Document ID: SEC-2006-0488-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NYSE Arca, Inc.
Posted Date: 2006-04-13T04:00Z

[Federal Register: April 13, 2006 (Volume 71, Number 71)]
[Notices]               
[Page 19224-19226]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13ap06-128]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53609; File No. SR-NYSEArca-2006-01]

 
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Order Granting Accelerated Approval of Proposed Rule Change 
Relating to Brokers Executing as Principal Orders They Represent as 
Agent

April 6, 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 March 21, 2006, NYSE Arca, Inc. (``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 
prepared by the Exchange. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons 
and is approving the proposal on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to change the time period that NYSE Arca 
Brokers (``Brokers'') must wait prior to executing as principal orders 
they represent as agent. The text of the proposed rule change is 
available on the Exchange's Web site (http://www.archipelago.com), at 

the Exchange's Office of the Secretary, 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 III below. The Exchange 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 purpose of this filing is to amend NYSE Arca Rule 6.76, 
``Priority and Order Allocation Procedures,'' relating to the 
Exchange's PCX Plus System (``PCX Plus'' or ``System''). NYSE Arca Rule 
6.76(c), which governs Crossing Orders on PCX Plus, among other things 
provides for a Crossing Mechanism that Brokers may utilize to 
electronically cross two orders.\3\ With respect to principal-agency 
crosses effected electronically on the Exchange but not through the 
Crossing Mechanism, Rule 6.76(c)(3)(B)(i) stipulates that Brokers may 
not execute as principal orders that they represent as agent unless the 
agency orders are first exposed on the Exchange for at least 30 
seconds.\4\ Rule 6.76(c)(3)(B)(i) was included in the rules to guard 
against Brokers circumventing the time parameters established in the 
Crossing Mechanism by immediately executing as principal orders they 
represent as agent. It is this section of Rule 6.76 that the Exchange 
proposes to change.
---------------------------------------------------------------------------

    \3\ See NYSE Arca Rule 6.76(c)(2), which defines the Crossing 
Mechanism as ``a process by which a NYSE Arca Broker may facilitate 
orders or cross two orders.'' As detailed below, the Crossing 
Mechanism exposes one of the orders to market participants for a 
specified period of time before executing the cross. See also NYSE 
Arca Rule 6.76(c)(1)(A), which defines Cross Order for the purposes 
of Rule 6.76(c) as ``two orders with instructions to match the 
identified buy-side with the identified sell-side at a specified 
price (the ``Cross Price'').''
    \4\ Telephone conversation between Glenn Gsell, Director, 
Regulation, Exchange, and Ira Brandriss, Special Counsel, and Kate 
Robbins, Attorney, Division of Market Regulation, Commission, on 
April 4, 2006 (``Telephone Conversation of April 4, 2006''). The 
Broker may also execute a cross in open outcry, pursuant to Rule 
6.47. Telephone Conversation of April 4, 2006.
---------------------------------------------------------------------------

    When entering two orders into the Crossing Mechanism, one of the 
orders must be designated as an Exposed Order.\5\ Exposed Orders are 
exposed to market participants for a period of 3 seconds prior to an 
electronic cross execution. The exposure period allows an opportunity 
for OTP Holders and OTP Firms to trade against the Exposed Order.
---------------------------------------------------------------------------

    \5\ See NYSE Arca Rule 6.76(c)(1)(D), which defines ``Exposed 
Order'' as follows: ``The buy or sell side of a Cross Order that has 
been designated by a NYSE Arca Broker as the side to be exposed to 
the market and that is eligible for execution against all trading 
interest. Public Customer orders will always be deemed to be the 
Exposed Order in a Cross Order. In the case of a Cross Order 
involving a non-customer on both the buy side and sell side, the 
NYSE Arca Broker must designate one side of the Cross Order as the 
Exposed Order.''
---------------------------------------------------------------------------

    When NYSE Arca Rule 6.76(c)(2), governing the Crossing Mechanism, 
was approved by the Commission as part of SR-PCX-2002-36,\6\ the rule 
called for a 30-second exposure period. At the time the rule was 
approved, PCX Plus was not applicable to all issues traded on the 
Exchange and not all OTP Holders and OTP Firms were utilizing fully 
electronic trading systems. It was felt that a 30-second exposure 
period was needed in order to allow an opportunity for all market 
participants to enter orders.
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release No. 47838 (May 13, 
2003), 68 FR 27129 (May 19, 2003).
---------------------------------------------------------------------------

    Once PCX Plus was fully phased in Exchange-wide, with all issues 
trading on the System, and once all market participants became 
electronically connected to the System, it was felt that a 30-second 
exposure period was no longer necessary to insure adequate exposure of 
orders. Since the full implementation of the all-electronic PCX Plus 
System, the Exchange has on two previous occasions filed with the 
Commission to amend Rule 6.76(c) in order to reduce the exposure period 
contained in the Crossing Mechanism. The most recent change established 
the present 3-second exposure period.\7\
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release Nos. 52814 (November 21, 
2005), 70 FR 71591 (November 29, 2005) (order approving a 10-second 
exposure period in the Crossing Mechanism) and 53384 (February 27, 
2006), 71 FR 11280 (March 6, 2006) (order approving a 3-second 
exposure period in the Crossing Mechanism) (``PCX Plus 3-Second 
Approval Order'').
---------------------------------------------------------------------------

