`[Federal Register Volume 71, Number 189 (Friday, September 29, 2006)]
[Notices]
[Pages 57590-57596]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-8397]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54520; File No. SR-NYSE-2006-65]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change and Amendment Nos. 1, 2 and 3 
Thereto Relating to Exchange Rules Governing Certain Definitions, 
Systemic Processing of Certain Orders, and the Implementation Schedule 
of the NYSE HYBRID MARKETSM

September 27, 2006.
    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 August 23, 2006 the New York Stock Exchange LLC (``NYSE'' or the 
``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 Exchange. On 
September 11, 2006, September 15, 2006, and September 26, 2006 the 
Exchange filed Amendment Nos. 1,\3\ 2,\4\ and 3 \5\ respectively, to 
the proposed rule change. The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 (``Amendment No. 1'') replaced the original 
filing in its entirety.
    \4\ Partial Amendment No. 2 (``Amendment No. 2'') added proposed 
rule language to NYSE Rule 1000 governing the maximum order size of 
automatic executions.
    \5\ Partial Amendment No. 3 (``Amendment No. 3'') removed 
proposed changes to NYSE Rule 13 related to At the Opening or At the 
Opening Only Orders and Regulation NMS-compliant Immediate or Cancel 
Orders.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NYSE proposes to amend Exchange Rules to clarify certain 
definitions and systemic processes in the NYSE HYBRID 
MARKETSM (``Hybrid Market''). The proposed amendment further 
serves to differentiate between certain definitions in NYSE Rule 13 and 
terms in NYSE Rule 1000 (Direct +[supreg]). It also adds in the rule 
text a chart containing the Exchange's calculated liquidity 
replenishment points (``LRPs''). In addition, this filing updates the 
Hybrid Market implementation schedule.\6\
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    \6\ See Securities Exchange Act Release No. 53539 (March 22, 
2006), 71 FR 16353 (March 31, 2006), (SR-NYSE-2004-05) (``Hybrid 
Order'').
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    The text of the proposed rule change, as amended, is available on 
NYSE's Web site at (http://www.nyse.com), at the principal office of 
NYSE, and at the Commission's Public Reference Room.

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 Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change, as 
amended. 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
    The Exchange is submitting this proposed rule change to amend 
certain rules governing the Hybrid Market in order to clarify 
definitions and the operation of certain systemic processes.
    The Commission approved the Hybrid Market on March 22, 2006.\7\ The 
approved rules did not become effective immediately; rather they are 
being implemented in a series of phases over a period of time.
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    \7\ Id.
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    Implementation of Phase 1 of the Hybrid Market, which focused 
primarily on the ability of Floor brokers to electronically represent 
their customers' interest (``e-Quote'') was substantially completed on 
April 5, 2006.
    The installation of software necessary to implement Phase 2 of the 
Hybrid

[[Page 57591]]

Market, which focuses primarily on the ability of specialists to 
algorithmically quote and trade, has been installed Floor-wide. 
Specialist firms are in the process of readying their algorithmic 
systems so that they can begin operating the systems as permitted in 
Phase 2.
    In addition, on May 12, 2006, the Exchange implemented a Hybrid 
Market Pilot (``Pilot'') that increased the availability of automatic 
executions in the securities participating in the Pilot by: (i) Raising 
the maximum size of an auto ex order to one million shares (with the 
ability to increase the maximum size to three million shares); (ii) 
eliminating the prohibition against entry of orders for the account of 
the same beneficial owner in less than 30-second intervals; (iii) 
treating all market orders in Pilot securities as auto ex orders; and 
(iv) implementing the approved change to NYSE Rules 13 and 1000 
regarding auto execution of marketable limit orders.\8\ Currently, the 
Pilot applies to one security--Lucent Technologies, Inc.
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    \8\ See Securities Exchange Act Release No. 53791 (May 11, 
2006), 71 FR 28732 (May 17, 2006). This Pilot expires on October 31, 
2006.
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    Similarly, starting June 21, 2006, specialists were permitted to 
algorithmically quote (``s-Quote'') in their specialty securities, 
without the receipt of order information as such orders are entering 
Exchange systems.\9\ Starting August 15, 2006, specialists were 
permitted to send algorithmically-generated trading messages to 
interact with the Exchange quotation (``hit bid/take offer''), also 
without receipt of order information as such orders are entering 
Exchange systems.\10\
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    \9\ See Securities Exchange Act Release No. 54024 (June 21, 
2006), 71 FR 36849 (June 28, 2006). This is effective until Phase 2 
is fully implemented.
    \10\ See Securities Exchange Act Release No. 54316 (August 15, 
2006), 71 FR 48569 (August 21, 2006). This is effective until Phase 
2 is fully implemented.
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    Phase 3 of the Hybrid Market which includes, among other things, 
Floor broker discretionary orders, if approved by the Commission,\11\ 
implementation of sweeps, auto-routing of orders to markets displaying 
better bids and offers, and elimination of restrictions on 
Direct+[supreg] availability, is scheduled to begin in or about early 
October 2006.
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    \11\ Floor broker discretionary orders are the subject of a 
separate filing. See Securities Exchange Release No. 54150 (July 14, 
2006), 71 FR 41496 (July 21, 2006) (Notice of SR-NYSE-2006-36).
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    Since the approval of the Hybrid Market, the Exchange has continued 
to discuss Hybrid Market features with its members and advisory 
committees. Based on these discussions, the Exchange has decided to 
propose changes to certain aspects of the Hybrid Market to produce a 
trading venue that best addresses the various needs of our customers 
and members. In addition, in order to accomplish the implementation of 
Phase 3 with the functionalities noted above within a similar time 
frame as that originally proposed, certain amendments to the approved 
Hybrid Market rules are necessary.

