Document ID: SEC-2012-1218-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange LLC
Posted Date: 2012-07-27T04:00Z

[Federal Register Volume 77, Number 145 (Friday, July 27, 2012)]
[Notices]
[Pages 44302-44305]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-18329]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67488; File No. SR-NYSE-2012-29]

Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change Amending NYSE Rule 76 To Add 
Supplementary Material Relating to a Cross Function That Provides a 
Regulation NMS Rule 611-Compliant Tool for Floor Brokers

July 23, 2012.
    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 July 13, 2012, New York Stock Exchange LLC (the ``Exchange'' or 
``NYSE'') 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 Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend NYSE Rule 76 to add supplementary 
material relating to a cross function that provides a Regulation NMS 
Rule 611-compliant tool for Floor Brokers. The text of the proposed 
rule change is available on the Exchange's Web site at www.nyse.com, at 
the principal office of the Exchange, 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 self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

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

1. Purpose
    The Exchange proposes to amend Rule 76 to describe an enhancement 
to the current processes used by Floor Brokers to manually cross orders 
in compliance with Regulation NMS Rule 611 (``Rule 611''). 
Specifically, the Exchange proposes to allow Floor Brokers to use new 
functionality for the wireless hand held devices (``HHD'') that will 
assist them in meeting their Rule 611 compliance requirements by 
providing for a ``look-back'' period in effecting crosses under NYSE 
rules. The Exchange believes that use of the HHD by Floor Brokers to 
assist in the execution of manual cross trades, combined with a brief 
and reasonable amount of time to accommodate the manual manner by which 
Floor Brokers must comply with NYSE crossing rules, will enhance the 
efficiency of such crosses and provide a better audit trail for 
purposes of Rule 611. The new functionality (``Cross Function'') and 
the proposed procedures are described below.
Background
    NYSE Rule 76 governs the execution of ``cross'' or ``crossing'' 
orders by Floor Brokers. Rule 76 applies only to manual transactions 
executed at the point of sale on the trading Floor and provides that 
when a member has an order to buy and an order to sell the same 
security that can be crossed at the same price, the member is required 
to announce to the trading crowd the proposed cross by offering the 
security at a price that is higher than his or her bid by a minimum 
variation permitted in the security before crossing the orders. Any 
other member, including the Designated Market Maker (``DMM''), can 
break up the announced bid and offer by trading with either side of the 
proposed cross transaction.\3\ If no one in the trading

[[Page 44303]]

