Document ID: SEC-2009-0530-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by New York Stock Exchange LLC Rescinding NYSE Rule 110 Which Establishes the Role of Competitive Traders and Exchange Rule 107A Which Establishes the Role of the Registered Competitive Market Makers
Posted Date: 2009-04-16T04:00Z

[Federal Register: April 16, 2009 (Volume 74, Number 72)]
[Notices]               
[Page 17702-17705]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16ap09-85]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59746; File No. SR-NYSE-2009-08]

 
Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by New York Stock Exchange LLC Rescinding NYSE Rule 110 Which 
Establishes the Role of Competitive Traders and Exchange Rule 107A 
Which Establishes the Role of the Registered Competitive Market Makers

April 10, 2009.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on April 6, 2009, New York Stock Exchange LLC (``NYSE'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by the self-
regulatory organization. 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 rescind NYSE Rule 110 which establishes 
the role of Competitive Traders (``CTs'') and Exchange Rule 107A which 
establishes the role of the Registered Competitive Market Makers 
(``RCMMs''). The Exchange also proposes to make conforming amendments 
to NYSE Rules 36, 98, 123, 111, 476A, 800, 900 and 1600 to eliminate 
references to RCMMs and CTs. The text of the proposed rule change is 
available at the Exchange, the Commission's Public Reference Room, and 
http://www.nyse.com.

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
    The Exchange proposes to rescind NYSE Rule 110 which sets forth the 
role of CTs and NYSE Rule 107A which sets forth the role of RCMMs. With 
the rescission of NYSE Rule 110 and NYSE Rule 107A, CTs and RCMMs will 
no longer be recognized classes of Floor Traders on the NYSE Floor.
    The Exchange also proposes to make conforming amendments to NYSE 
Rules 36, 98, 476A, 111, 800, 900 and 1600 to eliminate references to 
RCMMs and CTs.
I. Background of CTs and RCMMs
    The rules establishing CTs and RCMMs were enacted to create classes 
of Floor Traders that would commit capital to trade in a manner that 
would provide additional liquidity, contribute to mitigating price 
fluctuations and enhance competition. CTs were the class of Floor 
Traders that the Exchange established first in 1964.\4\ CTs were Floor 
Traders registered with and approved by the Exchange to trade for an 
account for which the CT had an interest.
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    \4\ NYSE Rule 110 (Amended May 21, 1964 and July 16, 1964, 
effective August 3, 1964).
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    Section 11(a) of the Securities and Exchange Act of 1934 (the 
``Act''),\5\ as amended by the 1975 Amendments, makes it unlawful, in 
part, for Exchange members to effect any transaction on the Floor for 
their own accounts. Section 11(a)(1)(A) stated that it would exempt 
from this general prohibition transactions made by a dealer acting in 
the capacity of a market maker (``market maker exception'').\6\ A 
market maker is defined in Section 3(a)(38) of the Act as ``any dealer 
who, with respect to a security, holds himself out (by entering 
quotations in an inter-dealer communications system or otherwise) as 
being willing to buy and sell such security for his own account on a 
regular or continuous basis.'' \7\
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    \5\ 15 U.S.C. 78k(a).
    \6\ 15 U.S.C. 78k(a)(1)(A).
    \7\ 15 U.S.C. 78c(a)(38).
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    In order to maintain a class of trader that could be called in to 
add depth and liquidity to the markets in listed stocks, the Exchange 
established the RCMM class of Floor trader in 1978.\8\ RCMMs functioned 
as proprietary traders that serve as supplemental market makers on the 
Floor. Historically, RCMMs were called upon to narrow the spread 
between bids and offers, improve the depth of the market in a given 
security and enter a bid or offer on the side of the market when called 
upon to do so by a Floor official. In their capacity as dealers, RCMMs 
were expected to provide a degree of competition to the specialists on 
the NYSE.
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    \8\ See Securities Exchange Act Release No. 14718 (May 1, 1978), 
43 FR 19738 (May 8, 1978) (SR-NYSE-78-24).
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    On February 24, 1981, the Commission adopted Rule 11a1-5 \9\ to 
exempt from the proprietary trading prohibition of Section 11(a)(1) 
certain transactions by RCMMs registered on the Exchange. The 
Commission determined that RCMMs had the potential to provide 
sufficient benefits to their markets to warrant an exemption from the 
statutory prohibition pursuant to Section 11(a)(1)(H).\10\ Rule 11a1-5 
set forth that ``any transaction by a New York Stock Exchange 
registered competitive market maker * * * effected in compliance with 
their respective governing rules shall be deemed to be of a kind which 
is consistent with the purposes of Section 11(a)(1) of the Act, the 
protection of investors, and the maintenance of fair and orderly 
markets.'' \11\
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    \9\ 17 CFR 240.11a1-5.
    \10\ This provision has since been changed to Section 
11(a)(1)(I).
    \11\ See Securities Exchange Act Release No. 17569, 46 FR 14888 
(March 3, 1981).
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II. Functions and Obligations of the RCMMs and CTs
    CTs and RCMMs are classes of Floor traders that commit capital to 
trade in a manner that provides additional liquidity, contribute to 
mitigating price fluctuations and enhance competition. A member 
registered as an RCMM is permitted, with certain limitations, to act as 
both a Floor Broker and RCMM in the same trading session. However, an 
RCMM may not act as both Floor Broker and RCMM in the same security in 
the same trading session.
    As a Floor Broker, the RCMM executes orders as agent for his 
customers, including other Floor Brokers. In his capacity as a Floor 
Broker, the RCMM acts solely as agent for his customer and does not 
commit capital or initiate on-Floor orders,

