Document ID: SEC-2008-1364-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange LLC
Posted Date: 2008-10-06T04:00Z

[Federal Register: October 6, 2008 (Volume 73, Number 194)]
[Notices]               
[Page 58283-58285]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06oc08-126]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58680; File No. SR-NYSE-2008-76]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Granting Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1 Thereto, Amending NYSE Rule 2B To Establish Procedures 
Designed To Manage Potential Informational Advantages Resulting From 
the Affiliation Between the Exchange and Archipelago Securities L.L.C.

September 29, 2008.

I. Introduction

    On August 20, 2008, the New York Stock Exchange LLC (``NYSE'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change amending NYSE Rule 2B to 
establish procedures designed to manage potential informational 
advantages resulting from the affiliation between the Exchange and 
Archipelago Securities L.L.C. (``Arca Securities''), an NYSE affiliated 
member. On September 4, 2008, the proposed rule change was published 
for comment in the Federal Register.\3\ The Commission received no 
comments on the proposed rule change. On September 25, 2008, NYSE filed 
Amendment No. 1.\4\ This order approves the proposed rule change, as 
modified by Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 58430 (August 27, 
2008), 73 FR 51678 (``Notice'').
    \4\ In Amendment No. 1, NYSE requested that the Commission 
accelerate approval of the proposed rule change. Because Amendment 
No. 1 is technical in nature, the Commission is not publishing it 
for comment.
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II. Background

A. NYSE Arca's PO Plus Proposal

    On August 20, 2008, NYSE Arca, Inc. (``NYSE Arca'') filed with the 
Commission a proposed rule change to expand the availability of its PO 
Order type (``PO Plus Proposal'').\5\ NYSE Arca's PO Order is a market 
or limit order that is to be routed to the primary market in that 
security without first attempting to access liquidity on the NYSE Arca 
book. The PO Orders are routed to the primary market through NYSE 
Arca's routing broker-dealer, Arca Securities, which is an affiliate of 
NYSE Arca as described more fully below. The ``primary market'' may be 
the New York Stock Exchange LLC (``NYSE'') or the American Stock 
Exchange LLC (``Amex''),\6\ each of which, as described more fully 
below, also is (or will be) an affiliate of NYSE Arca and Arca 
Securities.
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    \5\ See Securities Exchange Act Release No. 58431 (August 27, 
2008), 73 FR 51681 (September 4, 2008). The Commission today is 
approving NYSE Arca's proposed rule change. See Securities Exchange 
Act Release No. 58681 (September 29, 2008) (SR-NYSEArca-2008-90) 
(``PO Plus Approval Order'').
    On February 13, 2008, NYSE Arca filed a proposal to modify its 
PO Order pursuant to 19(b)(3)(A), making it effective upon filing 
with the Commission. See Securities Exchange Act Release No. 57377 
(February 25, 2008), 73 FR 11177 (February 29, 2008) (SR-NYSEArca-
2008-19). The Commission abrogated the proposal on April 11, 2008, 
noting that it has, in the past, expressed concern about the 
potential for unfair competition and conflicts of interest between 
an exchange's self-regulatory obligations and its commercial 
interests if an exchange were affiliated with one of its members, as 
well as the potential for unfair competitive advantage that the 
affiliated member could have by virtues of informational or 
operational advantages, or the ability to receive preferential 
treatment. See Securities Exchange Act Release No. 57648 (April 11, 
2008), 73 FR 20981 (April 17, 2008) at note 9 and accompanying text. 
The Commission noted that NYSE Arca's filing raised this issue by 
expanding the activities of Arca Securities in sending orders to its 
affiliate, the NYSE, and therefore should be subject to notice and 
comment and review pursuant to Sections 19(b)(1) and 19(b)(2) of the 
Act. See id. at note 10 and accompanying text. Further, the 
Commission stated that the issue of whether the routing of PO Orders 
by Arca Securities to the NYSE is consistent with existing NYSE and 
NYSE Arca rules should be subject to notice and comment pursuant to 
Sections 19(b)(1) and 19(b)(2) of the Act. See id. at note 11 and 
accompanying text.
    \6\ Amex will change its name to NYSE Alternext US in connection 
with the acquisition of Amex by NYSE Euronext. See Securities 
Exchange Act Release No. 58673 (September 29, 2008) (order approving 
a proposed rule change related to the acquisition of the Amex by 
NYSE Euronext) (SR-Amex-2008-62; SR-NYSE-2008-60) (``NYSE Alternext 
US Order''). The transaction is expected to close shortly.
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    Such orders, currently, may only be entered until a cut-off time 
established from time to time by the Exchange.\7\ In its PO Plus 
Proposal, NYSE Arca

