67980 Federal Register / Vol. 69, No. 224 / Monday, November 22, 2004 / Notices 

6 15 U.S.C. 78o–3.

7 15 U.S.C. 78o–3(b)(5).

8 15 U.S.C. 78s(b)(3)(A)(ii).

9 17 CFR 240.19b–4(f)(2).

10 15 U.S.C. 78s(b)(3)(C).

11 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See 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.

4See 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.

FEE SCHEDULE FOR TAKE-OUT AND

ROUTING

Average daily shares of liquidity provided on NASDAQ 

and/or BRUT 

Fee to take

liquidity/Brut 

routing fee

(per share) 

Greater than 10 million ......... 0.0027 

Greater than 500,000 but 

less than or equal to 10 

million ................................ 0.0028 

Less than or equal to 

500,000 ............................. 0.0030 

Nasdaq represents that it will 

continue to charge a $0.001 per share 

NMC order delivery charge on NMC 

orders delivered to fee-charging ECNs 

participating in NMC. This charge is 

currently capped at $10,000 per month 

for firms providing more than 500,000 

shares per day, on average, over the 

course of the month. Nasdaq also 

represents that, in conjunction with the 

adoption of this pricing structure, Brut 

will cease charging an access fee on 

orders delivered to it from the NMC. In 

addition, Nasdaq represents that it 

currently does not charge when a firm 

executes against its own quote or order. 

Nasdaq represents that, upon the 

implementation of the above pricing 

schedule, Nasdaq will begin charging 

for these executions at the rates listed 

above. 

2. Basis 

Nasdaq believes that the proposed 

rule change, as amended, is consistent 

with the provisions of Section 15A of 

the Act,6 in general, and with Section 

15A(b)(5) of the Act,7 in particular, in 

that the proposed rule change provides 

for the equitable allocation of reasonable 

dues, fees, and other charges among 

members.

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

Nasdaq does not believe that the 

proposed rule change, as amended, will 

result in 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 

Nasdaq states that written comments 

were neither solicited nor received. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

The forgoing rule change is subject to 

Section 19(b)(3)(A)(ii) of the Act 8 and 

subparagraph (f)(2) of Rule 19b–4 9

thereunder because it establishes or 

changes a due, fee, or other charge 

imposed by the self-regulatory 

organization. Accordingly, the proposal 

is effective upon Commission receipt of 

the filing. At any time within 60 days 

of the filing of such proposed rule 

change, the Commission may summarily 

abrogate such rule change if it appears 

to the Commission that such action is 

necessary or appropriate in the public 

interest, for the protection of investors, 

or otherwise in furtherance of the 

purposes of the Act.10

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–NASD–2004–167 on the 

subject line. 

Paper Comments 

• 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–NASD–2004–

167. 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 NASD. 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—

NASD–2004–167 and should be 

submitted on or before December 13, 

2004.

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.11

Margaret H. McFarland, 

Deputy Secretary.

[FR Doc. E4–3272 Filed 11–19–04; 8:45 am] 

BILLING CODE 8010–01–P

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 

Federal Register / Vol. 69, No. 224 / Monday, November 22, 2004 / Notices 67981

5See 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’’).

6See Securities Exchange Act Release No. 50173 

(August 10, 2004), 69 FR 50407 (‘‘Notice’’).

7See Securities Exchange Act Release No. 50277 

(August 26, 2004), 69 FR 53759 (September 2, 

2004).

8See 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.

9The 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.

as amended by Amendment Nos. 2 and 

3 from interested persons.

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

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+

(‘‘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.

* * * * *

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 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 

67982 Federal Register / Vol. 69, No. 224 / Monday, November 22, 2004 / Notices 

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 reentered 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 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 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 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 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 

Federal Register / Vol. 69, No. 224 / Monday, November 22, 2004 / Notices 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 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 tradethrough’’ 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 tradethrough 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 

67984 Federal Register / Vol. 69, No. 224 / Monday, November 22, 2004 / Notices 

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 associationsponsored 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; 

Federal Register / Vol. 69, No. 224 / Monday, November 22, 2004 / Notices 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, establish 

the best bid or offer on the Exchange;

(ii) When not reacting to an order 

entering the Display Book, 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

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.

67986 Federal Register / Vol. 69, No. 224 / Monday, November 22, 2004 / Notices 

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 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 contraside 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.