[[Page 17703]]

except in the case of a trade for his error account.
    As an RCMM, the RCMM may initiate on-Floor orders to commit capital 
on his firm's behalf, subject to certain conditions. While acting in an 
RCMM capacity, and subject to its dealings, an RCMM provides additional 
liquidity in situations in which the RCMM is requested to do so by a 
Floor Official, DMM, or other Floor Broker. Additionally, an RCMM may, 
subject to certain limitations on its dealings, provide liquidity in 
instances in which the dealings are reasonably calculated to contribute 
to maintenance of price continuity with reasonable depth, and to 
minimize temporary disparities between supply and demand.
    RCMMs have both affirmative and negative obligations pursuant to 
NYSE Rule 107A(b). The RCMM's affirmative obligations require the RCMM 
to: (i) Make a bid or offer in a stock that contributes to the 
maintenance of a fair and orderly market whenever called upon; and (ii) 
effect all purchases and sales for the RCMM's proprietary account in a 
manner that contributes to the maintenance of price continuity with 
reasonable depth and minimizes the effects of a temporary disparity 
between supply and demand. The negative obligations of the RCMM require 
the RCMM to avoid participation as a dealer during the opening of the 
stock in a manner that would disrupt the public balance of supply and 
demand. Furthermore, RCMMs may not effect transactions for its own 
account or the account of its member organization that are not a part 
of a course of dealings reasonably calculated to contribute to the 
maintenance of price continuity with reasonable depth and to the 
minimizing of the effects of any temporary disparity between supply and 
demand. RCMMs must be ready to enter the market with one round lot if 
called upon by a Floor Official or broker to narrow the quotation 
spread or add liquidity to the market.
    CTs likewise have these same affirmative and negative obligations 
pursuant to NYSE Rule 110. In addition, members acting as CTs that 
desire to purchase or sell stock for accounts in which they have an 
interest shall not congregate in a particular stock, and individually 
or as a group, intentionally or unintentionally, dominate the market in 
that stock, and shall not effect such purchases or sales except in a 
reasonable and orderly manner. CTs are also subject to meeting certain 
stabilization tests which are computed on a monthly basis. 
Specifically, CT trading is required to be 75% stabilizing.
    NYSE Regulation Inc. is responsible for reviewing RCMM and CT 
trading activity in order to determine that RCMMs and CTs are complying 
with their negative and affirmative obligations.
III. Viability of CTs and RCMMs in Today's NYSE Market
    The volume and speed of the securities markets has increased 
dramatically since the inception of the CTs and RCMMs. Significant 
changes have occurred with respect to market dynamics such as 
quotations, order entry and order executions. The majority of trades on 
the Exchange are executed electronically. When the Exchange introduced 
its Hybrid Market,\12\ the Exchange determined that a review of the 
viability of RCMMs and CTs to trade in the more electronic trading 
environment was warranted. The Exchange undertook to assess the 
contributions of RCMMs and CTs to the liquidity available to the NYSE 
in its more electronic market model.
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    \12\ See Securities Exchange Act Release No. 53539 (March 22, 
2006), 71 FR 16353 (March 31, 2006) (SR-NYSE-2004-05) (establishing 
the Hybrid Market).
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    In October 2005, the Exchange implemented a Moratorium on the 
qualification and registration of new CTs and RCMMs while the Exchange 
conducted a study on the future viability of CTs and RCMMs.\13\ At the 
time the Moratorium was first imposed, there were 11 registered RCMMs 
and one registered but inactive CT. In December 2006, the largest RCMM 
firm ceased its RCMM business and left the Floor, eliminating 6 RCMMs 
from the Floor. This reduced the number of RCMMs operating on the 
