Document ID: SEC-2006-1328-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange LLC
Posted Date: 2006-10-12T04:00Z

[Federal Register: October 12, 2006 (Volume 71, Number 197)]
[Notices]               
[Page 60216-60220]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12oc06-99]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54578; File No. SR-NYSE-2006-82]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Relating to A Pilot Until 10/31/06 to Put Into Operation 
Certain Rule Changes Pending Before the Securities and Exchange 
Commission to Coincide With the Exchange's Implementation of Phase 3 of 
the NYSE HYBRID MARKETSM

October 5, 2006.
    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 October 5, 2006 the New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice and order to solicit comments 
on the proposed rule change from interested persons and to approve the 
proposed rule change on an accelerated basis.
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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 is proposing a pilot (the ``Pilot'') to put into 
operation certain rule changes pending before the Commission to 
coincide with the Exchange's implementation of NYSE HYBRID 
MARKETSM (``Hybrid Market'') \3\ Phase 3 for the securities 
identified in Exhibit 3 of its filing. The text of the proposed rule 
change is available on NYSE's Web site (http://www.nyse.com), at the 

principal office of the Exchange, and at the Commission's Public 
Reference Room.
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    \3\ The Hybrid Market was approved on March 22, 2006. See 
Securities Exchange Act Release No. 53539 (March 22, 2006), 71 FR 
16353 (March 31, 2006) (SR-NYSE-2004-05) (``Hybrid Market Order'').
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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 III 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 
Statutory Basis for, the Proposed Rule Change

 1. Purpose
    The Commission approved the Hybrid Market on March 22, 2006.\4\ The 
approved rules did not become effective immediately; rather they are 
being implemented in a series of phases over a period of time.
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    \4\ Id.
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    Implementation of Phase 1 of the Hybrid Market, which focused 
primarily on the ability of Floor brokers to electronically represent 
their customers' interest (``e-Quote''), was substantially completed on 
April 5, 2006.
    Phase 2 of the Hybrid Market focused primarily on the ability of 
specialists to use their algorithmic systems to quote and trade. The 
installation of software necessary to implement Phase 2 of the Hybrid 
Market has been installed Floor-wide. Some specialist firms have been 
in the process of readying their systems to quote and trade with 
receipt of order information, while others have begun quoting with 
receipt of such information. Phase 2 will continue to become 
operational concurrently with the roll out of Phase 3. In addition, 
beginning June 21, 2006, specialists were permitted to algorithmically 
quote (``s-Quote'') in their specialty securities, without the receipt 
of order information as such orders are entering Exchange systems.\5\ 
Starting August 15, 2006, specialists were permitted to send 
algorithmically-generated trading messages to interact with the 
Exchange quotation (``hit bid/take offer''), also without receipt of 
order information as such orders are entering Exchange systems.\6\
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    \5\ See Securities Exchange Act Release No. 54024 (June 21, 
2006), 71 FR 36849 (June 28, 2006) (SR-NYSE-2006-44). This is 
effective until Phase 2 is fully implemented.
    \6\ See Securities Exchange Act Release No. 54316 (August 15, 
2006), 71 FR 48569 (August 21, 2006) (SR-NYSE-2006-59). This is 
effective until Phase 2 is fully implemented.
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    Phase 3 of the Hybrid Market, as approved, includes implementation 
of the following features:
     Automatic routing of orders to automated markets posting 
better bids and offers in accordance with Regulation NMS;
     Availability of NYSE IOC orders for automatic executions;
     Use of indicators to identify NYSE quotations that are not 
immediately available for automatic execution;
     Implementation of gap quoting requirements;
     Elimination of 1,099 size restriction for automatic 
executions and increase in size eligibility for automatic executions to 
1 million shares; \7\
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    \7\ See Securities Exchange Act Release No. 54520 (September 27, 
2006), 71 FR 57590 (September 29, 2006) (SR-NYSE-2006-65) (proposing 
to amend several Exchange Rules to clarify certain definitions and 
systemic processes (``Omnibus Filing'')).
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     Elimination of 30-second restriction on the entry of auto 
ex orders on orders from the same person;
     Availability of automatic executions through the close;
     Elimination of Direct+ availability only to straight limit 
orders;
     Elimination of Direct+ suspensions due to price (i.e., a 
trade at a price that would be more than five cents from the last trade 
in the stock on the Exchange);
     Elimination of Direct+ suspensions due to size (i.e., a 
100-share published bid or offer);
     Conversion of marketable limit orders to auto ex orders; 
and
     Automatic executions of market orders.\8\
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    \8\ Id.
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    The Exchange intends to begin implementation of Phase 3 on October 
6, 2006. The Exchange has proposed changes to some of the rules already 
approved for implementation in Phase 3 \9\ as well as moving the 
implementation of sweeps and liquidity replenishment points (``LRPs'')

