[Federal Register Volume 62, Number 235 (Monday, December 8, 1997)]
[Notices]
[Pages 64615-64618]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-32028]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39379; File No. SR-NYSE-97-17]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change to Amend the Exchange's 
Wireless Data Communications Initiatives

December 1, 1997.

I. Introduction

    On May 28, 1997, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to modify certain aspects of its program for the 
use of wireless data communications technology that allows a member in 
a trading crowd or elsewhere on the trading floor to communicate with 
other locations on the floor by means of a hand-held wireless device.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    Notice of the proposed rule change, together with the substance of 
the proposal, was published for comment in Securities Exchange Act 
Release No. 38786 (June 30, 1997), 62 FR 36597 (July 8, 1997). No 
comments were received on the proposal. This order approves the 
proposed rule change.

II. Description

    In 1995, the Committee approved a proposed rule change of the 
Exchange \3\ that allowed the Exchange to introduce wireless data 
communications technology onto the Exchange trading floor. The Exchange 
believes that such technology expedites, and makes more efficient, the 
process by which members receive and execute orders. The technology 
involves the floor-based use of wireless hand-held data communications 
devices. To effect that initiative, the Exchange undertook to develop 
and install a wireless data communications infrastructure on its floor. 
It determined to allow private vendors, as well as the Exchange itself, 
to offer hand-held device services to Exchange members.
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    \3\ Securities Exchange Act Release No. 35931 (June 30, 1995), 
60 FR 35767 (July 11, 1995) (``1995 Filing'').
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    As described at length in the 1995 Filing, the Exchange's plan has 
been to introduce the new technology in four phases:
    (1) In Phase I, the Exchange supervised and monitored three 
``proof-of-concept'' pilot programs on the floor of the Exchange.
    (2) In Phase II, the Exchange monitored and supervised additional, 
more structured, pilot testing of independent wireless data 
communications services, including that offered by the Exchange.
    (3) In Phase III, the Exchange will conduct on the floor a 
preproduction pilot test of its wireless data communications system 
infrastructure, will supervise the installation and testing of the 
infrastructure and will move its own wireless data communications 
system to the infrastructure. In addition, the Exchange will continue 
to allow pilot testing of private vendors' wireless data communications 
services.
    (4) In Phase IV, the Exchange will direct the production roll-out 
of the wireless data communications infrastructure and the migration of 
vendors to the infrastructure.
    The Exchange had completed Phase I prior to the time of its 
submission of the 1995 Filing. Since then, the Exchange has completed 
Phase II and recently entered into Phase III.
    Specifically, the purposes of the proposed rule change are: (1) To 
modify the types of wireless data communications that the Exchange will 
permit over the infrastructure; (2) to clarify that a vendor cannot 
provide wireless data communications services to Exchange members 
unless it is a member organization of the Exchange; and (3) to 
introduce the forms of agreement and provisions pursuant to which the 
Exchange will allow vendors and member organizations to provide 
wireless data communications services to members on the trading floor 
of the Exchange in the production roll-out environment.
    First, the Exchange proposes to modify the types of wireless 
communications permitted over the infrastructure. The 1995 Filing 
specified as follows:

    A vendor's Phase II pilot program must restrict wireless data 
communications to communications between a hand-held device used by 
a member on the floor and a terminal in a floor booth location. The 
Exchange will prohibit all floor-based wireless data communications 
between any other points.

