Document ID: SEC-2011-1272-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange LLC
Posted Date: 2011-08-24T04:00Z

[Federal Register Volume 76, Number 164 (Wednesday, August 24, 2011)]
[Notices]
[Pages 53015-53018]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-21656]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65164; File No. SR-NYSE-2011-43]

 Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Deleting the Text of NYSE Rule 92 and Adopting a New NYSE Rule 5320 
That Is Substantially the Same as Financial Industry Regulatory 
Authority Rule 5320 To Prohibit Trading Ahead of Customer Orders With 
Certain Exceptions (Commonly Known as the Manning Rule)

August 18, 2011.
    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 
August 11, 2011, 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 self-regulatory organization. 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 delete the text of NYSE Rule 92, which 
limits trading ahead of customer orders, and adopt a new NYSE Rule 5320 
that is substantially the same as Financial Industry Regulatory 
Authority (``FINRA'') Rule 5320. The text of the proposed rule change 
is available at the Exchange, the Commission's Public Reference Room, 
and http://www.nyse.com.

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.

[[Page 53016]]

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

1. Purpose
    The Exchange proposes to delete the text of NYSE Rule 92, which 
limits trading ahead of customer orders, and adopt a new NYSE Rule 5320 
that is substantially the same as FINRA Rule 5320.\3\ As with FINRA 
Rule 5320, proposed NYSE Rule 5320 would prohibit trading ahead of 
customer orders with certain exceptions, including large order and 
institutional account exceptions, a no-knowledge exception, a riskless 
principal exception, an intermarket sweep order (``ISO'') exception, 
and odd lot and bona fide error transaction exceptions, discussed in 
detail below. Proposed NYSE Rule 5320 also provides the same guidance 
as FINRA Rule 5320 on minimum price improvement standards, order 
handling procedures, and trading outside normal market hours.
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    \3\ See Securities Exchange Act Release No. 63895 (February 11, 
2011), 76 FR 9386 (February 17, 2011) (SR-FINRA-2009-090). The 
Exchange's affiliates, NYSE Amex LLC and NYSE Arca, Inc., also have 
filed substantially similar rule filings. See SR-NYSEAmex-2011-59 
and SR-NYSEArca-2011-57.
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Background
    NYSE Rule 92, which applies to Exchange-listed securities, 
generally prohibits member organizations from trading on a proprietary 
basis ahead of, or along with, customer orders that are executable at 
the same price as the proprietary order. The Rule contains several 
exceptions that make it permissible for a member or member organization 
to enter a proprietary order while representing a customer order that 
could be executed at the same price, provided, among other things, that 
the customer order is not for an account of an individual investor and 
the customer has provided express permission. Current NYSE Rule 92 also 
permits riskless transactions for the purpose of facilitating the 
execution, on a riskless principal basis, of one or more customer 
orders.
Proposal To Adopt Text of FINRA Rule 5320
    In conjunction with its rules harmonization with FINRA, the 
Exchange proposes to delete the text of NYSE Rule 92 and its 
supplementary material and adopt the text of FINRA Rule 5320, with 
certain technical changes, as NYSE Rule 5320. FINRA Rule 5320 generally 
provides that a FINRA member that accepts and holds an order in an 
equity security from its own customer or a customer of another broker-
dealer without immediately executing the order is prohibited from 
trading that security on the same side of the market for its own 
account at a price that would satisfy the customer order, unless it 
immediately thereafter executes the customer order up to the size and 
at the same or better price at which it traded for its own account.
    Proposed NYSE Rule 5320 permits a member organization to trade a 
security on the same side of the market for its own account at a price 
that would satisfy a customer order in certain circumstances.\4\
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    \4\ Although NYSE Rule 92 refers to member organizations and 
members, proposed NYSE Rule 5320 would follow the structure of FINRA 
Rule 5320 and refer to member organizations. Because all NYSE 
members are associated with NYSE member organizations, proposed NYSE 
Rule 5320 would apply to them.
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Large Orders and Institutional Accounts
    The most notable exception to the customer order protection rule is 
to allow member organizations to negotiate terms and conditions on the 
acceptance of certain large-sized orders (orders of 10,000 shares or 
more unless such orders are less than $100,000 in value) or orders from 
institutional accounts as defined in NASD Rule 3110. Such terms and 
conditions would permit the member organization to continue to trade 
alongside or ahead of such customer orders if the customer agrees.
    Specifically, under the proposed rule, a member organization would 
be permitted to trade a security on the same side of the market for its 
own account at a price that would satisfy a customer order provided 
that the member organization provides clear and comprehensive written 
disclosure to each customer at account opening and annually thereafter 
that (a) discloses that the member organization may trade proprietarily 
at prices that would satisfy the customer order, and (b) provides the 
customer with a meaningful opportunity to opt in to the NYSE Rule 5320 
protections with respect to all or any portion of its order.
    If a customer does not opt in to the protections with respect to 
all or any portion of its order, the member organization may reasonably 
conclude that such customer has consented to the member organization 
trading a security on the same side of the market for its own account 
at a price that would satisfy the customer's order.\5\
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    \5\ As is always the case, customers retain the right to 
withdraw consent at any time. Therefore, a member organization's 
reasonable conclusion that a customer has consented to the member 
organization trading along with such customer's order is subject to 
further instruction and modification from the customer.
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    In lieu of providing written disclosure to customers at account 
opening and annually thereafter, the proposed rule would permit member 
organizations to provide clear and comprehensive oral disclosure to, 
and obtain consent from, a customer on an order-by-order basis, 
provided that the member organization documents who provided such 
consent and that such consent evidences the customer's understanding of 
the terms and conditions of the order. In addition, where a customer 
has opted in to the NYSE Rule 5320 protections, a member organization 
may still obtain consent on an order-by-order basis to trade ahead of 
or along with an order from that customer, provided that the member 
organization documents who provided such consent and that such consent 
evidences the customer's understanding of the terms and conditions of 
the order.
No-Knowledge Exception
    The Exchange is also proposing to include a ``no-knowledge'' 
exception to its customer order protection rule. The proposed exception 
would allow a proprietary trading unit of a member organization to 
continue trading in a proprietary capacity and at prices that would 
satisfy customer orders that were being held by another, separate 
trading unit at the member organization. The no-knowledge exception 
would be applicable with respect to NMS stocks, as defined in Rule 600 
of SEC Regulation NMS. In order to avail itself of the no-knowledge 
exception, a member organization must first implement and utilize an 
effective system of internal controls (such as appropriate information 
barriers) that operate to prevent the proprietary trading unit from 
obtaining knowledge of the customer orders that are held at a separate 
trading unit.
    A member organization that structures its order handling practices 
in NMS stocks to permit its proprietary and/or market-making desk to 
trade at prices that would satisfy customer orders held by a separate 
trading unit must disclose in writing to its customers, at account 
opening and annually thereafter, a description of the manner in which 
customer orders are handled by the member organization and the 
circumstances under which the member organization may trade 
proprietarily at its market-making desk at prices that would satisfy 
the customer order.
Riskless Principal Exception
    The Exchange's proposal also provides that the obligations under 
this rule shall not apply to a member organization's proprietary trade 
if such proprietary trade is for the purposes of

