Document ID: SEC-2006-1238-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NYSE Arca, Inc.
Posted Date: 2006-09-22T04:00Z

[Federal Register: September 22, 2006 (Volume 71, Number 184)]
[Notices]               
[Page 55537-55539]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22se06-163]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54466; File No. SR-NYSEArca-2006-48]

 
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change To Amend NYSE Arca Equities, Inc.'s Clearly 
Erroneous Executions Rule To Include an Appeal Fee for the Archipelago 
Exchange

September 18, 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 August 11, 2006, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by NYSE Arca. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NYSE Arca proposes to amend NYSE Arca Equities Rule 7.10 governing 
clearly erroneous executions (``CEE'') on the Archipelago Exchange, the 
equities trading facility of NYSE Arca Equities, Inc. (``NYSE Arca 
Equities''). Specifically, the Exchange proposes to assess a fee 
associated with the appellate mechanism of NYSE Arca Equities Rule 
7.10.
    The text of the proposed rule change is available on NYSE Arca's 
Web site (http://www.nysearca.com), at NYSE Arca's principal office, 

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, NYSE Arca 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. NYSE Arca 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 Exchange amended NYSE Arca Equities Rule 7.10 (Clearly 
Erroneous Executions) to include subsections (c)(2)-(4), which 
amendment became effective May 16, 2005. NYSE Arca Equities Rules 
7.10(c)(2)-(4) provide for an appeals panel that includes the 
Exchange's Chief Regulatory Officer (``CRO''), or a designee of the 
CRO, and two representatives from Equity Trading Permit (``ETP'') 
Holders (together with the CRO, the ``CEE Panel'') to review the 
determination of clearly erroneous executions that are made by an NYSE 
Arca Equities officer under NYSE Arca Equities Rule 7.10(c)(1).
    As part of its continuing efforts to enhance the appeal process, 
the Exchange proposes to add NYSE Arca

[[Page 55538]]

Equities Rule 7.10(c)(5).\3\ Under the proposed rule, if the CEE Panel 
votes to uphold the decision made pursuant to NYSE Arca Equities Rule 
7.10(c)(1), the Exchange would assess a $500.00 fee against the ETP 
Holder(s) who initiated the request for appeal. The Exchange's 
experience with the appeal process strongly indicates that some ETP 
Holders are improperly taking advantage of the appeal opportunity 
provided under the rule. The Exchange believes that assessing a $500.00 
fee against the ETP Holder(s) who appeals a decision made under NYSE 
Arca Equities Rule 7.10(c)(1) that is subsequently upheld by the CEE 
Panel would discourage frivolous and abusive practices of the appeal 
process.
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    \3\ Telephone Call between David Hsu, Special Counsel, Division 
of Market Regulation, Commission, and Melanie Grace, Associate 
General Counsel, NYSE Group, Inc., on September 8, 2006.
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    Since NYSE Arca Equities Rules 7.10(c)(2)-(4) were adopted, the 
Exchange has found that some ETP Holders have taken advantage of the 
process by categorically appealing all decisions in which they are 
involved, including decisions that involve a de minimis value. 
According to the Exchange, in effect, these ETP Holders file appeals 
simply to ``get a second bite at the apple.'' More specifically, in the 
months of August and September 2005, three ETP Holders were responsible 
for filing approximately 52% of all appeals filed at the Exchange. In 
addition, on July 26, 2005, an ETP Holder appealed an Exchange ruling 
to bust a 34-share transaction.
    Furthermore, under NYSE Arca Equities Rule 7.10(c)(1), an ETP 
Holder may request that an NYSE Arca Equities officer review any 
transaction the ETP Holder regards as erroneous. Accordingly, an 
officer renders an official determination whether the transaction is 
erroneous and, if so, whether it should be canceled or modified. The 
initial determination made by the NYSE Arca Equities officer is done at 
no charge to the ETP Holder, and the Exchange believes that any further 
examination of the execution should incur a modest fee, in the event 
the original decision is upheld, to reduce the number of frivolous and 
abusive appeals.\4\
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    \4\ Id.
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    The Exchange notes that the appeal process draws upon the resources 
of not only the Exchange but also of the ETP Holders who volunteer as 
appeal panelists pursuant to NYSE Arca Equities Rule 7.10(c)(2)(A). 
Specifically, an appeal requires the efforts of two NYSE Arca Equities 
employees to accept and process the appeal (i.e., contact members in 
the pool of appeal panelists to determine their availability to serve 
on the CEE Panel, write up the circumstances of the trade(s) leading up 
to the appeal, moderate the actual appeal that is conducted by 
conference call, contact the parties to the appeal after the CEE Panel 
reaches a decision and document the process and decision). From start 
to finish, the appeal process may take up to 1\1/2\ hours to complete.
    Moreover, the CEE Panel is largely dependent on ETP Holder 
participation. Each panel member is a volunteer and dedicates his or 
her own time to the CEE Panel, which often meets during the busiest 
periods in a trading day. The Exchange believes that constant abuse of 
this process would likely foster volunteer frustration and may lead 
panelists to withdraw entirely from participating in the process.
    The Exchange believes that appeals such as those described above 
represent an unintended use of the appeal process and demonstrate that 
abuses can proliferate when ETP Holders incur no downside risk to 
filing repeated appeals, whether valid or otherwise, and, in effect, 
are given a free second bite at the apple. Therefore, the Exchange 
believes that it is necessary to limit the abuse of the process and 
reduce the number of frivolous and de minimis appeals by assigning a 
modest fee for all appeals that are upheld.\5\
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    \5\ Id.
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    When the Exchange amended NYSE Arca Equities 7.10(c)(2) to provide 
for an appeals process, the Exchange did not intend for the CEE Panel 
to serve as a redundant decision making mechanism, and it did not 
anticipate that the CEE Panel would be called upon to meet as 
frequently as it does today. Additionally, while the Exchange does not 
have statistical data surrounding other self-regulatory organizations' 
appeal processes, the Exchange understands that usage of their 
appellate mechanism is done sparingly and is not exploited by their 
members.
    The Exchange did not anticipate these effects when it proposed NYSE 
Arca Equities Rule 7.10(c)(2)-(4). As a result, the Exchange deems it 
necessary to propose a fee of $500 against each ETP Holder who appeals 
a decision made under NYSE Arca Equities Rule 7.10(c)(1) and such 
decision is confirmed by the CEE Panel.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) \6\ of the 
Act, in general, and furthers the objectives of Section 6(b)(5) \7\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principals of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanisms of a free and open 
market and a national market system.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 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 purpose 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

    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 Exchange 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-NYSEArca-2006-48 on the subject line.

[[Page 55539]]

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-NYSEArca-2006-48. 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 fromsubmissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NYSEArca-2006-48 and should be submitted on or before 
October 13, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 06-8036 Filed 9-21-06; 8:45 am]

BILLING CODE 8010-01-P