Document ID: SEC-2008-1605-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange LLC
Posted Date: 2008-11-26T05:00Z

[Federal Register: November 26, 2008 (Volume 73, Number 229)]
[Notices]               
[Page 72094-72097]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26no08-113]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58979; File No. SR-NYSE-2008-116]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change Amending Rule 411(b) 
Concerning Certain Odd-Lot Order Handling Requirements, Rescinding NYSE 
Information Memorandum 94-14 and Issuing a New Information Memo That 
Provides Comprehensive and Updated Interpretive Guidance on, and 
Application of, Current NYSE Odd-Lot Trading Practices and Rules

November 19, 2008.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that, on November 6, 2008, 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, II, and III 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.
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    \1\ 15 U.S.C.78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 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 (i) amend Rule 411(b) concerning certain 
odd-lot order handling requirements, (ii) rescind NYSE Information 
Memorandum (``Information Memo'') 94-14 to the extent it created a 
distinction in the regulatory treatment of odd-lot limit and odd-lot 
market orders, and (iii) issue a new Information Memo that provides 
comprehensive and updated interpretive guidance on, and application of, 
current NYSE odd-lot trading practices and Rules. This rule filing is 
available on the Exchange's Web site at http://www.nyse.com, at the 
Exchange's principal office, and at the Public Reference Room of the 
Commission.

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, 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
    This proposal is to (i) amend NYSE Rule 411(b) concerning certain 
odd-lot order handling requirements, (ii) rescind NYSE Information Memo 
94-14 to the extent it created a distinction in the regulatory 
treatment of odd-lot limit and odd-lot market orders, and (iii) issue a 
new Information Memo that provides comprehensive and updated 
interpretive guidance on, and application of, current NYSE odd-lot 
trading practices and Rules.
Current Operation of the Odd-Lot Order System
    The odd-lot order system is used for all orders for less than a 
unit of trading (a unit of trading is generally referred to as a 
``round-lot''), currently set at 100 shares for most NYSE-listed 
securities.\4\ These orders, which are too small to be handled 
efficiently in the regular auction market on the Exchange, 
traditionally, have been used by retail investors to buy and sell small 
amounts of stock. More recently, market

[[Page 72095]]

