20844 Federal Register / Vol. 66, No. 80 / Wednesday, April 25, 2001 / Notices

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

2 17 CFR 240.19b–4.

3 In Amendment No. 1, NYSE modified references

the Exchange had made to the Commission’s Quote

Rule.

4 In Amendment No. 2, NYSE removed all

references to the Commission’s Quote Rule. NYSE

also eliminated its proposed exemption for bids or

offers relating to program trading orders entered

into an ECN or other market centers by an upstairs

trading operation conducted by a specialist member

organization.

5Securities Exchange Act Release No. 41397 (May

13, 1999), 64 FR 27610.

6The Exchange defines ‘‘specialist’’ as an

individual specialist on the floor.

7 ‘‘Another market center’’ means a registered

national securities exchange or registered national

securities association.

8The Exchange views ‘‘communicate’’ in this

context to require the specialist to make the price,

whether the bid or the offer, available for execution

on the Exchange. The specialist would then be

liable for executions at this price on both the

Exchange and on the ECN or other market center.

9The proposed rule applies only to specialists

when they add liquidity to an ECN or another

market center (i.e., enter a new bid or offer) and not

when they remove liquidity (i.e., hit a pre-existing

bid or offer) or enter ‘‘fill-or-kill’’ orders.

10See letter from Mike Cormack, Manager, Equity

Trading, ACIM, to Jonathan G. Katz, Secretary, SEC,

dated July 28, 1999. The Commission received two

substantially similar comment letters from

Archipelago. See letters from Gerald D. Putnam,

CEO, Archipelago, to Jonathan G. Katz, Secretary,

SEC, dated July 20 and July 21, 1999.

11See Letter from James E. Buck, Senior Vice

President and Secretary, NYSE, to Jonathan G. Katz,

Secretary, SEC, dated September 23, 1999.

12Securities Exchange Act Release No. 37619A

(September 6, 1996), 61 FR 48290 (September 12,

1996). 13 15 U.S.C. 78k–1. 14Rule 19c–1 precludes exchanges from

prohibiting exchange members from routing

customer orders to off-exchange trading venues. 17

CFR 240.19c–1. 15Archipelago also noted that off-exchange

restrictions on proprietary specialist trading are

inconsistent with the NMS as well. 16 17 CFR 240.19b–4.

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–44194; File No. SR–NYSE–

97–18]

Self-Regulatory Organizations; New

York Stock Exchange, Inc.; Order

Approving Proposed Rule Change

Relating to Specialists’ Entry of Bids

and Offers in Electronic

Communications Networks and Other

Market Centers

April 18, 2001.

I. Introduction

On June 2, 1997, the New York Stock

Exchange, Inc. (‘‘NYSE’’ or ‘‘Exchange’’)

submitted to the Securities and

Exchange Commission (‘‘SEC’’ or

‘‘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

prohibit a specialist from entering bids

and offers in electronic communications

networks (‘‘ECNs’’) or other market

centers at prices superior to the

specialist’s quote on the Exchange. On

November 19, 1997, the Exchange

submitted Amendment No. 1 to the

proposed rule change.3 On February 10,

1999, the Exchange submitted

Amendment No. 2 to the proposed rule

change.4

The proposed rule change, including

Amendment Nos. 1 and 2, were

published for comment in the Federal

Register on May 20, 1999.5 The

Commission received three comment

letters on the proposal. This order

approves the proposed rule change as

amended.

II. Description of the Proposal

The proposal would amend NYSE

Rule 104.10 to explain that a specialist 6

has a duty to quote his or her best bid

and offer on the Exchange. Under the

proposed rule, a specialist’s bid or offer

for a specialty stock on the Exchange

could not be inferior to his or her bid

or offer in an ECN or another market

center.7 Thus, if a specialist placed a bid

or offer in an ECN or on another market

center at a price superior to the then

disseminated best bid or offer on

Exchange, the specialist would be

required to communicate 8 such price to

the Exchange.

In addition, the proposed rule change

would prohibit a specialist from

entering a bid or offer for a specialty

stock in an ECN or on another market

center at a price variation in which the

specialist would not be permitted to

quote or trade under Exchange rules.

