Document ID: SEC-2009-0542-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Change: New York Stock Exchange LLC and NYSE Alternext US LLC
Posted Date: 2009-04-20T04:00Z

[Federal Register: April 20, 2009 (Volume 74, Number 74)]
[Notices]               
[Page 18009-18012]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20ap09-123]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59755; File Nos. SR-NYSE-2009-18 and SR-NYSEAltr-2009-
15]

 
Self-Regulatory Organizations; New York Stock Exchange LLC and 
NYSE Alternext US LLC (n/k/a NYSE Amex LLC); Order Granting Approval of 
Proposed Rule Changes Amending Rule 123C to Provide the Exchanges with 
the Ability to Temporarily Suspend Certain Requirements Relating to the 
Closing of Securities on the Exchange

April 13, 2009.

I. Introduction

    On February 19, 2009, the New York Stock Exchange LLC (``NYSE'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
amend NYSE Rule 123C to provide the Exchange with the ability to 
temporarily suspend certain NYSE requirements relating to the closing 
of securities at the Exchange. On February 20, 2009, NYSE Alternext US 
LLC (n/k/a NYSE Amex LLC) (``NYSE Amex'' and, with NYSE, each an 
``Exchange'' and collectively, the ``Exchanges'') filed with the 
Commission, pursuant to Section 19(b)(1) of the Act \3\ and Rule 19b-4 
thereunder,\4\ a substantively identical proposed rule change to amend 
NYSE Amex Equities Rule 123C. The proposed rule changes were published 
for comment in the Federal Register on March 10, 2009.\5\ The 
Commission received no comments regarding the proposals. This order 
approves the proposed rule changes, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
    \5\ See Securities Exchange Act Release Nos. 59489 (March 3, 
2009), 74 FR 10330 (SR-NYSE-2009-18) and 59488 (March 3, 2009), 74 
FR 10334 (SR-NYSEAltr-2009-15) (each a ``Notice'' and collectively, 
the ``Notices'').
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II. Description of the Proposal

A. NYSE's October 2, 2008 Amendments to Rule 48

    On October 2, 2008, NYSE filed for immediate effectiveness to amend 
NYSE Rule 48 to provide NYSE with the ability to suspend certain rules 
at the close when extremely high market volatility could negatively 
affect the ability to ensure a fair and orderly close.\6\ NYSE amended 
Rule 48 on a temporary basis in order to respond swiftly to market 
conditions at that time. The Rule 48 amendments are scheduled to end on 
April 30, 2009.\7\
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    \6\ See Securities Exchange Act Release No. 58743 (October 7, 
2008), 73 FR 60742 (October 14, 2008) (SR-NYSE-2008-102) (referred 
to herein as ``NYSE's October 2, 2008 filing'').
    \7\ Rule 48.10. See also Securities Exchange Act Release Nos. 
59168 (December 29, 2008), 74 FR 483 (January 6, 2009) (SR-NYSE-
2008-139) and 59666 (March 31, 2009), 74 FR 15792 (April 7, 2009) 
(SR-NYSE-2009-35).
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    On December 1, 2008, NYSE Amex (then known as NYSE Alternext US 
LLC) relocated its equities trading to facilities located at NYSE's 
main trading floor at 11 Wall Street, New York, New York (the 
``Equities Relocation''). NYSE Amex's equity trading systems and the 
facilities at 11 Wall Street are operated by NYSE on behalf of NYSE 
Amex. In connection with the Equities Relocation, NYSE Amex adopted 
NYSE Rules 1-1004, subject to such changes as necessary to apply the 
rules to NYSE Amex, to govern trading on the NYSE Alternext Trading 
System beginning on December 1, 2008.\8\ In particular, among the rules 
adopted in substantively identical form were the rules at issue in this 
proposal--most notably, NYSE Rules 48, 52, and 123C.
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    \8\ See Securities Exchange Act Release Nos. 58705 (October 1, 
2008), 73 FR 58995 (October 8, 2008) (SR-Amex-2008-63) and 59022 
(November 26, 2008), 73 FR 73683 (December 3, 2008) (SR-NYSEALTR-
2008-10).
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    The temporary provisions of Rule 48 provide that a qualified 
Exchange officer could declare an extreme market volatility condition 
before the scheduled close of trading in cases where the Exchange noted 
volatility during the day's trading session and evidence of significant 
order imbalances at the close.\9\ A declaration of extreme market 
volatility at the close under Rule 48 permits each Exchange to 
temporarily suspend Rule 52 (Hours of Operation) to allow the DMM to 
solicit and enter into Exchange systems additional orders in order to 
offset any imbalance in a security at the close.\10\ Rule 48 requires 
that any additional interest be represented manually on the Floor by an 
Exchange Floor broker.\11\ A declaration of extreme market volatility 
at the close also permits each Exchange to temporarily suspend NYSE 
Rules 123C(1) and (2) (Market on the Close Policy and Expiration 
Policy) in order to allow cancellation or reduction of market-at-the-
close (``MOC'') and limit-at-the-close (``LOC'') orders after 3:50 p.m. 
if such orders are the result of a legitimate error and would cause 
significant price dislocation at the close, among other 
requirements.\12\ Each Exchange is required to make a reasonable effort 
to consult with Commission staff before declaring an extreme market 
volatility condition and granting a suspension of NYSE rules or 
procedures.\13\
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    \9\ Rule 48(c)(1)(A).
    \10\ Rule 48(b)(2)(A).
    \11\ Rule 48(b)(2)(A)(ii).
    \12\ Rule 48(b)(2)(B).
    \13\ Rule 48(c)(2).
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    The Exchanges now propose to adopt the amendments to Rule 48 on a 
permanent basis by deleting these provisions from Rule 48 and moving 
them to Rule 123C. As part of the amendments to Rule 123C, the 
Exchanges further propose modifying the terms of the temporary 
suspensions by permitting the Exchange to invoke such relief on a 
security-by-security basis without first declaring a Floor-wide extreme 
market volatility condition and codifying certain