professionals using certain trading strategies and programs have also 
accessed the odd-lot system.
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    \4\ The vast majority of securities trade in round-lots of 100 
shares; however, there are some securities that trade in round-lots 
of 10 or even 1 share.
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    NYSE Rule 124 prescribes certain rules governing the execution of 
odd-lot orders. Among other things, because odd-lot orders are executed 
outside the regular auction market, Rule 124(a) prescribes that the 
Designated Market Maker (``DMM'') is the contra party for all odd-lot 
orders, thereby providing execution and price guarantees. Pursuant to 
NYSE Rule 124(c), odd-lot market orders and marketable limit orders are 
subject to automatic execution at the price of the next round-lot 
transaction in the subject security on the Exchange.
    NYSE Rule 411(b) prescribes certain order-handling requirements for 
odd-lot orders. In particular, Rule 411(b)(1) provides that member 
organizations may not combine (or ``bunch'') multiple odd-lot orders 
from different customers without prior approval. The Rule also requires 
member organizations to aggregate odd-lot orders, where possible, into 
as many round lot orders as possible rather than process them 
separately. Although not expressly stated, Rule 411(b) also implicitly 
prohibits a customer or member organization from unbundling a round-lot 
order in order to avoid the round-lot market and take advantage of the 
odd-lot market.
Background
    The odd-lot system was initially created to replace odd-lot dealers 
on the Exchange. Before the creation of the odd-lot system, odd-lot 
dealers made markets in odd-lots and either paired-off odd-lot orders 
against each other or traded with them as dealers. When the Exchange 
eliminated separate odd-lot dealers and adopted Rule 124, DMMs (at the 
time, specialists) were made the counter-party for each odd-lot order 
execution in their respective stocks.
    Because the system forces DMMs to provide liquidity, the Exchange 
has always sought to limit the use of the odd-lot order system to only 
the types of trading it replaced (so-called ``traditional'' or 
``standard'' odd-lot trading practices) in order to ensure the system's 
continued economic viability. In particular, the Exchange has long 
prohibited the specific use of the odd-lot order system as a 
professional trading platform, because it reduces the DMMs' willingness 
to provide cost effective and efficient liquidity for the odd-lot 
system as a whole. Accordingly, the Exchange has on many occasions 
issued guidance that any use of the odd-lot system in a manner that is 
inconsistent with traditional or standard odd-lot investment activity 
is strictly prohibited.
Distinction in Regulatory Treatment of Odd-Lot Limit and Odd-Lot Market 
Orders
    Information Memo 94-14 provides that certain trading practices that 
rely specifically on odd-lot limit orders are flatly prohibited.\5\ 
Under the terms of Information Memo 94-14, however, odd-lot market 
orders were not subject to the same restrictions.
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    \5\ See Information Memo 94-14 (April 18, 1994). See also 
Securities Exchange Act Release No. 34-33678 (February 24, 1994), 59 
FR 10192 (March 3, 1994) (SR-NYSE-92-13).
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    This distinction in the regulatory treatment between odd-lot limit 
and odd-lot market orders noted in Information Memo 94-14 evolved from 
changes made to the odd-lot order system in and around 1991.\6\ Before 
then, DMMs were permitted to charge a differential on (i) all odd-lot 
limit orders executed through the automated system, and (ii) any odd-
lot order that required manual handling; all other odd-lot orders, 
including market orders, were executed without a differential.\7\
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    \6\ In May 1992, because it made changes to existing NYSE Rule 
124, the Exchange submitted to the Commission the interpretive 
guidance that would later become Information Memo 94-14, which was 
approved in February 1994 after several amendments. See Securities 
Exchange Act Release No. 34-33678 (February 24, 1994), 59 FR 10192 
(March 3, 1994) (SR-NYSE-92-13) (formally adopting Information Memo 
94-14). Information Memo 94-14 was subsequently distributed to all 