crowd breaks up the proposed cross, the DMM on behalf of the Floor 
Broker enters the cross transaction into the Exchange's Display Book 
system as a completed transaction. The completed transaction is printed 
to the Consolidated Tape at that price.
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    \3\ An agency ``cross'' of 10,000 shares or more at or between 
the Exchange best bid or offer has priority and can only be broken 
up to provide price improvement that is better than the cross price 
as to all or part of such bid or offer. A buy and sell order to be 
crossed pursuant to Rule 72(d) is subject to Rule 76, including the 
requirement that such a proposed cross be announced to the crowd. 
See NYSE Rule 72(d). In addition, cross transactions to be executed 
at a clean-up price outside the current quotation on the Exchange 
are subject to Rule 127. See NYSE Rule 127.
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    Currently, after announcing a proposed cross transaction, the Floor 
Broker and DMM manually monitor the protected best bid or offer to 
ensure that the proposed cross can be executed in accordance with the 
customer's instructions and in compliance with Rule 611. In today's 
fast-moving, electronic markets, where prices can change in millisecond 
time frames, this manual monitoring process may not be the optimal 
manner by which to facilitate and evidence such compliance.
    The Commission and its staff have recognized the difficulty that 
broker-dealers face when manually handling orders in light of Rule 611. 
Specifically, the SEC staff has issued guidance pertaining to the 
manual execution of orders under staff FAQ 3.23 of Rule 611.\4\ Under 
the FAQ, a broker-dealer that acts as agent in arranging block 
transactions between two or more parties at prices that are 
individually negotiated,\5\ and at a price that is at or within the 
protected quotations must capture the negotiated price in its automated 
system within a reasonable time period.\6\ Due to the manual nature of 
these transactions, the individually negotiated price may not be at or 
within the protected bid and offer at the time the transaction terms 
ultimately are captured in the automated system. FAQ 3.23 addresses 
this issue by permitting the broker-dealer to utilize a 20-second 
``look-back'' period for purposes of demonstrating compliance with Rule 
611.
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    \4\ See ``Responses to Frequently Asked Questions Concerning 
Rule 611 and Rule 610 of Regulation NMS,'' FAQ 3.23 ``Agency Block 
Transactions with Non-Trade-Through Prices that are Individually 
Negotiated'' (``FAQ 3.23''). FAQ 3.23 is available at: http://www.sec.gov/divisions/marketreg/nmsfaq610-11.htm.
    \5\ The negotiations can occur either through communications 
with personnel of the broker-dealer or through direct communications 
between the parties of the transaction, and the negotiations may 
occur through a telephone conversation or through automated messages 
(e.g., email).
    \6\ Under the FAQ, the transaction must be individually 
negotiated, and at least one of the parties individually negotiating 
the price of the transaction must be a ``customer,'' as defined in 
Rule 600(b)(16) of Regulation NMS. Similarly, crosses under the FAQ 
must be in block size, as defined in Rule 600(b)(9).
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    As discussed below, the Exchange is proposing a similar means for 
assisting Floor Brokers with compliance with Rule 611 that is 
consistent with existing Exchange crossing rules. Exchange Floor 
Brokers cross large orders pursuant to Rule 76. In many cases, these 
orders are sent to a Floor Broker by customers seeking a primary market 
print, as well as orders from customers who do not wish to have their 
orders handled by broker-dealers that also trade as principal. While 
the crossing of orders by Floor Brokers using the proposed Cross 
Function would differ in degree from the crossing guidance in FAQ 
3.23,\4\ as discussed below, the fundamental issue of facilitating 
compliance with Rule 611 when handling large manual trades is the same. 
Moreover, the proposed Cross Function is narrowly tailored to address 
the manual handling of cross orders by Floor Brokers, who face unique 
issues by virtue of their status as Floor-based participants.
    Floor Broker activities are subject to various regulatory 
restrictions that are not imposed upon broker-dealers executing orders 
off the Floor of the Exchange. Floor Broker activities on the Floor of 
the Exchange are subject to Section 11(a) of the Exchange Act and the 
rules thereunder.\7\ As such, Floor Brokers are limited in their 
ability to trade for their own account or for the account of an 
associated person or an account over which they exercise discretion. In 
addition, pursuant to NYSE Rule 112, Floor Brokers are also prohibited 
from initiating orders on the Trading Floor. Consequently, Floor 
Brokers act only as agents on the Floor, even in circumstances where 
they are representing principal order flow from an associated person or 
upstairs desk. Moreover, because Floor Brokers may not access away 
markets directly while at the point of sale,\8\ Floor Brokers cannot 
rely on the exception set forth in Rule 611(b)(6), which permits market 
participants to send intermarket sweep orders while simultaneously 
effecting a crossing transaction that may trade through protected 
quotations.
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    \7\ 15 U.S.C. 78k(a). The Exchange notes that, although Section 
11(a) provides for certain limited exceptions for Floor Broker 
activities (e.g., transactions to offset a transaction made in 
error), it generally imposes limitations on Floor Brokers that are 
not applicable to broker-dealers engaged in trading off the Floor of 
the Exchange.
    \8\ See NYSE Rules 76 and 70.40. Floor Brokers must be at the 
point of sale to execute crossing transactions pursuant to Rule 76.
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    Furthermore, broker-dealers executing cross transactions off the 
floor of the Exchange are not subject to Rule 76 requirements. Rule 76 
requires that Floor-based crossing transactions be exposed to the DMM 
and the crowd prior to being executed, which provides other Exchange 
members and public customers the ability to participate in such 
transactions. Because of this requirement, Floor Broker proposed cross 
transaction are required to be exposed publicly in a manner not 
required of off-Floor participants.
    As explained in greater detail below and given the regulatory 
restrictions applicable to the operation of Floor Brokers, the Exchange 
believes the proposal is consistent with the purposes underlying FAQ 
3.23, notwithstanding certain factual differences in the scenarios. As 
previously noted, Floor Brokers currently monitor protected bids and 
offers manually to ensure that the proposed cross can be executed in 
accordance with Rule 611, which is not optimal in today's electronic 
markets. The relief provided in FAQ 3.23 is designed to facilitate 
compliance with Rule 611 for manual transactions. Likewise, the 
Exchange is proposing to amend Rule 76 to enable Floor Brokers to 
effectively and efficiently cross customer orders in compliance with 
NYSE Rules and Regulation NMS.
Proposed Amendment to Rule 76
    To assist Floor Brokers in monitoring the price of protected 
quotations and ensuring compliance with Rule 611, the Exchange proposes 
the Cross Function as set forth in the proposed supplementary material 
to Rule 76. As proposed, Floor Brokers would be able to submit not held 
orders to be crossed (purchase and sale of the same security) into the 
HHD at a limit price consistent with customer instructions and as 
determined by the Floor Broker. The Floor Broker, however, may not use 
the Cross Function with regard to a cross involving a principal order 
to buy and a principal order to sell submitted by the same broker-
dealer. After the orders are entered into the HHD, a quote minder 
function within Exchange systems will monitor protected quotations to 
determine when the limit prices assigned to the buy and sell orders are 
such that the orders may be executed consistent with Rule 611. When the 
protected quotation permits a Rule 611-compliant print (i.e., the 
desired crossing price is at or between the protected bid and offer), 
the quote minder will:
    (i) Deliver an Alert message to the Floor Broker's HHD indicating 
that the orders may be crossed;
    (ii) Capture within Exchange systems a time-stamped quote that 
includes the time the Alert is sent to the HHD and the protected bid 
and offer at that time;

