Document ID: SEC-2007-0802-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange LLC
Posted Date: 2007-06-12T04:00Z

[Federal Register: June 12, 2007 (Volume 72, Number 112)]
[Notices]               
[Page 32386-32389]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12jn07-84]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55859; File No. SR-NYSE-2006-28]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Amendment No. 4 to Proposed Rule Change and Order 
Granting Accelerated Approval of Proposed Rule Change as Modified by 
Amendment Nos. 2, 3, and 4 Relating to NYSE Rules 134 and 411

June 5, 2007.

I. Introduction

    On May 2, 2006, the New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934, as amended (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend NYSE Rules 134 
(Differences and Omissions-Cleared Transactions) and 411 (Erroneous 
Reports). On September 22, 2006, NYSE filed Amendment No. 1 to the 
proposed rule change. On February 20, 2007, NYSE filed Amendment No. 2

[[Page 32387]]

to the proposed rule change. The proposed rule change as modified by 
Amendment No. 2 was published for comment in the Federal Register on 
March 6, 2007.\3\ The Commission received no comments on the proposal. 
On March 22, 2007, NYSE filed Amendment No. 3 to the proposed rule 
change.\4\ On May 30, 2007, NYSE filed Amendment No. 4 to the proposed 
rule change.\5\ This order approves the proposed rule change, as 
modified by Amendment Nos. 2, 3, and 4, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 55361 (February 27, 
2007), 72 FR 9985 (``Notice'').
    \4\ In Amendment No. 3, the Exchange made technical changes to 
the rule text of the proposed rule change to correctly identify the 
numbering of NYSE Rule 134(g)(i) and (ii) as proposed new text. 
These technical changes were reflected in the Notice. See footnote 5 
of the Notice. This is a technical amendment and is not subject to 
notice and comment.
    \5\ In Amendment No. 4, the Exchange made changes to the rule 
text of the proposed rule change to clarify the meaning of the term 
``system malfunction'' contained in proposed NYSE Rule 134(h). The 
text of Amendment No. 4 is available on the Exchange's Web site 
(http://www.nyse.com), at the Exchange's Office of the Secretary, 

and at the Commission's Public Reference Room.
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II. Description

A. Current Practice

    Currently, recognized trading errors fall into two categories. The 
first category applies to held \6\ and not held \7\ orders and includes 
trades that are mistakenly executed outside the written order 
instructions. These types of errors encompass situations where the 
transaction was incorrectly executed: (i) In the wrong security; (ii) 
on the wrong side of the market; (iii) outside of the price 
instructions; (iv) for a quantity greater than specified in the 
instructions; or (v) duplicating a prior execution of the same original 
order. The second category of trading errors currently applies only to 
held orders and involves situations where a held order was executable 
in the prevailing market but the Floor broker failed to take advantage 
of the opportunity to execute the order at that time.
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    \6\ A ``held'' order is a market or limit order that the broker 
must execute as instructed without discretion as to the time of an 
execution.
    \7\ A ``not held'' order is a market or limit order that gives 
the broker both time and price discretion to attempt to get the best 
possible execution.
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    Under the current NYSE rules and interpretations, a Floor broker 
may use his or her error account to ``assume or acquire'' a position as 
a result of a recognized trading error so that the customer receives 
the trade he or she would have received had the recognized trading 
error not occurred. However, a Floor broker is not permitted to use his 
or error account in cases involving trading errors that are not 
recognized by the Exchange. Instead, in such cases, a Floor broker 
would generally issue a difference check \8\ or offer a commission 
adjustment to resolve any monetary disadvantage suffered by the 
customer.\9\ According to the Exchange, the issuance of the difference 
check or commission adjustment ultimately is not in the best interest 
of the customer because the administrative cost associated with the 
processing of the difference check or commission adjustment ultimately 
is borne by the customer and thus the remedy does not serve to make the 
customer whole. In addition, according to the Exchange, many 
institutional investors do not want the administrative burden of 
processing a difference check or commission adjustment as a result of 
the Floor broker's failure to execute a not held order due to 
administrative mistake or system malfunction.
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    \8\ A ``difference check'' is a check issued to the customer by 
the member to cover the monetary difference between the execution 
price and the price the customer and the member agree was the proper 
price.
    \9\ If, at the time the Floor broker identifies the execution 
failure, the customer's order can be executed in the market at an 
equal or better price than the customer could have received had the 
order been executed in the prevailing market, then the Floor broker 
will execute the order. In the event the market is adverse to the 
customer's interest at the time the error is identified, under the 
current rules and interpretation, the remedy is to have the Floor 
broker issue a difference check or offer a commission reduction to 
address any disadvantage to the customer. See NYSE Regulation, 
Information Memorandum 02-19, issued April 17, 2002, clarifying the 
application of NYSE Rules 134, 411, and 407A.
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B. Proposed Amendments to NYSE Rule 134 (Differences and Omissions-
Cleared Transactions