[[Page 58284]]

proposes to modify the PO Order type so that such orders may be entered 
at any time throughout the trading day and be immediately routed to the 
primary, listing market for execution.\8\ Further, the proposal permits 
an entering party to designate a PO Order as an Intermarket Sweep Order 
(as defined in Rule 600(b) of Regulation NMS under the Act).\9\ The 
expanded PO order is referred to as a PO Plus order.\10\
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    \7\ See NYSE Arca Equities Rule 7.31(x). Currently, a PO Order 
entered for participation in the primary market opening must be 
entered before 6:28 a.m. (Pacific Time), and a PO Order entered for 
participation in the primary market re-opening after a trading halt 
must be entered after trading was halted on NYSE Arca and before the 
re-opening time. See id.
    \8\ A PO Order would have to be a day or immediate-or-cancel 
(``IOC'') order. If the PO Order is not an IOC order it would remain 
at the venue to which it was routed, until executed, cancelled, or 
the end of day. Further, under the proposal, PO Orders entered for 
participation in the primary market, other than for participation in 
the primary market opening or primary market re-opening, must be 
marked with the modifier PO+. Such orders would be eligible for 
entry and execution throughout the trading day.
    \9\ 17 CFR 240.600(b). In addition, in its filing NYSE Arca 
proposes that: (1) The use of certain non-public information by Arca 
Securities be restricted; (2) NYSE Regulation, Inc. (``NYSE 
Regulation'') would collect and maintain certain information with 
respect to Arca Securities; and (3) routing by Arca Securities in 
its capacity as a facility of NYSE, to NYSE Arca, be authorized for 
a pilot period of 12 months.
    \10\ See PO Plus Approval Order, supra note 5.
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B. Arca Securities Routing Function