Amendments to the Definitions of Orders Types--Exchange Rule 13 and 
Conforming Changes to Related Rules

Auto Ex Order

Definition
    The definition of an ``auto ex'' order in NYSE Rule 13 originally 
encompassed only orders that were specifically entered for automatic 
execution. In other words, an ``auto ex'' order was one specifically 
designated for automatic execution and thereby immediately initiates an 
automatic execution upon entry. In the original definition, an order 
that merely participated in an automatic execution was not an ``auto 
ex'' order simply by virtue of such participation. As such, the 
definition focused on the order's designation when entered, not how the 
order was executed.
    The Hybrid Market filings amended this definition by listing 
various types of orders that initiate or participate in automatic 
executions. By so doing, the concept that an ``auto ex'' order is one 
that immediately initiates an automatic execution upon entry was lost. 
However, the amended rule didn't include all order types that are 
capable of participating in an automatic execution. For example, it 
omitted auction limit orders which, while primarily an order type that 
offers an opportunity for price improvement through manual handling, 
may participate in or initiate automatic executions.
    In addition, Exchange systems retain the concept that an ``auto 
ex'' order is one that initiates an automatic execution immediately 
upon entry, systemically applying the designation in those cases where 
the order omits it. For example, a marketable limit order entered on 
the Exchange will initiate an automatic execution immediately upon 
entry on the Exchange. Such order no longer needs to be specifically 
designated for automatic execution by the person entering the order; 
Exchange systems apply the appropriate designation.
    As a result, the definition of ``auto ex'' order as approved in the 
Hybrid Market filings is not complete nor is it consistent with 
Exchange systems. The Exchange proposes to clarify that an ``auto ex'' 
order is an order that initiates an automatic execution immediately 
upon arrival. Accordingly, reference to elected stop, stop limit 
orders, and CAP-DI orders will be eliminated from the rule as they do 
not initiate an automatic execution upon their entry on the Exchange. 
In addition, to assist people who may look to this definition in 
connection with the general topic of automatic executions, the Exchange 
proposes to add a section that clarifies that ``non-auto-ex'' orders 
(i.e., elected stop orders, percentage orders, etc.) participate in or 
initiate automatic executions in accordance with the rules governing 
their operation.
    Further, the Exchange proposes to amend NYSE Rules 1000-1004 to 
replace the term ``auto ex'' with the words ``automatically executing'' 
to reflect that these rules govern all automatic executions, not just 
those involving an auto ex order.
Market Orders
    The definition of an ``auto ex'' order in NYSE Rule 13, as amended 
by the Hybrid Market filings, included a ``market order designated for 
automatic execution.'' The Exchange proposes to amend this definition 
to include all market orders. In other words, a market order no longer 
needs to be designated for automatic execution to be treated as an auto 
ex order. The Exchange believes this change will benefit customers by 
simplifying order entry requirements for market orders, treating them 
in the same fashion as marketable limit orders. Conforming changes to 
NYSE Rules 104(c)(vii), 104(e)(i), 123(e)(7), 123F(b), 132B(a)(9), and 
132B(b)(9) are also proposed.
Buy Minus--Sell Plus Orders
    The reference in the definition of an ``auto ex'' order to a ``sell 
`plus'--`buy' `minus' '' order has been rephrased to ``buy minus--sell 
plus'' to track the way that order type is referred to in other places 
in Exchange rules.
Maximum Size
    The maximum size of automatic executions, which had been included 
in NYSE Rule 13's definition of an ``auto ex'' order, was eliminated in 
the Hybrid Market filings.\12\ However, there is a maximum order size 
that Exchange systems can handle, currently 3,000,000 shares. 
Additionally, the Exchange proposes to gradually increase the size of 
automatic executions, rather than start with a maximum size of 3 
million shares. Accordingly, the Exchange proposes to add a rule that 
reflects this. The Exchange proposes to phase-in the