[[Page 53017]]

facilitating the execution, on a riskless principal basis, of another 
order from a customer (whether its own customer or the customer of 
another broker-dealer), provided that the member organization (a) 
submits a report, contemporaneously with the execution of the 
facilitated order, identifying the trade as riskless principal to the 
Exchange and (b) has written policies and procedures to ensure that 
riskless principal transactions relied upon for this exception comply 
with applicable Exchange rules. At a minimum these policies and 
procedures must require that the customer order was received prior to 
the offsetting principal transaction, and that the offsetting principal 
transaction is at the same price as the customer order exclusive of any 
markup or markdown, commission equivalent or other fee and is allocated 
to a riskless principal or customer account in a consistent manner and 
within 60 seconds of execution.
    Member organizations must have supervisory systems in place that 
produce records that enable the member organization and the Exchange to 
reconstruct accurately, readily, and in a time-sequenced manner all 
orders on which a member organization relies in claiming this 
exception.
ISO Exception
    The proposed rule change also provides that a member organization 
shall be exempt from the obligation to execute a customer order in a 
manner consistent with NYSE Rule 5320 with regard to trading for its 
own account that is the result of an intermarket sweep order routed in 
compliance with Rule 600(b)(30)(ii) of SEC Regulation NMS where the 
customer order is received after the member organization routed the 
ISO. Where a member organization routes an ISO to facilitate a customer 
order and that customer has consented to not receiving the better 
prices obtained by the ISO, the member organization also shall be 
exempt with respect to any trading for its own account that is the 
result of the ISO with respect to the consenting customer's order.
Odd Lot and Bona Fide Error Exception
    In addition, the Exchange proposes applying an exception for a 
firm's proprietary trade that (1) offsets a customer odd lot order 
(i.e., an order less than one round lot, which is typically 100 shares) 
or (2) corrects a bona fide error. With respect to bona fide errors, 
member organizations would be required to demonstrate and document the 
basis upon which a transaction meets the bona fide error exception.
Minimum Price Improvement Standards
    The proposed rule change establishes the minimum amount of price 
improvement necessary for a member organization to execute an order on 
a proprietary basis when holding an unexecuted limit order in that same 
security without being required to execute the held limit order.
Order Handling Procedures
    The proposed rule change provides that a member organization must 
make every effort to execute a marketable customer order that it 
receives fully and promptly. A member organization that is holding a 
customer order that is marketable and has not been immediately executed 
must make every effort to cross such order with any other order 
received by the member organization on the other side of the market up 
to the size of such order at a price that is no less than the best bid 
and no greater than the best offer at the time that the subsequent 
order is received by the member organization and that is consistent 
with the terms of the orders. In the event that a member organization 
is holding multiple orders on both sides of the market that have not 
been executed, the member organization must make every effort to cross 
or otherwise execute such orders in a manner that is reasonable and 
consistent with the objectives of the proposed rule and with the terms 
of the orders. A member organization can satisfy the crossing 
requirement by contemporaneously buying from the seller and selling to 
the buyer at the same price.
Trading Outside Normal Market Hours
    A member organization generally may limit the life of a customer 
order to the period of normal market hours of 9:30 a.m. to 4 p.m. 
Eastern Time. However, if the customer and member organization agree to 
the processing of the customer's order outside normal market hours, the 
protections of proposed NYSE Rule 5320 would apply to that customer's 
order(s) at all times the customer order is executable by the member 
organization.
Conforming and Other Changes
    The Exchange further proposes to make a conforming change to NYSE 
Rule 900 to delete a reference to NYSE Rule 92 and to delete rule text 
that provided that Rule 92 shall not preclude a member or member 
organization from entering in the Off-Hours Trading Facility an 
aggregate-price order to buy (sell) 15 or more securities coupled with 
an identical order to sell (buy) when the member or member organization 
holds an unexecuted closing-price order for a component security. The 
Exchange has determined that, as part of the harmonization process, it 
will not keep this exception to NYSE Rule 92. The Exchange further 