[[Page 60217]]

originally included for Phase 4 to Phase 3.\10\
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    \9\ See Omnibus Filing.
    \10\ The Commission notes that the Exchange has proposed changes 
to its sweep functionality and LRPs. Specifically, in the Omnibus 
Filing, the Exchange proposes to amend NYSE Rule 1000(d)(iii) to 
provide that during a sweep, an order will trade with all interest 
at each price capable of trading, before moving to the next price 
point. In addition, the Exchange proposes to amend NYSE Rule 
1000(a)(iv) to implement a single LRP rather than the two LRPs 
originally approved in the Hybrid Market Order. These Omnibus Filing 
changes are included in the Pilot.
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    In addition, the Exchange has proposed modifications to other 
Exchange Rules that the Exchange proposes to become operational as part 
of Phase 3 and are the subject of other pending rule filings.\11\ The 
substantive proposed amendments in the Omnibus Filing, Stabilization 
Filing and Block Cross Filing are necessary to a successful 
implementation of Phase 3, except the proposed changes in the Omnibus 
filing applicable to ``auction limit'' and ``auction market'' orders. 
These order types will not be available in Phase 3.
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    \11\ See Securities Exchange Act Release No. 54504 (September 
26, 2006), 71 FR 57011 (September 28, 2006) (SR-NYSE 2006-76) 
(proposing to amend the specialist stabilization requirements set 
forth in Exchange Rule 104.10 (``Stabilization Filing'')); and SR-
NYSE-2006-73 (filed on September 13, 2006) (proposing to amend 
Exchange Rule 127 which governs the execution of a block cross 
transaction at a price outside the prevailing NYSE quotation 
(``Block Cross Filing'')). See also Omnibus Filing (proposing 
amendments to Exchange Rules related to stop order and stop limit 
orders).
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    Accordingly, the Exchange proposes to implement on a pilot basis 
the changes that the Exchange has proposed in the Omnibus Filing, 
Stabilization Filing, and the Block Cross Filing.\12\ The proposed 
amendments to rules previously approved in the Hybrid Market \13\ and 
new proposals \14\ are discussed in detail in those filings. The Pilot 
would apply to a group of securities, known as Phase 3 Pilot securities 
(``Pilot securities'').\15\ The Pilot would commence following 
Securities and Exchange Commission approval of the Pilot \16\ and will 
terminate on the close of business on October 31, 2006.
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    \12\ The amendments to Exchange rules proposed pursuant to the 
Omnibus Filing, Stabilization Filing and Block Cross Filing are 
attached to the filing, available on the Exchange's Web site, as 
Exhibits 5A, 5B, and 5C respectively. In Exhibit 5 of the filing the 
Exchange proposes to retain NYSE Rule 104.10(7) and to add language 
to NYSE Rule 104.10(5)(i)(a)(II)(a) to clarify that such 
transactions are other than those reaching across the market. These 
changes are not reflected in the Stabilization Filing and Exhibit 
5B. In addition, in Exhibit 5 of the filing, the Exchange proposes 
additional changes to Exchange Rule 127 that are also not reflected 
in the Block Cross Filing and Exhibit 5C. The Exchange intends to 
submit amendments to the aforementioned filings to the Commission to 
reflect these changes.
    \13\ See Omnibus Filing.
    \14\ See Stabilization Filing, Block Cross Filing and proposed 
amendments to stop orders and stop limit orders contained in Omnibus 
Filing.
    \15\ Phase 3 Pilot securities will also be posted on the 
Exchange's Web site.
    \16\ The changes related to stop orders and stop limit orders 
proposed in the Omnibus Filing will be implemented on October 16, 
2006 pending SEC approval of this Pilot, to give customers and 
member organizations sufficient time to make any changes necessary 
as a result of the elimination of stop limit orders.
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    The Exchange plans to phase-in the securities in the Pilot, if 
approved, over several weeks. However, Exchange Rule 1002(P3) 
(``Availability of Automatic Execution Feature''), which extends 
automatic executions to the close, will apply to all securities on the 
Exchange upon commencement of the Pilot.\17\
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    \17\ The extension of automatic executions to the close as set 
forth in NYSE Rule 1002 was approved as part of the Hybrid Market 
filings. See Securities Exchange Act Release No. 53539, supra note 
3. As approved, NYSE Rule 1002 was always intended for 
implementation in Phase 3. The amendments to NYSE Rule 1002, set 
forth in the pending Omnibus Filing, are merely technical in nature, 
clarifying the rule's applicability, rather than the operation.
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    To eliminate possible confusion as to which Exchange Rules or 
sections thereof apply to the Pilot securities, the Exchange has 
identified the rules that will be operational during the Pilot with a 
``P3.''
    For purposes of the Pilot, the Exchange further requests that the 
Commission re-interpret the specialist's negative obligation to 
eliminate the requirement with respect to Exchange Rule 104(a) that 
each trade by the specialist for the dealer account meet a test of 
reasonable necessity.\18\ The Exchange believes that such an 
interpretation is appropriate in view of the development of the 
national market system over the past seventy years since the 
interpretation was initially issued.
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    \18\ The Exchange is not seeking to have the Commission 
eliminate trade-by-trade analysis with respect to rules specifically 
calling for such an analysis, such as rules relating to Prohibited 
trades under NYSE Rule 104.10(5) and Conditional trades in inactive 
securities and NYSE Rule 104.10(6).
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    According to the Exchange, the Commission has been granted specific 
authority by Congress to reinterpret the negative obligation. 
Specifically, in 1975, in connection with the 1975 amendments \19\ to 
the Act, Congress eliminated the negative obligation clause from 
Section 11(b) of the Act and gave the Commission the flexibility to 
define dealer obligations for both exchange members and over-the-
counter market makers. In making the changes, Congress noted that 
changes in the marketplace might warrant changes in the scope of the 
dealer obligation:
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    \19\ Securities Acts Amendments of 1975 (``1975 Amendments''), 
Pub. L. No. 94-29, 89 Stat. 97 (June 4, 1975).

