Document ID: SEC-2011-1270-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Amex LLC
Posted Date: 2011-08-24T04:00Z

[Federal Register Volume 76, Number 164 (Wednesday, August 24, 2011)]
[Notices]
[Pages 53009-53012]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-21657]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65165; File No. SR-NYSEAmex-2011-59]

Self-Regulatory Organizations; NYSE Amex LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Deleting the Text 
of NYSE Amex Equities Rules 92, 513, 514 and Adopting New NYSE Amex 
Equities Rule 5320 That Is Substantially the Same as Financial Industry 
Regulatory Authority Rule 5320 To Prohibit Trading Ahead of Customer 
Orders With Certain Exceptions (Commonly Known as the Manning Rule)

August 18, 2011.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that on August 11, 2011, NYSE Amex LLC (the ``Exchange'' or 
``NYSE Amex'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to delete the text of NYSE Amex Equities 
Rules 92, 513, and 514, which limit trading ahead of customer orders, 
and adopt a new NYSE Amex Equities Rule 5320 that is substantially the 
same as Financial Industry Regulatory Authority (``FINRA'') Rule 5320. 
The text of the proposed rule change is available at the Exchange, the 
Commission's Public Reference Room, and http://www.nyse.com.

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 self-regulatory organization 
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 those 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 parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to delete the text of NYSE Amex Equities 
Rules 92, 513, and 514 which limit trading ahead of customer orders, 
and adopt a new NYSE Amex Equities Rule 5320 that is substantially the 
same as FINRA Rule 5320.\4\ As with FINRA Rule 5320, proposed NYSE Amex 
Equities Rule 5320 would prohibit trading ahead of customer orders with 
certain exceptions, including large order and institutional account 
exceptions, a no-knowledge exception, a riskless principal exception, 
an intermarket sweep order (``ISO'') exception, and odd lot and bona 
fide error transaction exceptions, discussed in detail below. Proposed 
NYSE Amex Equities Rule 5320 also provides the same guidance as FINRA 
Rule 5320 on minimum price improvement standards, order handling

[[Page 53010]]