[[Page 57592]]

maximum order size eligibility for automatic executions, beginning with 
a maximum size of 1,000,000 shares.
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    \12\ See Hybrid Order, supra note 6.
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    Given the change to the definition of an ``auto ex'' order, 
discussed above, NYSE Rule 13's ``auto ex'' definition no longer 
appears to be the appropriate location for this provision. Accordingly, 
the Exchange proposes to move it to the Direct+ rules, as the first 
provision under NYSE Rule 1000.\13\
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    \13\ NYSE Rule 13's definition of ``auto ex'' order currently 
has a provision regarding the maximum size of an ``auto ex'' order 
applicable only to the Lucent Pilot. See Securities Exchange Act 
Release No. 53791, supra note 8. This part of the rule is designated 
with a ``P.'' This rule is virtually identical to the proposed rule 
regarding maximum size, discussed above. However, given the limited 
applicability of the Lucent Pilot rule and the fact that it has been 
in place since mid-May, the Exchange does not propose changing its 
designation..
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Auction Market Orders
    As a result of the change in the way market orders will be handled, 
discussed above, the Exchange proposes to add a definition for 
``Auction Market Order'' to NYSE Rule 13. Conforming changes to NYSE 
Rules 104(c)(vii), 104(e)(i), 123(e)(7), 123F(b), 132B(a)(9) and 
132B(b)(9) are also proposed.
Immediate or Cancel (``IOC'') Orders
    In the Hybrid Market Filings, the Exchange created two types of IOC 
orders which are defined in NYSE Rule 13. The first type is an IOC 
order that complies with the SEC's Regulation NMS (``Reg. NMS'').\14\ A 
Reg. NMS IOC order would not be routed during an Exchange sweep, if 
any, to satisfy better priced protected bids or offers \15\ displayed 
by other market centers; rather, a Reg. NMS IOC order would be 
cancelled and the Exchange sweep would end.
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    \14\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005) (File No. S7-10-04) (17 CFR parts 
200, 201, 230, 240, 242, 249 and 270).
    \15\ A protected bid and offer is one that meets the definition 
set forth in Section 242.600(b)(57) of Regulation NMS, 17 CFR 
242.600(b)(57).
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    The second type of IOC order is a ``NYSE IOC'' order. Unlike a Reg. 
NMS IOC order, a NYSE IOC order permits portions to be routed during a 
sweep, if any, to other markets to satisfy better priced protected bids 
or offers and cancels only when once it is no longer able to receive an 
execution.
    In this filing, the Exchange proposes to amend NYSE Rule 13 to 
reflect that IOC orders discussed in NYSE Rule 13 paragraph (a) are now 
identified as Regulation NMS-compliant Immediate or Cancel orders.
    The Exchange also seeks to amend the definition of a NYSE IOC order 
to clarify that Exchange systems will accept NYSE IOC orders for 
participation in the re-opening trade after a trading halt. 
Specifically, NYSE IOC orders received during a trading halt will be 
systemically maintained in their order of receipt for execution upon 
the re-opening of the halted security. If a NYSE IOC order is not 
executed as part of the re-opening trade, the order will be cancelled. 
This is similar to the way in which IOC orders are handled currently on 
the Exchange.
Stop Orders and Stop Limit Orders
    Several changes are proposed to the definition and operation of 
stop orders, and references to stop limit orders is proposed to be 
deleted from Exchange rules, including NYSE Rule 13. These changes are 
discussed in detail below.
Modifications to Systemic Processing
Stop Orders and Stop Limit Orders
    The Exchange is proposing to amend its rules relating to the 
processing of Stop (``STP'') orders and Stop Limit (``STL'') orders. 
These order types require that the stock in question trade at a 
specified price (``the electing price'') before the order becomes 