    The Exchange limited communications during the Phase II pilot 
programs to communications between a booth terminal and a floor-based 
hand-held device and will continue that limitation during Phase III 
pilot programs. However, the Exchange proposes the ultimate addition of 
communications between two hand-held devices on the floor.
    As during the pilot programs, the Exchange will continue to 
prohibit wireless data communications either from a booth terminal or 
from a location on the trading floor to a location off of the floor. 
However, the same as under the pilot programs, a member subscribing to 
a wireless data communications service, whether from the Exchange or 
from a private vendor, may effect communications between a floor booth 
terminal and a member's off-floor system in the same ``wired'' manner 
as it can today, subject to applicable rules and policies. In addition, 
the subscribing member's booth terminal may interface with the 
Exchange's Common Message Switch (``CMS'') in order to allow the member 
to enter orders into the Exchange's SuperDOT System complex. That 
interface would not differ from today's booth/CMS interfaces and would 
be subject to existing CSM interface standards.
    Next, the Exchange proposes to only provide access to its wireless 
communications infrastructure to vendors that are member organizations. 
The Exchange anticipates that some member organizations that are 
interested in vending those services will enter into contracts with 
non-member organizations (e.g., traditional wireless data device 
vendors that desire to function as agents or contractors of the member 
organization) and that those contracts will delegate many of the 
service functions to those other entities. The Exchange is willing to 
permit that use of agents and contractors, so long as the member 
organization remains responsible for the performance of those functions 
and guarantees the performance of the agents and contractors.
    Additionally, the Exchange included as part of the 1995 Filing, a 
form of agreement (the ``Pilot Program Vendor Form'') pursuant to which 
the Exchange would allow vendors of wireless data communications 
services to provide those services to Exchange members for the purposes 
of the Phase I and Phase II pilot testing. Now that the pilot testing 
period is completed, the Exchange has derived from the Pilot Program 
Vendor Form two different forms of agreement that are designed for use 
by member organizations that wish to provide wireless data 
communications services to members in the Exchange's production roll-
out wireless data communications environment. One of those forms (the 
``Associated Member Form'') allows a member organization to provide 
such

