Document ID: SEC-2008-0020-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; New York Stock Exchange LLC; Order Approving Proposed Rule Change
Posted Date: 2008-01-04T05:00Z

[Federal Register: January 4, 2008 (Volume 73, Number 3)]
[Notices]               
[Page 903-909]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04ja08-58]                         

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57058; File No. SR-NYSE-2007-102]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Approving Proposed Rule Change, as Modified by Amendment No. 1 Thereto, 
Relating to NYSE Rule 1500 (NYSE MatchPoint \SM\)

December 28, 2007.

I. Introduction

    On November 8, 2007, the New York Stock Exchange LLC (``NYSE'') 
filed with the Securities and Exchange Commission (``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 
adopt NYSE Rule 1500 to establish NYSE MatchPoint \SM\ 
(``MatchPoint''), an electronic facility that matches aggregated orders 
at predetermined, one-minute sessions

[[Page 904]]

throughout regular hours and after hours of the Exchange. The proposed 
rule change was published for comment in the Federal Register on 
November 23, 2007.\3\ On December 27, 2007, NYSE filed Amendment No. 1 
to the proposed rule change.\4\ The Commission received no comment 
letters on the proposed rule change. This order approves the proposed 
rule change, as modified by Amendment No. 1 thereto.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 56798 (November 15, 
2007), 72 FR 65787 (``Notice'').
    \4\ In Amendment No. 1, NYSE proposed technical and clarifying 
amendments to the proposed rule change. In Amendment No. 1, NYSE 
proposes to: (1) Clarify that allocation of orders in the MatchPoint 
system may, during regular trading hours of the Exchange, occur some 
seconds before or after the end of the one-minute matching session; 
(2) clarify which securities may be traded on the MatchPoint system 
and that MatchPoint will not trade securities that are not listed on 
any securities exchange; (3) clarify that for purposes of the 
MatchPoint system the ``primary market'' is the listing market and 
if a security is dually listed, the ``primary market'' will be the 
market in which the particular security is trading the greatest 
volume of shares; (4) clarify that partial round lots (i.e., ``mixed 
lots'') may be entered into MatchPoint as single orders or as part 
of a portfolio, but the odd lot portion of the order will not be 
executed; (5) clarify that the NYSE is requesting that the 
Commission concur with the NYSE's interpretation that MatchPoint 
orders entered from off the Floor of the Exchange comply with the 
provisions of Rule 11a2-2(T) of the Act; (6) represent that 
participation in MatchPoint would be voluntary and open to all 
eligible NYSE market participants and would not result in any 
advantage to market participants that participate in matching 
sessions over those that do not participate; and (7) make conforming 
technical and clarifying changes to the proposed rule text. Because 
Amendment No. 1 is technical in nature, the Commission is not 
publishing it for comment.
---------------------------------------------------------------------------

II. Description of the Proposal

    NYSE proposes to adopt NYSE Rule 1500 to establish NYSE MatchPoint, 
an electronic facility that matches aggregated orders at seven 
predetermined, one-minute matching sessions during regular trading 
hours and one matching session during the after hours of the 
Exchange.\5\ MatchPoint will trade securities listed on NYSE as well as 
securities listed on other exchanges and admitted to unlisted trading 
privileges (``UTP'') on NYSE.\6\ MatchPoint is an anonymous trading 
platform and no order information will be displayed and clearance and 
settlement of executions will be anonymous. Trade reports will be 
disseminated after each matching session.
---------------------------------------------------------------------------

    \5\ MatchPoint matching sessions will occur during the Exchange 
trading hours at 9:45 a.m., 10 a.m., 11 a.m., 12 p.m., 1 p.m., 2 
p.m. and 3 p.m. A MatchPoint after hours matching session will occur 
at 4:45 p.m. See proposed Rule 1500(a)(1). NYSE will need to file a 
proposed rule change with the Commission if it plans to alter the 
times of the MatchPoint matching sessions and/or add or eliminate 
matching sessions.
    \6\ See proposed Rule 1500(b)(2)(E). Securities admitted to 
unlisted trading privileges could be listed on NYSE Arca, Inc. 
(``NYSE Arca''), the NASDAQ Stock Market, Inc. (``Nasdaq''), the 
American Stock Exchange (``Amex''), or other stock exchanges. 
MatchPoint will not trade securities that are not listed on any 
securities exchange.
---------------------------------------------------------------------------

A. Participation Eligibility

    All NYSE members, member organizations and sponsored participants 
of sponsoring member organizations are automatically eligible for 
access to MatchPoint.\7\ Before access is granted to MatchPoint users, 
all users must go through a connectivity authorization process.\8\ 
Specialists on the floor of the Exchange are not authorized to access 
MatchPoint.\9\ The off-floor operations of specialist firms may obtain 
authorized access to MatchPoint provided they have policies and 
procedures and barriers in place that preclude improper information 
sharing between the specialist firm and the firm's specialist on the 
floor of the Exchange.\10\
---------------------------------------------------------------------------

