Document ID: SEC-2007-1519-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange LLC
Posted Date: 2007-11-06T05:00Z

[Federal Register: November 6, 2007 (Volume 72, Number 214)]
[Notices]               
[Page 62719-62721]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06no07-123]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56726; File No. SR-NYSE-2007-96]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Rule 80A (Index Arbitrage Trading Restrictions)

October 31, 2007.
    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 25, 2007, the 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 and 
II below, which Items have been substantially prepared by the Exchange. 
The NYSE filed the proposal pursuant to Section 19(b)(3)(A) of the Act 
\3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders it effective upon 
filing with the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to rescind NYSE Rule 80A (Index Arbitrage 
Trading Restrictions) to eliminate order entry restrictions on certain 
index arbitrage orders entered on the Exchange. The text of the 
proposed rule change is available on the NYSE's Web site (http://www.nyse.com
), at the NYSE, and at the Commission's Public Reference 

Room.

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 Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

[[Page 62720]]

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

1. Purpose
    The Exchange is proposing to rescind NYSE Rule 80A (Index Arbitrage 
Trading Restrictions) and thereby eliminate the ``collar'' provisions 
of the rule. Currently, NYSE Rule 80A(a) and (b) require that, for any 
component stock of the S&P 500 Stock Price Index\SM\, whenever the NYSE 
Composite Index[supreg] (``NYA'') \5\ advances or declines by a 
predetermined value from its previous day's closing value, all index 
arbitrage orders to buy or sell (depending on the direction of the move 
in the NYA) must be entered as either ``buy minus'' or ``sell plus.'' 
\6\ The tick restrictions are imposed based upon a ``two-percent 
value'' change in the NYA from its prior day's closing value, where the 
``two-percent change'' is two percent of the average closing value of 
the NYA for the last month of the previous calendar quarter, rounded 
down to the nearest ten points. The order entry conditions are lifted 
if the NYA recovers to within one percent of the previous day's closing 
value, and can be reimposed if the average moves away by two percent 
again during a trading session.
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    \5\ The trigger values were originally based on movement in the 
value of the Dow Jones Industrial Average, but were changed in 2005. 
See Securities Exchange Act Release No. 52328 (August 24, 2005), 70 
FR 51398 (August 30, 2005) (SR-NYSE-2005-45).
    \6\ NYSE Rule 13 defines a ``buy minus'' order as an order to 
buy a stated amount of stock provided that the price to be obtained 
is not higher than the last sale if the last sale was a ``minus'' or 
``zero minus'' tick, and is not higher than the last sale minus the 
minimum fractional change in the stock if the last sale was a 
``plus'' or ``zero plus'' tick. A ``sell plus'' order is defined as 
an order to sell a stated amount of a stock provided that the price 
to be obtained is not lower than the last sale if the last sale was 
a ``plus'' or ``zero plus'' tick, and is not lower than the last 
sale plus the minimum fractional change in the stock if the last 
sale was a ``minus'' or ``zero minus'' tick.
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NYSE Rule 80A
    NYSE states that NYSE Rule 80A was formulated as one of the 
responses to the market break of October 1987 to reduce market 
volatility and promote investor confidence.\7\ In its initial form, the 
rule used a measure of a 50 point move in the Dow Jones Industrial 
AverageSM to activate restrictions on order entry in S&P 500 
stocks into Exchange systems.\8\ The restrictions were triggered on 
relatively few occasions throughout the early 1990s (for example, only 
9 times in 1993), but were increasingly invoked as volatility 
heightened later in the decade (366 times in 1998). The basis for the 
restrictions calculation was changed in 1999 from 50 points to the two 
percent value discussed above.\9\ This had the effect of reining in the 
imposition of the restrictions; in fact, they were imposed only once 
during 2004-2005. They have been imposed 15 times so far in 2007.
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    \7\ Rule 80A was originally approved by the Commission in April 
1988. See Securities Exchange Act Release No. 25599 (April 19, 
1988), 53 FR 13371 (April 22, 1988) (SR-NYSE-88-02).
    \8\ ``Dow Jones Industrial Average'' is a service mark of Dow 
Jones & Co., Inc.
    \9\ See Securities Exchange Act Release No. 41041 (February 11, 
1999), 64 FR 8424 (February 19, 1999) (SR-NYSE-98-45).
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    The Exchange is making this change since it does not appear that 
the approach to market volatility envisioned by the use of these 
``collars'' is as meaningful today as when the rule was formalized in 
the late 1980s. In the Exchange's view, volatility is neither 
restrained nor enhanced by the imposition of the collars. It is as 
likely that markets will reverse trends whether or not Rule 80A is 
invoked. In addition, NYSE Rule 80A addresses only one type of trading 
strategy, namely index arbitrage, whereas the number and types of 
strategies have increased markedly in the last 20 years and may as well 
contribute to the increase in or lack of volatility. Indeed, in 
approving the Exchange's expansion of the collars to the two percent 
level in 1999, the Commission stated that ``[i]t may make little sense 
to single out index arbitrage, which ensures that markets are aligned 
economically, from all other types of program trading.'' \10\
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    \10\ Id. at 8246.
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    As markets have continually and significantly evolved in the years 
since the original rule was adopted, similar regulatory constraints on 
trading have been removed. For example, earlier this year, the 
Commission ended price tick restrictions on short sales by removing 
Rule 10a-1,\11\ a regulation adopted almost 70 years ago.\12\ In doing 
so, the Commission discussed the practice of applying different price 
tests to trading in different securities and markets. This is true in 
NYSE Rule 80A as well since its tick restrictions apply only to index 
arbitrage orders in S&P 500 component stocks.
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    \11\ 17 CFR 240.10a-1.
    \12\ See Securities Exchange Act Release No. 55970 (June 28, 
2007), 72 FR 36348 (July 3, 2007).
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    For these reasons, the Exchange believes it is appropriate to 
remove the order entry restrictions of NYSE Rule 80A.
Definitions in NYSE Rule 80A
    Definitions in NYSE Rule 80A.40(a) and (b) for the terms ``index 
arbitrage'' and ``program trading'' are proposed to be repositioned in 
NYSE Rule 132B (Order Tracking Requirements) as they continue to be 
part of the Exchange's regulatory agenda.\13\ The definition of 
``account of an individual investor'' in NYSE Rule 80A.40(c) is 
proposed to be made part of NYSE Rule 92.40 as this rule currently 
refers to this definition in NYSE Rule 80A.
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    \13\ Earlier this year, the Exchange advised its member 
organizations of new reporting requirements for program trading 
activities, including index arbitrage activities. See NYSE 
Regulation Information Memo No. 07-52 (June 11, 2007). If the 
proposed relocation of the definitions of ``index arbitrage'' and 
``program trading'' is approved, the Exchange will inform member 
organizations of these reporting obligations.
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Other Rule Amendments
    Conforming amendments to two other Exchange rules are proposed as a 
consequence of the proposed amendments to NYSE Rule 80A.
    NYSE Rule 123C--This rule details the procedures for ``market on 
close'' (MOC) and ``limit on close'' (LOC) order entry, publication of 
imbalances and closing prints. Generally, MOC or LOC orders are not 
cancelable after 3:40 p.m., except to correct certain errors or to 
comply with the order entry requirements of NYSE Rule 80A, if the two 
percent collars are in effect. References to the NYSE Rule 80A 
provisions are proposed to be removed in Rule 123C (1) and (2).
    NYSE Rule 123C(7)--This rule establishes procedures for exceptions 
to NYSE Rule 80A's entry restrictions for MOC index arbitrage orders on 
so-called ``expiration days'', i.e., the day when expiring stock and 
index option and futures products' pricing is established, usually the 
third Friday of the month. It is proposed that this section be 
rescinded entirely.
    NYSE Rule 476A--This rule establishes procedures to enable the 
Exchange to impose appropriate sanctions for less serious violations of 
Exchange rules. References to violations of NYSE Rule 80A contained in 
the list of rules subject to these procedures are proposed to be 
deleted.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) of the Act \14\ 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

