Document ID: SEC-2008-0268-0001
Agency: sec
Document Type: Notice
Title: 1. Purpose   The NYSE proposes a new rule to provide the Exchange with the authority to cancel or adjust clearly erroneous trades of securities executed on or through the systems and facilities of the NYSE.
Posted Date: 2008-02-20T05:00Z

[Federal Register: February 20, 2008 (Volume 73, Number 34)]
[Notices]               
[Page 9371-9373]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20fe08-124]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57323; File No. SR-NYSE-2008-09]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change, 
and Amendment No. 1 Thereto, To Permit the Exchange To Modify or Cancel 
Clearly Erroneous Trades

February 13, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on January 28, 2007, New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared substantially by NYSE. On 
February 8, 2008, NYSE submitted Amendment No. 1 to the proposed rule 
change.\3\ NYSE filed the proposed rule change as a ``non-
controversial'' proposed rule change pursuant to Section 19(b)(3)(A) of 
the Act \4\ and Rule 19b-4(f)(6) thereunder,\5\ which renders it 
effective upon filing with the Commission. 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\ In Amendment No. 1, the Exchange made technical and 
clarifying revisions to the purpose section and Exhibit 1 of the 
filing and amended the text of new Rule 128 to allow a request for 
review of a clearly erroneous execution to be made in person on the 
Floor of the Exchange.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to adopt new Rule 128 on an interim, six 
month basis, to permit the Exchange to cancel or adjust clearly 
erroneous executions if they arise out of the use or operation of any 
quotation, execution or communication system owned or operated by the 
Exchange, including those executions that occur in the event of a 
system disruption, system malfunction or equipment changeover.
    The text of the proposed rule change is available at http://www.nyse.com
, the principal office of NYSE, and 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, NYSE included statements 
concerning the purpose of and basis for the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NYSE 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 NYSE proposes a new rule to provide the Exchange with the 
authority to cancel or adjust clearly erroneous trades of securities 
executed on or through the systems and facilities of the NYSE. 
Currently, Rule 128B (Publication of Changes, Corrections, 
Cancellations or Omissions and Verifications of Transactions) permits 
the NYSE to cancel a trade when all

[[Page 9372]]

parties agree, such as when the execution in question was erroneous and 
a Floor Official concurs in the cancellation. However, such action 
cannot be taken if one or both parties to the trade do not agree to 
cancel the trade. Additionally, the Exchange has no authority, on its 
own initiative, to cancel or adjust an execution when such execution is 
clearly erroneous.
    Most other national securities exchanges have some version of a 
clearly erroneous execution rule, and the NYSE is currently in 
discussions with the Commission to adopt a robust and market-
appropriate rule of its own. In the interim, however, the Exchange 
lacks the authority to cancel or adjust executions of securities in 
situations where there has been a clearly erroneous trade.
    In an era of interconnected markets and highly sophisticated 
electronic trading, the NYSE's inability to cancel or adjust trades 
presents a risk to the integrity of the equities markets and all 
related markets. This is because a clearly erroneous order will likely 
be executed on multiple exchanges, not just the NYSE, but whereas 
trades executed on other markets will be subject to cancellation and/or 
adjustment through the enforcement of those markets' clearly erroneous 
execution rules, trades executed on the NYSE will stand. This would 
render an unequal result in plainly identical circumstances.
    To address this gap in otherwise analogous trading situations, the 
NYSE proposes to adopt an interim rule based on a clearly erroneous 
trade rule used by NYSE Arca, Inc.\6\ The proposed NYSE rule would 
sunset after six months (subject to renewal by application to the 
Commission), which will give the NYSE and Commission staff an 
opportunity to develop a more robust and market-appropriate clearly 
erroneous execution rule, without risking the integrity of the market 
in the interim.
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    \6\ See NYSE Arca Equities Rule 7.10 (Clearly Erroneous 
Executions).
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Description of the Proposed Rule
    The proposed rule sets forth the process through which the Exchange 
may review certain executions and declare them null and void or 
otherwise modify their terms. The rule contemplates primarily two 
scenarios: (i) Clearly erroneous trades, which are trades where one 
element of the trade (side of the market, size of the trade, price of 
the trade, or security symbol) is obviously incorrect and needs to be 
corrected; and (ii) trades resulting from extraordinary market 
conditions or other circumstances in which the cancellation of the 
trades is necessary in order to maintain a fair and orderly market or 
to protect the public interest.
    Among other things, the proposed rule authorizes the NYSE to 
receive complaints from market participants requesting designated 
officers of the Exchange to review the terms of the execution and 
creates a process by which the parties to the trade and the Exchange 
can conduct the review and determine whether to nullify or modify the 
execution in question if it is found to be clearly erroneous. Requests 
for review of a clearly erroneous execution by an officer of the 
Exchange may be made via telephone, facsimile, e-mail or in person on 
the Floor of the Exchange.
    In the event the designated officer of the Exchange determines that 
the transaction in dispute is clearly erroneous, the officer is 
authorized to declare the transaction null and void or modify one or 
more of the terms of the transaction to achieve an equitable 
rectification of the error placing the parties in the same position, or 
as close as possible to the same position in which they would have 
been, had the error not occurred.
    The proposed rule also provides that the NYSE may, on its own 
initiative, review trades that it believes are clearly erroneous, and 
may cancel or modify such trades if necessary to protect the integrity 
of the markets or the public interest. Such trades may take place in 
connection with a malfunction or disruption of any systems, electronic 
communications, and trading facilities of the Exchange, or in 
connection with extraordinary market conditions or other circumstances. 
The Exchange believes that errors due to these types of conditions 
warrant a review irrespective of whether an Exchange member or member 
organization complains. Moreover, such reviews are consistent with 
standard industry practices.\7\
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    \7\ See, e.g., Nasdaq Rule 11890(b).
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    Under the circumstances described above, the provision allows the 
designated reviewing officer, on his or her own motion, to review these 
transactions and declare such transactions arising out of the use or 
operation of such facilities during such period null and void or modify 
the terms of these transactions if the officer determines that the 
transactions are clearly erroneous, or that such actions are necessary 
for the maintenance of a fair and orderly market or for the protection 
of investors and the public interest. Absent extraordinary 
circumstances, action by the officer must be taken within 30 minutes of 
detection of the erroneous transaction, in accordance with the 
procedures set out in the rule.
Appeal Process
    The proposed rule permits a party affected by the NYSE's decision 
to cancel or modify a clearly erroneous trade to request an appeal to 
the Clearly Erroneous Execution Panel (``CEE Panel'') to review the 
determination, and sets out the process for doing so. The members of 
the CEE Panel are the NYSE Chief Regulatory Officer (``CRO''), or the 
CRO's designee,\8\ and representatives from two members or member 
organizations.\9\
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    \8\ The Exchange represents that a designee of the CRO will be 
an employee of the Exchange, working closely with and reporting 
directly to the CRO. The Exchange notes that NYSE Arca Equities Rule 
7.10 designates a CEE Panel to independently make appeals decisions 
and also to overturn or modify actions taken by the Exchange. See 
NYSE Arca Equities Rule 7.10(c)(2).
    \9\ The Exchange shall designate at least 10 member or member 
organization representatives to be called upon to serve on the CEE 
Panel.
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    The procedures for both the initial decision and the appeal reflect 
a balance between giving the parties adequate time to respond to the 
decision, and the need for market certainty that a trade either will or 
won't stand. Thus, for example, requests for an appeal must be made via 
facsimile or e-mail within 30 minutes after the party requesting the 
appeal is given notification of the initial determination, after which 
the CEE Panel will review the information and make a final 
determination to either affirm or overturn or modify the action taken 
by the Officer. All final determinations made by the CEE Panel are 
without prejudice to the rights of the parties to the transaction to 
submit their dispute to arbitration. In order to discourage frivolous 
or abusive use of the appeal process, the Exchange will assess a 
$500.00 fee against the Exchange member or member organization that 
initiated the request for appeal if the outcome of the appeal is to 
uphold the initial decision of the Exchange officer.
Trade Nullification and Price Adjustment for Securities Admitted to 
Unlisted Trading Privileges on the NYSE (``UTP'') That Are the Subject 
of Initial Public Offerings (``IPOs'')
    Pursuant to Rule 12f-2 under the Act,\10\ the Exchange may extend 
unlisted trading privileges to a security that is the subject of an 
initial public offering when at least one transaction in the subject 
security has been effected on the national securities exchange or