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services to members that are officers, partners and employees of the 
member organization. The other form (the ``Revised Vendor Form'') 
allows a member organization to provide such services to other members.
    The primary differences of substance between the Pilot Program 
Vendor Form and the Revised Vendor Form are as follows. The Revised 
Vendor Form eliminates: (1) References to the creation and installation 
of the infrastructure; (2) permission to use radio bands other than 
that which the Exchange provides through its infrastructure; (3) a 
requirement that members migrate to the infrastructure once it becomes 
available; and (4) a limited Exchange obligation to support the 
communications equipment of private vendors.
    Also, the Revised Vendor Form clarifies that only member 
organizations may vend wireless data communications services on the 
Exchange's floor, but allows the member organization to delegate 
functions to agents and contractors, so long as the member organization 
guarantees the performance of the agents and contractors. The Revised 
Vendor Form will allow communications between members using hand-held 
devices at two different locations on the trading floor, as well as 
between a member using a hand-held device on the floor and a member at 
a booth terminal, as the Exchange permitted in the pilot programs.
    In addition, the Revised Vendor Form will not contain the 
restriction on participating vendors that they refrain from 
discriminating among the members to whom they are willing to provide 
their vendor services.\4\ The Exchange believes that the completion of 
the infrastructure means that the technology necessary to allow every 
member to enjoy wireless data communications services will be 
available, whether from a vending member organization or from the 
Exchange. In Phase IV, the production roll-out phase, the Exchange will 
therefore allow vending member organizations to enter into such 
wireless data communications arrangements with members as they may see 
fit. For instance, a member organization may vend a wireless data 
communication service to Exchange members, but may offer preferential 
terms and conditions to members with which it is affiliated. As a 
result, the Revised Vendor Form will eliminate: (1) the several 
provisions found in the Pilot Program Vendor Form that require the 
vendor to provide wireless data communications services only on 
unbiased, non-discriminatory grounds; and (2) the provision that limits 
the scope of any pilot program to 25 members.
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    \4\ The Commission notes that the anti-discrimination 
restrictions will still apply through the completion of Phrase III.
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    The Revised Vendor Form also will eliminate the provision that 
prohibits a vendor from representing that it is the sole vendor of 
wireless data communications services on the Exchange floor. Finally, 
the Exchange proposes to add to the Revised Vendor Form a provision 
that prohibits a vending member organization from introducing its 
service, or from modifying its equipment or transmission methodology, 
until the Exchange has seen the service or the modification operate 
satisfactorily. In addition, the Revised Vendor Form grants the 
Exchange the right to test a service and related equipment.\5\
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    \5\ Finally, the proposed rule change provides that: the NYSE is 
not liable to the vendor, any Authorized Service Recipient, or any 
other person, for lost profits; and that the vendor cannot represent 
that the NYSE provides the service, except for the infrastructure 
and certain other equipment in support of the wireless data 
communications services.
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    The vendor agreement form requires the vendor to prepare a 
description of its service for attachment to the form. Attachment A to 
the form (``the Revised Vendor Service Description'') sets forth the 
information that the Exchange requires the vendor to include in the 
service description. The Exchange proposes to eliminate, from that 
required information, information that completion of the infrastructure 
makes irrelevant. In addition, the Exchange proposes to add to those 
required items of information the vendor's method and location for 
storing devices when not in use. Furthermore, the Exchange proposes to 
clarify that among the rules and regulations with which the vendor is 
required to comply are all health and safety standards.\6\
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    \6\ The service description as so amended (the ``Revised Vendor 
Service Description'') is set forth in Attachment A to Exhibit A of 
the rule filing.
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    As an important element of the Pilot Program Vendor Form, the 
Exchange required a vendor of a Phase I or II pilot program to provide 
its service to a member only pursuant to a written contract with the 
member. The Exchange required that contract to govern six elements of 
the vendor-member relationship \7\ and to include certain provisions 
designed to protect the interests of the Exchange and its members. The 
Exchange set forth those requirements in an Attachment B to the Pilot 
Program Vendor Form. For the purpose of the Revised Vendor Form, the 
Exchange is proposing to amend those contract requirements in the 
manner set forth in Attachment B to Exhibit A (the ``Revised Vendor-
Member Agreement Terms''). The amendments: reflect the fact that the 
Exchange will now permit communications between members using hand-held 
devices at two different locations on the floor; remove the requirement 
that the vendor-member agreement must govern the six prescribed 
elements of the relationship; remove the Exchange-imposed termination 
requirements for terminations by the vendor or the subscribing member; 
and add that NYSE rules apply.
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    \7\ Responsibility for losses; training; system maintenance and 
support; technological limitations; the availability of equipment 
and spare parts; and service charges.
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    For the production roll-out phase, the Exchange has prepared the 
Associated Member Form for use by a member organization that wishes to 
provide wireless data communications services on the Exchange's trading 
floor solely to officers, partners and employees of the member 
organization that are Exchange members.\8\
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    \8\ A copy of the Associated Member Form is attached to the 
filing as Exhibit B. Attached as Attachment A to that form is a 
service description (the ``Associated Member Service Description''), 
modified from the Revised Vendor Service Description as necessary to 
reflect the associated member context.
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    The Associated Member Form contains provisions that are almost 
identical in substance to those found in the Revised Vendor Form, 
except that the Associated Member Form requires the member organization 
to take responsibility for the actions of its members and to assure 
that its members will comply with all provisions of the Form as well as 
with relevant laws, rules and regulations. For that reason, the 
Exchange does not propose to require the member organization to enter 
into an agreement with a subscriber to its wireless data communications 
service if the subscriber is an Exchange member that is an officer, 
partner or employee of the member organization. As a result, the 
Exchange does not propose to impose on the member organization a set of 
terms and conditions--for application between the member organization 
and its members--that parallel those set forth in the Revised Vendor-
Member Agreement Terms. However, the proposed rule change does add to 
the Associated Member Form a paragraph similar to one found in the 
Revised Vendor-Member Agreement Terms stating that if the Exchange 
determines that any Associated Member has failed to comply with the 
rules, policies and

