[Federal Register Volume 66, Number 108 (Tuesday, June 5, 2001)]
[Notices]
[Pages 30256-30257]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-14027]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44352; File No. SR-NYSE-2001-08]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the New York Stock Exchange, Inc. 
Amending Its Rules To Provide for the Trading of Exchange-Traded Funds 
on an Unlisted Trading Privileges Basis

May 25, 2001.
    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 April 25, 2001, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule changes is described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. On May 22, 2001, the NYSE filed Amendment No. 1 to the 
proposed rule change.\3\ 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\ See letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Nancy Sanow, Assistant Director Division of 
Market Regulation, Commission, dated May 21, 2001 (``Amendment No. 
1''). In Amendment No. 1, the NYSE amended the proposed rule text to 
reflect the correct wording of current NYSE Rule 36,
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend the following NYSE rules and 
policies to accommodate the trading of certain exchange-trade funds 
(``ETFs'') on an unlisted trading privileges (``UTP'') basis: NYSE Rule 
98, NYSE Rule 36, paragraph (1) of the Guidelines to NYSE Rule 105, 
NYSE Rule 111, NYSE Rule 13, NYSE Rules 104.20 and 104.21, and the 
NYSE's Market-On-Close/Limit-At-The-Close and Pre-Opening Price 
Indications Policies.
    The text of the proposed rule change is available upon request from 
the Office of the Secretary, the NYSE or the Commission.

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. The 
text of these statements may be examined at the placed 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
    As part of its overall business strategy, the Exchange believes 
that it appropriate to trade ETFs on the NYSE Floor. In December 2000, 
the Exchange began trading an ETF on the S&P Global 100 (symbol 
IOO).\4\ The Exchange intends to trade additional ETFs listed by other 
ETF sponsors, on a UTP basis, that are currently listed and trading on 
other markets. These ETFs may include the NASDAQ 100 Trust (symbol 
QQQ), Standard and Poor's Depositary Receipts (symbol SPY) and the Dow 
Industries DIAMONDS (symbol DIA). It should be noted the UTP ETFs will 
trade at a post separate from any other type of security trading on the 
Exchange.
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    \4\ See Securities Exchange Act Release No. 43658 (December 1, 
2000), 65 FR 77408 (December 11, 2000).
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Summary of Proposed Rule and Policy Changes

NYSE Rule 98

    Exchange Rule 98 provides that affiliates of a specialist 
organization can receive an exemption from certain rules applicable to 
specialists (principally impacting proprietary trading and investment 
banking), providing that they establish a system of information 
barriers between themselves and the affiliated specialist. One of the 
conditions for the NYSE Rule 98 exemption is that the specialist 
organization be capitalized separately and apart from any affiliate. 
The Exchange is proposing to delete this requirement in the case of a 
specialist organization that is registered solely in ETFs. The Exchange 
believes that the question of adequacy of capital can be appropriately 
addressed by the special allocation committee \5\ in allocating the 
ETF. However, a specialist organization that is registered only in 
ETF's will remain subject to the minimum capital requirements specified 
in NYSE Rule 104.20.
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    \5\ See Securities Exchange Act Release No. 44272 (May 5, 2001).
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NYSE Rule 105

    Currently, Guideline (1) to NYSE Rule 105 prohibits affiliates of 
specialist units from acting as a primary market maker in the option on 
a specialty security. The NYSE proposes to permit an affiliate of a 
NYSE ETF specialist to act in any market making capacity with respect 
to options on an ETF as long as NYSE rule 98 information barriers are 
established.\6\ the Exchange believes that, because ETFs are 
derivatively priced, the conflicts of interest with respect to market 
making in both the underlying security and its corresponding option are 
not present. The Exchange also proposes to permit an affiliate of the 
EFT specialist to act in a market making capacity (but not as a 
specialist) in the EFT itself on another market center so long as NYSE 
Rule 98 information barriers are established.
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    \6\ As discussed above, the NYSE has proposed to eliminate the 
separate capital requirement with respect to ETF specialists. See 
also Securities Exchange Act Release No. 44175 (April 11, 2001), 66 
FR 19825 (April 17, 2001).
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NYSE Rules 36.30 and 111