Federal Register / Vol. 69, No. 224 / Monday, November 22, 2004 / Notices 67987

(2) A market order not designated for 

automatic execution but delivered 

systemically to the Display Book 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 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+ 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 singlesided 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 

67988 Federal Register / Vol. 69, No. 224 / Monday, November 22, 2004 / Notices 

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 

Federal Register / Vol. 69, No. 224 / Monday, November 22, 2004 / Notices 67989

10The 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 tradethrough 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.

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 (‘‘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 predetermined 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 timetested 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: 

• Execution of auction limit orders 

and market orders; 

• Tick-restricted orders, stop orders, 

and other orders eligible for automatic 

execution; 

• The broker agency interest file; 

• Definition of the Crowd; 

• The specialist interest file and 

algorithm; 

• Sweeps and LRP;

• Gap quoting; and 

• 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).

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, 

67990 Federal Register / Vol. 69, No. 224 / Monday, November 22, 2004 / Notices 

11See Exhibit A.

12 Id.

13See Securities Exchange Act Release No. 50103 

(July 28, 2004), 69 FR 48008 (August 6, 2004).

14See Exhibit A.

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.

16See NYSE Rule 123A.30.

17This 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.

18A 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.

consistent with AL orders’ limit 

prices.11

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 × 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

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

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.

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.

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, ticksensitive 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.

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 agencyauction 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 

Federal Register / Vol. 69, No. 224 / Monday, November 22, 2004 / Notices 67991

19Rule 11Ac1–1, 17 CFR 240.11Ac1–1.

20CAP-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.

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).

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.

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 CAPDI 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.

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).

Proposed NYSE Rule 70.20 has been 

amended to reflect the matters noted 

above. 

67992 Federal Register / Vol. 69, No. 224 / Monday, November 22, 2004 / Notices 

22 IOC orders would be cancelled in all instances 

when automatic executions are unavailable.

23See 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).

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.

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

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 

Federal Register / Vol. 69, No. 224 / Monday, November 22, 2004 / Notices 67993

25This 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.

26See, 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).

27See note 23, supra.

28Telephone conversation between Cyndi 

Rodriguez, Special Counsel, Division, Commission, 

and Don Siemer, Director, Market Surveillance, 

NYSE, on November 10, 2004.

29When 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.

30See Exhibit A.

OpenBook or another data distribution 

channel.

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

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 autorouted 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 × 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.

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).

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

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 

67994 Federal Register / Vol. 69, No. 224 / Monday, November 22, 2004 / Notices 

31 Id.

32For a complete description of Gap quotes, see 

footnote 18 of the Notice, supra note 6.

33This 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.

34The 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.

35NYSE 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.

36Trades occurring within the Crowd or between 

the Crowd and the specialist, as either agent or 

dealer, are reported manually.

37See Amendment No. 1, supra note 5.

38The Exchange believes that this would be 

consistent with concepts discussed in proposed 

Regulation NMS. See note 23, supra.

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

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.

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 offsetting 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

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

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.

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.

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

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 

Federal Register / Vol. 69, No. 224 / Monday, November 22, 2004 / Notices 67995

39 15 U.S.C. 78f(b).

40 15 U.S.C. 78f(b)(5).

41 15 U.S.C. 78k–1(a)(1).

42 17 CFR 200.30–3(a)(12).

43Automatic execution orders are designated NX.

44The 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.

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 newlyarriving 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.

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 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/

rules/sro.shtml!); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–NYSE–2004–05 on the 

subject line. 

Paper Comments 

• 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

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 × 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 × 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 × 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 

× 2000.44

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 × 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 

67996 Federal Register / Vol. 69, No. 224 / Monday, November 22, 2004 / Notices 

45All specialist trading, whether manual or 

electronically generated by algorithms, must be in 

accordance with Exchange Rules. These examples 

presume compliance with these rules.

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 × 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 

× 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 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 × 1,000. Only 1,500 

shares to buy at 20.05 is shown on NYSE 

OpenBook, 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 × 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 × 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 × 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 × 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

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 contraside 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 × 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 × 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 × 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 × 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: 

Federal Register / Vol. 69, No. 224 / Monday, November 22, 2004 / Notices 67997

46See note 23, supra.

47Telephone conversation between Kelly Riley, 

Assistant Director, Division, Commission, and Jeff 

Rosenstrock, Senior Special Counsel, Market 

Surveillance, NYSE, on November 15, 2004.

The quotation is 20.05 bid, offered at 20.07, 

1,500 × 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 × 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 × 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 × 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 × 2,500.