members and member organizations on April 18, 1994.
    \7\ See Securities Exchange Act Release No. 34-28837 (January 14 
[sic], 1991), 56 FR 4660 (February 5, 1991) (SR-NYSE-91-03).
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    In February 1991, at the conclusion of a six month pilot program, 
the Exchange amended NYSE Rule 124 to eliminate price differentials on 
odd-lot orders executed on the Exchange and extended the ``no 
commission policy'' to cover floor brokerage charges on all 
systematized odd-lot orders. The Exchange stated that, by providing 
more economic pricing, the amendments would enhance the efficiency of 
odd-lot order executions compatible with the traditional odd-lot 
investing practices of smaller investors. Although there were concerns 
about possible adverse impacts to the odd-lot market, the data 
collected during the implementation of the pilot program reflected that 
the mix of odd-lot limit and market orders had remained at or near 
historical levels and there was no evidence of regulatory issues or 
trading abuses.\8\
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    \8\ See Securities Exchange Act Release No. 34-28837 (January 14 
[sic], 1991), 56 FR 4660 (February 5, 1991) (SR-NYSE-91-03). See 
also Securities Exchange Act Release No. 34-33678 (February 24, 
1994), 59 FR 10192 (March 3, 1994) (SR-NYSE-92-13).
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    In July 1991, after implementation of the amendments and further 
observation of the odd-lot market, the Exchange released Information 
Memo 91-29. In that Information Memo, the Exchange identified and 
precluded certain trading practices that had developed that were 
inconsistent with traditional or standard odd-lot trading practices and 
that undermined the economic benefits derived by the market from the 
elimination of differential pricing for odd-lot orders. These practices 
included the unbundling of round-lot orders for the purpose of entering 
odd-lot limit orders in comparable amounts, the failure to aggregate 
into round-lots odd-lot orders from the same account or accounts with a 
common monetary interest, and the entry of odd-lot limit orders on both 
sides of the market for a security in order to capture the ``spread''. 
The Exchange also emphasized more generally that any odd-lot order 
entry practices intended to circumvent the round-lot auction market 
were prohibited.\9\
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    \9\ See Information Memo 91-29 (July 25, 1991).
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    To address these issues in part, in 1992 the Exchange amended NYSE 
Rule 411(b) to expand the requirement for aggregating odd-lot orders to 
include market participants who entered multiple orders on behalf of 
various accounts over which they had investment discretion.\10\
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    \10\ See Securities Exchange Act Release No. 34-31048 (August 
18, 1992), 57 FR 38706 (August 26, 1992) (SR-NYSE-92-03).
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    In Information Memo 94-14, the Exchange identified and precluded 
additional types of trading using odd-lot limit orders in particular, 
including index arbitrage, program trading and day trading, as 
inconsistent with traditional or standard odd-lot trading practices and 
that undermined the integrity of the odd-lot order system and its 
purpose. At that time, the Exchange noted that such trading practices 
using odd-lot market orders were not precluded.\11\
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    \11\ See Information Memo 94-14 (April 18, 1994). See also 
Securities Exchange Act Release No. 34-33678 (February 24, 1994), 59 
FR 10192 (March 3, 1994) (SR-NYSE-92-13).
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    More recently, in Information Memo 07-60, the Exchange provided 
additional interpretive guidance concerning the odd-lot system, 
including an overview of various types of prohibited trading 
practices.\12\
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    \12\ See Information Memo 07-60 (June 29, 2007). This 
Information Memo was not filed with the SEC.
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Proposed Rule Changes
    The rules and interpretive guidance (in the form of Information 
Memos and Enforcement Decisions) for the