The Exchange believes that if the

specialist placed a superior priced bid

or offer in an ECN 9 or other market

center at a variation that could not be

quoted or traded on the Exchange, the

specialist would be unable to satisfy his

or her specialist obligations, i.e., the

specialist could not trade at his or her

best bid or offer with contra-side

marketable orders received on the

Exchange. Also, if the specialist placed

in an ECN or other market center an

inferior bid or offer at a variation not

accepted by the Exchange and the order

was subsequently executed on the ECN

or other market center, the specialist

could not satisfy any superior-priced

orders on his or her book at the price of

his or her trade off the Exchange,

consistent with his or her

responsibilities as agent.

III. Summary of Comments

The Commission received comment

letters from American Century

Investment Management (‘‘ACIM’’) and

Archipelago, LLC, opposing the

proposed rule change.10 The Exchange

responded to these letters but did not

amend the proposed rule change.11

In its letter, ACIM suggested that the

proposal was an attempt by the NYSE to

control the trading of its own member

firms to protect the NYSE’s monopoly of

listed equity trading in the U.S. ACIM

urged the Commission to reject the

proposal because it limits the

competitiveness of the U.S. equity

markets, raises the costs for investors,

and conflicts with the Order Handling

Rules (‘‘OHR’’) 12 by limiting the choices

of specialists in the display and routing

of orders. ACIM also questioned how

the proposal would be implemented

after decimalization, asking: (1) Will the

specialist be forced to follow the

increment selected by the NYSE, and (2)

what happens to orders routed to the

NYSE that do not meet the increment

guidelines of the NYSE? In addition,

ACIM argued that when a specialist

faces the possibility of double liability

because the specialist has used an ECN

to post an order, the NYSE should not

be able to mandate procedures for the

specialist’s behavior; the specialist

should be able to make his own

investment decisions.

Archipelago also challenged the

proposal as anti-competitive.

Specifically, Archipelago charged that

the proposal violates the 1975

Amendments to the Act 13 and Rule

19c–1 14 because it undermines the

concept of the National Market System

(‘‘NMS’’) by severely limiting the ability

of specialists to use ECNs in an agency

capacity, which in turn prevent

specialists from meeting their best

execution obligations to customers.15 In

addition, the proposal deprives

investors of pricing efficiency and

flexibility; specifically the ability to

enter competitively priced limit orders

in sub-$1/16 increments. Archipelago

further commented that the proposal, by

limiting the ability of specialists to use

ECNs competitively, is an attempt to

circumvent the OHR, which require full

integration of ECNs into the

marketplace. Lastly, Archipelago stated

that the NYSE has not provided any

meaningful analysis concerning the

competitive effects of the proposal as

required by Rule 19b–4,16 offering only

perfunctory boilerplate.

In response, the Exchange argued that

Archipelago and a ACIM’s letters

mischaracterized the NYSE’s proposal

and raised broad policy questions

regarding the future evolution of the

NMS that are not relevant to the

Federal Register / Vol. 66, No. 80 / Wednesday, April 25, 2001 / Notices 20845

17 15 U.S.C. 78f(b)(5) and 78f(b)(8).

18 In approving this rule, the Commission has

considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

U.S.C. 78c(f).

19 15 U.S.C. 78k(b).

20 17 CFR 240.11b–1.

21See, e.g., 17 CFF 240.11b–1; NYSE Rule 104.

22See supra note 11 at 48316; see also NYSE Rule

79A.

23Currently, the exchanges have adopted a

minimum price variation of a penny. See Securities

Exchange Act Release No. 42914 (June 8, 2000).

24 15 U.S.C. 78s(b)(2).

25 17 CFR 200.30–3(a)(12).

proposed rule change. Specifically, the

NYSE responded that the proposal does

not undermine the NMS or Rule 19c–1

because the proposal does not impose

any restrictions on the routing of

customer orders. The proposal only sets

standards for a specialist’s market maker

bid or offer on the exchange. The NYSE

also stated that the proposal is

consistent with the OHR because it does

not impose any restrictions on a

specialist’s responsibility to display

customer orders.

Further, the NYSE wrote that the

proposal does not impose any burden

on competition not necessary or

appropriate in furtherance of the

purposes of the Act with respect to the

routing of customer limit orders to ECNs

or other market centers. The NYSE

opined that the restriction on specialists

is appropriate because it is designed to

ensure that specialists’ dealer capital is

committed to meeting their affirmative

obligation to maintain fair and orderly

markets in the primary market in which

they are registered as dealers. Finally,

the NYSE argued that each market

center would determine its own decimal

trading variation. If these variations are

the same, then the restriction against

bidding or offering at a variation not

permitted on the Exchange will not

apply. In any event, the NYSE suggested

that contra side order flow would seek

to trade at whatever variation it chooses.

