Document ID: SEC-2007-0553-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange LLC
Posted Date: 2007-04-17T04:00Z

[Federal Register: April 17, 2007 (Volume 72, Number 73)]
[Notices]               
[Page 19225-19227]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17ap07-88]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55615; File No. SR-NYSE-2007-34]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change To Amend NYSE Rule 80A.40(b) 
To Update the Definition of ``Program Trading,'' To Substitute 
Simplified Audit Trail Requirements, and To Make Conforming Amendments 
to NYSE Rule 410B

April 11, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on March 22, 2007, the New York Stock Exchange LLC (``NYSE'' 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 substantially by NYSE. 
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 proposes to amend NYSE Rule 80A.40(b) to update the definition 
of ``program trading'' by eliminating the pre-determined minimum dollar 
value requirement for trading strategies that involve the related 
purchase or sale of a ``basket'' or group of 15 or more stocks, to 
substitute simplified audit trail requirements, and to make conforming 
amendments to Rule 410B. The text of the proposed rule change is 
available at NYSE, http://www.nyse.com, and 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 included statements 
concerning the purpose of and basis for the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NYSE 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
    In order to improve the reporting and monitoring of program trading 
by the Exchange, NYSE proposes to clarify what constitutes program 
trading and to streamline the process for entering and identifying 
program trades. To accomplish this, the Exchange is proposes (i) to 
amend NYSE Rule 80A.40 to eliminate the minimum dollar value from the 
definition of program trading, and (ii) to substitute simplified audit 
trail requirements in place of the more cumbersome reporting 
requirements that currently apply to program trading. The proposed 
amendments also include certain conforming amendments to NYSE Rule 
410B. In connection with these changes, the Exchange also intends to 
issue guidance regarding the definition of a ``coordinated strategy,'' 
as that term is used in Rule 80A.40.
    Background. The Exchange adopted Rule 80A in the wake of the 1987 
market break to address various coordinated professional trading 
strategies, in particular, program trading that was using the cash 
market to take advantage of trading in the derivatives market. To 
ensure that the rule would encompass the various permutations that such 
trading strategies might take, the Exchange defined program trading as 
either index arbitrage or ``any trading strategy involving the related 
purchase or sale of a 'basket' or group of 15 or more stocks having a 
total market value of $1 million or more.'' The monetary value was 
believed at the time to capture program trading strategies that would 
be significant in the context of the market. Despite a significant 
increase in the size and value of trading in the market since 1987, 
however, this monetary component of the definition has not been updated 
since it was adopted.
    Proposed Redefinition of Program Trading. Given the technical and 
automated nature of the trading environment that exists today, the 
Exchange believes that the current definition of ``program trading'' is 
no longer workable, since, among other things, it captures certain 
computer-driven or algorithmic trading strategies that are not intended 
to be program trades. At the same time, certain strategies that could 
fairly be classified as programs--that is, strategies involving 15 or 
more stocks that are intended to be coordinated, but which do not meet 
the monetary threshold--are not being captured.
    In contrast to 1987, most firms today employ algorithmic trading to 
manage and carry out both plain-vanilla execution strategies that are 
not intended to be programs, including public-customer driven 
parameter-based trading (that is, trading in which the customer 
specifies certain desired execution conditions such as timing, pricing, 
quantity, or marketplace selection, and the algorithm evaluates market 
information and generates orders that best match the specified 
conditions without further human intervention), and more complex 
trading strategies that are intended to be programs. The Exchange 
therefore recognizes that not all computer-driven trading strategies 
constitute Program Trading. For example, if they otherwise lack the 
other definitional characteristics of program trading, algorithmic 
trading, volume-weighted average price (``VWAP'') trading, statistical 
arbitrage, and similar computer-driven trading strategies may not need 
to be classified or reported as a program simply because the strategy 
is executed through a computer model or ``black box.''
    This has led to regulatory confusion; indeed, member firms have 
informed the Exchange that in order to ensure full compliance with the 
rule, they feel compelled to report computer-driven trading strategies 
that meet the technical definition of a program even though they are 
not, in fact, intended as program trading.
    To address the issue of the overbroad definition of program trading 
and to improve the precision of program trade reporting, the Exchange 
proposes to amend the definition of program trading under NYSE Rule 
80A.40 to eliminate