procedures, and trading outside normal market hours.
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    \4\ See Securities Exchange Act Release No. 63895 (February 11, 
2011), 76 FR 9386 (February 17, 2011) (SR-FINRA-2009-090). The 
Exchange's affiliates, New York Stock Exchange LLC and NYSE Arca, 
Inc., also have filed substantially similar rule filings. See SR-
NYSE-2011-42 and SR-NYSEArca-2011-57.
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Background
    NYSE Amex Equities Rule 92, which applies to Exchange-listed 
securities, generally prohibits member organizations from trading on a 
proprietary basis ahead of, or along with, customer orders that are 
executable at the same price as the proprietary order. The Rule 
contains several exceptions that make it permissible for a member or 
member organization to enter a proprietary order while representing a 
customer order that could be executed at the same price, provided, 
among other things, that the customer order is not for an account of an 
individual investor and the customer has provided express permission. 
Current NYSE Amex Equities Rule 92 also permits riskless transactions 
for the purpose of facilitating the execution, on a riskless principal 
basis, of one or more customer orders. NYSE Amex Equities Rule 92 
applies to Exchange-listed securities. NYSE Amex Equities Rules 513 and 
514 impose limitations on trading ahead of customer limit orders and 
market orders, respectively, with respect to Nasdaq securities that 
trade on the Exchange.\5\
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    \5\ See generally NYSE Amex Equities Rules 500-525.
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Proposal To Adopt Text of FINRA Rule 5320
    In conjunction with its rules harmonization with FINRA, the 
Exchange proposes to delete the text of NYSE Amex Equities Rules 92, 
513, and 514 and their supplementary material and adopt the text of 
FINRA Rule 5320, with certain technical changes, as NYSE Amex Equities 
Rule 5320. FINRA Rule 5320 generally provides that a FINRA member that 
accepts and holds an order in an equity security from its own customer 
or a customer of another broker-dealer without immediately executing 
the order is prohibited from trading that security on the same side of 
the market for its own account at a price that would satisfy the 
customer order, unless it immediately thereafter executes the customer 
order up to the size and at the same or better price at which it traded 
for its own account.
    Proposed NYSE Amex Equities Rule 5320 permits a member organization 
to trade a security on the same side of the market for its own account 
at a price that would satisfy a customer order in certain 
circumstances.\6\
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    \6\ Although NYSE Amex Equities Rule 92 refers to member 
organizations and members, proposed NYSE Amex Equities Rule 5320 
would follow the structure of FINRA Rule 5320 and refer to member 
organizations. Because all NYSE Amex members are associated with 
NYSE Amex member organizations, proposed NYSE Amex Equities Rule 
5320 would apply to them.
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Large Orders and Institutional Accounts
    The most notable exception to the customer order protection rule is 
to allow member organizations to negotiate terms and conditions on the 
acceptance of certain large-sized orders (orders of 10,000 shares or 
more unless such orders are less than $100,000 in value) or orders from 
institutional accounts as defined in NASD Rule 3110. Such terms and 
conditions would permit the member organization to continue to trade 
alongside or ahead of such customer orders if the customer agrees.
    Specifically, under the proposed rule, a member organization would 
be permitted to trade a security on the same side of the market for its 
own account at a price that would satisfy a customer order provided 
that the member organization provides clear and comprehensive written 
disclosure to each customer at account opening and annually thereafter 
that (a) Discloses that the member organization may trade proprietarily 
at prices that would satisfy the customer order, and (b) provides the 
customer with a meaningful opportunity to opt in to the NYSE Amex 
Equities Rule 5320 protections with respect to all or any portion of 
its order.
    If a customer does not opt in to the protections with respect to 
all or any portion of its order, the member organization may reasonably 
conclude that such customer has consented to the member organization 
trading a security on the same side of the market for its own account 
at a price that would satisfy the customer's order.\7\
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    \7\ As is always the case, customers retain the right to 
withdraw consent at any time. Therefore, a member organization's 
reasonable conclusion that a customer has consented to the member 
organization trading along with such customer's order is subject to 
further instruction and modification from the customer.
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    In lieu of providing written disclosure to customers at account 
opening and annually thereafter, the proposed rule would permit member 
organizations to provide clear and comprehensive oral disclosure to, 
and obtain consent from, a customer on an order-by-order basis, 
provided that the member organization documents who provided such 
consent and that such consent evidences the customer's understanding of 
the terms and conditions of the order. In addition, where a customer 
has opted in to the NYSE Amex Equities Rule 5320 protections, a member 
organization may still obtain consent on an order-by-order basis to 
trade ahead of or along with an order from that customer, provided that 
the member organization documents who provided such consent and that 
such consent evidences the customer's understanding of the terms and 
conditions of the order.
No-Knowledge Exception
    The Exchange is also proposing to include a ``no-knowledge'' 
exception to its customer order protection rule. The proposed exception 
would allow a proprietary trading unit of a member organization to 
continue trading in a proprietary capacity and at prices that would 
satisfy customer orders that were being held by another, separate 
trading unit at the member organization. The no-knowledge exception 
would be applicable with respect to NMS stocks, as defined in Rule 600 
of SEC Regulation NMS. In order to avail itself of the no-knowledge 
exception, a member organization must first implement and utilize an 
effective system of internal controls (such as appropriate information 
barriers) that operate to prevent the proprietary trading unit from 
obtaining knowledge of the customer orders that are held at a separate 
trading unit.
    A member organization that structures its order handling practices 
in NMS stocks to permit its proprietary and/or market-making desk to 
trade at prices that would satisfy customer orders held by a separate 
trading unit must disclose in writing to its customers, at account 
opening and annually thereafter, a description of the manner in which 
customer orders are handled by the member organization and the 
circumstances under which the member organization may trade 
proprietarily at its market-making desk at prices that would satisfy 
the customer order.
Riskless Principal Exception
    The Exchange's proposal also provides that the obligations under 
this rule shall not apply to a member organization's proprietary trade 
if such proprietary trade is for the purposes of facilitating the 
execution, on a riskless principal basis, of another order from a 
customer (whether its own customer or the customer of another broker-
dealer), provided that the member organization (a) Submits a report, 
contemporaneously with the execution of the facilitated order, 
identifying the trade as riskless principal to the Exchange and (b) has 
written policies and procedures to ensure that riskless principal 
transactions relied upon for this exception comply with applicable 
Exchange rules. At a minimum these policies and procedures must require 
that the customer order was received prior to the offsetting principal