    \7\ In Amendment No. 1, NYSE represented that participation in 
MatchPoint will be voluntary and open to all eligible NYSE market 
participants, and will not result in any advantage to market 
participants that participate in matching sessions over those market 
participants that do not participate.
    \8\ MatchPoint can only be accessed through an electronic 
Financial Information exchange (``FIX'') application and/or an 
internet based password-protected order entry application. Users 
must fill out an application for connectivity through either of 
these two electronic connectivity capabilities. Once granted 
connectivity through the authorization process, eligible users may 
access MatchPoint. 8
    \9\ See proposed Rule 1500(g)(4)(A).
    \10\ The Exchange stated that, currently, all specialist 
organizations on the Exchange utilize information barrier procedures 
pursuant to NYSE Rule 98 (Restrictions on Approved Person Associated 
with a Specialist's Member Organization). The Exchange has 
represented that the information barrier procedures that would be 
utilized to block access by a specialist to any MatchPoint trading 
information generated by the off-floor personnel of the specialist 
organization would be similar in design and utilization.
---------------------------------------------------------------------------

    Members who have authorized access to MatchPoint are not permitted 
to enter orders into the MatchPoint system from the floor of the 
Exchange when such orders are for their own accounts, the accounts of 
associated persons, or accounts over which it or an associated person 
exercises investment discretion.\11\ Similarly, members on the floor 
may not have such orders entered into MatchPoint by sending them to an 
off-floor facility for entry. Members with authorized access to 
MatchPoint may only enter customer orders into MatchPoint from the 
floor of the Exchange. Members that have authorized access to 
MatchPoint may enter proprietary and customer orders into MatchPoint 
from off the floor of the Exchange.\12\
---------------------------------------------------------------------------

    \11\ See proposed Rule 1500(g)(4)(B).
    \12\ Id.
---------------------------------------------------------------------------

B. MatchPoint Order Parameters

    MatchPoint participants (``users'') transmit their market and limit 
orders, which are undisplayed, by means of an electronic interface. 
MatchPoint users may enter, correct or cancel orders beginning at 3:30 
a.m. until 4:45 p.m.\13\ The MatchPoint system will not accept any 
orders before 3:30 a.m. or after 4:45 p.m. MatchPoint will accept and 
execute single orders and NYSE MatchPoint Portfolios (``portfolios'').
---------------------------------------------------------------------------

    \13\ See proposed Rule 1500(d)(1).
---------------------------------------------------------------------------

    MatchPoint orders must be designated for only one of the matching 
sessions during regular hours of the Exchange or for the single after 
hours matching session.\14\ A user must designate an order for only one 
matching session at a time. All MatchPoint orders, single and 
portfolio, must have the following parameters: (1) List name;\15\ (2) 
matching session (if a user fails to designate a specific matching 
session, the system will provide a default function and direct the 
order to the next eligible matching session); (3) side of the market 
(i.e., buy, sell or short side); (4) symbol; and (5) minimum and 
maximum amount of shares available for execution.\16\ Additionally, a 
user may include an optional constraint (i.e., net cash and internal 
match constraints) for a MatchPoint order.\17\ Orders may be either 
market or limit orders and must have a minimum size of one round lot. 
MatchPoint will permit odd lot and partial round lot orders to be 
entered into the system; however, odd lot orders and the odd lot 
portion of partial round lot orders will not be executed.\18\
---------------------------------------------------------------------------

    \14\ If a MatchPoint order does not execute in the designated 
matching session, it will be cancelled back to the user immediately 
upon completion of the matching session. If a user fails to 
designate a particular matching session for a MatchPoint order, the 
order, by default, will be available for execution in the next 
scheduled matching session. If an undesignated order does not 
execute in the next scheduled regular hours matching session it will 
be cancelled back to the user immediately upon completion of such 
matching session. If a user fails to designate an order and enters 
the order after 3 p.m., which is the last regular hours matching 
session, the order will participate in the after hours matching 
session at 4:45 p.m. If the order does not execute in the after 
hours matching session it will be cancelled back to the user 
immediately upon completion of the after hours matching session.
    \15\ A portfolio must have a unique portfolio name that is 
distinct from the names of other portfolios of the same user.
    \16\ See proposed Rule 1500(d)(2)(A).
    \17\ Id.
    \18\ See proposed Rule 1500(d)(2)(C).
---------------------------------------------------------------------------

    Orders may not be cancelled or replaced while a matching session is 
in progress or when trading in the

[[Page 905]]

applicable security is halted in the MatchPoint system.\19\ MatchPoint 
orders will not be available for execution until the next eligible 
matching session. All orders must be available for automatic execution. 
MatchPoint has no order delivery capability and will not route to other 
market centers. Users, however, would be able to enter eligible orders 
into MatchPoint through a FIX \20\ application and/or an Internet based 
order entry system provided the orders are available for automatic 
execution. The Exchange stated that MatchPoint orders will not trade-
through a protected bid or protected offer as defined in Regulation 
NMS.\21\
---------------------------------------------------------------------------

    \19\ See proposed Rule 1500(d)(2).
    \20\ FIX Protocol is a messaging standard developed specifically 
for the real-time electronic exchange of securities transactions.
    \21\ See 17 CFR 242.600(b)(57).
---------------------------------------------------------------------------

