Document ID: SEC-2008-1213-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange LLC
Posted Date: 2008-09-04T04:00Z

[Federal Register: September 4, 2008 (Volume 73, Number 172)]
[Notices]               
[Page 51678-51681]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04se08-73]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58430; File No. SR-NYSE-2008-76]

 
Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by New York Stock Exchange LLC Amending NYSE Rule 2B in Order To 
Establish Procedures Designed To Manage Potential Informational 
Advantages Resulting From the Affiliation Between the Exchange and 
Archipelago Securities L.L.C.

August 27, 2008.
    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 August 20, 2008, New York Stock Exchange LLC (``NYSE'' or the 
``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 amend Exchange Rule 2B in order to 
establish procedures designed to manage potential informational 
advantages resulting from the affiliation between the Exchange and 
Archipelago Securities L.L.C., an NYSE affiliated member. 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,

[[Page 51679]]

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
    On February 13, 2008, NYSE Arca Inc. (``NYSE Arca'') filed with the 
Commission a proposed rule change to amend NYSE Arca Rule 7.31(x) (the 
``PO Plus Proposal'').\3\ NYSE Arca filed that rule change as a ``non-
controversial'' proposed rule change pursuant to Section 19(b)(3)(A) 
\4\ of the Act and Rule 19b-4(f)(6) \5\ thereunder, which rendered it 
effective upon filing with the Commission. On April 11, 2008, the 
Commission issued an order abrogating NYSE Arca's PO Plus Proposal (the 
``Abrogation Order'').\6\
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    \3\ See Securities Exchange Act Release No. 57377 (Feb. 25, 
2008), 73 FR 11177 (February 29, 2008) (SR-NYSEArca-2008-19).
    \4\ 15 U.S.C. 78s(3)(A).
    \5\ 17 CFR 240.19b-4.
    \6\ See Securities Exchange Act Release No. 57648 (Apr. 11, 
2008), 73 FR 20981 (April 17, 2008) (SR-NYSEArca-2008-19) (order 
abrogating NYSE Arca Rule 7.31(x)).
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    In the Abrogation Order, the Commission noted its concern regarding 
(i) the potential for conflicts of interest in instances where a member 
firm is affiliated with an exchange to which it is routing orders and 
(ii) the potential for informational advantages that could place an 
affiliated member of an exchange at a competitive advantage vis-
[agrave]-vis other non-affiliated members.\7\
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    \7\ Id.
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    The Exchange is submitting this proposed rule change in order to 
address the Commission's concerns and clarify the Exchange's procedures 
regarding affiliated members.
a. NYSE Arca's Proposed PO Plus Order
    According to its recent rule filing, NYSE Arca proposes to amend 
its Primary Only (``PO'') Order. The PO Order is a market or limit 
order that is routed to the primary, listing market, without sweeping 
the NYSE Arca book.\8\ NYSE Arca Users submit the PO Order to NYSE 
Arca. In turn, NYSE Arca passes the PO Order to Archipelago Securities 
L.L.C. (``Arca Securities''), its outbound order routing facility. Arca 
Securities routes the PO Order to the primary, listing market. PO 
Orders are thus a form of directed order, an order type that is 
commonly offered by exchanges and other market centers to enable firms 
to discharge their obligations under Regulation NMS and other rules.\9\ 
According to its filing, NYSE Arca intends to offer this order type, 
modified as PO Plus, for entry and execution throughout the trading 
day. Of course, by its definition, PO Orders may be routed by Arca 
Securities (upon instruction from NYSE Arca) to the NYSE in those 
instances where the NYSE is the primary, listing exchange.
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    \8\ See NYSE Arca Equities Rule 7.31(x).
    \9\ NYSE Arca's proposed PO Plus functionality is substantially 
similar to the ``Directed Order'' type currently offered by The 
NASDAQ Stock Market LLC (``Nasdaq''), which allows Nasdaq members to 
enter orders to be routed to a user-designated market center other 
than Nasdaq, without first interacting with the Nasdaq order book. 
See Securities Exchange Act Release No. 55405 (March 6, 2007), 72 FR 
11069 (March 12, 2007) (SR-NASDAQ-2007-020).
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b. Order Routing and Existing NYSE Rules
    NYSE Rule 2B provides, in pertinent part, that:

    Without prior SEC approval, the Exchange or any entity with 
which it is affiliated shall not, directly or indirectly, acquire or 
maintain an ownership interest in a member organization. (Emphasis 
added.)