    It might well be that with active competition among market 
makers and the elimination of trading advantages specialists now 
enjoy, such a restriction on specialists' dealings would become 
unnecessary. Because trading patterns and market making behavior in 
the context of a national market system cannot now be predicted, it 
appears appropriate to expand the Commission's rulemaking authority 
in this area so that the Commission may define responsibilities and 
restrict activities of specialists in response to changing market 
conditions.\20\
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    \20\ S. Rep. No. 94-75, at 100 (1975).

    The Exchange believes that the conditions for change that were 
identified by Congress have largely come to pass, and that as a result, 
it is appropriate to redefine the scope of the specialist's negative 
obligation. For example, the institutionalization of the market, 
increased competition, and increased application of computer and 
communication technology has significantly diminished the time-and-
place advantages of specialists. As a result, markets have seen 
increases in the average daily trading volume and the movement off the 
Floor of the decision making that affects the direction and extent of 
movements in the specialty stocks. There is also a dramatic increase in 
transparency with respect to the specialist's book through, among other 
things, Exchange initiatives like Exchange OPENBOOK.TM This 
increased transparency gives all market participants, both on and off 
the Floor, a greater ability to see and react to market changes.
    There has also been a significant increase in competition in 
Exchange-listed securities. For example, unlike in previous years, 
Exchange specialists must now compete with upstairs liquidity providers 
and with multiple OTC dealers, crossing networks and Alternative 
Trading Systems. As a result of UTP and dual listings, specialists also 
face competition from other national and regional exchanges. For all of 
these reasons, the Exchange believes that it is appropriate to 
reinterpret the negative obligation away from an emphasis on trade-by-
trade necessity, and toward an approach based on patterns and practices 
in the trading of specialty securities for the dealer account.
    New York Stock Exchange Regulation (``NYSER'') has appropriate 
surveillance procedures in place to surveil for compliance with the 
negative obligation by specialists. For example, NYSER will monitor, on 
a pattern and practice basis, specialist activity that appears to cause 
or exacerbate an excessive price movement in the market, as such 
transactions would appear to be in violation with a specialist's 
negative