[[Page 18010]]

practices for the entry of orders after 4 p.m.

B. Proposed Amendments to Rule 123C

1. Modification of the Requirements for Temporary Suspensions
    As noted above, the amendments to Rule 48 were adopted by NYSE as 
an emergency measure to respond to the extreme market volatility that 
the markets experienced in September and October 2008. Under current 
Rule 48, each Exchange must first declare a Floor-wide extreme market 
volatility condition before it can consider, on a security-by-security 
basis, whether to temporarily suspend either Rule 52 or Rule 123C(1) or 
(2). The Exchanges stated in their respective Notices that they believe 
the requirement to declare a Floor-wide extreme market volatility 
condition before 4 p.m. could hamper their ability to invoke the 
temporary suspensions when they are needed most--for example, when 
during normal market conditions that would not otherwise warrant a Rule 
48 condition at the close, Exchange systems receive in the seconds 
before the close a large market order in a security that by itself 
creates the type of extreme imbalance that would merit a temporary 
suspension of Rule 52. The Exchanges therefore believe that the ability 
to temporarily suspend rules at the close should be available on a 
security-by-security basis as part of Rule 123C, which governs the 
closing process at the Exchange.\14\ The Exchanges therefore propose 
deleting the extreme market volatility at the close condition from Rule 
48 and returning Rule 48 to a form substantively identical to the form 
of NYSE Rule 48 prior to NYSE's October 2, 2008 filing amending that 
rule.
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    \14\ See proposed Rule 123C(8)(c).
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2. Temporary Suspension of Rule 52
    Proposed Rule 123C(8)(a)(1) would permanently establish the 
temporary provisions of Rule 48(b)(2)(A) that give each Exchange the 
ability to temporarily suspend Rule 52 for the sole purpose of allowing 
the entry of orders after 4 p.m. to offset an extreme order imbalance 
at the close. The Exchanges propose to adopt without change the 
language of Rule 48(b)(2)(A)(i) and (iii) (proposed as Rule 
123C(8)(a)(1)(i) and (v)) concerning, respectively, the purpose of 
soliciting orders after 4 p.m. and the use of a ``designated Exchange 
database'' \15\ on an ``as of'' basis following execution of an order.
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    \15\ In the Notices, the Exchanges refer to FESC as the relevant 
``designated Exchange database.''
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    The Exchanges propose to codify in Rule 123C(8)(a)(1)(ii) the 
requirement that when soliciting orders to offset an imbalance in a 
security that may exist after 4 p.m., such interest will be solicited 
from off-Floor participants directly and via their Floor broker 
representatives. Such solicitation requests shall be transmitted 
electronically both off-Floor and on-Floor and shall include, at a 
minimum, information about the security symbol, the imbalance amount 
and side, the last sale price, and an order acceptance cut-off time 
(which in no event may be later than 4:30 p.m.). The Exchanges also 
propose adding conditions on the type of order that may be entered in 
response to a solicitation request. As proposed in Rule 
123C(8)(a)(1)(iii), any offsetting interest received in response to a 
solicitation request must be a limit order priced no worse than the 
last sale and must be irrevocable.
    The Exchanges propose to maintain in Rule 123C(8)(a)(1)(iii) that 
any offsetting interest must be represented by a Floor broker. As noted 
in the NYSE's October 2, 2008 filing to amend Rule 48, Exchange systems 
do not have the capability to receive electronic interest after 4:00 
p.m. The Exchanges stated in their respective Notices that the time and 
cost necessary to reconfigure Exchange systems to electronically accept 
orders after 4 p.m. for this limited purpose would far outweigh any 
benefit that may accrue from such technology changes. In any event, the 
Exchanges believe that more information is necessary before they 
undertake to implement any such technology change. The Exchanges 
therefore propose that six months after the approval of this proposed 
rule change, the Exchanges will provide the Commission with information 
regarding how many times a Rule 52 temporary suspension under proposed 
Rule 123C(8)(a)(1) has been invoked. At that time, the Exchanges and 
the Commission can make a more informed decision of whether the benefit 
in accepting orders electronically after 4 p.m. outweighs the costs 
associated with making such changes. To provide both the Exchange and 
the Commission with time to evaluate the proposed rule, the Exchange 
proposes that Rule 123C(8)(a)(1) be approved on a Pilot basis, to end 
six months after the date of this order.
    The Exchanges also propose to add to the rule certain parameters 
regarding the timing of the closing of a security when such offsetting 
interest is solicited. As proposed in Rule 123C(8)(a)(1)(iv), in such 
circumstances, the DMM should close the security the earlier of the 
order acceptance cut-off time or the time that the imbalance is paired 
off at or reasonably contiguous to the last sale price.\16\ This 
provision is intended to require the DMM to arrange for a fair and 
orderly close that is as close to 4 p.m. as possible, notwithstanding 
the fact that the Exchange seeks additional offsetting interest after 4 
p.m. Finally, the Exchanges propose that any offsetting interest 
entered after 4 p.m., but before the DMM closes the security, would 
trade on parity.\17\
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    \16\ A ``reasonably contiguous to the last sale price'' means a 
price point that is within cents of the last sale price, and would 
be a price point that during a regular closing auction would not be 
considered a dislocating closing price as compared to the last sale 
price. See Rule 123C(8)(a)(1)(iv).
    \17\ The Exchange notes that all MOC and marketable LOC orders 
entered before 4 p.m. that otherwise would have participated in the 
close will continue to participate in the close. Because the MOC/LOC 
imbalance dictates the closing price (see Rule 123C(3)), any 
additional interest solicited after 4 p.m. under proposed Rule 
123C(8)(a)(1) is simply to ensure that the existing imbalance of MOC 
and marketable LOC orders can be filled at a price that does not 
cause a significant price dislocation from the last sale price.
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3. Temporary Suspensions Under Rule 123C(1) and (2)
    The Exchanges propose to adopt permanently the provisions of Rule 
48(b)(2)(B) as proposed Rule 123C(8)(a)(2), without any change. 
Therefore, each Exchange would continue to have the ability to 
temporarily suspend, on a security-by-security basis, the Rule 123C(1) 
and (2) requirements that MOC and LOC orders cannot be cancelled or 
reduced after 3:50 p.m. for MOC and LOC orders that are the result of a 
legitimate error and would cause significant price dislocation at the 
close.
4. Parameters for Obtaining Temporary Rule Suspensions
    The Exchanges propose codifying the practices concerning how a 
temporary suspension under proposed Rule 123C(8)(a) would be invoked 
and who should be involved. As proposed in Rule 123C(8)(b), only the 
DMM assigned to a particular security may request a temporary 
suspension under proposed section 8(a) of the Rule. The Exchanges 
argued in their respective Notices that because the DMM is responsible 
for facilitating the close of trading in its registered securities, the 
DMM is in the unique position to know whether he or she would need 
additional interest to ensure a fair or orderly close.
    To ensure that such temporary suspensions are not invoked 
indiscriminately, the Exchanges propose that any such determination, as 
well as any entry or cancellation of orders or closing of a security 
under proposed Rule 123C(8)(a), must be approved by