[[Page 19226]]

the requirement that program trades must have a combined value of $1 
million or more. The Exchange believes that the minimum dollar value 
currently contained in Rule 80A.40 establishes an arbitrary and 
artificial bar for determining whether a coordinated strategy 
constitutes program trading. In the absence of the dollar threshold, 
the Exchange proposes assessing whether a trading program constitutes a 
coordinated strategy examining its attributes rather than relying on 
such an arbitrary limitation.
    To assist firms in determining whether a particular set of trades 
constitutes a ``program,'' the Exchange intends to issue guidance to 
member organizations regarding factors to consider in determining 
whether a trading strategy is ``coordinated.'' This guidance will focus 
on how the primary investment objective of the trading, as well as the 
linkage or dependency between and among simultaneous (or substantially 
simultaneous) trades in different securities, relate to the investment 
objective. As described more fully below, under the revised rule, the 
Exchange would consider any execution of 15 or more stocks that is 
entered as part of a single investment strategy (including liquidation, 
rebalancing, or realignment of a basket/portfolio) with the intention 
to execute all or most of the stocks to be a ``coordinated strategy.''
    ``Coordinated strategies'' would include any purchase or sale of 15 
or more stocks that is (i) coordinated pursuant to a broader investment 
strategy such as economic, financial, or fundamental characteristics 
(such as a particular industry, sector, or industry) or market 
activity, and (ii) where the execution of the securities within the 
portfolio is linked, as opposed to being merely coincidental single 
stock definitions. A coordinated strategy would include a portfolio or 
basket strategy of 15 or more stocks wherein each stock execution is 
dependent upon the execution of all or most of the securities within 
the portfolio or basket. And, as before, program trading would also 
include all index arbitrage trading. Accordingly, any strategy that 
attempts to capture identified mispricings between an S&P 500 component 
security and its related future as the filters for buying or selling 
such stock, regardless of the number of stocks involved, is a program.
    As noted above, not all computer-driven trading strategies would be 
defined as program trading. For example, portfolio VWAP transactions 
that attempt to provide a customer with an average price for the 
purchase or sale of stocks would not necessarily be a program. For VWAP 
trading to constitute a program, the trading would have to involve a 
portfolio or basket of 15 or more stocks as part of a coordinated 
strategy.
    In addition, pairs trading, in which stocks are put into pairs by 
fundamental or market-based similarities and traded versus each other, 
would not necessarily be program trading. For pairs trading to fall 
within the program trading definition, the engine or algorithm used for 
execution of the selected pairs would have to consist of a group of 
related stocks that would be defined as a program, e.g., an automative 
``pairs'' algorithm that typically trades more than 15 different 
automotive stocks.
    Streamlining Reporting of Program Trades. The Exchange is also 
proposing to streamline the reporting process that member organizations 
must follow when reporting program trading. Since 1988, the Exchange 
has required that member firms report program trading activities by the 
close of business on the second business day following the trade date 
on a Daily Program Trading Report (``DPTR''). Member firms currently 
file their DPTRs via an electronic filing platform operated by the 
Exchange.
    Because the DPTR is created after the trades have been executed, 
rather than in connection with the entry of orders at issue, the DPTR 
is potentially less accurate than determining program trading 
information based on audit trail information, which captures trading 
information at the time of execution. Moreover, because all information 
reported on the DPTR is already available to the Exchange via audit 
trail information, the DPTR has become redundant. Accordingly, to 
streamline the reporting process, the Exchange is proposing to 
eliminate the DPTR requirement, and to rely instead on audit trail 
information to determine whether firms are engaging in program trading. 
To assist in identifying program trading, the Exchange is redefining 
two of the eight existing program trading related audit trail account 
types so that member firms can mark the specific program trading 
strategy at the time of order entry and execution, rather than waiting 
to report via the DPTR.
    The Exchange does not believe that the proposed changes to Rules 
80A and 410B would in any way compromise its existing surveillances, or 
impair the ability to conduct additional surveillances, as necessary. 
To the contrary, the Exchange believes that the proposed changes to the 
definition of program trading and the revised audit trail information 
will lead to more focused surveillances for assessing whether member 
organizations engage in program trading.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \3\ 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 general, to protect 
investors and the public interest.
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    \3\ 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

    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 such 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 No. SR-NYSE-2007-34 on the subject line.

[[Page 19227]]

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-NYSE-2007-34. 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 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-2007-34 
and should be submitted on or before May 8, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-7224 Filed 4-16-07; 8:45 am]

BILLING CODE 8010-01-P