[[Page 60218]]

obligation. Additionally, the Division of Market Surveillance of NYSER 
will monitor for all subsequent action taken by the specialist, or lack 
thereof, to cushion such price movement. As today, the Exchange will in 
the context of price volatility alerts, monitor for excessive price 
movements that may involve a failure to comply with either the 
affirmative or negative obligation. As the Exchange gains experience 
with its new market structure, the Exchange will enhance existing 
surveillances and/or create new surveillances where necessary and 
appropriate to monitor for compliance with the specialist negative 
obligations.
    The Exchange believes the Pilot will prove beneficial from both a 
technology and a training perspective. The process will allow for a 
controlled and moderated roll out of the new systems and capabilities. 
The Pilot will allow the Exchange to commence implementation of Hybrid 
Market Phase 3, as amended, therefore providing the Exchange and users 
with real-time testing of those functionalities.
    Further, the Pilot will give the Exchange the opportunity to 
identify and address any system problems and to identify and 
incorporate beneficial system changes that become apparent as a result 
of usage in real time and under real market conditions. The ability to 
have such real time user interface will be invaluable, as it is 
impossible to accurately anticipate behavioral changes in a development 
or mock-trading environment. In addition, the Pilot will allow users to 
gain essential practical experience with the new systems and processes 
in a well-modulated way.
    Prior to the Pilot, there has been comprehensive training for both 
Floor brokers and specialists, individually and together in a mock 
trading environment. Training was conducted by the Exchange and was 
supplemented in most cases by firm-specific training conducted by 
member organizations for their employees. The Exchange training 
environment was made available also to proprietary system vendors for 
their training sessions.
    In addition, testing has occurred at all levels, including 
development testing, automation testing, SIAC testing, NYSE testing, 
integrated system testing and code reviews, production environment 
testing, fall-back and recovery testing, and regression and new 
functionality testing.
    Moreover, the Exchange intends to have available at all times 
during the Pilot two versions of the operating software--the new 
version that would be operational and the original, pre-Pilot version. 
If a problem develops during the Pilot, the Exchange will be able to 
revert to the pre-Pilot software within an average time of two minutes 
or less.
    The Pilot will also enable the Exchange to be fully Regulation NMS 
\21\-compliant by February 5, 2007 date and comply with its obligations 
under the proposed NMS Linkage Plan.\22\ Without this Pilot, it is 
unlikely the Exchange will be able to meet either requirement.
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    \21\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005) (17 CFR Parts 200, 201, 230, 240, 
242, 249, and 270).
    \22\ A ``Plan for the Purpose of Creating and Operating an 
Intermarket Communications Linkage Pursuant to Section 11A(a)(3)(B) 
of the Securities Exchange Act of 1934'' to facilitate trades 
between different market centers. See Securities Exchange Act 
Release No. 54551 (September 29, 2006). The Commission published 
notice of the NMS Linkage Plan on July 28, 2006. See also Securities 
Exchange Act Release No. 54239 (July 28, 2006), 71 FR 44328 (August 
4, 2006), 17 CFR 242.608.
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    The Exchange anticipates that the Pilot will operate with minimal 
problems given the amount and degree of testing and training that has 
occurred to date. Accordingly, the Exchange believes that the 
extensiveness of the testing and training, the phase-in approach 
described above and the fall-back capabilities of Exchange Systems 
provide significant assurances that the Pilot will operate as expected. 
However, in the event systems or other problems arise with the Pilot 
that adversely impact investors or impede the Exchange's ability to 
maintain a fair and orderly market, the Exchange will immediately 
terminate the Pilot in whole or in part, as appropriate, and return 
trading to current operations under current NYSE rules.
    Finally, the Exchange represents that it will provide the 
Commission with any and all data and analysis the Commission may 
request regarding the operation of the rules governing stabilization.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b)(5) of the Act \23\ that an exchange have rules that 
are designed to promote just and equitable principles of trade, 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 the 
proposed rule change is also designed to support the principles of 
Section 11A(a)(1) \24\ of the Act in that it seeks to assure 
economically efficient execution of securities transactions, make it 
practicable for brokers to execute investors' orders in the best market 
and provide an opportunity for investors' orders to be executed without 
the participation of a dealer.
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    \23\ 15 U.S.C. 78f(b)(5).
    \24\ 15 U.S.C. 78k-1(a)(1).
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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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.\25\
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    \25\ The Commission notes that it has received a comment letter 
in response to the Omnibus Filing.
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III. 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-2006-82 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-NYSE-2006-82. 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