    To be consistent with exposure periods included in the rules 
governing the Crossing Mechanism, the Exchange now proposes to shorten 
the time that a Broker must wait prior to executing as principal orders 
he or she represents as agent from 30 seconds to 3 seconds. Under the 
present rules, the Broker that enters an agency order into the PCX Plus 
System must wait 30 seconds before entering a principal order to 
execute against the agency order. All other OTP Holders and OTP Firms 
are given an opportunity to respond to the original order during this 
period.\8\ Since the intent of the original 30-second time period in 
NYSE Arca Rule 6.76(c)(3)(B)(i) was to prevent circumvention of the 30-
second exposure period in the Crossing Mechanism rules, and since the 
Crossing Mechanism now contains a 3-second exposure period, the 
Exchange believes that customer orders may be

[[Page 19225]]

subject to unwarranted delays if Brokers must wait 30 seconds to 
execute as principal an order they represent as agent. Even if agency 
orders are subjected to a 3-second exposure period, the Exchange 
asserts that OTP Holders and OTP Firms will still have adequate time to 
respond to the agency order prior to the Broker entering an order as 
principal.
---------------------------------------------------------------------------

    \8\ Telephone Conversation of April 4, 2006.
---------------------------------------------------------------------------

    The Exchange notes that the proposed rule change is virtually the 
same as a rule change the Chicago Board of Options Exchange (``CBOE'') 
proposed in SR-CBOE-2006-09.\9\ In that filing, the CBOE proposed a 
change to the Interpretations and Policies subsection of CBOE Rules 
6.45A and 6.45B, so that the rules would read: ``Order entry firms may 
not execute as principal against orders they represent as agent unless: 
(i) Agency orders are first exposed on the Hybrid System for at least 
three (3) seconds * * *.''
---------------------------------------------------------------------------

    \9\ See Securities Exchange Act Release No. 53278 (February 13, 
2006), 71 FR 9184 (February 22, 2006). The Commission notes that 
since the time NYSE Arca filed the instant proposal, the Commission 
approved SR-CBOE-2006-09. See Securities Exchange Act Release No. 
53567 (March 29, 2006), 71 FR 17529 (April 6, 2006) (``CBOE Approval 
Order'').
---------------------------------------------------------------------------

    According to the Exchange, Brokers will be able to provide timelier 
executions for their customers' orders once the time period that the 
Broker must wait prior to executing as principal orders they represent 
as agent is reduced from 30 seconds down to 3 seconds. Timely 
executions are consistent with the principles under which the PCX Plus 
system was developed.
2. Statutory Basis
    The Exchange notes that the basis under the Act for this proposed 
rule change is the requirement under section 6(b)(5) \10\ that an 
exchange have rules that are designed 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. The Exchange asserts that 
the proposed rule change will provide investors with more timely 
execution of their options orders, while ensuring that there is an 
adequate exposure of all orders in the NYSE Arca marketplace.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not 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 not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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-NYSEArca-2006-01 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-NYSEArca-2006-01. 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. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NYSEArca-2006-01 and should be submitted on or before 
May 4, 2006.

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

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of section 6(b) of the 
Act \11\ and the rules and regulations thereunder applicable to a 
national securities exchange,\12\ and in particular with section 
6(b)(5) of the Act.\13\ The Commission believes that the proposal, 
which reduces the time that a Broker that enters an agency order into 
PCX Plus must wait before entering a principal order to execute against 
the agency order to 3 seconds, is consistent with the exposure period 
recently approved by the Commission for the Crossing Mechanism,\14\ and 
with rules the Commission has approved at other exchanges.\15\ The 
Commission believes that in an electronic environment like that of PCX 
Plus, in which market participants utilize trading systems that monitor 
updates to the market and can automatically respond based on pre-set 
parameters, an exposure period of 3 seconds for orders entered into the 
System provides participants an adequate opportunity to compete for 
those orders.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b).
    \12\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ See PCX Plus 3-Second Approval Order.
    \15\ See, e.g., CBOE Approval Order.
---------------------------------------------------------------------------

    The Exchange has requested accelerated approval of the proposed 
rule change. The Commission finds good cause, pursuant to section 
19(b)(2) of the Act,\16\ for approving the proposed rule change prior 
to the thirtieth day after the date of publication of the notice of 
filing in the Federal Register so as not to delay implementation of a 
rule that establishes a consistent exposure period for orders in PCX 
Plus. The Commission notes that the Exchange's proposal is 
substantially similar to a rule the Commission

[[Page 19226]]

recently approved for another exchange.\17\
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(2).
    \17\ See CBOE Approval Order.
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-NYSEArca-2006-01) is hereby 
approved on an accelerated basis.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78s(b)(2).
    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E6-5485 Filed 4-12-06; 8:45 am]

BILLING CODE 8010-01-P