Document ID: SEC-2006-1347-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange LLC
Posted Date: 2006-10-18T04:00Z

[Federal Register: October 18, 2006 (Volume 71, Number 201)]
[Notices]               
[Page 61524-61525]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18oc06-107]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54592; File No. SR-NYSE-2006-04]

 
 Self-Regulatory Organizations; New York Stock Exchange, Inc. (n/
k/a New York Stock Exchange LLC); Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 Thereto Relating to NYSE Rule 116 
(``Stop'' Constitutes Guarantee) and NYSE Rule 123B (Exchange Automated 
Order Routing Systems)

October 12, 2006.
    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 February 9, 2006, the New York Stock Exchange, Inc. (n/k/a New York 
Stock Exchange LLC) (``NYSE'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II and III below, which Items have been 
prepared by the NYSE.\3\ The NYSE filed Amendment Nos. 1 and 2 to the 
proposed rule change on April 5, 2006 \4\ and September 8, 2006,\5\ 
respectively. The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Commission notes that the rule text submitted by the 
Exchange contained minor, technical errors. Exchange staff has 
committed to address these errors following publication of this 
notice. In addition, certain technical corrections and 
clarifications were made throughout the discussion of the proposed 
rule change pursuant to a conversation with NYSE staff. Telephone 
conversation between Gillian Rowe, Principal Rule Counsel, Office of 
the General Counsel, NYSE Group, Inc., and Jennifer Colihan, Special 
Counsel, and Kate Robbins, Attorney, Division of Market Regulation, 
Commission, on October 2, 2006.
    \4\ In Amendment No. 1, the Exchange made technical and 
clarifying changes to the rule text and purpose section.
    \5\ In Amendment No. 2, which replaced the original filing in 
its entirety and incorporated Amendment No. 1, the Exchange proposed 
additional changes to NYSE Rule 116 regarding a specialist's ability 
to stop stock in the NYSE's Hybrid Market.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    In the proposed rule change, the Exchange seeks to amend NYSE Rule 
116 (``Stop'' Constitutes Guarantee) and NYSE Rule 123B (Exchange 
Automated Order Routing Systems) regarding a specialist's ability to 
``stop'' stock and report such a transaction. The text of the proposed 
rule change is available on the NYSE's Web site (http://www.nyse.com), at the 

NYSE'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 NYSE included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The practice of stopping stock by specialists on the Exchange 
refers to a guarantee by the specialist that an order he or she 
receives will be executed at no worse a price than the contra side 
price in the market at the time the order was stopped, with the 
understanding that the order may in fact receive a better price. For 
example, the Exchange market in a stock is quoted at 20.00 bid, offered 
at 20.10, and the specialist receives a market order to buy. If the 
specialist ``stops'' the buy order, the specialist is guaranteeing that 
the order will receive no worse a price than 20.10, the then-prevailing 
offer price. The specialist would then make a bid on behalf of the 
market order to buy at a price above the prevailing bid, for example, 
at 20.05. If a sell order trades with this bid, the stopped order has 
received price improvement (as has the sell order trading with it). If, 
however, another buy order enters the market and executes at the offer 
price of 20.10, the stopped buy order will be executed at that same 
price pursuant to the specialist's guarantee as evidenced by the 
``stop.''
    The current Hybrid MarketSM is the result of a series of 
initiatives, approved by the Commission, to implement changes to the 
operation of the Exchange's market to expand access to automated 
trading while preserving the advantages of the agency auction 
market.\6\ Customers and other market participants will have greater 
opportunities for speed and certainty of execution through the enhanced 
electronic trading. Opportunities for price improvement will continue 
to be available.
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    \6\ See The Hybrid Market initiative proposed in SR-NYSE-2004-05 
and Amendments Nos. 1, 2, 3, 5, 6, 7 and 8 thereto approved on March 
22, 2006. See Securities Exchange Act Release No. 53539 (March 22, 
2006), 71 FR 16353 (March 31, 2006) (``Hybrid Market Release''). See 
also Securities Exchange Act Release Nos. 52362 (August 30, 2005), 
70 FR 53701 (September 9, 2005) (SR-NYSE-2005-57); 52954 (December 
14, 2005), 70 FR 75519 (December 20, 2005) (SR-NYSE-2005-87); 53014 
(December 22, 2005), 70 FR 77228 (December 29, 2005) (SR-NYSE-2005-
89); 53359 (February 24, 2006), 71 FR 10736 (March 2, 2006) (SR-
NYSE-2006-09); 53487 (March 15, 2006), 71 FR 14278 (March 21, 2006) 
(SR-NYSE-2006-21); 53780 (May 10, 2006), 71 FR 28398 (May 16, 2006) 
(SR-NYSE-2006-24); and 53791 (May 11, 2006), 71 FR 28732 (May 17, 
2006) (SR-NYSE-2006-33).
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    NYSE Rule 116 generally provides for the ability of a member to 
stop stock. Paragraph .30 in the Rule's Supplementary Material provides 
three circumstances in which a specialist may stop stock, including at 
the opening or reopening of trading in a stock, when a broker in the 
trading crowd is representing another order at the stop price or when 
requested to by another member. In the latter circumstance, the 
provisions of NYSE Rule 116.30 require that the quotation spread be not 
less than twice the minimum variation (currently one cent), or, if the 
quotation spread is the minimum variation, that the quote conditions 
(i.e., an imbalance in the amount of shares bid for or offered) suggest 
the likelihood of price improvement, and that the order be under 2,000 
shares. The rule further provides a limitation of a total of 5,000 
shares for all stopped orders. A specialist may seek approval of a 
Floor Official to override these conditions. In