[[Page 72096]]

Exchange's odd-lot order system have evolved over the years in response 
to changes in the way market participants use the system. This has 
resulted in a set of rules and policies that, while comprehensive, is 
not readily accessible in one source. Moreover, some of the rules (i.e. 
Rule 411(b)) have not been updated to reflect the Exchange's most 
current interpretive guidance and application of odd-lot trading 
practices. As a result, and as described more fully below, the Exchange 
proposes the following changes in order to update Rule 411(b) and to 
provide a single source of interpretive guidance in accordance with the 
current odd-lot order system and trading practices.
2. Proposed Amendments to Rule 411(b)
    The Exchange proposes to amend Rule 411(b) to update and clarify 
certain odd-lot trading practices described in the Rule.
    First, the Exchange proposes to amend the first subparagraph of the 
Rule to clarify that a person, member or member organization shall not 
enter or accept multiple odd-lot orders in the same security where 
those orders can be aggregated into round-lots. Under the current Rule, 
members or member organizations must monitor and aggregate odd-lot 
orders received from their customers where appropriate. As amended, the 
Rule would also explicitly provide that members or member organizations 
must not submit un-aggregated orders.
    In addition, the Exchange proposes to limit the requirement to 
aggregate odd-lot orders to regular trading hours from 9:30 a.m. to 4 
p.m. The Exchange's member firms have differing systems and procedures 
that make it difficult to standardize their capability to aggregate 
odd-lot orders prior to the commencement of trading at 9:30 a.m. As a 
result, the Exchange believes that it is more equitable to limit the 
aggregation requirement to regular trading hours.
    The Exchange also proposes to add a new subparagraph to the Rule to 
explicitly provide that no person, member or member organization shall 
unbundle market or limit round-lot orders for the purpose of entering 
multiple odd-lot orders that aggregate to an amount comparable to the 
amount of the original round-lot order(s).\13\
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    \13\ E-mail from Jason Harman, Consultant, NYSE Regulation, to 
Nathan Saunders, Special Counsel, and Steve Varholik, Attorney, 
Division of Trading and Markets, Commission, on November 18, 2008 
(clarifying discussion relating to proposed NYSE Rule 411(b)(3)).
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    Finally, the Exchange proposes to make technical amendments to Rule 
411(b) to reorder and renumber the subparagraphs in this section in 
accordance with these proposed amendments.
3.Proposed Rescission of Information Memo 94-14 and Issuance of New 
Information Memo
    The Exchange is seeking approval from the SEC to rescind 
Information Memo 94-14 and to eliminate the regulatory distinction 
between odd-lot limit and odd-lot market orders.
    The distinction in the regulatory treatment of odd-lot limit and 
odd-lot market orders as described in Information Memo 94-14 is no 
longer necessary or practical in today's market. In the past, as 
observed by the Exchange, odd-lot limit orders could be and were used 
by market participants to access the odd-lot order system in ways that 
were inconsistent with traditional or standard odd-lot trading and that 
undermined the integrity of the odd-lot order system. Since the filing 
and approval of Information Memo 94-14, however, the market has 
undergone significant changes, including the adoption of Regulation NMS 
and technological developments impacting order routing and execution. 
Today, volume is much greater and the speed of the market has increased 
such that most limit orders are effectively market orders when entered. 
In addition, there are numerous programs and algorithmic trading 
platforms that permit market participants to use trading strategies 
involving both limit and market orders. At the same time, the Exchange 
has better tools with which to conduct market surveillance and 
regulation.
    In conjunction with these changes to the marketplace, NYSE 
Regulation has noted the increasing use of odd-lot market orders in 
trading practices that, were they implemented using odd-lot limit 
orders (even marketable limit orders), would be violations of the 
Exchange's current odd-lot rules and interpretive guidance. These 
trading practices are designed to circumvent the auction market and 
provide liquidity and pricing that is not otherwise available, or to 
create an unfair advantage over other market participants, and, as a 
result, threaten to undermine the economic viability of the odd-lot 
trading system and reduce the DMMs' willingness to provide cost-
effective and efficient liquidity.
    Given this trend, the Exchange believes that it is no longer 
proper, or consistent with the protection of investors, to maintain a 
regulatory distinction between odd-lot limit and odd-lot market orders 
in determining whether odd-lot activity is violative and that, 
moreover, continuation of this distinction impedes the appropriate 
regulation of abusive trading practices involving both odd-lot limit 
and odd-lot market orders.
    In addition, in the interest of providing market participants with 
a single, comprehensive source of guidance, the Exchange proposes to 
issue a new Information Memo that would update and restate the 
Exchange's most current interpretive guidance and application of odd-
lot trading practices and Rules. The proposed new Information Memo 
would retain the relevant portions of Information Memo 94-14 and prior 
Information Memos, as well as the more recent guidance issued in 
Information Memo 07-60.
4. Statutory Basis
    The statutory basis for the proposed rule change is Section 6(b)(5) 
of the Act,\14\ which requires the rules of an exchange to prevent 
fraudulent and manipulative acts and practices, 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 proposed 
rule change also supports the principles of Section 11A(a)(1) \15\ of 
the Act, in that it seeks to ensure economically efficient execution of 
securities transactions and fair competition among brokers and dealers 
and among exchange markets.
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    \14\ 15 U.S.C. 78f(b)(5).
    \15\ 15 U.S.C. 78k-1(a)(1).
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    In particular, as noted above, the proposed rule filing would bring 
the Exchange's odd-lot Rules and interpretive guidance into line with 
the way the odd-lot system is currently used by market participants. 
The proposed filing also would eliminate a historical distinction in 
the regulatory treatment of odd-lot trading that is no longer relevant 
in today's market. The Exchange has observed patterns of abuse by 
market participants who have crafted schemes involving odd-lot market 
orders that, were they implemented using odd-lot limit orders, would be 
violations of the Exchange's current odd-lot rules and interpretive 
guidance. The Exchange believes that, in order to effectively regulate 
the use of the odd-lot system and protect investors, it is necessary to 
close this loophole. In addition, the proposed filing would provide 
market participants with a comprehensive source of the Exchange's most 
current interpretive guidance and

[[Page 72097]]

application of odd-lot trading practices and Rules.

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-2008-116 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-2008-116. 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 the 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-NYSE-2008-116 and should be 
submitted on or before December 17, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-28042 Filed 11-25-08; 8:45 am]

BILLING CODE 8011-01-P