[[Page 60219]]

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-2006-82 and should be 
submitted on or before November 2, 2006.

IV. Commission's Finding and Order Granting Accelerated Approval of the 
Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\26\ 
Specifically, the Commission finds that approval of the proposed rule 
change is consistent with Section 6(b)(5) of the Act because the 
proposal is designed to promote just and equitable principles of trade, 
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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    \26\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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    With this proposed rule change, the Exchange has requested 
temporary approval by the Commission of certain proposed amendments to 
the rules that govern its Hybrid Market, so that it may begin to 
implement Phase 3, with the rules that the Exchange has proposed to 
amend while these changes are pending approval by the Commission. 
According to the Exchange, this Pilot is necessary so that the Exchange 
can maintain its planned implementation schedule for the Hybrid Market 
and meet the Regulation NMS compliance dates. In addition, this Pilot 
will allow NYSE to comply with the new NMS Linkage Plan.
    The Commission is considering each of the proposed filings that are 
pending, including comments received, if any, and has not reached a 
decision on whether they should be approved or disapproved. The 
Commission, however, believes that due to the limited nature of the 
Pilot and its short duration, it is consistent with the Act to allow 
NYSE to implement the Pilot so that it may remain on schedule for 
Regulation NMS compliance, begin testing its new systems with this 
Pilot and comply with the NMS Linkage Plan.
    The NYSE explained in its filing that it has tested these Hybrid 
Market functions extensively but that it needs to test them in an 
actual trading environment to ensure that they operate as intended. 
Accordingly, NYSE represented that it does not anticipate any 
significant problems arising from the Pilot. However, NYSE will 
immediately terminate the Pilot, in whole or in part, as appropriate, 
should any systems or other problems arise that adversely impact the 
protection of investors or impede its ability to maintain a fair and 
orderly market, and return trading to its current operations under 
current NYSE rules.\27\
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    \27\ The Exchange stated that it would be able to revert back to 
pre-Pilot operations within an average of two minutes or less. The 
Exchange represents that it intends to have available at all times 
during the Pilot two versions of the operating software: (1) The new 
version that would be operational during the Pilot and (2) the 
original, pre-Pilot version which would operational in case the 
Pilot prematurely needs to be terminated. The Exchange will notify 
the public via its Web site if the Pilot is terminated in whole or 
in part. In addition, the Exchange will notify floor members at the 
post if the Pilot is terminated in whole or in part.
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A. Stabilization Filing