[[Page 61525]]

addition, a specialist must take specific actions to reduce the spread 
in the quotation after the stop is granted, may not reduce the size of 
the market following the stop and must execute orders on the book 
entitled to priority against the stopped stock.
    The Exchange generally believes that the practice of specialists 
stopping stock makes less sense in a hybrid market. This is primarily 
due to the dynamics of increased speed of trading and more effective 
functioning of the market through initiatives such as sweeps,\7\ the 
discretionary e-QuotesSM \8\ and the ability of Exchange 
specialists to provide electronic price improvement.\9\ Given the 
availability of these other avenues for price improvement, the Exchange 
believes that the procedures in NYSE Rule 116.30(3) for granting stops 
are a less attractive and efficient mechanism to seek price improvement 
in faster markets due to the time required to perform the procedures.
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    \7\ The ``sweep'' functionality will allow orders to 
automatically execute against contra side interest in the Display 
Book[supreg] System at and outside the Exchange best bid or offer 
until the order is filled.
    \8\ See Exchange Rule 70.25.
    \9\ See Exchange Rules 104(b)(i)(H) and 104(e). These rules were 
approved as part of the Hybrid Market initiative, see Hybrid Market 
Release, supra note 6, and became operative on October 6, 2006.
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    The Exchange further believes that in manually stopping stock there 
is a substantial risk that a stopped order would ``miss the market'' 
given the speed of automatic executions and the ``sweep'' 
functionality.
    As a result, the Exchange seeks to remove the provisions in NYSE 
Rule 116.30 that permit stopping stock by a specialist in all 
situations. As explained above, the provisions for stopping stock in 
situations related to the quote spread and the procedures associated 
with these are not, in the Exchange's view, useful going forward in our 
Hybrid MarketSM. Additionally, the Exchange no longer 
systemically supports a specialist's stopping stock in any 
situation,\10\ which requires a specialist to execute stopped stock 
transactions manually. The Exchange believes these manual transactions 
are not conducive to efficient trading in our Hybrid 
MarketSM. As such, the Exchange seeks to amend NYSE Rule 
116.30 to eliminate a specialist's ability to stop stock.
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    \10\ As of December 13, 2005 the Exchange eliminated the 
systemic support for the reporting of executions of stopped orders. 
The Exchange continues to require manual reporting. See Member 
Education Bulletin 2005-25 (December 13, 2005) from the NYSE's 
Division of Market Surveillance.
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    The Exchange further seeks to amend subsection (b)(3) of NYSE Rule 
123B (Exchange Automated Order Routing Systems) to remove references to 
the systemic reporting of executions of stopped orders now that 
Exchange systems no longer execute that function.
2. Statutory Basis
    The basis under the Act \11\ for this proposed rule change is the 
requirement under Section 6(b)(5) \12\ 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.
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    \11\ 15 U.S.C. 78a.
    \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

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

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the NYSE consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. 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-2006-04 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NYSE-2006-04. 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. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the NYSE. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NYSE-2006-04 and should be submitted on or before 
November 8, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-17321 Filed 10-17-06; 8:45 am]

BILLING CODE 8011-01-P