Exchange to five.\14\ These remaining five RCMMs are associated with 
two member organizations.
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    \13\ See Securities Exchange Act Release No. 52648 (October 21, 
2005), 70 FR 62155 (October 28, 2005) (SR-NYSE-2005-63).
    \14\ Registration as an RCMM is applicable only to individual 
members, not member organizations. See NYSE Rule 107A(1). 
Accordingly, RCMM trading licenses are issued to individual members.
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    In its study of the CT and RCMM trading in the more electronic 
environment, the Exchange reviewed the trading data associated with the 
CT and RCMM order execution. The review found that the CT class of 
Floor Trader had not executed any transactions on the Floor as a result 
of the non-usage of the CT license and therefore provided no 
contribution to the quality of the NYSE Market.
    From May 2004 to December 2004, RCMM trading volume comprised only 
.018% of the total NYSE trading volume for that time period. In 2005, 
the year that the Moratorium was implemented, RCMM trading volume 
comprised only .017% of the total NYSE trading volume for the year. In 
2006, the RCMM trading volume comprised .008% of the total NYSE trading 
volume for the year. After the largest RCMM firm ceased its business in 
December 2006, RCMM trading volume in 2007 and 2008 comprised only 
.001% of the NYSE total trading volume for each of those years.
    From August 2005 through February 2008, RCMM's monthly average 
trading volume for that time period never exceeded .021% of the 
Exchange's total trading volume for that time period. On average during 
this time period, RCMMs comprised only .006% of the NYSE's trading 
volume. The Moratorium was then extended six times \15\ while the 
Exchange continued its evaluation of CT and RCMM trading. A review of 
the trading volume prior to and during the Moratorium indicates that 
RCMM/CT trading volume was minimally impacted by the Moratorium.
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    \15\ See Securities Exchange Act Release Numbers 54140 (July 13, 
2006), 71 FR 41491 (July 21, 2006) (SR-NYSE-2006-48); 54985 
(December 21, 2006), 72 FR 171 (January 3, 2007) (SR-NYSE-2006-113); 
55992 (June 29, 2007), 72 FR 37289 (July 9, 2007) (SR-NYSE-2007-57); 
56556 (September 27, 2007), 72 FR 56421 (October 3, 2007) (SR-NYSE-
2007-86); 57072 (December 31, 2007), 73 FR 1252 (January 7, 2008) 
(SR-NYSE-2007-125); 57601 (April 2, 2008), 73 FR 19123 (April 8, 
2008) (SR-NYSE-2008-22). The Moratorium was also amended to grant 
RCMM firms the ability to replace a RCMM who relinquishes his or her 
registration and ceases to conduct business as a RCMM during the 
moratorium, with a newly qualified and registered RCMM. See 
Securities Exchange Act Release No. 53549 (March 24, 2006), 71 FR 
16388 (March 31, 2006) (SR-NYSE-2006-11).
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    On October 24, 2008, the Commission approved the Exchange's new 
market model filing (``Next Generation NYSE'').\16\ The Next Generation 
NYSE rule and technology changes: (i) Provided market participants with 
additional abilities to post hidden liquidity on Exchange systems; (ii) 
created a Designated Market Maker (``DMM''), and phased out the NYSE 
specialist; and (iii) enhanced the speed of execution through 
technological enhancements and a reduction in message traffic between 
Exchange systems and its DMMs. In light of the implementation of the 
Next Generation NYSE, the Exchange requested an extension of the 
Moratorium to evaluate the viability of the RCMMs and CTs in the 
proposed New Generation NYSE.\17\
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    \16\ See Securities Exchange Act Release No. 58845 (October 24, 
2008), 73 FR 64379 (October 29, 2008) (SR-NYSE-2008-46).
    \17\ See Securities Exchange Act Release Numbers 58033 (June 26, 
2008), 73 FR 38265 (July 3, 2008) (SR-NYSE-2008-49); 58713 (October 
2, 2008), 73 FR 59024 (October 8, 2008) (SR-NYSE-2008-96); 59069 
(December 8, 2008), 73 FR 76081 (December 15, 2008) (SR-NYSE-2008-
124).