[[Page 53011]]

transaction, and that the offsetting principal transaction is at the 
same price as the customer order exclusive of any markup or markdown, 
commission equivalent or other fee and is allocated to a riskless 
principal or customer account in a consistent manner and within 60 
seconds of execution.
    Member organizations must have supervisory systems in place that 
produce records that enable the member organization and the Exchange to 
reconstruct accurately, readily, and in a time-sequenced manner all 
orders on which a member organization relies in claiming this 
exception.
ISO Exception
    The proposed rule change also provides that a member organization 
shall be exempt from the obligation to execute a customer order in a 
manner consistent with NYSE Amex Equities Rule 5320 with regard to 
trading for its own account that is the result of an intermarket sweep 
order routed in compliance with Rule 600(b)(30)(ii) of SEC Regulation 
NMS where the customer order is received after the member organization 
routed the ISO. Where a member organization routes an ISO to facilitate 
a customer order and that customer has consented to not receiving the 
better prices obtained by the ISO, the member organization also shall 
be exempt with respect to any trading for its own account that is the 
result of the ISO with respect to the consenting customer's order.
Odd Lot and Bona Fide Error Exception
    In addition, the Exchange proposes applying an exception for a 
firm's proprietary trade that (1) Offsets a customer odd lot order 
(i.e., an order less than one round lot, which is typically 100 shares) 
or (2) corrects a bona fide error. With respect to bona fide errors, 
member organizations would be required to demonstrate and document the 
basis upon which a transaction meets the bona fide error exception.
Minimum Price Improvement Standards
    The proposed rule change establishes the minimum amount of price 
improvement necessary for a member organization to execute an order on 
a proprietary basis when holding an unexecuted limit order in that same 
security without being required to execute the held limit order.
Order Handling Procedures
    The proposed rule change provides that a member organization must 
make every effort to execute a marketable customer order that it 
receives fully and promptly. A member organization that is holding a 
customer order that is marketable and has not been immediately executed 
must make every effort to cross such order with any other order 
received by the member organization on the other side of the market up 
to the size of such order at a price that is no less than the best bid 
and no greater than the best offer at the time that the subsequent 
order is received by the member organization and that is consistent 
with the terms of the orders. In the event that a member organization 
is holding multiple orders on both sides of the market that have not 
been executed, the member organization must make every effort to cross 
or otherwise execute such orders in a manner that is reasonable and 
consistent with the objectives of the proposed rule and with the terms 
of the orders. A member organization can satisfy the crossing 
requirement by contemporaneously buying from the seller and selling to 
the buyer at the same price.
Trading Outside Normal Market Hours
    A member organization generally may limit the life of a customer 
order to the period of normal market hours of 9:30 a.m. to 4 p.m. 
Eastern Time. However, if the customer and member organization agree to 
the processing of the customer's order outside normal market hours, the 
protections of proposed NYSE Amex Equities Rule 5320 would apply to 
that customer's order(s) at all times the customer order is executable 
by the member organization.
Conforming and Other Changes
    The Exchange further proposes to make a conforming change to NYSE 
Amex Equities Rule 900 to delete a reference to NYSE Amex Equities Rule 
92 and to delete rule text that provided that NYSE Amex Equities Rule 
92 shall not preclude a member or member organization from entering in 
the Off-Hours Trading Facility an aggregate-price order to buy (sell) 
15 or more securities coupled with an identical order to sell (buy) 
when the member or member organization holds an unexecuted closing-
price order for a component security. The Exchange has determined that, 
as part of the harmonization process, it will not keep this exception 
to NYSE Amex Equities Rule 92. The Exchange further notes that the NYSE 
Amex Equities Rule 900 reference is no longer necessary because 
proposed NYSE Amex Equities Rule 5320 does not bar the entry of an 
order for a member organization's own account when holding an 
unexecuted customer order; rather, if the NYSE Amex Equities Rule 5320 
customer order protections are applicable, the member organization only 
needs to ensure that a customer order is executed up to the size and 