[[Page 62721]]

general, to protect investors and the public interest.
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    \14\ 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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing rule change does not: (1) Significantly 
affect the protection of investors or the public interest; (2) impose 
any significant burden on competition; and (3) become operative for 30 
days after the date on which it was filed, or such shorter time as the 
Commission may designate, it has become effective pursuant to Section 
19(b)(3)(A) of the Act \15\ and Rule 19b-4(f)(6) thereunder.\16\
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    \15\ U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
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    NYSE has requested that the Commission waive the 30-day operative 
delay.\17\ The Commission believes that waiver of the 30-day operative 
delay is consistent with the protection of investors and the public 
interest because rescission of NYSE Rule 80A would remove restrictions 
on index arbitrage, the appropriateness of which the Commission has 
previously questioned.\18\ For this reason, the Commission designates 
the proposed rule change to be effective and operative upon filing with 
the Commission.\19\
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    \17\ 17 CFR 240.19b-4(f)(6)(iii). Rule 19b-4(f)(6) also requires 
the self-regulatory organization to give the Commission notice of 
its intent to file the proposed rule change, along with a brief 
description and text of the proposed rule change, at least five 
business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission. The 
Exchange has satisfied the five-day pre-filing requirement.
    \18\ See Securities Exchange Act Release No. 41041, supra note 
18, at 8426. There, the Commission also noted that it ``may make 
little sense to single out index arbitrage, which ensures that 
markets are aligned economically, from all other types of program 
trading. Indeed, the restrictions on index arbitrage may tend to 
disconnect the securities and futures markets and impose unnecessary 
costs on market participants.'' Id.
    \19\ For the purposes only of waiving the 30-day operative 
delay, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of such proposed rule 
change the Commission may summarily abrogate 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-YSE-2007-96 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSE-2007-96. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all 

written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 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 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-2007-96 and should be 
submitted on or before November 27, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-21773 Filed 11-5-07; 8:45 am]

BILLING CODE 8011-01-P