capable of execution. Once a transaction is executed on the Exchange at 
the electing price, the STP or STL order becomes a market order or a 
limit order, respectively. The proposed amendment seeks to modify the 
way in which STP orders are handled and processed. It further seeks to 
eliminate STL orders, which represent a very small percentage of the 
orders entered on the Exchange.
Elimination of Stop Limit Orders
    Under the proposed amendments, the Exchange would eliminate STL 
orders as an acceptable order type, given their infrequent use. 
Currently STL orders represent a very small percentage of total order 
flow on the Exchange. For example, on trade dates between March 20, 
2006 and March 28, 2006, STL orders represented approximately .028% of 
the total number of orders entered on the Exchange. Given the 
relatively small customer demand for this order type, the Exchange 
proposes to eliminate it in its entirety. Exchange systems would be 
programmed to reject all STL orders. Existing GTC STL orders would be 
purged after notice to the entering firm.
    Accordingly, the definition of a STL is proposed to be deleted from 
NYSE Rule 13 and conforming changes eliminating references to STLs are 
proposed with respect to other definitions within NYSE Rule 13 and NYSE 
Rules 76, 118(2), 123(e)(7), 124(f), 132B(a)(9) and (b)(9), 750.91 and 
.92, 476A, and 1004.
New Processing of Stop Orders
    Today, STP orders are entered primarily through SuperDOT[supreg] 
\16\ and are routed directly to the Display Book (``Book''),\17\ where 
they reside awaiting election. The specialist assigned to each security 
has the ability to view the prices at which STP orders would be elected 
and the sizes of such orders. As a result of the specialist's ability 
to view information that is not available to other market participants, 
NYSE Rule 123A.40 requires that, in certain circumstances described 
below, the specialist guarantees the price that elected STP orders 
receive.
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    \16\ SuperDot[supreg] is an electronic order-routing system used 
by NYSE member firms to send market and limit orders to the NYSE.
    \17\ The Book is an order management and execution facility. It 
receives and displays orders to specialists and provides a mechanism 
to execute and report transactions and publish results to the 
Consolidated Tape. In addition, the Book is connected to a variety 
of other NYSE systems for purposes of comparison, surveillance, and 
reporting information to customers and market data and National 
Market Systems, such as the Intermarket Trading System, Consolidated 
Tape and Consolidated Quote.
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    The Exchange proposes to migrate the processing of STP orders away 
from the Book so that STP orders will no longer be visible to the 
specialist or available to the specialist's system employing 
algorithms. Rather, STP orders will be maintained in a ``blind file'' 
in order of the time received. The rule has been amended to remove 
references to STP orders being routed to the Book because, under the 
proposed STP order processing, Exchange Systems will handle STP orders 
so that the STP order is not visible to the part of the Book the 
specialist ``sees.'' When a transaction on the Exchange results in the 
election of a STP order that had been received prior to such 
transaction, the elected STP order will be sent as a market order to 
the Book and the specialist's system employing algorithms and will be 
handled in the same way as any other market order. This change removes 
the specialist's ability to view the electing price and size of STP 
orders. As a result, the specialist will no longer have any unique 
information regarding STP orders.
    In order to maintain the integrity of the blind file, NYSE Rule 
115A is being added and NYSE Rule 116.50 amended to prohibit 
specialists, trading assistants, and anyone on their behalf from using 
the opening and closing process, proposed below, in a manner designed 
to inappropriately discover information about unelected STP