notes that the NYSE Rule 900 reference is no longer necessary because 
proposed NYSE Rule 5320 does not bar the entry of an order for a member 
organization's own account when holding an unexecuted customer order; 
rather, if the NYSE Rule 5320 customer order protections are 
applicable, the member organization only needs to ensure that a 
customer order is executed up to the size and the same or better price 
at which it traded for its own account.
    The Exchange has filed a series of operative delays for NYSE Rule 
92(c)(3),\6\ which permits Exchange member organizations to submit 
riskless principal orders to the Exchange, but requires them to submit 
to a designated Exchange database a report of the execution of the 
facilitated order. In extending the operative delay to September 12, 
2011, the Exchange stated that it was premature to require firms to 
meet the Exchange's Front End Systemic Capture reporting requirements 
pending full harmonization of the respective customer order protection 
rules with FINRA. In adopting NYSE Rule 5320 and deleting the text of 
NYSE Rule 92 in its entirety, no additional operative delays for NYSE 
Rule 92(c)(3) are necessary, as the Exchange will use the FINRA model 
to capture riskless principal orders.\7\
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    \6\ See Securities Exchange Act Release Nos. 56968 (Dec. 14, 
2007), 72 FR 72432 (Dec. 20, 2007) (SR-NYSE-2007-114); 57682 (Apr. 
17, 2008), 73 FR 22193 (Apr. 24, 2008) (SR-NYSE-2008-29); 59621 
(Mar. 23, 2009), 74 FR 14179 (Mar. 30, 2009) (SR-NYSE-2009-30); 
60396 (July 30, 2009), 74 FR 39126 (Aug. 5, 2009) (SR-NYSE-2009-73); 
61251 (Dec. 29, 2009), 75 FR 482 (Jan. 5, 2010) (SR-NYSE-2009-129); 
62541 (July 21, 2010), 75 FR 44042 (July 27, 2010) (SR-NYSE-2010-
52); 63455 (Dec. 7. 2010), 75 FR 77687 (Dec. 13, 2010) (SR-NYSE-
2010-76); and 64860 (July 12, 2011), 76 FR 42150 (July 18, 2011) 
(SR-NYSE-2011-32).
    \7\ All member organizations that would be subject to proposed 
NYSE Rule 5320 also are subject to FINRA Rule 5320 and would 
therefore report riskless principal transactions as required under 
the FINRA Rule. There would be no need for them to separately report 
riskless principal transactions to the Exchange.
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    For consistency with Exchange rules, NYSE Rule 5320 will have 
certain differences from FINRA Rule 5320. The Exchange proposes not to 
include Supplementary Material .02(b) and portions of Supplementary 
Material .06, which relate to OTC equity securities,

[[Page 53018]]

and to change all references from ``members'' to ``member 
organizations.''
Implementation Date
    The Exchange proposes to implement NYSE Rule 5320 on the same date 
that FINRA implements FINRA Rule 5320, which FINRA has announced will 
be September 12, 2011.\8\ The Exchange will provide notice of the 
implementation date to its member organizations via an Information 
Memorandum.
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    \8\ See FINRA Regulatory Notice 11-24.
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) \9\ of the 
Act, in general, and furthers the objectives of Section 6(b)(5) \10\ 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 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. The Exchange believes that adopting the proposed rule 
at the same time that FINRA implements a substantially similar rule 
will contribute to investor protection by defining important parameters 
by which member organizations must abide when trading proprietarily 
while holding customer limit and market orders, and foster cooperation 
by harmonizing requirements across self-regulatory organizations.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 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

    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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \11\ and Rule 19b-4(f)(6) thereunder.\12\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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    \11\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \12\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \13\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b4(f)(6)(iii),\14\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest.
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    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ 17 CFR 240.19b-4(f)(6)(iii).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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-2011-043 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-2011-043. 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 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 such 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-2011-043 and should be 
submitted on or before September 14, 2011.
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    \15\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-21656 Filed 8-23-11; 8:45 am]
BILLING CODE 8011-01-P