Document ID: SEC-2006-0628-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange LLC
Posted Date: 2006-05-16T04:00Z

[Federal Register: May 16, 2006 (Volume 71, Number 94)]
[Notices]               
[Page 28399-28401]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16my06-133]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53782; File No. SR-NYSE-2006-07]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto To 
Amend Exchange Rule 104 Regarding the Requirement That Specialists 
Obtain Floor Official Approval for Destabilizing Dealer Account 
Transactions That Match the National Best Bid or Offer

May 10, 2006.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on February 16, 2006, the 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. On April 27, 
2006, NYSE filed Amendment No. 1 to the proposed rule change.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange made technical corrections 
to the rule text of the proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to amend NYSE Rule 104 (Dealings by 
Specialists) to permit specialists to effect destabilizing dealer 
account transactions when matching the national best bid or offer 
without requiring that they obtain Floor Official approval.
    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in [brackets].
* * * * *

Dealings by Specialists

Rule 104

No change in (a) through .10(4)

    (5)(i) Transactions on the Exchange for his own account of a member 
acting as specialist are to be effected in a reasonable and orderly 
manner in relation to the condition of the general market, the market 
in the particular stock and the adequacy of the specialist's position 
to the immediate and reasonably anticipated needs of the round-lot and 
the odd-lot market. The following types of transactions to establish or 
increase a position are not to be effected except when they are 
reasonably necessary to render the specialist's position adequate to 
such needs:
    (A) A purchase at a price above the last sale in the same session:
    (B) The purchase of more than 50% of the stock offered in the 
market at a price equal to the last sale where such transaction would 
be on a ``zero plus tic'' (i.e., the last sale price was above the 
previous different regular way sale price); and
    (C) Failing to reoffer or rebid where necessary after effecting 
transactions described in (A) and (B) above.
    Transactions of these types may, nevertheless, be effected with the 
approval of a Floor Official or in less active markets where they are 
an essential part of a proper course of dealings and where the amount 
of stock involved and the price change, if any, are normal in relation 
to the market.
    (ii) Notwithstanding the provisions of subparagraphs (5)(i)(A) and 
(B) above, whenever a specialist effects a principal purchase of a 
[speciality] specialty stock, in another participating market center 
through ITS, at or above the price at which he holds orders to sell 
that stock, such orders which remain unexecuted on the Floor must be 
filled by the specialist buying the stock for his own account, at the 
same price at which he effected his principal transaction through ITS 
unless, effecting such a principal transaction on the Floor, at that 
price, would (a) be inconsistent with the maintenance of fair and 
orderly markets; or (b) result in the election of stop orders.
    (iii) Whenever a specialist effects a principal sale of a specialty 
stock, in

[[Page 28400]]

another participating market center through ITS, at or below the price 
at which he holds orders to buy that stock, such orders which remain 
unexecuted on the Floor must be filled by the specialist by selling the 
stock for his own account, at the same price at which be effected his 
principal transaction through ITS subject to the same conditions as set 
forth in (ii)(a) and (b) above and provided further that effecting such 
a principal transaction on the Floor, at that price, would not be 
precluded by the short selling rules, or would not result in a sale to 
a stabilizing bid.
    (iv) Notwithstanding the provisions of (5)(i)(A) and (B) above, a 
specialist may effect a principal purchase of a specialty security to 
establish or increase a position at a price above the last sale in the 
same session at a price that matches the then current national best bid 
or, in the case of a sale, that matches the then current national best 
offer.
    (6)(i) Transactions on the Exchange by a specialist for his own 
account in liquidating or decreasing his position in a specialty stock 
are to be effected in a reasonable and orderly manner in relation to 
the condition of the general market, the market in the particular stock 
and the adequacy of the specialist's positions to the immediate and 
reasonably anticipated needs of the round-lot and the odd-lot market 
and in this connection:
    (A) The specialist may liquidate a position by selling stock on a 
direct minus tick or by purchasing stock on a direct plus tick only if 
such transactions are reasonably necessary in relation to the 
specialist's overall position in the stocks in which he is 
registered[;] , and the specialist has obtained the prior approval of a 
Floor Official;
    (B) The specialist may liquidate a position by selling a security 
on a direct or zero minus tick or by purchasing a security on a direct 
or zero plus tick without the need to obtain Floor Official approval if 
such transaction is effected at a price that matches the then current 
national best bid or offer;
    [(B)] (C) The specialist should maintain a fair and orderly market 
during liquidation and, after reliquifying, should re-enter the market 
to offset imbalances between supply and demand. The selling of stock on 
a direct minus tick or a zero minus tick, or the purchasing of stock on 
a direct plus tick or a zero plus tick should be effected in 
conjunction with the specialist's re-entry in the market on the 
opposite side of the market from the liquidating transaction where the 
imbalance of supply and demand indicates that immediately succeeding 
transactions may result in a lower price (following the specialist's 
sale of stock on a direct minus tick or a zero minus tick) or a higher 
price (following the specialist's purchase of stock on a direct plus 
tick or a zero plus tick). During any period of volatile or unusual 
market conditions resulting in a significant price movement in the 
subject security, the specialist's transactions in re-entering the 
market following a liquidating transaction effected by selling stock on 
a direct minus tick or zero minus tick, or purchasing stock on a direct 
plus tick or zero plus tick, should, at a minimum, reflect the 
specialist's usual level of dealer participation in the subject 
security. During such periods of unusual price movement in a security, 
any series of such transactions which may be effected in a brief period 
of time should be accompanied by the specialist's re-entry in the 
market and effecting transactions which reflect a significant degree of 
dealer participation;
    [(C)] (D) Transactions by a specialist for his or her dealer 
account in liquidating or decreasing a position in a specialty security 
must yield parity to and may not claim precedence based on size over a 
customer order in the crowd upon the request of the member representing 
such order, where such request has been documented as a term of the 
order, to the extent of the volume of such order that has been included 
in the quote prior to the transaction. However, this provision shall 
not apply to automatic executions involving the specialist dealer 
account.
    (ii) Notwithstanding the provisions of subparagraph (6)(i)(A) 
above, whenever a specialist effects a principal purchase (sale) of a 
specialty stock, in another participating market center through ITS, at 
or above (at or below) the price at which he holds orders to sell (buy) 
that stock, such orders which remain unexecuted on the Floor must be 
filled by the specialist by buying (selling) the stock for his own 
account, at the same price at which he effected his principal 
transaction through ITS subject to the same conditions as set forth in 
subparagraphs (5)(ii) and (iii) above.