    Arca Securities is the approved outbound routing facility of NYSE 
Arca. In its Order approving the merger of the Archipelago Exchange 
(``ArcaEx'') with the Pacific Exchange (the ``PCX''),\10\ the 
Commission permitted ArcaEx's holding company, Archipelago Holdings, 
Inc. (``Archipelago''), to own and operate Arca Securities, in its 
capacity as a facility of the PCX that routes orders from ArcaEx to 
other market centers.\11\ This approval remains in effect insofar as 
Arca Securities acts in the capacity of a facility of NYSE Arca for the 
routing of orders from NYSE Arca to other market centers, including the 
NYSE, subject to the applicable conditions.\12\ Although Arca 
Securities was required to discontinue its operation of the DOT 
function in connection with the Archipelago/NYSE merger, no 
restrictions other than those previously described were requested or 
imposed by the Commission with respect to Arca Securities' continuing 
role as an outbound router for NYSE Arca.\13\
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    \10\ Following the ArcaEx-PCX merger, Archipelago merged with 
the NYSE and the PCX was later renamed NYSE Arca.
    \11\ See Securities Exchange Act Release No. 52497 (September 
22, 2005), 70 FR 56949 (September 29, 2005) (order approving SR-PCX-
2005-90). The Commission's approval was subject to several 
conditions and undertakings, specifically that: (1) Arca Securities 
would continue to operate and be regulated as a facility of the PCX; 
(2) the scope of the exception would be limited to outbound routing; 
(3) the primary regulatory responsibility for Arca Securities would 
lie with an unaffiliated SRO; and (4) the continued use of Arca 
Securities for outbound routing would remain optional for other PCX 
members.
    \12\ Id.
    \13\ For purposes of inbound orders in general and NYSE Arca's 
proposed amendment in particular, the Exchange believes that there 
is no functional difference between inbound orders routed by Arca 
Securities that previously scrape the NYSE Arca book and the PO 
Order, which do not. Each type of order is subject to the same 
principles governing NYSE Arca's authority to send, and the 
Exchange's authority to receive, orders routed via Arca Securities. 
As clarified herein, appropriate procedures are in place to manage 
any potential conflicts of interest or potential information 
advantages.
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    Arca Securities performs a similar outbound routing function on 
behalf of the NYSE. On April 5, 2007, in a notice of immediate 
effectiveness, the Commission published the NYSE's rule change that 
established Arca Securities as a facility of the NYSE for purposes of 
routing orders to away market centers for execution in compliance with 
NYSE Rules and Regulation NMS.\14\ Pursuant to NYSE Rule 17, Arca 
Securities receives its routing instructions from the NYSE and reports 
any such executions back to the NYSE.\15\ Arca Securities has no 
discretion and cannot change the terms of an order or the routing 
instructions.\16\ Moreover, each type of order is subject to the same 
principles governing the Exchange's authority to route orders to away 
market centers, namely: Use of Arca Securities for outbound routing is 
only available to--and is optional for--NYSE Members, the primary 
regulatory responsibility for Arca Securities lies with an unaffiliated 
SRO, and, as clarified herein, appropriate procedures are in place to 
manage any conflicts of interest or potential information advantages. 
In this capacity as a facility of the NYSE, Arca Securities receives 
the routing instructions from the NYSE and routes the orders to various 
away market centers, including NYSE Arca, for execution.
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    \14\ See Securities Exchange Act Release No. 55590 (April 5, 
2007), 72 FR 18707 (April 13, 2007) (notice of immediate 
effectiveness of SR-NYSE-2007-29).
    \15\ See NYSE Rule 17(b)(1).
    \16\ Id.
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c. Record Keeping
    As mentioned above, in the Abrogation Order, the Commission noted 
the potential for conflicts of interest in instances where a member 
firm is affiliated with an exchange to which it is routing orders.
    In order to manage these concerns, with respect to orders routed to 
NYSE by Arca Securities, an NYSE member, in its capacity as a facility 
of NYSE Arca,