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procedures of the NYSE, the Commission, or the Federal Communications 
Commission (``FCC''), then the vendor (customer) has to stop providing 
the Service to that Associated Member immediately, upon notice to the 
customer or after a reasonable amount of time after notice.
    As in respect of Phase II, the Exchange reserves the right to limit 
the number of vendors that may provide wireless data communications 
systems on the floor during Phase IV, based on the ability of the 
Exchange to maintain its regulatory oversight responsibilities in a 
satisfactory manner. In addition, as the Exchange gains experience with 
the use of wireless data communications technology on its floor, it may 
determine that additional restrictions, such as in respect of 
permissible transmissions or hardware, are warranted.
    The Exchange does not currently plan to charge vendors or Exchange 
members or member organizations for the privilege of providing wireless 
data communications services during Phase IV, although it reserves its 
right to do so. If the Exchange does determine to impose Phase IV 
charges or any other charges, it would first seek Commission approval 
of any such charge.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with the requirements of Section 6(b).\9\ Specifically, the 
Commission believes the proposal is consistent with the Section 
6(b)(5)\10\ requirements that the rules of an exchange be designed to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanisms of a 
free and open market and a national market system, and, in general, to 
protect investors and the public, by continuing to expedite and improve 
the efficiency of the process by which members receive and execute 
orders on the floor of the Exchange.\11\
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    The Commission believes that allowing communications between two 
hand-held devices located at two different positions on the floor is 
consistent with the Act and the original pilot approval because it will 
expedite and allow for more efficient processing of orders and 
dissemination of information among members on the floor, by eliminating 
the current necessary step of communicating with the booth terminal. A 
member may rely on the information it receives from another member on 
the floor through a hand-held wireless device to make trading 
decisions, without having to first communicate with the booth. The 
Commission notes the pilot testing has demonstrated that the Exchange's 
wireless data communications infrastructure has the capacity to 
accommodate those communications. The Commission also notes that the 
restriction will still apply that any order or information coming from 
off the floor must go to a booth terminal before it can be transmitted 
to someone on the floor of the Exchange.
    The Commission also believes that it is consistent with the Act to 
allow the Exchange to provide access to its wireless data 
communications infrastructure only to vendors that are member 
organizations because only member organizations are subject to the 
Exchange's Constitution, rules, and oversight. The Exchange notes that 
the only vendors that participated in wireless data communications 
service pilot tests during Phases I and II were a member organization 
of the Exchange and a party affiliated with a member organization of 
the Exchange. It is unlikely that this restriction will dampen the 
availability of available vendors, given that member organizations will 
be allowed to contract out the provided vendor services.
    The Commission believes that the proposed changes to the Pilot 
Program Vendor form, resulting in two separate forms, the Revised 
Vendor Form and the Associated Member Form, are consistent with the 
Act. The Commission believes that the proposed changes that eliminate 
references to the creation and installation of the infrastructure, 
permission to use radio bands other than that which the Exchange 
provides through its infrastructure, the requirement that members 
migrate to the infrastructure once it becomes available, and a limited 
Exchange obligation to support the communications equipment of private 
vendors, are reasonable because the Exchange will use the Revised 
Vendor Form in an environment in which the Exchange will already have 
completed the development and installation of its wireless data 
communications infrastructure.
    In addition, because the Exchange limited the scope of the Phase I 
and II pilot programs and will similarly limit Phase III pilot 
programs, the Exchange insisted that each participating vendor refrain 
from discriminating among the members to whom it was willing to provide 
its pilot service through the end of Phase III. However, the completion 
of the infrastructure means that the technology necessary to allow 
every member to enjoy wireless data communications services will be 
available, whether from a vending member organization or from the 
Exchange. Therefore, in Phase IV, the production roll-out phase, the 
proposed rule change will allow vending member organizations to enter 
into such wireless data communications arrangements with members as 
they may see fit. The Commission believes that this portion of the 
proposed rule change will not result in unfair discrimination between 
customers, issuers, brokers, and dealers, in part because the NYSE's 
own system will be available to everyone,\12\ which means that a member 
will always be able to have access to wireless data communication 
services. The Commission notes that eliminating the non-discriminatory 
requirements allows both vendors and potential customer/members to 
negotiate more freely regarding various aspects of the service.
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    \12\ Phone call between Santo Famularo, NYSE and Heather Seidel, 
Attorney, Market Regulation, Commission, on October 3, 1997.
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    The Commission believes that the proposed rule change that 
eliminates from the Revised Vendor Form the provision that prohibits a 
vendor from representing that it is the sole vendor of wireless data 
communications services on the Exchange floor is reasonable under the 
Act because the Exchange feels certain that all members will be aware 
that the Exchange and certain member organizations will provide service 
alternatives.\13\
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    \13\ The Exchange has represented that it will circulate a 
bulletin to its members informing them that there will be service 
alternatives through Exchange members and the Exchange itself. 
Telephone conversation between Santo Famularo, NYSE, and Heather 
Seidel, Attorney, Market Regulation, Commission, on November 25, 
1997.
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    Finally, the Commission believes that the addition to the Revised 
Vendor Form of a provision that prohibits a vending member organization 
from introducing its service, or from modifying its equipment or 
transmission methodology, until the Exchange has seen the service or 
the modification operate satisfactorily, and allows the Exchange to 
test the service