[[Page 44304]]

    (iii) Start a 20-second timer (as discussed below), and
    (iv) Enable a ``print'' key function in the HHD allowing the Floor 
Broker to execute the orders and send the trade report through Exchange 
systems to the Tape.
    As proposed, the Cross Function includes a 20-second timer that 
commences from the moment the cross trade at its proposed price could 
be executed at or between the protected bid and offer. As detailed 
below, the Floor Broker will use this brief period to comply with the 
Rule 76 requirement to announce the proposed cross transaction to the 
crowd. If Exchange systems do not receive the ``print'' message from 
the HHD within the allotted time period, the ability to execute the 
orders and print to the tape will expire and the cross instructions 
will be canceled.
    As required by Rule 76, when using the proposed Cross Function, the 
Floor Broker must first ``clear'' the crowd before executing a cross 
transaction. Therefore, the Floor Broker is required to be physically 
present at the post/panel of the DMM for the subject security and must 
verbally announce the cross trade. If there is crowd and/or DMM 
interest in response to the Floor Broker's verbal announcement of the 
cross trade, the Floor Broker must trade with such interest on behalf 
of the applicable customer order(s), as required by NYSE Rules. Under 
the proposed functionality, if the original terms of the proposed cross 
transaction cannot be met for any reason, for example, if the crowd 
trades with a portion of either the proposed bid or offer and the Floor 
Broker cannot otherwise complete the proposed cross transaction in the 
size or price that was entered into the Crossing Function, the 
originally-entered proposed cross transaction will be cancelled.\9\
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    \9\ Currently, due to limitations in the functionality of the 
system, the Exchange cancels a proposed cross transaction when the 
originally-entered size of the cross changes. However, the Exchange 
is exploring the possibility of making system changes to allow a 
proposed cross transaction to proceed if the only change in the 
proposed cross is a change in the size.
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    If the crowd or DMM does not break up the proposed cross trade, the 
Floor Broker may execute the trade by selecting the ``print'' key in 
the HHD prior to the expiration of the 20-second timer, which also will 
transmit a message to Exchange systems to print the transaction to the 
Tape. Thus, the 20-second timer permits a reasonable time for Floor 
Brokers to comply with Exchange crossing rules and establishes a brief 
``look-back'' period that permits the crossing of the orders at the 
designated limit price even if the market for the security subsequently 
moves while the Floor Broker is meeting its obligation under Rule 76. 
The Exchange believes that providing the 20-second timer is consistent 
with FAQ 3.23 because, similar to how off-Floor transactions require 
sufficient time for negotiation and entry into execution systems, Floor 
Broker proposed transactions need a similar time period to be exposed 
to the public and then, once executed, to be transmitted through broker 
systems to the Display Book and then to the Tape.\10\ To confirm 
compliance with Rule 76, the DMM will be required to enter the Floor 
Broker's badge number into Exchange systems.
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    \10\ As with off-Floor crossing transactions that are executed 
consistent with FAQ 3.23, the time that the proposed Floor Broker 
cross transaction ``prints'' via the HHD key may be at a time when 
either the protected bid or offer or Exchange best bid or offer has 
moved. Accordingly, by using the Cross Function, Floor Brokers will 
ensure compliance with not only Rule 611, but also NYSE Rule 127 in 
that the proposed cross transaction will not trade through the 
Exchange's best bid or offer at the time of Rule 611 validation.
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    A Floor Broker may cancel the orders associated with the proposed 
Cross Function at any time up to the point that the trade is executed 
(that is, at the time the ``print'' key is activated).\11\
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    \11\ The Exchange notes that Floor Brokers are required to have 
policies and procedures designed to ensure compliance with, among 
other things, Rule 76. Therefore, Floor Brokers will be required to 
update their policies and procedures to reflect any amendments to 
Rule 76.
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    In addition, consistent with FAQ 3.23, the proposed Cross Function 
would be available only for proposed cross transactions that are for at 
least 10,000 shares or a quantity of stock having a market value of 
$200,000 or more, which is the definition of a block transaction under 
Regulation NMS Rule 600(b)(9).
    Moreover, the Exchange proposes that the proposed cross transaction 
may not be for orders for the account of the member or member 
organization, an account of an associated person, or an account with 
respect to which the member, member organization or associated person 
thereof exercises investment discretion. The Exchange believes that 
requiring orders to be on behalf of unaffiliated entities provides the 
Floor broker analog to the FAQ 3.23 requirement that at least one side 
of the transaction be for a ``customer.'' As recognized in Rule 72(d), 
which permits a Floor broker to assert priority on behalf of block-
sized order flow from an unaffiliated member organization, Floor broker 
customers are not limited to non-broker dealers. The Exchange believes 
that the proposed limitation to use the proposed Cross Function on 
behalf of unaffiliated broker dealers meets the spirit of FAQ 3.23 by 
assuring that the Cross Function will not be used for affiliated 
principal order flow.
    Accordingly, as proposed, a Floor broker may use the proposed Cross 
Function for any order flow he or she may receive from an unaffiliated 
member organization, even if one side of the proposed cross transaction 
is for the account of the unaffiliated member organization. Likewise, a 
Floor broker could use the proposed Cross Function for proposed crossed 
transactions that represent principal orders of two different 
unaffiliated broker-dealer customers.
    The Exchange believes that Floor Brokers provide a useful service 
to the market and their customers in their ability to source liquidity 
and provide price discovery for transactions. Therefore, the Cross 
Function is designed to assist Floor Brokers in providing such services 
in a more efficient and effective manner in light of the requirements 
of Rule 611. Specifically, the Cross Function, with its ``look-back'' 
feature, would provide a more effective mechanism by which a Floor 
Broker can manually execute a cross in accordance with the customer's 
instructions and in compliance with Rule 611, particularly when there 
is significant quote traffic with flickering prices. Moreover, the 
proposed changes to Rule 76 are narrowly drafted to address the 
practical issues and concerns related to the interaction between a 
manual process and electronic quotes as well as the unique limitations 
applicable only to Floor Brokers. It would not otherwise change the 
current operation of Rule 76; in particular, the requirement to expose 
crosses to the crowd for possible price improvement prior to finalizing 
the cross would remain intact.\12\
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    \12\ The Exchange notes that Rule 76 currently governs the 
manual execution of cross orders by Floor Brokers without 
consideration of the order size. The Exchange is not proposing to 
amend Rule 76 to limit Floor Brokers' ability to manually execute 
cross orders that are block size.
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    The Cross Function would not be available with regard to crosses 
involving buy and sell principal orders represented by the same broker-
dealer, and all crosses, including crosses involving principal and 
agency orders, will be subject to being broken up upon exposure to the 
crowd and the DMM. The Exchange recognizes that a proposed Floor broker 
crossed transaction that represents principal orders of two separate 
broker-dealer customers differs from the scenario in FAQ 3.23. However, 
given the unique