C. MatchPoint Order Allocation

    MatchPoint matching sessions occur through an automated matching 
mechanism. During the matching sessions, the MatchPoint Reference Price 
(``Reference Price'') \22\ is determined and eligible orders are 
executed at the designated hour at the randomly selected time during 
the predetermined one-minute trading session.\23\ The matching and 
execution of orders occurs immediately after the algorithm selects a 
Reference Price.\24\ If an order is not executed in a particular 
matching session it will be immediately cancelled back to the user upon 
completion of the matching session. The user may resubmit the order in 
any one of the subsequent matching sessions.
---------------------------------------------------------------------------

    \22\ The Reference Price is the single trading price at which 
MatchPoint orders will execute during a predetermined one-minute 
``matching session.'' During the regular hours of the Exchange, the 
Reference Price will be the midpoint of the national best bid and 
national best offer (``NBBO'') which is randomly selected during a 
predetermined one-minute pricing period. See proposed Rule 
1500(b)(2)(I). For the after hours MatchPoint matching session, the 
Reference Price will be the official closing price of the primary 
market (i.e., the listing market) for securities listed on the NYSE, 
NYSE Arca, Amex, Nasdaq, and regional stock exchanges. If, however, 
there is no official closing price for a particular security, the 
Reference Price will be the last sale price of the primary market 
for a particular security. See proposed Rule 1500(c)(1)(A) and 
(c)(2)(A).
    \23\ See proposed Rule 1500(c)(1)(A).
    \24\ During the Exchange's regular trading hours, the allocation 
of orders in the matching sessions may occur some seconds after the 
end of the one-minute matching session, depending on when within the 
one-minute pricing window the MatchPoint algorithm randomly selects 
the Reference Price. For example, if the algorithm selects the 
Reference Price (i.e., the midpoint of the NBBO) early in the one-
minute pricing window, the algorithm has sufficient time to allocate 
all of the orders before the end of the one-minute matching session. 
If the algorithm selects the Reference Price late in the one-minute 
pricing window, the one-minute matching session may be extended a 
few seconds to allow the algorithm to allocate all MatchPoint 
orders. In any case, execution takes place immediately after the 
Reference Price is randomly selected, and all orders are executed at 
the same Reference Price in a given matching session.
    During the after hours matching session, the Reference Price is 
the official closing price or the last sale price of a particular 
security. Because this price is static, there is no need to randomly 
select a time during the one-minute pricing window to determine the 
Reference Price. Therefore, the allocation of orders in the after 
hours matching session will always be completed within the one-
minute matching session.
---------------------------------------------------------------------------

    MatchPoint orders will be allocated on a pro rata basis.\25\ Shares 
will be allocated pro rata in round lots (rounded down to the nearest 
100 shares) to eligible orders based on the original size of the 
order.\26\ In this process MatchPoint will honor all user-directed 
constraints. If the allocation to an eligible order is less than the 
minimum acceptable execution quantity for that order, the order will 
not be eligible for execution in that matching session. If additional 
shares remain after the initial pro rata allocation, those shares will 
continue to be allocated pro rata to eligible orders. If additional 
shares remain thereafter that are the same size or are unexecuted 
because of rounding or minimum trade size constraints, the remaining 
shares will be allocated in 100 share lots to the oldest eligible 
orders.\27\
---------------------------------------------------------------------------

    \25\ See proposed Rule 1500(d)(3).
    \26\ MatchPoint will execute orders only in round lots. The 
MatchPoint system will accept odd lot orders but not execute them. 
Similarly, orders containing partial round lots (i.e., ``mixed 
lots'') may be entered into MatchPoint but the odd lot portion of 
the order will not be executed. The system will permit the entry of 
odd lot and partial round lot orders to accommodate portfolio 
orders.
    \27\ For an example of how MatchPoint allocates shares on a pro 
rata basis, see Notice, supra note 3, at 65790.
---------------------------------------------------------------------------

1. Portfolio Trading
    A MatchPoint user may submit NYSE MatchPoint Portfolios into the 
MatchPoint system for execution.\28\ An NYSE MatchPoint Portfolio is a 
group of linked orders with user-directed parameters and a unique, 
user-defined portfolio name.\29\ The portfolio orders may represent 
separate and distinct broker-dealer-customer orders and separate and 
distinct proprietary broker-dealer orders. A user may enter one 
portfolio of buy and sell/short orders or many portfolios of buy and 
sell/short orders.
---------------------------------------------------------------------------

    \28\ See proposed Rule 1500(d)(2)(D).
    \29\ See proposed Rule 1500(b)(2)(g).
---------------------------------------------------------------------------

