Document ID: SEC-2008-0140-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange LLC
Posted Date: 2008-01-29T05:00Z

[Federal Register: January 29, 2008 (Volume 73, Number 19)]
[Notices]               
[Page 5254-5257]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29ja08-109]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57184; File No. SR-NYSE-2008-02]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change Relating to NYSE Rule 103A (Specialist Stock Reallocation 
and Member Education and Performance) and NYSE Rule 103B (Specialist 
Stock Allocation)

January 22, 2008.
    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 January 7, 2008, the New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission the 
proposed rule change as described in Items I and II below, which Items 
have been substantially prepared by the Exchange. The Commission is 
publishing this notice and order to solicit comments on the proposed 
rule change from interested persons and to approve the proposed rule 
change on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to extend, to March 31, 2008, the moratorium 
on the administration of the Specialist Performance Evaluation 
Questionnaire (``SPEQ'') pursuant to Exchange Rule 103A and the use of 
the SPEQ pursuant to Exchange Rule 103B (``Moratorium'') that was 
implemented on June 8, 2007 and terminated on December 31, 2007. In 
addition, the Exchange proposes to continue to suspend the use of 
SuperDot turnaround for orders received and the use of responses to 
administrative messages as objective measures in the assessment of 
specialist performance during the Moratorium. The Exchange further 
proposes that the SPEQ and Order Reports/Administrative Responses 
continue to be removed from the criteria used to commence a specialist 
performance improvement action during the Moratorium. The Exchange 
requests that the effective date of such extension be retroactive to 
December 31, 2007.
    The text of the proposed rule changes is available on the 
Exchange's Web site (http://www.nyse.com), at the Exchange's Office of 

the Secretary, and at 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, the Exchange 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 III 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
    The Exchange proposes to extend, to March 31, 2008, the Moratorium 
on the administration of the SPEQ pursuant to Exchange Rule 103A and 
the use of the SPEQ pursuant to Exchange Rule 103B, which was 
implemented on June 8, 2007 and terminated on December 31, 2007.\3\ The 
Exchange requests that the effective date of such extension be 
retroactive to December 31, 2007.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 55852 (June 4, 
2007), 72 FR 31868 (June 8, 2007) (SR-NYSE-2007-47) (``Original 
Request'').
---------------------------------------------------------------------------

    In addition, the Exchange proposes that the use of SuperDot 
turnaround for orders received and responses to administrative messages 
continue to be removed from the objective measures used in the 
assessment of specialist performance pursuant to Exchange Rule 103B or 
as criteria used to commence specialist performance improvement

[[Page 5255]]

action pursuant to Exchange Rule 103A during the Moratorium.
SPEQ
    Prior to June 2007, pursuant to Exchange Rule 103A, on a quarterly 
basis, the Exchange distributed a twenty question survey known as the 
SPEQ to eligible Floor brokers \4\ to evaluate specialist performance 
during the quarter immediately prior to the distribution of the SPEQ. 
Initially, this subjective feedback provided critical information to 
assist the Exchange in maintaining the quality of the NYSE market.
---------------------------------------------------------------------------

    \4\ The Exchange believed that conscientious participation in 
the SPEQ process was a critical element in the Exchange's program 
for evaluating the overall performance of its specialists. All 
eligible Floor brokers are required to participate in the process 
and evaluate from one to three specialist units each quarter. Floor 
brokers were selected to participate in the SPEQ process based on 
broker badge data submitted in accordance with audit trail 
requirements. Brokers who intentionally failed or refused to 
participate in the SPEQ process were potentially subject to 
disciplinary action, including the imposition of a summary fine 
pursuant to Exchange Rule 476A.
---------------------------------------------------------------------------

    However, the Exchange believed that the SPEQ no longer adequately 
allowed a Floor broker to assess the electronic interaction between the 
specialist and the Floor broker. The Hybrid Market provided Floor 
brokers and specialists with electronic trading tools that have 
resulted in less personal and verbal contact between Floor brokers and 
specialists. Currently, the majority of transactions executed on the 
Exchange are done through electronic executions.
    In addition, the dramatic increase in transparency with respect to 
the Display Book through, among other things, Exchange initiatives like 
Exchange OPENBOOK\TM\ \5\ (``OPENBOOK'') has decreased the need for the 
Floor broker to obtain market information verbally from the specialist. 
This increased transparency gives all market participants, both on and 
off the Floor, a greater ability to see and react to market changes.
---------------------------------------------------------------------------