[[Page 51680]]

the Exchange notes that Arca Securities is subject to independent 
oversight and enforcement by the Financial Industry Regulatory 
Authority (``FINRA''), an unaffiliated self-regulatory organization 
(``SRO'') that is Arca Securities' designated examining authority. In 
this capacity, FINRA is responsible for examining Arca Securities with 
respect to its books and records and capital obligations, and shares 
with NYSE Regulation, Inc. (``NYSE Regulation'') the responsibility for 
reviewing Arca Securities' compliance with intermarket trading rules 
such as SEC Regulation NMS. In addition, through an agreement between 
FINRA and the NYSE pursuant to the provisions of Rule 17d-2 under the 
Act, FINRA's staff reviews for Arca Securities' compliance with other 
NYSE rules through FINRA's examination program. NYSE Regulation 
monitors Arca Securities for compliance with NYSE trading rules, 
subject, of course, to SEC oversight of NYSE Regulation's regulatory 
program.
    In order to alleviate any residual concerns the Commission may have 
regarding the potential for conflicts of interest, the Exchange notes 
that NYSE Regulation has agreed with the Exchange that it will collect 
and maintain the following information of which NYSE Regulation staff 
becomes aware--namely, all alerts, complaints, investigations and 
enforcement actions where Arca Securities (in its capacity as a 
facility of NYSE Arca, routing orders to the NYSE) is identified as a 
participant that has potentially violated NYSE or applicable SEC 
rules--in an easily accessible manner, so as to facilitate any review 
conducted by the SEC's Office of Compliance Inspections and 
Examinations. NYSE Regulation has further agreed with the Exchange that 
it will provide a report to the Exchange's Chief Regulatory Officer, on 
at least a quarterly basis, which: (i) Quantifies all alerts (of which 
NYSE Regulation is aware in its tracking system) that identify Arca 
Securities as a participant that has potentially violated NYSE or SEC 
rules and (ii) quantifies the number of all investigations that 
identify Arca Securities as a participant that has potentially violated 
NYSE or SEC rules.\17\
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    \17\ The Exchange, NYSE Regulation, and SEC staff, may agree 
going forward to reduce the number of applicable or relevant 
surveillances that form the scope of the agreed upon report.
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d. New Policies and Procedures.
    Finally, in the Abrogation Order, the Commission noted the 
potential for informational advantages that could place an affiliated 
member of an exchange at a competitive advantage vis-[agrave]-vis other 
non-affiliated members.
    In response to this concern, with respect to Arca Securities being 
an affiliated member of the NYSE, the Exchange is proposing to amend 
Exchange Rule 2B. As amended, Exchange Rule 2B will require the 
implementation of policies and procedures that are reasonably designed 
to prevent Arca Securities from acting on non-public information 
regarding NYSE systems prior to the time that such information is made 
available generally to all NYSE members performing inbound order 
routing functions. These policies and procedures would include systems 
development protocols to facilitate an audit of the efficacy of these 
policies and procedures.
    Specifically, Exchange Rule 2B shall provide as follows:

    The holding company owning both the Exchange and Archipelago 
Securities LLC shall establish and maintain procedures and internal 
controls reasonably designed to ensure that Archipelago Securities, 
L.L.C. does not develop or implement changes to its system on the 
basis of non-public information regarding planned changes to 
Exchange systems, obtained as a result of its affiliation with the 
Exchange, until such information is available generally to similarly 
situated members of the Exchange in connection with the provision of 
inbound order routing to the Exchange.

    The Exchange believes these measures will effectively address the 
concerns identified by the Commission regarding the potential for 
informational advantages favoring Arca Securities vis-[agrave]-vis 
other non-affiliated NYSE members.
e. Pilot Period
    The Exchange proposes that the Commission authorize the NYSE to 
receive inbound routes of PO Plus Orders from Arca Securities for a 
pilot period of twelve months from the date of the approval of this 
rule filing. The Exchange believes that this pilot period is of 
sufficient length to permit both the Exchange and the Commission to 
assess the impact of the rule change described herein.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) \18\ of 
the Act, in general, and furthers the objectives of Section 
6(b)(5),\19\ 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, and to 
remove impediments to and perfect the mechanisms of a free and open 
market and a national market system.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 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

    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 the 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-2008-76 on the subject line.

Paper Comments

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

    All submissions should refer to File Number SR-NYSE-2008-76. This 
file number should be included on the subject line if e-mail is used. 
To help the

[[Page 51681]]

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 Section, 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 will also be available for inspection and 
copying at the principal office of the self-regulatory organization. 
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-2008-76 
and should be submitted on or before September 25, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Florence E. Harmon,
Acting Secretary.
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    \20\ 17 CFR 200.30-3(a)(12).
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 [FR Doc. E8-20466 Filed 9-3-08; 8:45 am]

BILLING CODE 8010-01-P