[[Page 57593]]

orders.\18\ Accordingly, while it is appropriate and expected that 
specialists and trading assistants will effect multiple searches to 
determine appropriate opening and closing prices, to the extent that 
such prices have been identified, further searches outside the 
identified prices for the purpose of identifying the election prices 
and sizes of STP orders would be inappropriate.
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    \18\ The proposed opening and closing processes for STP order 
handling are not available intraday; therefore, during the trading 
day, it is not possible for these processes to be employed in a 
manner designed to inappropriately discover information about 
unelected STP orders.
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    Opening and closing procedures on the Exchange will be modified to 
accommodate the fact that the specialists will no longer be able to 
determine and account for STP order volume that would be elected by the 
opening or closing execution. Currently, the specialist calculates the 
opening price based in part on the STP order volume that will be 
elected by the opening trade. The opening trade executed by the 
specialist is reflected in the first print. The STP order volume 
elected by the opening execution trades at the same price as the open, 
and is reflected in the second print. Similarly, on the close, the 
specialist calculates the closing price based in part on the STP order 
volume that will be elected and the volume of buy and sell market-on-
close/limit-on-close (MOC/LOC) \19\ orders that will be executed as a 
result of the closing price.
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    \19\ A MOC order is a market order, which is to be executed in 
its entirety at the closing price, on the Exchange, of the stock 
named in the order, and if not so executed, is to be treated as 
cancelled. A LOC order is a limit order, which may or may not 
receive execution on the close depending on the closing price and 
depth of contra side interest. The term ``at the close order'' also 
includes a limit order that is entered for execution at the closing 
price, on the Exchange, of the stock named in the order, pursuant to 
such procedures as the Exchange may from time to time establish.
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    In order for the specialist to continue to effectively price the 
opening and the close, the specialist must have an accurate 
understanding of the total volume of shares available for purchase and 
sale at the opening price and at the closing price.
    On the open, this will be accomplished by the specialist or trading 
assistant indicating to the system the price at which the specialist 
contemplates opening the stock. The system will then calculate the 
volume of shares available for execution on the open at that price, 
including STP order volume that would be elected by an execution at 
that price. There will be no indication what, if any, portion of the 
total volume accounts for STP orders. As a result there will only be 
one opening print, and it will include STP orders that are elected by 
the opening trade.
    Similarly, prior to the close, the specialist or trading assistant 
will indicate to the system the price at which the specialist is 
contemplating closing the stock. In turn, the system will calculate the 
volume of shares executable on the close at that price, including STP 
order volume that would be elected by an execution at that price. Once 
again, there will be no indication what, if any, portion of the total 
volume accounts for STP orders. The unelected STP orders will only be 
included in the total volume of shares available to trade on the close 
five minutes prior to the close.
    The definition of a STP order in NYSE Rule 13 will be amended to 
reflect these changes and similar conforming changes will be made to 
NYSE Rules 116.40 and 123C(3)(A).
Elimination of Specialist's Guarantee
    NYSE Rule 123A.40 requires the specialist to guarantee that elected 
STP orders receive the same price as the electing sale under certain 
conditions: Specifically, if the specialist was party to the election 
of such STP order and his or her bid (offer) had the effect of 
bettering the market or was part of an electing transaction that was 
more than 0.10 cents away from the prior transaction price. This rule 
addressed the fact that specialists have the ability to view the 
electing prices and sizes of all STP orders present on his or her Book, 
information that is not generally available to the rest of the market. 
Requiring the specialist to guarantee the price at which these orders 
are executed in the circumstances prescribed by NYSE Rule 123A.40 
removes any incentive on the part of the specialist to effect 
proprietary trades that would cause the election of the STP orders 
inappropriately.
    Under the Exchange proposal, the specialists will no longer have 
access to the electing price and size information for STP orders. Thus, 
the reason for the price guarantee required by current NYSE Rule 
123A.40 will no longer exist and the Exchange proposes its elimination. 
Conforming changes to NYSE Rules 104.10(5)(ii), 115(iii), and 476A are 
similarly proposed.
Elimination of Floor Official Approval
    NYSE Rule 13.30(v) currently requires a specialist to obtain Floor 
Official approval prior to the execution of a transaction under the 
circumstances outlined in sections (i), (ii), (iii) and (iv) of the 
rule, if the bid or offer that would elect the STP order was more than 
0.10 point away from the last sale and was being made for the 
specialist dealer account. Similar to the price guarantee required by 
NYSE Rule 123A.40, this rule addresses the fact that specialists have 
information about STP orders that is not generally available to the 
rest of the market; that is, specialists have the ability to view the 
electing prices and sizes of all STP orders present on the Book. 
Requiring the specialist to obtain Floor Official approval prior to the 
execution of the transaction removes any incentive on the part of the 
specialist to effect proprietary trades that would cause the election 
of the STP orders inappropriately.
    However, as stated above, under the Exchange proposal, specialists 
will no longer have access to the electing price and size information 
for STP orders. Accordingly, their proprietary trading decisions would 
not be made with knowledge that it would elect STP orders. Therefore, 
the reason for the Floor Official approval required by current NYSE 
Rule 13.30(v) will no longer exist, and the Exchange proposes its 
elimination.
Floor Broker STP Order Processing
    Under the proposed amendments, a Floor broker will still be 
permitted to receive and execute STP orders. A Floor broker in receipt 
of a STP order may transmit the STP order to SuperDOT[supreg] and that 
order will be processed and executed as outlined above. Additionally, a 
Floor broker may choose to manually represent the STP order in the 
Crowd. However, the Floor broker would be responsible for monitoring 
for the election of the STP order (i.e., there would be no systemic 
support for STP orders handled by a Floor broker in the Crowd). As 
explained above, once the STP order is elected, it becomes a market 
order, and the Floor broker would be required to appropriately execute 
such market order. Given the increased pace of order executions, a 
Floor broker who represents a STP order in the Crowd is at risk of 
missing the market upon election of such manually-handled STP 
order.\20\ Moreover, STP orders represented by Floor brokers in the 
Crowd may not be included in a Floor Broker Agency Interest File (``e-
Quote''). NYSE Rule 70.20 is proposed to be amended to reflect this.
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    \20\ A member or member organization is deemed to have ``missed 
the market'' when it has accepted an order for execution and by 
reason of neglect or otherwise fails to execute an executable order 
in the prevailing market.
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Redefinition of Sweep
    NYSE Rule 1000(d) describes the manner in which automatically