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 × 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

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 × 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 × 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 

× 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 × 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 × 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 × 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. 

67998 Federal Register / Vol. 69, No. 224 / Monday, November 22, 2004 / Notices 

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 × 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).

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 × 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 × 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 × 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 × 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 × 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. 


EN22NO04.001</GPH>
Federal Register / Vol. 69, No. 224 / Monday, November 22, 2004 / Notices 67999

48See 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.

49See note 13, supra.

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3Amendment No. 1 replaced and superseded the 

original filing in its entirety.

4 15 U.S.C. 78s(b)(3)(A).

5 17 CFR 240.19b–4(f)(6).

6For purpose of calculating the 60-day period 

within which the Commission may summarily 

abrogate the proposed rule change under Section 

19(b)(3)(C) of the Act, the Commission considers 

that period to commence on November 10, 2004, 

the date that the PCX filed Amendment No. 1.

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 × 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 × 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.

27. Tick-restricted Orders.

(a) The quotation is 20.05 bid, offered at 

20.07, 1,500 × 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 × 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 × 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 × 1,500.

[FR Doc. 04–25771 Filed 11–19–04; 8:45 am] 

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–50668; File No. SR–PCX–

2004–90] 

Self-Regulatory Organizations; Notice 

of Filing and Immediate Effectiveness 

of Proposed Rule Change by the 

Pacific Exchange, Inc. To Extend the 

Applicability of the Cross-and-Post 

Functionality on the Archipelago 

Exchange Facility to PNP Cross Orders 

November 16, 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 

3, 2004, the Pacific Exchange, Inc. 

(‘‘PCX’’ or ‘‘Exchange’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in items I, II, and 

III below, which items have been 

prepared by the PCX. On November 10, 

2004, the PCX filed Amendment No. 1 

to the proposed rule change.3 The 

Exchange proposed the rule change 

under Section 19(b)(3)(A) of the Act 4

and Rule 19b–4(f)(6) thereunder,5 which 

renders it effective upon filing.6 The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change, as amended, from interested 

persons.

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The PCX, through its wholly owned 

subsidiary PCX Equities, Inc. (‘‘PCXE’’), 

proposes to amend its rules relating to 

the Cross and Post Order to make clear 

that this order type applies to PNP Cross 

Orders. 

The text of the proposed rule change, 

as amended, is below. Proposed new 

language is in italics; proposed 

deletions are in brackets.

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Rule 7 Equities Trading 

Rule 7.31 Orders and Modifiers 

(a)–(r)—No change. 

(s)(1)–(2)—No change. 

(3) Following the execution 

parameters described above, any 

unexecuted portion of a Cross Order 

shall be cancelled, unless the Cross 

Order has been designated as a Cross 

and Post, as defined in Rule 7.31(ff), in 

which case any unexecuted portion will 

be displayed in Arca Book at the cross 

price.

(t)–(aa)—No change. 

(bb) PNP (Post No Preference) Cross 

Order. A Cross Order that is to be 

executed in whole or in part on the 

Corporation and the portion not so 

executed is to be canceled, without 

routing any portion of the Cross Order 

to another market center. When the 

cross price is equal to or better than the 

NBBO and is at the BBO, the relevant 

portion of the PNP Cross Order will be 

matched first against displayed orders 

with priority in the Arca Book, and then 

the remainder of the PNP Cross Order 

will be matched. Any unexecuted 

portion of the PNP Cross will be 

canceled, unless the PNP Cross Order 

has been designated as a Cross and 

Post, as defined in Rule 7.31(ff), in 

which case any unexecuted portion will 

be displayed in Arca Book at the cross 

price. The Corporation will cancel 

either the entire PNP Cross Order at the 

time of order entry, or the unexecuted 

portion of a PNP Cross Order (whether 

or not it has been designated as a Cross 

and Post) at any time during the order 

execution process, whichever is 

applicable, if: 

(1) The cross price would cause an 

execution at a price that trades through 

the NBBO, except as provided in Rule 

7.37; 

(2) The cross price is between the 

BBO and does not improve the BBO by 

the MPII pursuant to Rule 7.6(a), 

Commentary .06. 

(cc)–(ee)—No Change. 

(ff) Cross-and-Post Order. A Cross 

Order or PNP Cross Order that is to be 

executed in whole or in part on the 

Corporation [pursuant to Rule 7.31(s)] 

where any unexecuted portion of the 

Cross-and-Post Order will be displayed 

in the Arca Book at the cross price. 

(1)–(2)—No Change.

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