the same or better price at which it traded for its own account.
    The Exchange has filed a series of operative delays for NYSE Amex 
Equities Rule 92(c)(3),\8\ which permits Exchange member organizations 
to submit riskless principal orders to the Exchange, but requires them 
to submit to a designated Exchange database a report of the execution 
of the facilitated order. In extending the operative delay to September 
12, 2011, the Exchange stated that it was premature to require firms to 
meet the Exchange's Front End Systemic Capture reporting requirements 
pending full harmonization of the respective customer order protection 
rules with FINRA. In adopting NYSE Amex Equities Rule 5320 and deleting 
the text of NYSE Amex Equities Rule 92 in its entirety, no additional 
operative delays for NYSE Amex Equities Rule 92(c)(3) are necessary, as 
the Exchange will use the FINRA model to capture riskless principal 
orders.\9\
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    \8\ See Securities Exchange Act Release Nos. 59620 (Mar. 23, 
2009), 74 FR 14176 (Mar. 30, 2009) (SR-NYSEALTR-2009-29); 60397 
(July 30, 2009), 74 FR 39128 (Aug. 5, 2009) (SR-NYSEAmex-2009-48); 
61250 (Dec. 29, 2009), 75 FR 477 (Jan. 5, 2010) (SR-NYSEAmex-2009-
92); 62540 (July 21, 2010), 75 FR 44040 (July 27, 2010) (SR-
NYSEAmex-2010-70); 63454 (December 7, 2010), 75 FR 77685 (Dec. 13, 
2010) (SR-NYSEAmex-2010-111); and 64859 (July 12, 2011), 76 FR 42147 
(July 18, 2011) (SR-NYSEAmex-2011-47).
    \9\ All member organizations that would be subject to proposed 
NYSE Amex Equities Rule 5320 also are subject to FINRA Rule 5320 and 
would therefore report riskless principal transactions as required 
under the FINRA Rule. There would be no need for them to separately 
report riskless principal transactions to the Exchange.
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    For consistency with Exchange rules, NYSE Amex Equities Rule 5320 
will have certain differences from FINRA Rule 5320. The Exchange 
proposes not to include Supplementary Material .02(b) and portions of 
Supplementary Material .06, which relate to OTC equity securities, and 
to change all references from ``members'' to ``member organizations.''
Implementation Date
    The Exchange proposes to implement NYSE Amex Equities Rule 5320 on 
the same date that FINRA implements FINRA Rule 5320, which FINRA has 
announced will be September 12, 2011.\10\ The Exchange will provide 
notice of the implementation date to its

[[Page 53012]]

member organizations via an Information Memorandum.
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    \10\ See FINRA Regulatory Notice 11-24.
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) \11\ of 
the Act, in general, and furthers the objectives of Section 6(b)(5) 
\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 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. The Exchange believes that adopting the proposed rule 
at the same time that FINRA implements a substantially similar rule 
will contribute to investor protection by defining important parameters 
by which member organizations must abide when trading proprietarily 
while holding customer limit and market orders, and foster cooperation 
by harmonizing requirements across self-regulatory organizations.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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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 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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \13\ and Rule 19b-4(f)(6) thereunder.\14\ 
Because the 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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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    \13\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \14\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \15\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\16\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest.
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    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ 17 CFR 240.19b-4(f)(6)(iii).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend 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 Number SR-NYSEAmex-2011-59 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEAmex-2011-59. 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 Web site 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street, NE., Washington, DC 20549, 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 the 
Exchange. 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-
NYSEAmex-2011-59 and should be submitted on or before September 14, 
2011.

    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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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-21657 Filed 8-23-11; 8:45 am]
BILLING CODE 8011-01-P