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or related equipment, is consistent with the Act. The Commission 
believes that this change gives the Exchange sufficient authority to 
oversee its infrastructure by strengthening the Exchange's contractual 
safeguards at a time \14\ when the Exchange will allow vendors to have 
access to the Exchange's infrastructure, unlike Phases I and II, and 
when the Exchange may not have the same degree of communication with 
vending member organizations as it has had during the earlier 
phases.\15\
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    \14\ The Commission notes that the Revised Vendor Form is to be 
used only during Phase IV.
    \15\ The Commission believes that the proposed changes to the 
Revised Vendor Service Description, which sets forth the information 
that the Exchange requires the vendor to include in the service 
description, are consistent with the Act because the proposed 
changes eliminate the requirement of certain information that 
completion of the infrastructure makes irrelevant.
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    The Commission believes that the Revised Vendor-Member Agreement 
Terms \16\ are consistent with the Act.\17\ The proposed change that 
will remove the requirement that the vendor-member agreement must 
govern the six prescribed elements of that relationship is reasonable 
under the Act because it allows both the vendor and the member greater 
flexibility in fashioning a service agreement that is agreeable to both 
parties. Now that there will be no restriction on the number of 
customers a vendor may have,\18\ and the Exchange's service will be 
available to all parties who wish to utilize it, it is reasonable to 
allow the vendors and members more freedom in structuring their service 
agreements, within the boundaries set forth in the Revised Vendor Form 
and its attachments. Also, the provision that adds that the NYSE 
Constitution and rules apply is consistent with the Act because the 
NYSE is charged with ensuring that its members (and hence, the vendors 
and their customers) comply with the NYSE rules.
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    \16\ See supra note 7 and accompanying text.
    \17\ The proposed rule change that permits communications 
between members using hand-held devices at two different locations 
on the floor is incorporated into this document and is consistent 
with the Act for the same reasons discussed above.
    \18\ The vendor must still not exceed capacity.
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    The Commission notes that the Associated Member Form contains 
provisions that are almost identical in substance to those found in the 
Revised Vendor Form.\19\ However, under the proposed rule change, the 
Associated Member Form requires the member organization to take 
responsibility for the actions of its members and to assure that its 
members will comply with all provisions of the Form as well as with 
relevant laws, rules and regulations. For that reason, the Exchange 
does not propose to require the member organization to enter into an 
agreement with a subscriber to its wireless data communications service 
if the subscriber is an Exchange member that is an officer, partner or 
employee of the member organization; as a result, the proposed rule 
change does not impose on the member organization a set of terms and 
conditions that parallel those set forth in the Revised Vendor-Member 
Agreement Terms. The Commission believes that this portion of the 
proposed rule change is consistent with the Act because it still 
provides for sufficient control over the vendor-customer relationship 
and notes that the proposed rule change does provide that the vendor 
must terminate its relationship with an Associated Member whom the 
Exchange has determined has failed to comply with the rules, policies, 
and procedures of the NYSE, the Commission, or the FCC.
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    \19\ Therefore, the Commission believes that the reasoning 
behind approving the changes to the Revised Vendor Form also applies 
to the Associated Member Form, for the similar proposed changes.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-NYSE-97-17) is approved.

    \20\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-32028 Filed 12-5-97; 8:45 am]
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