[[Page 44305]]

limitations on Floor Broker trading, including that Floor Brokers 
cannot initiate orders on the Floor and in such situations, are acting 
as agents for their broker-dealer customers, the Exchange believes that 
the intent is consistent with FAQ 3.23. In addition, the Cross Function 
will timely capture the transaction terms in an automated system, 
thereby providing a better audit trail for manually crossed orders. 
Such an audit trail will facilitate the review of the Floor Brokers' 
manual crosses to ensure their compliance with Rule 611.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements of Section 6(b) of the Act,\13\ in general, and 
Section 6(b)(5) of the Act,\14\ in particular, in that it is designed 
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 for a free and open market and a national 
market system and, in general, to protect investors and the public 
interest.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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    In particular, the Exchange believes that the proposed Cross 
Function and proposed amendment to Rule 76 remove impediments to and 
perfect the mechanism for a free and open market because the Cross 
Function will assist Floor brokers' ability to meet both their Rule 611 
obligations and existing Rule 76 requirements with respect to crossed 
orders. Additionally, the Exchange believes the proposal removes 
impediments to and perfects the mechanism for a free and open market 
because Floor Brokers will have automated tools to enable their 
compliance with Rule 611 of Regulation NMS and efficiently execute the 
cross transactions. Furthermore, the Exchange believes the proposal 
will generate a better audit trail for purposes of Rule 611 of the 
crossed transactions.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

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

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

    Within 45 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 self-regulatory organization consents, the Commission will:
    A. By order approve or disapprove 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 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 email to rule-comments@sec.gov. Please 
include File Number SR-NYSE-2012-29 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSE-2012-29. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the 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-2012-29 and should be 
submitted on or before August 17, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-18329 Filed 7-26-12; 8:45 am]
BILLING CODE 8011-01-P