[[Page 57594]]

executing orders will trade. Section (iii) of that rule provides that 
the residual of an automatically executing order will ``sweep,'' 
trading with orders on the Book and any broker agency interest files 
(also referred to as ``e-Quotes'') and specialist interest (also 
referred to as ``s-Quotes'') 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 (``clean-up price'').
    The Exchange proposes to amend NYSE Rule 1000(d)(iii) to provide 
that during a sweep, the residual shall trade with all interest at each 
price capable of trading, before moving to the next price point. 
Accordingly, instead of a two-price execution (at the Exchange best bid 
or offer and the sweep clean-up price), a sweeping order may trade at 
multiple prices. The sweep will be automatic and uninterrupted and will 
only stop when the sweeping order is filled, its limit price, if any, 
is reached, a LRP is reached, or, in the case of a Reg. NMS IOC order, 
trading at a particular price on the Exchange would require 
cancellation because the order cannot be routed to another market 
center. At each execution price during the sweep, Floor broker e-Quotes 
and limit orders on the Book trade on parity. Elected CAP-DI orders 
will have an opportunity to trade prior to the sweep moving to the next 
price. Specialist s-Quotes yield to limit orders on the Book at each 
execution price and thereafter trade on parity with e-Quotes.
    The Exchange is proposing this change in response to customers who, 
while lauding the Exchange's initial sweep functionality, which rewards 
liquidity providers--orders on the Book and in interest files--with 
price improvement, candidly asserted that they would manage their 
orders so as not to cause a sweep. Rather, they would send in orders in 
a manner so that they obtained the benefit of trading at each price 
available on the Exchange.
    Accordingly, the Exchange is proposing to amend NYSE Rules 
70.20(d)(i) and (ii), 123A.30(a), and 1000(d)(iii) to reflect the 
redefined sweep functionality.
    Further, NYSE Rule 123A.30(a) has been reworded in order to clarify 
how and when CAP-DI orders participate in sweeps. Specifically, when an 
automatically executing order is sweeping the Book on the same side of 
CAP-DI orders, the orders will be elected at each execution price that 
is part of the sweep. To the extent that the order sweeping the book 
has additional volume, the elected same-side CAP-DI orders will not 
participate in a transaction at the executing price; rather, Exchange 
Systems will automatically and systemically unelect the CAP-DI orders 
in accordance with its terms. If, at the last execution price that is 
part of the sweep, the sweeping order is filled or unable to continue 
executing, and there is volume remaining on the Book or from contra-
side elected CAP-DI orders, then the same-side CAP-DI orders may 
participate in the final transaction.
    CAP-DI orders on the contra-side of an automatically executing 
order sweeping the Book are also elected at each execution price that 
is part of the sweep and participate at each of the execution prices if 
there is volume available on the Book or from CAP-DI orders on the same 
side of the market as the sweeping order.
    In addition, the Exchange is proposing a technical change to delete 
a repetitious sentence in NYSE Rule 1000(d)(v) and move the remaining 
rule text into NYSE Rule 1000(d)(iv).
Redefinition of Liquidity Replenishment Points (LRPs)
    NYSE Rule 1000(a)(iv) provides that automatic execution is not 
available when a LRP has been reached, and the order triggering the LRP 
has been executed to the extent possible at the LRP price. LRPs may be 
triggered by a sweep (i.e., the sweep LRP) or automatic executions that 
result in rapid price movement over a short period (i.e., the momentum 
LRP).
    Given the changes to the sweep functionality described above, and 
in recognition that LRPs as originally defined are complex and not 
easily understood, the Exchange is proposing to modify NYSE Rule 
1000(a)(iv) to provide a single, simpler LRP. LRPs will be calculated 
by adding and subtracting a value to the security's last sale price. 
The LRP values are based on an examination of trading data and vary 
based on the security's NYSE average daily volume (``ADV''), price, and 
volatility. A range of values for each ADV and price category are 
available to provide the Exchange with sufficient flexibility to ensure 
that the goal of a LRP is met, without unduly impacting the 
availability of automatic executions in such security. The proposed LRP 
ranges are as follows:

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         Price per share               <$5       $5-9.99    $10-24.99   $25-49.99   $50-99.99     $100-       $150-       $200-       $250-
-------------------------------------------------------------------------------------------------149.99------199.99------249.99------1000.00--
ADV:
    < 500,000 shares.............        0.05        0.05        0.10        0.15        0.35        0.60        1.00        1,00         1.00
                                         0.10        0.10        0.25        0.35        0.75        1.25        2.00        2.00         2.00
    500,000-3,999,999............        0.05        0.05        0.10        0.10        0.25        0.50        1.00        1.00         1.00
                                         0.10        0.10        0.20        0.25        0.50        1.00        2.00        2.00         2.00
    >= 4,000,000 shares..........        0.05        0.05        0.10        0.10        0.25        0.50        1.00        1.00         1.00
                                         0.10        0.10        0.20        0.25        0.50        1.00        2.00        2.00         2.00
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Initially, the lower values in each of the ranges will be used to 
calculate the LRPs. For example, for securities with an ADV of 500,000-
3,999,999 shares, the LRP values will be as follows: 0.05 for 
securities priced through $9.99; 0.10 for securities priced from $10.00 
through 49.99; 0.25, for securities priced from $50.00 through $99.99; 
0.50 for securities priced from $100.00 through 149.99; and 1.00 for 
securities priced $150.00 or more. As the Exchange gains more 
experience in how these securities trade in the Hybrid Market, the 
higher value in a particular price category may be used instead. The 
values used to calculate LRPs and LRPs themselves will be disseminated 
by the Exchange.
    The value used to calculate the LRP's range will not change. LRPs 
for a security will not be calculated until there is a trade on the 
Exchange; accordingly, if the security opens on a quote and there are 
no trades on the NYSE, LRPs will not be set.
    LRP's are volatility controls and, as such, are meant to be 
triggered infrequently, when there has been a large price movement 
(based on a security's typical trading characteristics) over a short 
period of time. If the price of the security stays within the LRP 
range, the LRP will not be triggered. If

[[Page 57595]]