[[Page 9373]]

association upon which the security is listed and the transaction has 
been reported pursuant to an effective transaction reporting plan. The 
proposed rule provides the Exchange with authority to nullify trades 
and adjust prices for securities that are the subject of initial public 
offerings. The Exchange believes that a separate provision is 
appropriate because the Exchange's intent is always to adjust the price 
of an opening trade on the Exchange if it is away from the price the 
issue opens on the listing market. Thus, if the price of the trade is 
either $1.00 or 10% away from the opening price on the listing market, 
the trade would be automatically adjusted to the opening price. In such 
circumstances, the designated reviewing officer shall declare the 
opening transaction null or adjust the transaction price to the opening 
price on the listed exchange or association. Clearly erroneous 
executions of subsequent trades in the subject security will be 
reviewed in the same manner as those subject to the general guidelines. 
Consistent with the clearly erroneous executions rule set forth in the 
proposed rule, this provision also provides an immediate appeal process 
for determinations.
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    \10\ 17 CFR 240.12f-2.
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2. Statutory Basis
    The proposed rule change is consistent with the provisions of 
Section 6 of the Act,\11\ in general, and with Section (b)(5) of the 
Act,\12\ in particular, in that it is designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, 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. NYSE believes the proposed 
rule would place the NYSE on an equal footing with other national 
securities exchanges. This will promote the integrity of the market and 
protect the public interest, since it would permit all exchanges to 
cancel or adjust clearly erroneous trades when such trades occur, 
rather than canceling them on all other markets, but leaving them 
standing on only one market.
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    \11\ 15 U.S.C. 78f.
    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NYSE does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act\13\ and Rule 19b-
4(f)(6) thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Commission has determined to waive the five-day pre-filing 
period in this case.
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    NYSE has requested that the Commission waive the 30-day operative 
delay. The Commission notes that the proposed rule is based on a rule 
that has been previously approved by the Commission.\15\ The Commission 
believes that waiving the 30-day operative delay will allow the 
Exchange to immediately and timely cancel or adjust trades that it 
determines to be clearly erroneous under Rule 128. The Commission 
believes that the addition of this clearly erroneous trade rule is 
consistent with the protection of investors and the public interest. 
The Commission hereby designates the proposal as operative upon 
filing.\16\
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    \15\ See supra note 6.
    \16\ For purposes only of waiving the 30-day operative delay of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File No. SR-NYSE-2008-09 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NYSE-2008-09. 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, on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal office of 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-2008-09 and should be submitted on or before March 12, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(A)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-3083 Filed 2-19-08; 8:45 am]

BILLING CODE 8011-01-P