IV. 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)(5) and

6(b)(8).17 Section 6(b)(5) requires that

the rules of an exchange be designated

to promote just and equitable principles

of trade, and, in general, to protect

investors and the public interest.18

Section 6(b)(8) requires that the rules of

an exchange do not impose any burden

on competition not necessary or

appropriate in furtherance of the

purposes of the Act. Further, the

Commission finds that the proposal is

consistent with section 11(b) of the

Act 19 and Rule 11b–1 thereunder,20

which allow exchanges to promulgate

rules relating to specialists to ensure

orderly markets.

Specialists play a crucial role in

providing stability, liquidity, and

continuity to the trading of securities on

the Exchange. In return for the privilege

of serving as the only specialist in

stocks traded on the NYSE, which as the

primary market for listed stocks

continues to receive a significant

percentage of the order flow, the NYSE

improves conditions designed to

improve the quality of its market.

Among the obligations imposed upon

specialists by the Exchange, and by the

Act and rules thereunder, is the

maintenance of an orderly market in

designated securities.21 To ensure that

specialists fulfill these obligations, it is

important that the Exchange have the

ability to implement rules and develop

measures to guide and improve

specialists’ performance. The

Commission believes that the proposal

is consistent with the Exchange’s

objective to promote the maintenance of

orderly markets because it enhances the

Exchange’s ability to encourage

improved specialist performance and

market quality by clarifying specialists’

duty at the NYSE—to quote his or her

best bid and offer on the Exchange.

The Commission carefully considered

the concerns expressed by Archipelago

and AICM in their letters opposing the

proposal. Although the proposed rule

change places restrictions on specialists,

the Commission finds that the

restrictions are reasonable. First, NYSE’s

proposal only applies to the bids and

offers of individual specialists on the

floor of the Exchange. The Commission

notes that the NYSE has amended the

proposal so that it no longer applies to

affiliates of individual specialists.

Therefore, the proposal is limited to the

firms that benefit from the privilege of

acting as specialists on the NYSE.

Second, the proposal is not inconsistent

with Rule 19c–1 because it does not

impose restrictions on the routing of

customer orders. Third, it is not

inconsistent with the OHR because it

does not impose restrictions on a

specialist’s responsibility to display

customer orders. Specialists will

continue to have an obligation under the

OHR to display a customer limit order

that betters their quote.22 Fourth,

exchanges have historically maintained

a minimum increment for quoting and

trading listed securities on the exchange

in order to ensure fair and orderly

trading, including capacity limitations

of exchange computer systems.23 Fifth,

as discussed above, exchanges need to

have the ability to set standards for

specialists’ performance. This proposal

with allow specialists to meet their

obligations by ensuring that if a

specialist places a superior priced bid or

offer on an ECN or other market center,

the specialist can trade at his or her best

bid or offer with contra-side marketable

orders received on the Exchange.

For these reasons, the Commission

finds that the proposal is consistent

with the Act, including sections 6(b)(5),

6(b)(8) and 11(b), in that it does not

impose any burden on competition that

is not necessary or appropriate in

furtherance of the Act.

V. Conclusion

It is Therefore Ordered, pursuant to

section 19(b)(2) of the Act,24 that the

proposed rule change (SR–NYSE–97–

18), as amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.25

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–10232 Filed 4–24–01; 8:45 am]

BILLING CODE 8010–01–M

OFFICE OF THE UNITED STATES

TRADE REPRESENTATIVE

[Docket No. 301–121]

Notice of Change in Location of Public

Hearing: Intellectual Property Laws

and Practices of the Government of

Ukraine

AGENCY: Office of the United States

Trade Representative.

ACTION: Notice.

SUMMARY: The location of the public

hearing scheduled for April 27, 2001 in

the Section 302 investigation of the

intellectual property laws and practices

of the Government of Ukraine has been

changed to the Office of the United

States Trade Representative, 1724 F

Street, NW., Rooms 1 and 2,

Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Sybia Harrison, Staff Assistant to the

Section 301 Committee, (202) 395–3419;

or William Busis, Associate General

Counsel, (202) 395–3150.

SUPPLEMENTARY INFORMATION: In a notice

published on April 6, 2001 (66 FR