2. Internal Match Constraints
    MatchPoint portfolio users may effectuate internal matches and 
simultaneously match residual shares against orders from other users 
within a single matching session when using an optional internal match 
constraint. This type of constraint enables the user to execute trades 
between the same user's portfolios first before trading with other 
available orders in a particular matching session. If any residual 
orders remain after an internal match occurs, the residual portfolios 
will trade with all other orders. Single orders may be designated for 
internal matches as well.
    Internal matches have priority over other executions. MatchPoint 
will first process internal matches and then process all other orders 
in the matching session. All user-directed constraints will be honored 
in the internal match. An internal match constraint, like a MatchPoint 
order, is active only for a single matching session. A user may 
resubmit a new internal match constraint when resubmitting an order for 
a different matching session.
    All orders that are designated with an internal match designation 
and entered by the same user are eligible for matching with all such 
orders. For example, single orders that have an internal match 
designation are capable of matching with all other orders entered by 
the same user that have an internal match designation. Portfolio orders 
within a portfolio that are designated for internal matches are also 
capable of matching with one another when entered by the same user. 
Such orders are allocated on a pro rata basis.\30\
---------------------------------------------------------------------------

    \30\ For an example of how an internal match is executed, see 
Notice, supra note 3, at 65791.
---------------------------------------------------------------------------

3. Net Cash Constraints
    MatchPoint portfolio users may utilize an optional ``net cash'' 
constraint.\31\ A user entering a single order may also place a net 
cash constraint on that order. To execute a net cash constraint, a user 
must enter a specific net buy dollar amount and a specific net sell 
dollar amount for a portfolio. A net cash constraint is active only for 
a single matching session. A user may resubmit a new net cash 
constraint when resubmitting an order for a different matching session.
---------------------------------------------------------------------------

    \31\ See proposed Rule 1500(b)(2)(C) and (d)(2)(D).
---------------------------------------------------------------------------

    When calculating a customer's net cash constraint position, the 
matching algorithm takes into account the eligible portfolio order 
shares in a specific security, the Reference Price of the security and 
the customer's net cash constraint. MatchPoint first processes the 
stock with the largest orders in the largest portfolios. In order to 
honor all cash constraints, the matching algorithm processes all single 
and portfolio orders

[[Page 906]]

in a particular security that have net cash constraints and calculates 
share allocation by applying a percentage of the original order size to 
contra side shares that are available to fill the order. The algorithm 
takes this percentage calculation and multiplies it by the Reference 
Price. This calculation is then compared to the order's net cash 
constraint and determines if the allocation of the available contra 
side shares will violate the order's net cash constraint. If the 
calculation violates the net cash constraint, these shares will not be 
allocated to the contra side order but may be allocated to other 
eligible orders. This algorithmic process continues until all eligible 
orders are executed.\32\ A net cash constraint placed on a portfolio 
may affect the execution of other orders in the matching session by 
generally allowing additional shares for such other orders to be 
executed. In addition, net cash constraints will generally result in 
fewer executions of a portfolio and may inhibit the maximum order 
execution potential of a particular security in a particular matching 
session.
---------------------------------------------------------------------------

    \32\ For examples of (1) how portfolios, with and without a net 
cash constraint, are executed in MatchPoint and (2) a chart 
comparing the post match customer net cash position results (i.e., 
total dollars raised and total dollars spent), see Notice, supra 
note 3, at 65791-92.
---------------------------------------------------------------------------

4. Price Collar Threshold in the After Hours Matching Session
    In the after hours matching session, the Exchange will place 
parameters called a ``Price Collar Threshold'' on the prices of all 
MatchPoint eligible securities in order to dampen volatility and 
provide accurate pricing for executions. A Price Collar Threshold is an 
after hours market price beyond which a MatchPoint order will not be 
executed.\33\ In a situation in which the market has moved 
significantly from the official closing price of the primary market 
based on information that becomes available after the market close, the 
Exchange will cancel the after hours MatchPoint matching session rather 
than execute the matching session at a price that no longer reflects 
the market accurately. All unexecuted orders will be immediately 
cancelled back to the user upon completion of the matching session. The 
Price Collar Threshold will be set at two percent (2%) initially, and 
may later be adjusted by the Exchange, up to a maximum of five percent 
(5%) of the MatchPoint after hours Reference Price.\34\
---------------------------------------------------------------------------

    \33\ See proposed Rule 1500(a)(2)(J) and (c)(2)(B).
    \34\ The Exchange has represented that it will inform its users 
of any such adjustment via the NYSE MatchPoint Web site at http://www.nyse.com/MatchPoint
 and the Member Firm Notice, and will provide 

notice of such adjustments to all users reasonably in advance of any 
such adjustment. For an example of how the Price Collar Threshold is 
calculated, see Notice, supra note 3, at 65793.
---------------------------------------------------------------------------

5. Locked and Crossed Markets
    If the NBBO for a particular security is locked at the time of a 
MatchPoint matching session during the regular trading hours of the 
Exchange, the matching session will execute orders at the locked 
price.\35\ Unexecuted MatchPoint orders in that security will be 
cancelled back to the user immediately upon completion of the matching 
session.
---------------------------------------------------------------------------

    \35\ See proposed Rule 1500(c)(1)(B).
---------------------------------------------------------------------------

    If the NBBO for a particular security is crossed at the time of a 
MatchPoint matching session during the regular trading hours of the 
Exchange, the matching session in that particular security will not 
occur.\36\ Unexecuted MatchPoint orders in that security will be 
cancelled back to the user immediately upon completion of the matching 
session.
---------------------------------------------------------------------------

