Document ID: SEC-2005-0001-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange, Inc.
Posted Date: 2005-09-21T04:00Z

[Federal Register: September 21, 2005 (Volume 70, Number 182)]
[Notices]               
[Page 55440-55441]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21se05-133]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52435; File No. SR-NYSE-2005-62]

 
Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change To Add Exchange Rule 123G 
Prohibiting Trade Shredding

September 14, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934, as amended, (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is 
hereby given that on September 9, 2005, the New York Stock Exchange, 
Inc. (``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 
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)(l).
    \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 add NYSE Rule 123G to prohibit members, 
member organizations and associated persons from unbundling orders for 
execution for the primary purpose of maximizing a monetary or like 
payment to the member, member organization or associated person without 
regard for the best interests of the customer.
    The text of the proposed rule change appears below. Additions are 
in italics.
* * * * *

Order Entry Practices

Rule 123G
    No member, member organization, allied member, approved person or 
registered or non-registered employee of a member or member 
organization may engage in conduct that has the intent or effect of 
unbundling orders for execution for the primary purpose of maximizing a 
monetary or in-kind amount received by the member, member organization, 
allied member, approved person or registered or non-registered employee 
of a member or member organization as a result of the execution of such 
orders. For purposes of this section, ``monetary or in-kind amounts'' 
shall be defined to include commissions, gratuities, payments for or 
rebate of fees resulting from the entry of such orders, or any similar 
payments of value to the member, member organization, allied member, 
approved person or registered or non-registered employee of a member or 
member organization.
* * * * *

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 NYSE 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    ``Trade shredding'' is the practice of unbundling customer orders 
for securities into multiple smaller orders for the primary purpose of 
maximizing payments to the member or member organization, and thereby 
possibly disadvantaging the customer by, for example, charging 
excessive fees or commissions, or failing to obtain best execution of 
an order. Such payments may create a conflict of interest between the 
customer and the member or member organization. For example, as a 
result of the manner in which market data revenues are calculated, 
market centers can derive a greater share of market data revenue by 
increasing the number of trades that they report to the consolidated 
tape. At the same time, some markets have adopted a practice of sharing 
these increased revenues with market participants, including non-
members, who send in orders. Thus, the Commission has expressed concern 
that an incentive exists for market participants receiving rebates to 
engage in distortive behavior, such as trade shredding, as a means to 
increase their share of market data revenues. Other economic 
arrangements between members or member organizations and their 
customers may create similar incentives to engage in similarly 
distortive behavior.
    The Commission has requested that all U.S. self-regulatory 
organizations implement rule changes to inhibit the practice of trade 
shredding. The NYSE does not rebate revenues from tape reporting to 
members or non-members. Thus, there is no incentive in this area for 
NYSE order providers to engage in trade shredding on orders sent to the 
Exchange. However, a member or member organization may engage in 
conduct that has an impact similar to trade shredding, in that it 
unbundles a customer's order for the primary purpose of maximizing 
payments to the member or member organization at the customer's expense 
and to the customer's detriment.
    In response to the Commission's request, the Exchange proposes to 
adopt a new Rule 123G prohibiting all such practices. Specifically, new 
Rule 123G would prohibit a member, member organization or any 
associated person from unbundling orders for execution for the primary 
purpose of maximizing a monetary or like payment of a type described in 
the rule.

[[Page 55441]]

2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act,\3\ in general, and furthers the objectives of Section 6(b)(5) of 
the Act,\4\ in particular, in that it is designed to prevent fraudulent 
and manipulative acts and practices, 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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    \3\ 15 U.S.C. 78f(b).
    \4\ 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 will impose no 
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 comments on this 
proposal.

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 self-regulatory organization 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 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-2005-62 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NYSE-2005-62. 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 offices of 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-2005-62 and should be submitted on or before October 12, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 05-18766 Filed 9-20-05; 8:45 am]

BILLING CODE 8010-01-P