    The Exchange proposes to amend NYSE Rule 134 to codify the first 
category of recognized trading errors. Specifically, NYSE Rule 134(g) 
would define a trading error to include situations when an order is 
executed outside of a customer's instructions as entered in the 
electronic order tracking systems \10\ of the Exchange. Types of 
recognized trading errors would include, but are not limited to, the 
execution of a held or not held order: (i) In the incorrect security; 
(ii) on the wrong side of the market; (iii) at a price outside the 
price instructions; (iv) for a quantity of shares greater than the 
amount of shares specified in the order instructions; or (v) the 
execution of an order in duplicate.\11\ In addition, Rule 134(g)(ii) 
would expand the type of recognized trading errors to include 
situations where a member fails to execute a not held order because he 
or she committed an error as to symbol, side or price in the execution 
of said order.\12\
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    \10\ See NYSE Rule 123(e).
    \11\ See proposed NYSE Rule 134(g)(i).
    \12\ See proposed NYSE Rule 134(g)(ii).
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    The Exchange also proposes to add Rule 134(h)(i) to codify the 
second category of recognized trading errors covering situations where 
the Floor broker failed to execute a held order that was executable in 
the prevailing market.\13\
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    \13\ See proposed NYSE Rule 134(h)(i).
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    The Exchange also proposes to add Rule 134(h)(ii) to the second 
category of recognized trading errors to cover those situations where a 
Floor broker failed to execute a not held order, in whole or in part, 
because the order was lost, misplaced or the order remains unexecuted 
as a result of a system malfunction.\14\ In addition to previously 
sanctioned uses of a Floor broker's error account, a Floor broker would 
now be allowed utilize his or her error account, under NYSE Rule 
134(j)(ii), to execute a customer's not held order in alignment with 
the Consolidated Tape, when the not held order remains unexecuted as a 
result of the order being lost or misplaced or as a result of a system 
malfunction.\15\ To prevent abuse of the proposed new rules, the 
Exchange is also amending NYSE Rule 134(d)(iii) to require a Floor 
broker to keep contemporaneous records documenting the circumstances 
surrounding errors. A Floor broker would be required to make and keep a 
time stamped record \16\ of the error including supporting 
documentation of the error.\17\ In addition, the Member Firm Regulation 
Division of NYSE Regulation, Inc. would include a review of these 
records during the course of its routine member firm examinations. The 
burden of proof would be on the Floor broker to substantiate that a 
legitimate error occurred.\18\
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    \14\ See proposed NYSE Rule 134(h)(ii). In Amendment No. 4 the 
Exchange added language to the proposed rule text to clarify that a 
system malfunction refers to the failure of physical equipment, 
devices and/or programming employed by the Floor broker or otherwise 
provided by the Exchange and used in the execution of orders.
    \15\ See proposed NYSE Rule 134(j)(ii).
    \16\ See proposed NYSE Rule 134(i).
    \17\ The record must include the date and time of the error, the 
date and time the error was discovered, the size of the error, the 
stock in which the error occurred, the original instructions, the 
names of all involved parties including the client and any upstairs 
trader, a detailed narrative of how the error occurred, detail 
narrative of discussions with relevant parties, the steps taken to 
correct the error and the ultimate resolution of the error. See 
proposed NYSE Rule 134(j)(iii).
    \18\ See proposed NYSE Rule 134(j)(iii).