    \36\ See proposed Rule 1500(c)(1)(C).
---------------------------------------------------------------------------

D. Regulatory

1. Halting, Suspending and Closing of MatchPoint Trading on NYSE
    Trading on MatchPoint will be halted, suspended or closed \37\ when 
necessary in order to maintain a fair and orderly market, and in 
certain other conditions, as described below.\38\ If trading in a 
particular security is halted, suspended or closed due to regulatory or 
unusual market conditions at the time a matching session commences, the 
matching session will not occur in that security and all unexecuted 
orders will be immediately cancelled back to the user upon completion 
of the matching session.
---------------------------------------------------------------------------

    \37\ The use of the word ``close'' in the context of this rule 
refers to the intentional closing of the market due to regulatory or 
other unusual circumstances as described above, and does not refer 
to the predetermined ``close'' or end of the regular trading day at 
4 p.m.
    \38\ See proposed Rule 1500(f).
---------------------------------------------------------------------------

    MatchPoint trading may be halted, suspended or closed when: (1) In 
the exercise of its regulatory capacity, the Exchange determines such 
action is necessary or appropriate to maintain a fair and orderly 
market, to protect investors, or otherwise is in the public interest 
due to extraordinary circumstances or unusual market conditions; (2) in 
the case of a particular security whenever, for regulatory purposes, 
trading in the related security has been halted, suspended or closed on 
the Exchange or the primary listing exchange; (3) in the case of a 
particular security trading on the Exchange pursuant to UTP, whenever, 
for regulatory purposes, trading in that security has been halted, 
suspended or closed on the primary listing exchange; (4) with respect 
to a particular security trading on the Exchange pursuant to UTP, if 
the authority under which a security trades on the Exchange or its 
primary market is revoked (i.e., because it is delisted); or (5) in the 
after hours matching session, news reports and/or corporate actions are 
disclosed after the close of the regular hours of the market that have 
a material impact on a particular security, which may include the 
following situations: (a) New corporate earnings; (b) major market 
index company deletions or additions; (c) corporate takeovers; (d) 
other significant corporate actions; (e) court decisions and 
injunctions; and (f) governmental announcements.\39\ No terms or 
conditions specified in the proposed rule would be interpreted to be 
inconsistent with any other rules of the Exchange.
---------------------------------------------------------------------------

    \39\ Id.
---------------------------------------------------------------------------

2. Clearance and Settlement of MatchPoint Executions
    Details of each MatchPoint trade will be automatically matched and 
compared by the Exchange and will be submitted to a registered clearing 
agency for clearing and settlement on a locked-in basis.\40\ All 
executions effected by a member or member organization will be cleared 
and settled using the member's and member organization's account, and 
all executions effected by a sponsored participant will be cleared and 
settled using the relevant sponsoring member organization's account.
---------------------------------------------------------------------------

    \40\ See proposed Rule 1500(e)(1).
---------------------------------------------------------------------------

    MatchPoint transaction reports will indicate the details of the 
transaction but not to reveal contra party and clearing firm 
identities, except under the following circumstances: (1) In the event 
the NSCC \41\ ceases to act for a member or member organization, which 
is the unidentified contra side of any such trade processing, and/or 
the relevant clearing firm, the NYSE would have the responsibility to 
identify to members or member organizations the trades included in 
reports produced by the NSCC which are with the affected member or 
member organization, and (2) for regulatory purposes or to comply with 
an order of a court or arbitrator.\42\
---------------------------------------------------------------------------

    \41\ Completed MatchPoint trades will be submitted for clearance 
and settlement to National Securities Clearing Corporation 
(``NSCC''), which is a subsidiary of the Depository Trust and 
Clearing Corporation.
    \42\ See proposed Rule 1500(e)(2) and (e)(3).

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

[[Page 907]]

    The trade reports that the NSCC will receive from MatchPoint for 
anonymous trades will contain the identities of the parties to the 
trade. This measure will enable the NSCC to conduct its risk management 
functions and settle anonymous trades. The trade report sent to the 
NSCC will contain an indicator noting that the trade is anonymous. On 
the contract sheets the NSCC issues to its participants, the NSCC will 
substitute ``ANON'' for the acronym of the contra-party.
3. Dissemination of Trading Information
    The MatchPoint system will report trade information to the 
Securities Information Processors for all MatchPoint eligible 
securities. Trades will be reported as one print for each security with 
the total volume of the transaction reported with the price. Market 
data for NYSE-listed securities will be disseminated via the 
consolidated tape pursuant to the Consolidated Tape Association Plan 
(``CTA Plan'').\43\ Trade reports of securities that are governed by 
the Joint Self-Regulatory Organization Plan Governing the Collection, 
Consolidation and Dissemination of Quotation and Transaction 
Information for Nasdaq-Listed Securities Traded on an Unlisted Trading 
Privilege Basis (``UTP Plan'') will be disseminated pursuant to the UTP 
Plan.\44\ All trades will indicate the market of execution as the NYSE 
for CTA and UTP purposes.
---------------------------------------------------------------------------

    \43\ See proposed Rule 1500(c)(1).
    \44\ Id.
---------------------------------------------------------------------------