the price moves to the LRP in a short period of time, automatic 
executions will pause for one manual trade, and will then resume, with 
a newly calculated LRP range.
    LRPs will be calculated automatically throughout the day, as 
follows:
     At specified time intervals (e.g., every few minutes 
throughout the day), as the Exchange shall determine from time to time;
     After a manual trade by the specialist; and
     When automatic executions resume after an LRP has been 
reached.\21\
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    \21\ Automatic executions resume after an LRP has been reached: 
(i) Automatically in 5 seconds where the NYSE is not locked or 
crossed; (ii) by a manual trade; or (iii) by manually resuming 
autoquote.
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    Initially, LRPs will be calculated every thirty seconds during the 
trading day.
    Further, the Exchange proposes to amend the time in which automatic 
executions and autoquote resume after an LRP is triggered, when the 
NYSE market is not locked or crossed. Currently, NYSE Rule 60(e)(ii)(C) 
provides that after an LRP is triggered, autoquote will resume as soon 
as possible or in no more than five seconds, provided the NYSE market 
is not locked or crossed. The Exchange proposes to amend this rule to 
provide that autoquote will resume in five to ten seconds. Initially, 
the ten second period will be used; as the Exchange gains experience in 
the effect of LRPs on the market in Hybrid, the time will be reduced to 
five seconds.
    In addition to NYSE Rules 1000(a)(iv) and 60(e)(ii)(C), the 
following rules have also been amended to reflect the changes discussed 
above: NYSE Rules 60(e)(iii) and (iv), 72(j)(i) and (ii), and 1000(c).
Miscellaneous
NYSE Rule 60(e)
    Currently, NYSE Rule 60(e)(iv)(c) provides, among other things, 
that when autoquote is suspended pursuant to a gap quote (NYSE Rule 
60(e)(i)(A)), it will nevertheless continue to update the quote as 
specified therein. The Exchange is proposing to delete the reference to 
NYSE Rule 60(e)(i)(A) to correct this provision, as autoquote does not 
continue to update the quote when it has been gapped in accordance with 
Exchange procedures. Rather, in gap quote situations, autoquote is 
suspended on both sides of the market and resumes with a manual 
transaction or the publication of a non-gapped quote.
NYSE Rule 72
    NYSE Rule 72 has been amended to remove the discussion of the 
priority and parity of residual interest at the momentum liquidity 
replenishment point to conform to the redefinition of LRPs as 
previously discussed herein.
NYSE Rule 76
    NYSE Rule 76 has been amended to provide that the crossing 
requirement does not apply to automatic executions. This rule was 
designed originally to provide an opportunity for price improvement to 
buy and sell orders represented by the same member. Under the current 
rule, the member is required to clearly announce his or her offer at a 
price higher by the minimum variation than his or her bid before 
crossing such orders, to enable the Crowd to trade with the order at 
such bid or offer price, thereby providing price improvement to the 
order. NYSE Rule 76 does not apply to bonds traded in ABS[supreg],\22\ 
the Exchange's automated execution facility for bond trading, as there 
is no verbal Crowd participation with respect to bond trading. 
Similarly, automatic executions via Direct +[supreg] do not allow for 
verbal Crowd participation. The rule will continue to apply to auction 
market transactions.
---------------------------------------------------------------------------

    \22\ ABS[supreg] is being renamed ``NYSE Bonds\SM\''
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``High-Priced Securities''--NYSE Rules 1000(a)(vi) and 60(e)(iv)(b)(i)
    The Exchange is proposing to redefine ``high-priced'' securities 
from those trading above $300.00 to those trading above $1,000.00. 
Exchange rules provide that automatic executions will be unavailable in 
securities trading at $300.00 or more. However, a $300.00 threshold 
encompasses securities with sufficient trading volume where automatic 
executions would be appropriate, such as Chicago Mercantile Exchange 
(``CME'').
Implementation Schedule
    As noted above, the implementation of the Hybrid Market is 
underway. The next phase--Phase 3-- is scheduled to be implemented in 
or about early October 2006. Approval of this filing and the changes 
discussed herein is necessary for the implementation of Phase 3. Phase 
3 will include the features previously approved by the Hybrid Market 
implementation schedule \23\ and the following additional changes:
---------------------------------------------------------------------------

    \23\ See Hybrid Order, supra note 6.
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     Elimination of Direct+ suspension when a better bid or 
offer is displayed by another market center
     Implementation of sweeps (as redefined herein);
     Implementation of LRP (as redefined herein);
     Implementation of new stop order processing (as discussed 
herein);
     Exchange Rule 1002 (``Availability of Automatic Execution 
Feature'') will be available for all stocks through the close upon 
implementation of Phase 3 of the Hybrid Market.
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act \24\ in general, and furthers 
the objectives of Section 6(b)(5) \25\ in particular, in that 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 believes the proposed rule change, as 
amended, is also designed to support the principles of Section 
11A(a)(1) of the Act,\26\ in that it seeks to assure economically 
efficient execution of securities transactions, make it practicable for 
brokers to execute investors' orders in the best market, and provide an 
opportunity for investors' orders to be executed without the 
participation of a dealer.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78f(b).
    \25\ 15 U.S.C. 78f(b)(5).
    \26\ 15 U.S.C. 78k-1(a)(1).
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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, as amended.\27\
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    \27\ The Commission notes that it has received one comment 
letter. See letter from George Rutherford daed September 10, 2006.
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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

[[Page 57596]]

(ii) as to which the Exchange consents, the Commission will:
    A. By order approve the proposed rule change, as amended, 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, is consistent with the Exchange 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 e-mail to [email protected]. Please include File 
Number SR-NYSE-2006-65 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSE-2006-65. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro/shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the NYSE. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File number SR-NYSE-2006-65 and should be submitted on or before 
October 20, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
---------------------------------------------------------------------------

    \28\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. 06-8397 Filed 9-27-06; 12:12 pm]
BILLING CODE 8010-01-P`