[No change to remainder of Rule]
* * * * *

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, as 
amended. 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
    NYSE Rule 104 governs specialists' dealings in their specialty 
stocks. In particular, NYSE Rules 104.10(5) and (6) describe certain 
types of transactions that are not to be effected unless they are 
reasonably necessary to render the specialist's position adequate to 
the needs of the market. In effect, these restrictions generally 
require specialists' transactions for their own accounts to be 
``stabilizing'' (i.e., against the trend of the market) and prohibit 
specialists from making transactions that are ``destabilizing'' (i.e., 
with the market trend by buying on plus ticks and selling on minus 
ticks), except with the approval of a Floor Official.
    The Exchange is proposing to allow specialists to effect 
proprietary transactions on a destabilizing basis for their own account 
when such trades are effected at a price that matches the current 
national best bid or offer (``NBBO''). In certain circumstances today, 
such as trading in exchange traded funds (``ETFs''), specialists are 
not currently restricted under NYSE Rule 104 from effecting proprietary 
destabilizing transactions that bring an ETF into parity with the value 
of the index on which the ETF is based. The Exchange believes that this 
recognizes that specialists are not leading the market through 
proprietary transactions in these instances, but rather following the 
market as set by the independent judgment of other market 
participants.\4\
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    \4\ See Securities Exchange Act Release No. 49087 (January 15, 
2004), 69 FR 3622 (January 26, 2004) (SR-Amex-2002-116) (``[T]he 
Commission believes that because ETFs are priced derivatively, an 
Exchange specialist would not be able to manipulate the pricing of 
an ETF.'').
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    Similarly, the Exchange believes that amending NYSE Rules 104.10(5) 
and (6) to permit specialists to effect a destabilizing proprietary 
trade in an equity security at a price established independent of the 
specialist should not be viewed as leading the market. The Exchange 
states that the standard of each specialist proprietary trade meeting 
the test of reasonable necessity would continue to apply to any such 
destabilizing trade.

[[Page 28401]]

    In addition, the Exchange notes that the time required to obtain 
Floor Official approval for such transactions can have the effect of 
delaying trading and could result in inferior execution prices for 
customer orders.
    Finally, the Exchange believes that removing these restrictions 
should enhance the specialist's ability to make competitive markets 
since the trades would be done at prices matching the then current 
national best bid or offer.
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) \5\ that 
an exchange have rules that are designed to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest.
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    \5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change, as amended, 
would not 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 not solicited, and does not intend to solicit, 
comments regarding the proposed rule change, as amended. The Exchange 
has not received any unsolicited written comments from members or other 
interested parties.

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 Exchange consents, the Commission shall:
    (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 No. SR-NYSE-2006-07 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-SR-NYSE-2006-07. 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 Commissions 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-2006-07 and should be submitted on or before June 
6, 2006.
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    \6\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E6-7453 Filed 5-15-06; 8:45 am]

BILLING CODE 8010-01-P