4. Member Organization and Non-Member Access to MatchPoint
    Members and member organizations of the Exchange are automatically 
eligible for access to MatchPoint by their membership on the Exchange. 
A non-member who wishes to trade securities on MatchPoint may do so as 
a ``Sponsored Participant'' of a member organization, i.e., 
``Sponsoring Member Organization,'' and must enter into a written 
agreement with the Sponsoring Member Organization and with the 
Exchange.\45\ All members, member organizations, and Sponsored 
Participants of Sponsoring Member Organizations must first obtain 
connectivity authorization before they can access MatchPoint.\46\
---------------------------------------------------------------------------

    \45\ See proposed Rule 1500(g)(1).
    \46\ See proposed Rule 1500(g)(2).
---------------------------------------------------------------------------

    The proposed rule requires the Sponsoring Member Organization and 
the Sponsored Participant to enter into a sponsorship arrangement and 
maintain a written ``sponsorship agreement.'' The sponsorship agreement 
must be agreed to by both the Sponsoring Member Organization and the 
Sponsored Participant and include provisions for ``Authorized 
Traders.'' \47\ Such written agreement must include the Sponsoring 
Member's consent to sponsor the Sponsored Participant.\48\
---------------------------------------------------------------------------

    \47\ See proposed Rule 1500(g)(3)(D).
    \48\ The provisions that must be included in the proposed 
sponsorship agreement are outlined in the Notice, supra note 3. See 
proposed Rule 1500(g)(3)(B).
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange \49\ and, in particular, the requirements of 
section 6 of the Act.\50\ Specifically, the Commission finds that the 
proposed rule change is consistent with section 6(b)(5) of the Act,\51\ 
which requires, among other things, that the rules of a national 
securities exchange be designed to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, and 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, and are not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers. MatchPoint, via both single order and portfolio trading, would 
provide market participants and investors with an additional mechanism 
for order execution. The Commission, in relying on NYSE's 
representation that participation in the matching session would be 
voluntary and open to all eligible NYSE market participants and would 
not result in any advantage to market participants that participate in 
matching sessions over those market participants that do not choose to 
participate, believes that MatchPoint is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \49\ In approving this proposed rule change the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \50\ 15 U.S.C. 78f.
    \51\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    NYSE has proposed to execute matching session orders at a 
predetermined Reference Price at a randomly selected point in time 
during a one-minute trading window. The Commission notes that using the 
automated and random matching mechanism to execute a matching session 
cross should minimize the opportunity for manipulation. In addition, 
the Commission notes that, should NYSE desire to institute additional 
matching sessions or to modify the time of matching sessions in the 
future, it must submit a rule change to the Commission pursuant to 
19(b) of the Act.\52\
---------------------------------------------------------------------------

    \52\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

A. Trading Ahead

    Because matching session orders that are executed during the 
regular hours session would be executed at the midpoint of the NBBO, it 
is possible that a NYSE member would trade ahead of a held customer 
order by less than $0.01 (i.e., $ 0.005). In the event a MatchPoint 
order executes at the midpoint of the NBBO and results in a member or 
member organization's trading ahead of a held customer order at the 
same price, NYSE Rule 92 (Limitations on Member's Trading Because of 
Customers' Orders) may be implicated. Rule 92(a) generally restricts a 
member or member organization from entering a proprietary order while 
in possession of a customer order. Rule 92(b) through (d) provides 
several exceptions to the general restrictions of Rule 92(a). The 
Commission notes that the Exchange has stated that all users must 
comply with Rule 92(a) when trading on the MatchPoint system unless 
such trading falls within an applicable exception in NYSE Rule 92(b) 
through (d).

B. Section 11(a) of the Act

    Section 11(a) of the Act prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises discretion (``Covered 
Accounts'') unless an exception applies.\53\ Rule 11a2-2(T), known as 
the ``effect versus execute'' rule, provides exchange members with an 
exemption from the section 11(a) prohibition. To comply with Rule 11a2-
2(T)'s conditions, a member: (1) Must transmit the order from off the 
exchange floor; (2) may not participate in the execution of the 
transaction once it has been transmitted to the member performing the 
execution; (3) may not be affiliated with the executing member; and (4) 
with respect to an account over which the member has investment 
discretion,

[[Page 908]]

neither the member nor its associated person may retain any 
compensation in connection with effecting the transaction without 
express written consent from the person authorized to transact business 
for the account in accordance with the Rule. NYSE requests that the 
Commission concur with its interpretation that MatchPoint orders 
entered from off the floor of the Exchange comply with these provisions 
of Rule 11a2-2(T).
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78k(a).
---------------------------------------------------------------------------

1. Off-Floor Transmission
    The requirement in Rule 11a2-2(T) for orders to be transmitted from 
off the exchange floor reflects Congress's intent that section 11(a) 
should operate to put member money managers and non-member money 
managers on the same footing for purposes of their transactions for 
covered accounts. In considering other automated systems, the 
Commission and the staff have stated that the off-floor transmission 
requirement would be met if a covered account order is transmitted from 
off the floor directly to the exchange floor by electronic means.\54\ 
Because all orders for Covered Accounts sent to MatchPoint will be 
electronically submitted directly to the system from locations other 
than on the Exchange floor,\55\ the Commission believes that orders 
transmitted for execution on MatchPoint satisfy the off-floor 
transmission requirement.
---------------------------------------------------------------------------