    NYSE Euronext, a Delaware Corporation (``NYSE Euronext'') currently 
indirectly owns Arca Securities, a broker-dealer that is a member of 
the NYSE. In addition, NYSE Euronext indirectly owns two registered 
securities exchanges--NYSE Arca and NYSE--and has entered into an 
agreement to acquire a third exchange, Amex.\11\ Thus, Arca Securities 
is (or will be) an affiliate of each of these exchanges.
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    \11\ See NYSE Alternext US Order, supra note 6.
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    NYSE Rule 2B prohibits NYSE, or any entity with which it is 
affiliated, from acquiring or maintaining an ownership interest in a 
member, absent prior Commission approval. Thus, Arca Securities' 
affiliation with NYSE would violate NYSE rules, absent Commission 
approval.
    The Commission has approved Arca Securities's affiliation with, and 
operation as a facility of, NYSE Arca for the provision of outbound 
routing from NYSE Arca to other market centers,\12\ subject to certain 
conditions.\13\ Arca Securities also operates as a facility of NYSE and 
similarly provides outbound routing from NYSE to other market 
centers,\14\ subject to the conditions that: (1) Arca Securities is 
operated and regulated as a facility of the NYSE; (2) the primary 
regulatory responsibility for Arca Securities lies with an unaffiliated 
SRO; and (3) the use of Arca Securities's for outbound routing is 
available only to NYSE members and the use of Arca Securities's routing 
functions remains optional.\15\
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    \12\ Such outbound routing includes the routing of PO Orders to 
the primary market.
    \13\ See Securities Exchange Act Release No. 52497 (September 
22, 2005), 70 FR 56949 (September 29, 2005) (SR-PCX-2005-90) (order 
approving a proposed rule change in connection with the acquisition 
of the Pacific Exchange, Inc. (``PCX'', n/k/a NYSE Arca) by 
Archipelago Holdings, Inc.). Arca Securities' operation as a 
facility providing outbound routing for NYSE Arca was (and continues 
to be) subject to the conditions that: (1) Arca Securities continue 
to operate and be regulated as a facility of NYSE Arca; (2) Arca 
Securities only provide outbound routing services; (3) the primary 
regulatory responsibility for Arca Securities would lie with an 
unaffiliated SRO; and (4) the use of Arca Securities for outbound 
routing is available only to NYSE Arca members and use of Arca 
Securities routing functions remains optional. Id.
    \14\ See Securities Exchange Act Release No. 55590 (April 5, 
2007), 72 FR 18707 (April 13, 2007) (SR-NYSE-2007-29) (order filed 
for immediate effectiveness to, among other things, establish a 
mechanism to route orders from NYSE to away market centers). See 
also Notice, supra note 3, at notes 14 to 16 and accompanying text.
    \15\ Id.
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    Currently, the operation of Arca Securities as a facility of NYSE 
and NYSE Arca providing outbound routing services from those exchanges 
is subject, respectively, to NYSE and NYSE Arca oversight, as well as 
Commission oversight. NYSE and NYSE Arca are each responsible for 
ensuring that Arca Securities is operated consistent with Section 6 of 
the Act and their respective rules. In addition, NYSE and NYSE Arca, 
respectively, must file with the Commission rule changes and fees 
relating to Arca Securities.
    Recognizing that the Commission has previously expressed concern 
regarding the potential for conflicts of interest in instances where a 
member firm is affiliated with an exchange to which it is routing 
orders, NYSE proposes to accept inbound orders that its affiliate Arca 
Securities routes in its capacity as a facility of NYSE Arca, subject 
to the following limitations and conditions:
     First, NYSE states that NYSE and FINRA have entered into 
an agreement pursuant to Rule 17d-2 under the Act. Pursuant to this 
agreement, FINRA is allocated regulatory responsibilities to review 
Arca Securities' compliance with certain NYSE rules.\16\ NYSE, however, 
retains ultimate responsibility for enforcing its rules with respect to 
Arca Securities.
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    \16\ NYSE also states that Arca Securities is subject to 
independent oversight by FINRA, its Designated Examining Authority, 
for compliance with financial responsibility requirements. See 
Notice, supra note 3, at section II.A.1.c.
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     Second, NYSE Regulation \17\ will monitor Arca Securities 
for compliance with NYSE's trading rules, and will collect and maintain 
certain related information.\18\
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    \17\ NYSE Regulation is a wholly owned subsidiary of the NYSE 
that performs the regulatory functions of the NYSE pursuant to a 
delegation agreement. NYSE Regulation also performs many of the 
regulatory functions of NYSE Arca pursuant to a regulatory services 
agreement. See Securities Exchange Act Release Nos. 53382 (February 
27, 2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) (order 
approving the combination of the New York Stock Exchange, Inc. and 
Archipelago Holdings) (``NYSE/Arca Order) at 11255.
    \18\ Specifically, NYSE Regulation ``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 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 
Examination.'' See Notice, supra note 3, at section II.A.1.c.
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     Third, NYSE states that NYSE Regulation has agreed with 
NYSE that it will provide a report to NYSE's CRO, on a quarterly basis, 
that: (i) Quantifies all alerts (of which NYSE Regulation is aware) 
that identify Arca Securities as a participant that has potentially 
violated NYSE or Commission rules, and (ii) quantifies the number of 
all investigations that identify Arca Securities as a participant that 
has potentially violated NYSE or Commission rules.\19\
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    \19\ See id.
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     Fourth, NYSE proposes an amendment to Rule 2B that will 
require NYSE Euronext, as the holding company owning both NYSE and Arca 
Securities, to establish and maintain procedures and internal controls 
reasonably designed to ensure that Arca Securities does not develop or 
implement changes to its system, based on non-public information 
obtained regarding planned changes to the NYSE systems as a result of 
its affiliation with NYSE, until such information is available 
generally to similarly situated members of NYSE, in connection with the 
provision of inbound order routing to NYSE.\20\
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    \20\ See proposed NYSE Rule 2B.
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     Fifth, NYSE proposes that routing of PO Plus Orders from 
Arca Securities to NYSE, in Arca Securities' capacity as a facility of 
NYSE Arca, be authorized for a pilot period of twelve months.\21\
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    \21\ See Notice, supra note 3, at section II.A.1.(e).
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III. Discussion

    After careful review, 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.\22\ In particular, the

[[Page 58285]]

Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\23\ which requires, among other things, 
that the rules of an exchange be 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; and are not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \22\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \23\ 15 U.S.C. 78f(b)(5).
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    In the past, the Commission has expressed concern that the 
affiliation of an exchange with one of its members raises potential 
conflicts of interest, and the potential for unfair competitive 
advantage.\24\ The proposed expansion of NYSE Arca's PO Order type, 
which the Commission approved today,\25\ will expand the activities of 
Arca Securities in routing orders to the NYSE. Although the Commission 
continues to be concerned about potential unfair competition and 
conflicts of interest between an exchange's self-regulatory obligations 
and its commercial interest when the exchange is affiliated with one of 
its members, for the reasons discussed below, the Commission believes 
that it is consistent with the Act to permit Arca Securities to provide 
inbound routing to NYSE, subject to the conditions described above.\26\
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    \24\ See, e.g., Securities Exchange Act Release No. 54170 (July 
18, 2006), 71 FR 42149 (July 25, 2006) (SR-NASDAQ-2006-006) (order 
approving Nasdaq's proposal to adopt Nasdaq Rule 2140, restricting 
affiliations between Nasdaq and its members), and NYSE/Arca Order, 
supra note 15.
    \25\ See PO Plus Approval Order, supra note 5.
    \26\ See supra notes 16-21 and accompanying text. See also PO 
Plus Approval Order, supra note 5 (approving the routing of orders 
by Arca Securities, in its capacity as a facility of NYSE, to NYSE 
Arca) and NYSE Alternext US Order, supra note 6 (including approval 
of NYSE Alternext US's affiliation with Arca Securities for purposes 
of routing orders, in its capacity as a facility of NYSE Arca and 
NYSE, to NYSE Alternext US).
    This order approves only the routing of orders by Arca 
Securities, in its capacity as a facility of NYSE Arca, to NYSE, 
subject to the conditions discussed herein. This approval does not 
include Arca Securities providing routing of orders from Amex, which 
will be affiliated with NYSE Arca following Amex's acquisition by 
NYSE Euronext, to NYSE. Amex does not currently use Arca Securities 
to route orders to other markets and has not requested approval of 
such in its filing related to its acquisition by NYSE Euronext. See 
NYSE Alternext U.S. Order, supra note 6).
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    NYSE has proposed five conditions applicable to Arca Securities 
routing activities, which are enumerated above. The Commission believes 
that these conditions mitigate its concerns about potential conflicts 
of interest and unfair competitive advantage. In particular, the 
Commission believes that FINRA's oversight of Arca Securities,\27\ 
combined with NYSE Regulation's monitoring of Arca Securities' 
compliance with NYSE's trading rules and quarterly reporting to NYSE's 
CRO, will help to protect the independence of NYSE's regulatory 
responsibilities with respect to Arca Securities. The Commission also 
believes that the proposed amendment to NYSE Rule 2B \28\ is designed 
to ensure that Arca Securities cannot use any information advantage it 
may have because of its affiliation with NYSE. Furthermore, the 
Commission believes that NYSE's proposal to allow Arca Securities to 
route PO Plus orders inbound to NYSE from NYSE Arca, on a pilot basis, 
will provide NYSE and the Commission an opportunity to assess the 
impact of any conflicts of interest of allowing an affiliated member of 
NYSE to route orders inbound to NYSE and whether such affiliation 
provides an unfair competitive advantage.
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    \27\ This oversight will be accomplished through the 17d-2 
agreement between FINRA and NYSE. See supra note 16 and accompanying 
text.
    \28\ See supra note 20 and accompanying text.
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IV. Accelerated Approval

    NYSE has asked the Commission to accelerate approval of the 
proposed rule change. NYSE notes that the proposed rule change reflects 
the Exchange's efforts to address concerns identified by the Commission 
regarding informational advantages favoring Arca Securities and states 
in part that ``accelerated approval * * * will permit the Exchange to 
immediately address this issue.'' \29\ The Commission finds good cause 
for approving the proposed rule change prior to the thirtieth day after 
the date of publication of notice of filing in the Federal 
Register.\30\ The Commission notes that the protections proposed by 
NYSE, which are designed to address conflict of interest concerns 
identified by the Commission in connection with the inbound routing of 
orders to an exchange when the routing broker-dealer is an affiliate of 
that exchange, are consistent with those approved by the Commission in 
another rule filing.\31\ The Commission also notes that the proposed 
rule change was published for the full 21-day comment period,\32\ and 
the comment period ended on September 25, 2008. No comments were 
received on the proposal.
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    \29\ See Amendment No. 1, supra note 4.
    \30\ 15 U.S.C. 78s(b)(2). Pursuant to Section 19(b)(2) of the 
Act, the Commission may not approve any proposed rule change, or 
amendment thereto, prior to the thirtieth day after the date of 
publication of notice thereof, unless the Commission finds good 
cause for so doing.
    \31\ See NYSE Alternext US Order, supra note 6, at section 
III.D.2.
    \32\ See supra note 3 and accompanying text.
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    Accordingly, the Commission finds good cause for approving the 
proposed rule change on an accelerated basis, pursuant to Section 
19(b)(2) of the Act.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\33\ that the proposed rule change (SR-NYSE-2008-76), as modified 
by Amendment No. 1 thereto, be, and hereby is, approved on an 
accelerated basis.
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    \33\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-23486 Filed 10-3-08; 8:45 am]

BILLING CODE 8011-01-P