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[[Page 32388]]

C. Proposed Amendments to NYSE Rule 411

    When a Floor broker commits an error as to security, side or price, 
there are instances where the Floor broker issues a report to the 
customer as a result of the execution. Currently, pursuant to NYSE Rule 
411, in instances where a Floor broker issued a report to a customer 
based on a transaction that was made outside of the customer's 
instructions on a not held order, the Floor broker would be required to 
rescind the report, thus leaving the customer's order unexecuted and 
disadvantaging the customer. To allow the Floor broker to utilize his 
or her error account or the error account of the member organization to 
alleviate any disadvantage to the customer, the Exchange proposes to 
amend NYSE Rule 411 to allow a Floor broker to treat ``erroneous 
reports'' \19\ as ``erroneous trades'' when the Floor broker committed 
an error as to security, side, or price.
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    \19\ An ``erroneous report'' is a report of an execution that is 
incorrect as to stock, price or whether an execution actually took 
place.
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    Pursuant to the proposed rule change, a Floor broker would be 
permitted to treat an ``erroneous report'' as an ``erroneous trade'' 
when the price and size of the order would have been executable in the 
market at or near the time of the erroneous transaction. Specifically, 
the erroneous report based on a transaction that was made in error as 
to security, side or price would stand, provided that the price and 
size of the erroneous report were within the range of prices and sizes 
in the specified security reported to the NYSE portion of the 
Consolidated Tape on the day in which the order was executed.\20\ The 
Floor broker would be required to report the error to the customer, 
including explaining to the customer whether the error was favorable or 
unfavorable to the customer.\21\ The Floor broker also would be 
required to document on a trade-by-trade basis, the name of the 
individual authorized to accept the erroneous report for the customer, 
the amount of the error and whether the error was favorable to the 
customer.\22\ The Floor broker would then treat the erroneous report as 
though it was an erroneous trade and his or her error account would 
become the opposite side to the report.\23 \ In addition, the Floor 
broker would assume any loss incurred and any profit that resulted 
would be paid to the New York Stock Exchange Foundation \24\ as 
currently required by NYSE Rule 411(a)(ii)(5). Thus, any disadvantage 
would be borne by the Floor broker who was responsible for committing 
the error, and not by the customer.
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    \20\ See proposed NYSE Rule 411(a)(iv)(1).
    \21\ See proposed NYSE Rule 411(a)(iv)(2).
    \22\ See proposed NYSE Rule 411(a)(iv)(3).
    \23\ See proposed NYSE Rule 411(a)(iv)(4).
    \24\ See proposed NYSE Rule 411(a)(iv)(5).
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III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\25\ In 
particular, the Commission believes that the proposal is consistent 
with Section 6(b)(5) of the Act,\26\ which require that the rules of an 
exchange be designed to promote just and equitable principles of trade, 
remove impediments to, and perfect the mechanism of, a free and open 
market and a national market system, and, in general, protect investors 
and the public interest. The Commission believes that the proposed 
rules provide for a fair, transparent, and reasonable process in which 
NYSE Floor brokers can correct trading errors. In particular, the 
Commission believes that it is appropriate for the Exchange to codify 
and thus make transparent its processes regarding the use of a Floor 
Broker's error account. The Commission notes that the proposed rule 
change is designed to provide Floor brokers with greater flexibility in 
using error accounts to correct trading errors in a manner that is less 
burdensome for customers. The Commission also notes that the proposed 
rule change includes recordkeeping requirements that will help the 
Exchange to monitor any potential abuse of the rule.
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    \25\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \26\ 15 U.S.C. 78f(b)(5).
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    Pursuant to Section 19(b)(2) of the Act,\27\ the Commission finds 
good cause for approving the proposal prior to the thirtieth day after 
the publication of the proposal, as modified by Amendment No. 4, in the 
Federal Register. The revision to the proposed rule change made by 
Amendment No. 4 does not raise any novel or substantive regulatory 
issues, and simply clarifies the meaning of a term in the proposed rule 
change. Therefore, the Commission finds good cause for approving the 
amended proposal on an accelerated basis.
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    \27\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the proposed rule change, as modified by Amendment 
No. 4, 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-2006-28 on the subject line.

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-2006-28. 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-NYSE-2006-28 and should be submitted on or before July 
3, 2007.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\28\ that the proposed rule change (SR-NYSE-2006-28), as modified 
by Amendment Nos. 2, 3, and 4, is hereby approved on an accelerated 
basis.
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    \28\ 15 U.S.C. 78s(b)(2).

[[Page 32389]]

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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-11188 Filed 6-11-07; 8:45 am]

BILLING CODE 8010-01-P