    \54\ See Securities Exchange Act Release Nos. 54552 (September 
29, 2006), 71 FR 59546 (October 10, 2006) (order approving proposed 
rule change of the American Stock Exchange LLC to establish new 
hybrid market); 29237 (May 31, 1991) (regarding NYSE's Off-Hours 
Trading Facility); and 15533 (January 29, 1979), 44 FR 6084 (January 
31, 1979) (regarding the Amex Post Execution Reporting System, the 
Amex Switching System, the Intermarket Trading System, the Multiple 
Dealer Trading Facility of the Cincinnati Stock Exchange, the PCX's 
Communications and Execution System, and the Phlx's Automated 
Communications and Execution System) (``1979 Release''). See also 
Letter from Paula R. Jensen, Deputy Chief Counsel, Division of 
Market Regulation, Commission, to Angelo Evangelou, Senior Attorney, 
Chicago Board Options Exchange (``CBOE''), dated March 31, 2003 
(regarding CBOE's CBOEdirect system) (``CBOEdirect Letter''); Letter 
from Paula R. Jenson, Deputy Chief Counsel, Division, Commission, to 
Jeffrey P. Burns, Assistant General Counsel, American Stock Exchange 
LLC (``Amex''), dated July 9, 2002 (regarding Amex's auto-ex system 
for options); Letter from Paula R. Jenson, Deputy Chief Counsel, 
Division, Commission, to Richard S. Rudolph, Counsel, Philadelphia 
Stock Exchange, Inc. (``Phlx''), dated April 15, 2002 (regarding 
Phlx's AUTOM System and its automatic execution feature AUTO-X); 
Letter from Paula R. Jenson, Deputy Chief Counsel, Division, 
Commission, to Kathryn L. Beck, Senior Vice President, Special 
Counsel and Antitrust Compliance Officer, Pacific Exchange, Inc. 
(``PCX''), dated October 25, 2001 (regarding Archipelago Exchange 
(``ArcaEx'')) (``ArcaEx Letter''); and Letter from Brandon Becker, 
Director, Division, Commission, to George T. Simon, Foley & Lardner, 
dated November 30, 1994 (regarding Chicago Match) (``Chicago Match 
Letter'').
    \55\ The Commission notes that NYSE Rule 1500(g)(4)(B) will 
prohibit members from entering orders into the MatchPoint system 
from the floor of the Exchange when such orders are for their own 
accounts, the accounts of associated persons, or accounts over which 
it or an associated person exercises investment discretion. Further, 
the rule also prohibits members from having such orders entered into 
MatchPoint by sending them to an off-floor facility for entry. 
Members with authorized access to MatchPoint may only enter customer 
orders into the MatchPoint system from the floor of the Exchange.
---------------------------------------------------------------------------

2. Non-Participation in Order Execution
    Rule 11a2-2(T) further provides that the exchange member and its 
associated persons may not participate in the execution of the 
transaction once the order has been transmitted to the exchange 
floor.\56\ This requirement was included to prevent members with their 
own brokers on the exchange floor from using those persons to influence 
or guide their orders' execution. This requirement does not preclude 
members from canceling or modifying orders, or from modifying the 
instructions for executing orders, after they have been transmitted to 
the floor. Such cancellations or modifications, however, also must be 
transmitted from off the exchange floor.\57\
---------------------------------------------------------------------------

    \56\ See Securities Exchange Act Release No. 44983 (October 25, 
2001), 66 FR 55225 (November 1, 2001) (Order approving ArcaEx as the 
equities trading facility of PCX Equities Inc.); 1979 Release, supra 
note 54. See also CBOEdirect Letter, supra note 54; Letter from 
Larry E. Bergmann, Senior Associate Director, Division, Commission, 
to Edith Hallahan, Associate General Counsel, Phlx, dated March 24, 
1999 (regarding Phlx's VWAP Trading System); Letter from Catherine 
McGuire, Chief Counsel, Division, to David E. Rosedahl, PCX dated 
November 30, 1998 (regarding OptiMark); Chicago Match Letter, supra 
note 54.
    \57\ See Securities Exchange Act Release No. 14563 (March 14, 
1978), 43 FR 11542 (March 17, 1978); see also Securities Exchange 
Act Release No. 53128 (January 13, 2006), 71 FR 3550 (January 23, 
2006) (order approving Nasdaq Stock Market LLC's registration as a 
national securities exchange) (``Nasdaq Exchange Order'').
---------------------------------------------------------------------------