    \5\ OPENBOOK Online Database is an Exchange online service that 
allows subscribers to view the contents of the specialist book for 
any stock at any given point in the day, or over a period of time. 
Results are returned in an Excel spreadsheet. OPENBOOK Online 
Database is a historical database with data stored online for a 12-
month period.
---------------------------------------------------------------------------

    The questions on the SPEQ did not take into account the operation 
of the electronic tools available in the Hybrid Market. The SPEQ did 
not provide Floor brokers with a means to evaluate specialist 
performance under the current market model. As a result of the more 
electronic interaction between Floor brokers and specialists, Floor 
brokers were unable to assess specialist performance using the SPEQ.
    The questions posed to the Floor brokers on the SPEQ required Floor 
brokers to opine on the specialists' ability to offer single price 
executions and specialists' ability to provide notification to Floor 
brokers of market changes in particular stocks. In the current Hybrid 
Market, specialists are unable to offer single price executions and the 
relative speed of executions makes it virtually impossible for 
specialists to notify brokers of changes in a particular security.
    Given the above, the SPEQ no longer served as a meaningful measure 
of specialist performance.
Objective Measures
    The Exchange further requests that during the extension of the 
Moratorium, allocations of newly listed securities on the Exchange 
continue to be based on the objective measures identified in Exchange 
Rule 103B \6\ with the exception of SuperDot turnaround for orders 
received and response to administrative messages.
---------------------------------------------------------------------------

    \6\ Pursuant to Exchange Rule 103B, specialist dealer 
performance is measured in terms of participation (TTV); 
stabilization; capital utilization, which is the degree to which the 
specialist unit uses its own capital in relation to the total dollar 
value of trading in the unit's stocks; and near neighbor analysis, 
which is a measure of specialist performance and market quality 
comparing performance in a stock to performance of stocks that have 
similar market characteristics. Additional objective measures 
pursuant to Exchange Rule 103B are those measures included in 
Exchange Rule 103A which are: (a) Timeliness of regular openings; 
(b) promptness in seeking Floor official approval of a non-
regulatory delayed opening; (c) timeliness of DOT turnaround; and 
(d) response to administrative messages.
---------------------------------------------------------------------------

    As explained in the Original Request, SuperDot turnaround for 
orders received and response to administrative messages no longer 
provide meaningful objective standards to evaluate specialist 
performance in the Hybrid Market. Specifically, in the more electronic 
Hybrid Market, orders received by Exchange systems that are marketable 
upon entry are eligible to be immediately and automatically executed by 
Exchange systems. As such, SuperDot turnaround no longer provided a 
meaningful objective measure of a specialist's performance.
    Furthermore, in the Hybrid Market the Exchange systems 
automatically respond to the majority of the administrative messages. 
Today, there are two administrative messages that require a manual 
response from specialists. These are messages that require the 
specialist to provide status information on market orders and stop 
orders. With regard to requests for the status of stop orders, the 
specialists are no longer capable of providing this information. In 
December 2006, following Commission approval,\7\ the Exchange changed 
its stop order handling process. Stop orders are no longer visible to 
the part of the NYSE Display Book[supreg] that the specialist ``sees.'' 
When a transaction on the Exchange results in the election of a stop 
order that had been received prior to such transaction, the elected 
stop order is sent as a market order \8\ to the Display Book and the 
specialist's system employing algorithms where it is handled in the 
same way as any other market order. The specialist therefore is unable 
to provide any information regarding the status of stop orders.
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 54820 (November 27, 
2006), 71 FR 70824 (December 6, 2006) (SR-NYSE-2006-65).
    \8\ As used herein, the term ``market order'' refers to market 
orders that are not designated as ``auction market orders.''
---------------------------------------------------------------------------

    Market orders are eligible to receive immediate and automatic 
execution on the Exchange. The immediate and automatic execution of 
market orders eliminates the need for the specialists to respond to the 
administrative request for the status of market orders. In practice, a 
customer that submits a market order will likely receive a report of 
execution before the administrative message requesting the status of 
the market order has been printed and read by the specialist.
    This change has had a minimal impact on Exchange customers. In the 
past few years, the average number of administrative messages received 
on a daily basis has steadily declined. The Exchange believes that 
immediate and automatic execution of orders will virtually eliminate 
administrative messages that require a manual response from a 
specialist. As a result, a specialist's ability to respond to 
administrative messages no longer provides a meaningful measure of 
specialists' performance during the Moratorium.
    Given the above, the Exchange seeks to continue suspension of the 
use of both measures as criteria used to assess specialists' 
performance during the extension of the Moratorium.
Performance Improvement Actions
    Similarly, during the extension of the Moratorium, the Exchange 
seeks to continue suspending the use of the SPEQ and Order Reports/
Administrative Reports as criteria for the implementation of a 
performance improvement action pursuant to Exchange Rule 103A. Exchange 
Rule 103A(b) provides that:

[[Page 5256]]

    The Market Performance Committee shall initiate a Performance 
Improvement Action (except in highly unusual or extenuating 
circumstances, involving factors beyond the control of a particular 
specialist unit, as determined by formal vote of the Committee) in 
any case where a specialist unit's performance falls below such 
standards as are specified in the Supplementary Material to this 
rule. The objective of a Performance Improvement Action shall be to 
improve a specialist unit's performance where the unit has exhibited 
one or more significant weaknesses, or has exhibited an overall 
pattern of weak performance that indicates the need for general 
improvement.

    Prior to June 2007, the SPEQ and Order Reports/Administrative 
Reports were two criteria included in the standards specified in 
Exchange Rule 103A Supplementary Material. Given that SPEQ and Order 
Reports/Administrative Reports no longer provided significant objective 
measures of specialists' performance in the Hybrid Market, the Exchange 
sought to suspend the use of both measures as criteria for the 
implementation of a performance improvement action during the 
Moratorium. Through this filing, the Exchange seeks to continue this 
suspension for the duration of the Moratorium.
Creation of a New Process
    Currently, the Exchange has completed its assessment of the 
specialists' function in its current market and identified objective 
standards it currently believes will provide a means to accurately 
assess and measure the specialists' performance of its market-making 
function. Using newly identified objective measures, the Exchange will 
formally submit a proposal to the Commission no later than February 1, 
2008 to amend Exchange rules that govern the allocation of securities 
to specialist firms and other related rules.
    The Exchange believes that the use of objective performance 
measures will provide for a more significant comparison of specialist 
performance. It is anticipated that the use of more objective and 
detailed measures will promote healthy competition between specialist 
firms and ultimately result in better market-making for Exchange 
customers.
Conclusion
    The Exchange therefore requests to extend the Moratorium on the 
administration of the SPEQ pursuant to Exchange Rule 103A and the use 
of the SPEQ pursuant to Exchange Rule 103B until March 31, 2008. In 
addition the Exchange proposes to continue to suspend the use of 
SuperDot turnaround for orders received and the use of responses to 
administrative messages as objective measures in the assessment of 
specialist performance during the Moratorium. The Exchange further 
proposes that the SPEQ and Order Reports/Administrative Responses 
continue to be removed from the criteria used to commence a specialist 
performance improvement action during the Moratorium. The Exchange 
requests that the effective date of the requested extension be 
retroactive to December 31, 2007.
2. Statutory Basis
    The Exchange believes that the basis under the Act for this 
proposed rule change is the requirement under Section 6(b)(5) \9\ that 
an Exchange have rules that are 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. The proposed 
rule change also is designed to support the principles of Section 
11A(a)(1) \10\ in that it seeks to assure economically efficient 
execution of securities transactions, make it practicable for brokers 
to execute investors' orders in the best market and provide an 
opportunity for investors' orders to be executed without the 
participation of a dealer.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78k-1(a)(1).
---------------------------------------------------------------------------

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

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

III. 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-NYSE-2008-02 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-2008-02. 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 
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-
NYSE-2008-02 and should be submitted on or before February 19, 2008.

IV. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Changes

    After careful review, 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.\11\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act, which 
requires that an exchange have rules designed, among other things, to 
promote just and equitable principles of trade, to remove

[[Page 5257]]

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 Commission believes that by extending the 
Moratorium the Exchange can discontinue relying on factors that no 
longer provide meaningful objective measures of a specialist's 
performance in the Hybrid Market environment.
---------------------------------------------------------------------------

    \11\ In approving this rule change, the Commission notes that it 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    Furthermore, the Commission finds good cause to approve the 
proposed rule change prior to the thirtieth day after the date of 
publication of the notice of filing. By extending the Moratorium from 
December 31, 2007 until March 31, 2008, the Exchange should have 
sufficient time to allow it to propose changes to its allocation policy 
that reflects its current market structure. The Commission notes that 
the Exchange advised that it expects to submit a proposal to amend its 
rules governing the allocation of securities to specialist firms and 
related rules by February 1, 2008. In addition, the Commission believes 
that allowing the extension of the Moratorium to take effect 
retroactively as of December 31, 2007 will allow the Moratorium to 
occur uninterrupted until March 31, 2008.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-NYSE-2008-02) be and hereby 
is approved on an accelerated basis.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-1481 Filed 1-28-08; 8:45 am]

BILLING CODE 8011-01-P