    NYSE Rule 36.30 governs the establishment of telephone or 
electronic communications between the Exchange's trading floor and any 
other location.\7\ The Exchange proposes to

[[Page 30257]]

permit ETF specialists to use communication devices at the Post to 
enter proprietary orders in the ETF, or in component securities of the 
ETF and would permit the ETF specialist to obtain market information 
with respect to ETFs, options, futures, and component securities.
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    \7\ Currently, NYSE Rule 36.30 allows specialists to have 
telephone lines to the floor of an options or futures exchange for 
the purpose of entering hedging orders.
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    The Exchange proposes to amend NYSE Rule 111 to permit the NYSE ETF 
specialist to initiate an order at the post in component stocks of the 
ETF for hedging purposes. The Exchange believes this will put Exchange 
ETF specialists on an equal footing with market makers in ETFs on other 
market centers.

NYSE Rule 13

    NYSE Rule 13 currently provides that stop and stop limit orders in 
an ETF can be elected by a bid (in the case of an order to buy) or an 
offer (in the case of an order to sell), provided that the specialist 
obtains the prior approval of a Floor Governor or two Floor Officials. 
The Exchange proposes to delete this prior approval requirement, 
because it believes that such a requirement may prove cumbersome and 
impractical in markets in which bids and offers are changing to reflect 
the relationship between ETFs and their component securities, and stop 
orders, which can only be elected by transactions, may receive inferior 
prices.

NYSE Rules 104.20 and 104.21--Capital Requirement

    NYSE Rules 104.20 and 104.21 are proposed to be amended to provide 
a capital requirement of $500,000 per ETF. A specialist registered only 
in an ETF would be subject to the $1,000,000 minimum capital 
requirement of NYSE Rule 104.20. The Exchange believes at the present 
time that these requirements are reasonable but reserves the right to 
revisit these requirements in terms of actual experience.

NYSE'S Market-On-Close/Limit-At-The-Close Policy

    The Exchange proposes that orders in ETFs will not be subject to 
the Exchange's Market-On-Close (``MOC'')/ Limit-At-The-Close (``LOC'') 
policy concerning order entry limitations, cancellation of orders 
during a regulatory halt, imbalance publications, and any other 
limitations or procedures with respect to MOC/LOC procedures. A MOC/LOC 
order in an ETF would be permitted to be entered at any time without 
regard to the limitations of the Exchange's MOC/LOC policies. In 
addition, the closing price of an ETF will not be subject to 
publication of imbalances under the Exchange's MOC/LOC policy. 
Furthermore, ETFs will trade until 4:15 p.m.
    Similarly, the Exchange proposes that its policies regarding 
mandatory dissemination of pre-opening price indications (other than 
ITS pre-opening notifications) in the case of significant order 
imbalances and potentially large price dislocation from the prior close 
will not apply to ETFs. Both the MOC/LOC procedures and the mandatory 
pre-opening price indications policy are intended to solicit offsetting 
contra side interest to minimize price dislocation. This rationale does 
not apply in the case of ETFs, which will be priced in relation to the 
values of the underlying component securities, regardless of the extent 
of an order imbalance.
    The Exchange will inform its members and member organizations of 
these proposed changes to its policies by publication of an Information 
Memo.
2. Statutory Basis
    The Exchange believes the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act \8\ in general, and furthers 
the objectives of Section 6(b)(5) of the Act \9\ 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.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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    More specifically, the Exchange believes that trading ETFs on a UTP 
basis will provide investors with increased flexibility in satisfying 
their investment needs because they will be able to purchase and sell a 
security that replicates the performance of a broad portfolio of stocks 
at negotiated prices throughout the business day.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in the 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 such 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, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. 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 submissions should refer to File No. 
SR-NYSE-2001-08 and should be submitted June 20, 2001.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-2(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-14027 Filed 6-4-01; 8:45 am]
BILLING CODE 8010-01-M