    The Commission has stated that the non-participation requirement is 
satisfied by automated systems when the member's use of such a system 
entails relinquishing the ability to influence or guide the execution 
of a covered account order once transmitted into the system.\58\ In 
MatchPoint, matching sessions commence automatically at a predetermined 
time. Matching, trading and pricing of orders is effectuated through a 
fixed algorithm, which does not permit entry, correction or 
cancellation of orders during the matching session. Once a member 
submits an order to the MatchPoint system, the order will be executed 
pursuant to the MatchPoint algorithm and in accordance with Exchange 
rules. Although a member will still have the ability to modify or 
cancel an order entered into the MatchPoint system (prior to the 
commencement of the matching session), they will not otherwise have 
control over their order. Because MatchPoint users will relinquish 
control of their orders upon transmission to the MatchPoint system, and 
will not be able to influence or guide the execution of their orders, 
the Commission believes that the non-participation requirement is met 
with respect to orders that are executed automatically in MatchPoint.
---------------------------------------------------------------------------

    \58\ See 1979 Release, supra note 54; see also, e.g., Securities 
Exchange Act Release Nos. 54422 (September 11, 2006), 71 FR 54537 
(September 15, 2006) (order approving proposed rule change of CBOE 
to establish a screen based trading system for non-option 
securities) (``CBOE STOC Order''); 51666 (May 9, 2005), 70 FR 25631, 
25633 (May 13, 2005) (order approving proposed rule change by 
International Securities Exchange, Inc. to establish facilitation, 
block order and solicited order mechanism).
---------------------------------------------------------------------------

3. Execution Through Unaffiliated Member
    Although Rule 11a2-2(T) contemplates having an order executed by an 
exchange member who is unaffiliated with the member initiating the 
order, the Commission has recognized that the requirement is not 
applicable when automated exchange facilities are used, if the 
execution of the order is automatic once it has been transmitted into 
the system, and if the design of the system ensures that members do not 
possess any special or unique trading advantages in handling their 
orders after transmitting them to the system.\59\ In such instances, 
the Commission has stated that executions obtained through these 
systems satisfy the independent execution requirement of Rule 11a2-
2(T).\60\ The Commission notes that NYSE has represented that the 
MatchPoint system is designed to ensure that members using MatchPoint

[[Page 909]]

will not possess any special or unique trading advantages in the 
handling of their orders after transmitting them to the MatchPoint 
system.
---------------------------------------------------------------------------

    \59\ In considering the operation of automated execution systems 
operated by an exchange, the Commission has noted that while there 
is no independent executing exchange member, the execution of an 
order is automatic once it has been transmitted into the system. 
Because the design of these systems ensures that members do not 
possess any special or unique trading advantages in handling their 
orders after transmitting them to the exchange, the Commission has 
stated that executions obtained through these systems satisfy the 
independent execution requirement of Rule 11a2-2(T). See 1979 
Release, supra note 54; see also, e.g., Securities Exchange Act 
Release No. 54365 (August 25, 2006), 71 FR 52192 (September 1, 2006) 
(order approving initial phase of the Boston Stock Exchange, Inc.'s 
proposed rule change to establish Boston Equities Exchange Trading 
System) (``BeX Phase I Order''); CBOE STOC Order, supra note 58.
    \60\ See 1979 Release, supra note 54; see also, e.g., Securities 
Exchange Act Release No. 54238 (July 28, 2005), 71 FR 44758 (August 
7, 2006) (order approving proposed rule change of NYSE Arca, Inc. to 
establish the OX trading platform); Nasdaq Exchange Order, supra 
note 57.
---------------------------------------------------------------------------

4. Non-Retention of Compensation for Discretionary Accounts
    The Commission notes that MatchPoint users who intend to rely on 
Rule 11a2-2(T) in connection with transactions using the MatchPoint 
system must comply with the requirements of Section (a)(2)(iv) of the 
Rule.
    In reliance on NYSE's representations and for the reasons set forth 
above, the Commission believes that members entering orders into the 
MatchPoint system would satisfy the requirements of Rule 11a2-2(T) 
under the Act.

C. Surveillance

    The Commission notes that NYSE Regulation has represented that it 
has appropriate policies and procedures in place to adequately and 
effectively regulate the MatchPoint system, and that a surveillance 
plan will be implemented prior to any trading to monitor the operation 
of MatchPoint. Also, the Financial Industry Regulatory Authority, Inc. 
(``FINRA''), as agent for NYSE Group, will perform examinations of 
specialist firms that trade on MatchPoint.\61\
---------------------------------------------------------------------------

    \61\ As stated in the Notice, supra note 3, FINRA examiners will 
perform an on-site review of the combined specialist firm's written 
policies and procedures and determine if they are adequate in 
relation to trading on MatchPoint. In addition, FINRA will interview 
appropriate individuals both within the affected departments as well 
as other areas of the specialist firm to determine whether firm 
policies have been appropriately disseminated and appear to be 
followed in relation to MatchPoint trading. The examination will 
also determine whether there have been any apparent breaches of the 
information barriers.
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\62\ that the proposed rule change (File No. SR-NYSE-2007-102), as 
modified by Amendment No. 1 thereto, be, and it hereby is, approved.
---------------------------------------------------------------------------

    \62\ 15 U.S.C. 78s(b)(2).
    \63\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\63\
Nancy M. Morris,
Secretary.
[FR Doc. E7-25626 Filed 1-3-08; 8:45 am]

BILLING CODE 8011-01-P