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[[Page 17704]]

    The Next Generation NYSE is currently operating as a pilot 
scheduled to end on October 1, 2009. For the time period of July 2008 
to December 2008, RCMM and CT average trading volume did not exceed 
.0011% of the Exchange's total trading volume per month for that time 
period. On average over these six months, RCMMs comprised only .001% of 
the NYSE's trading volume. The review found that the CT class of Floor 
Trader still had not executed any transactions on the Floor as a result 
of the non-usage of the CT license and therefore provided no 
contribution to the market quality on the NYSE. In 2009, RCMM trading 
is reported to comprise approximately .001% of the total NYSE trading 
volume to date.
    In light of these statistics, the Exchange has concluded that the 
level of participation of the RCMMs and CTs no longer serve as viable 
supplemental market makers because they no longer contribute 
significantly to the overall liquidity available on the NYSE.
    In addition to reviewing the trading statistics of the RCMMs and 
the sole inactive CT, NYSE Market and NYSE Regulation reviewed the 
technology, operational and regulatory costs required to adequately 
support and surveil RCMM and CT trading activity in a predominantly 
electronic trading environment. The review included the projected costs 
for trading system enhancements for RCMM and CT trading, the cost of 
continued development of surveillance technology and procedures, and 
staff training and hours spent in these efforts. The NYSE's trading 
systems, including the hand-held devices used by Floor brokers on the 
NYSE, were not designed to facilitate trading by RCMMs and CTs under 
special supplemental market-making rules enacted when the NYSE was a 
manual trading center in which RCMMs and CTs traded on paper. To 
develop technology specifically designed to comport with the RCMM and 
CT trading rules in the context of Next Generation NYSE would not be 
cost effective in view of the minimal current trading volume of the 
five RCMMs and the nonexistent trading volume of the one registered CT. 
The fundamental changes in the securities markets generally and in the 
NYSE trading model in particular since the RCMM and CT rules were first 
enacted in the late 1970s and early 1980s have resulted in much higher 
trading volumes and message traffic through NYSE systems. The RCMM and 
CT rules were enacted for a marketplace that functioned much 
differently than today's high speed and high volume trading 
environment.
    There are now new opportunities for market participants to 
efficiently access the NYSE market. The NYSE has developed a new class 
of electronic liquidity providers, Supplemental Liquidity Providers 
(``SLPs'')\18\ that has largely supplanted the role once filled by 
RCMMs and CTs. SLPs are off-Floor entities that quote and trade on the 
NYSE electronically. The operation of SLPs is intended to provide 
incentives for quoting and to add competition to the existing group of 
Floor-based liquidity providers, the DMMs. An SLP is required to quote 
at the National Best Bid (``NBB'') or the National Best Offer (``NBO'') 
at least 5% of the trading day for each assigned security in round lots 
to maintain its status as an SLP. If an SLP posts liquidity in its 
assigned securities that results in an execution, the Exchange will pay 
the SLP a financial rebate per share for such executions provided that 
the SLP meets its monthly quoting requirement for rebates averaging 3% 
at the NBB or NBO in its assigned securities in round lots. The 
Exchange believes that this rebate program will encourage SLPs to 
aggressively provide liquidity to the NYSE market and will also provide 
customers with the premier venue for price discovery, competitive quote 
and price improvement.
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    \18\ See Securities Exchange Act Release No. 58877 (October 29, 
2008), 73 FR 65904 (November 5, 2008) (SR-NYSE-2008-108). See also 
NYSE Rule 1600.
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    Because of the electronic nature of SLP trading, the regulatory and 
technology considerations that exist with maintaining CTs and RCMMs as 
classes of Floor Traders on the NYSE are not present. The intent behind 
establishing the CT and RCMM classes of trading, i.e., providing 
additional liquidity in the NYSE market, is now best fulfilled through 
the SLP process. Given all of the above, the Exchange seeks to rescind 
CTs and RCMMs as valid classes of Floor Traders.
    The Exchange notes that while it is proposing the rescission of 
RCMMs and CTs as classes of traders, it is not rescinding membership to 
the Exchange. Those RCMMs and CTs currently trading on the Exchange 
will continue to be Exchange members but will not be permitted to trade 
for their proprietary accounts in their roles as RCMMs and CTs. RCMMs 
and CTs will continue to have electronic access to the market and are 
permitted to continue trading as a different class of trader subject to 
regulatory requirements to change their respective business models.
IV. Conforming Changes to NYSE Rules 36, 98, 111, 123, 476A, 800, 900 
and 1600
    The Exchange seeks to make conforming amendments to NYSE Rules 36, 
98, 111, 123, 476A, 800, 900 and 1600 to delete references to RCMMs and 
CTs throughout the rule text.
V. Conclusion
    RCMMs and CTs are no longer viable classes of Floor Traders due to 
the significant evolution of the NYSE marketplace since the enactment 
of the original rules establishing these classes of members. The 
existing RCMMs and sole CT no longer meet the objectives of adding 
depth and liquidity to the NYSE market and providing a degree of 
competition to the NYSE DMMs. The Exchange concludes that these classes 
of Floor Traders should be rescinded given the trading volumes 
associated with CTs and RCMMs and the considerable costs to regulate 
these classes of traders.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
and furthers the objectives of Section 6(b)(5) of the Act,\19\ in that 
it is designed 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.
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    \19\ 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

    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

[[Page 17705]]

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-2009-08 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSE-2009-08. 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 will also be available for 
inspection and copying at the principal office of the self-regulatory 
organization. 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-2009-08 and should be submitted on or before May 7, 2009.

    For the Commission, by the Division of Trading and Markets, 
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. E9-8732 Filed 4-15-09; 8:45 am]

BILLING CODE 8010-01-P