    The Commission is currently considering the Stabilization Filing. 
As noted above, the Exchange has also requested a temporary 
interpretation by the Commission of the specialists' negative 
obligation set forth in NYSE Rule 104(a) to eliminate the requirement 
that each trade by a specialist meet a test of reasonable necessity. 
NYSE Rule 104(a) states that ``no specialist shall effect on the 
Exchange purchases or sales of any security in which such specialist is 
registered, for any account in which he or his member organization * * 
* is directly or indirectly interested, unless such dealings are 
reasonably necessary to permit such specialist to maintain a fair and 
orderly market * * *'' In 1937, the Commission issued an interpretation 
(``Saperstein Interpretation'') that among other things, stated that 
each transaction by a specialist for his own account must meet the test 
of reasonable necessity.\28\ The Saperstein Interpretation made clear 
that specialist's transactions for his own account would be required to 
meet the rule on a transaction-by-transaction basis, rather than on a 
review of such transactions generally.
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    \28\ See Securities Exchange Release No. 1117 (March 30, 1937), 
at 4.
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    In its filing, the NYSE requested that the Commission re-interpret 
the specialist's negative obligation to eliminate the requirement that 
each trade by the specialist for its dealer account meet a test of 
reasonable necessity. The Exchange has stated that it intends to amend 
the Stabilization Filing to include such a request there as well. The 
Commission notes that the comment period for the Stabilization Filing 
has not yet expired, and the Commission specifically requests comment 
on the appropriateness of the Exchange's request to amend the 
Commission's interpretation that the specialist's negative obligation 
be evaluated on a transaction-by-transaction basis.
    The Commission agrees with the NYSE that the national market system 
has changed greatly in the nearly seventy years since the Saperstein 
Interpretation was issued. The Commission also agrees that increased 
automation and competition--both within the Hybrid Market and in the 
markets generally--are significant factors, among others, that must be 
considered with regard to the scope of specialists' responsibilities 
and obligations. The Commission intends to fully consider the NYSE's 
request relating to the transaction-by-transaction requirement of the 
Saperstein Interpretation when it decides whether to approve the 
Stabilization Filing, as amended. However, the Commission preliminarily 
believes that the Exchange's request may have merit and, therefore, is 
permitting, as part of this Pilot, the Exchange to review the 
specialists' negative obligations on a pattern and practice basis, 
rather than on a transaction-by-transaction basis. The Commission 
emphasizes that this review applies solely to the interpretation of 
Exchange Rule 104(a) and notes that the specific requirements and 
restrictions applicable to specialists, set forth in NYSE Rule 
104.10(5)(i)(b), Rule 104.10(5)(i)(c), and Rule 104.10(6), must be 
reviewed and complied with for each individual transaction. Further, 
this temporary interpretation applies solely to the Pilot Securities.
    The Exchange represented that it will conduct surveillance of 
specialist trading for compliance with their negative obligation. NYSE 
further represented that it will enhance existing surveillance and/or 
create new surveillances as necessary and appropriate to monitor for 
compliance with the negative obligation. The Commission wishes to 
emphasize that specialists remain subject to the restrictions set forth 
in the negative

[[Page 60220]]

obligation with regard to proprietary trading.\29\
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    \29\ See also Hybrid Market Order for a discussion of the 
negative obligation, supra note 3.
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B. Accelerated Approval of the Pilot Proposal

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\30\ for approving the proposed rule change prior to the 
thirtieth day after the date of publication of the notice in the 
Federal Register. The Pilot, which as discussed above is limited in 
scope and duration, will allow the NYSE to remain on schedule for 
compliance with Regulation NMS, comply with the NMS Linkage Plan and to 
conduct real-time system and user testing of certain features of the 
Hybrid Market. According to NYSE, such testing should be beneficial 
from both a technology and a training perspective. Although preliminary 
steps have been taken--in the form of NYSE-provided training for both 
Floor brokers and specialists, training by member organizations for 
their employees, and training by proprietary system vendors in the NYSE 
trading environment for their training sessions--the Pilot should give 
the Exchange the opportunity to identify and address any system 
problems with these particular rules under the Hybrid Market. Further, 
the Pilot should allow users to gain essential practical experience 
with the new systems and processes. Therefore, the Commission finds 
that immediate implementation of the Pilot, which is limited in both 
scope and duration, should permit NYSE to remain on schedule to meet 
the Regulation NMS compliance dates, comply with the NMS Linkage Plan 
and continue to implement its Hybrid Market changes in an orderly 
manner.
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    \30\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefor ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-NYSE-2006-82) is hereby approved on 
an accelerated basis until October 31, 2006.

    For the Commission, by the Division of Market Regulation, by 
delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).

Nancy M. Morris,
Secretary.
 [FR Doc. E6-16897 Filed 10-11-06; 8:45 am]

BILLING CODE 8011-01-P