[[Page 18011]]

either an Executive Floor Governor or a qualified NYSE Euronext 
employee, as defined in Rule 46(b)(v). The Exchange also proposes 
requiring that any temporary suspensions under proposed Rule 123C(8)(a) 
should be under the supervision of a qualified Exchange Officer, as 
defined in Rule 48(d). To assist the DMM and Exchange officials, 
proposed Rule 123C(8)(b) identifies a number of factors that may be 
considered when making such a determination. Such factors include, but 
are not limited to, when the order(s) that impacted the imbalance were 
entered into Exchange systems or orally represented to the DMM; the 
impact of such order(s) on the closing price of the security; the 
volatility of the security during the trading session; and the ability 
of the DMM to commit capital to dampen the price dislocation.

C. Proposed Amendment to Rule 48(c)(2)

    In addition to the above-described amendments, the Exchanges also 
propose to amend Rule 48(c)(2), which concerns the method by which each 
Exchange notifies Commission staff when it declares a Rule 48 extreme 
market volatility condition.
    The current rule provides that the qualified Exchange officer will 
make a reasonable effort to consult with Commission staff before 
declaring an extreme market volatility condition and granting a 
suspension of the Exchange's rules or procedures. In the event that the 
qualified Exchange officer cannot reach the Commission staff, the 
qualified Exchange officer will, as promptly as practicable in the 
circumstances, inform the Commission staff of such declaration.
    Given the limited relief that can be granted during a Rule 48 
condition--certain Floor Official approvals are suspended and mandatory 
indications can be suspended--the Exchanges argued in their respective 
Notices that the requirement to consult with Commission staff before 
declaring an extreme market volatility condition imposes an undue 
burden on regulatory resources. Accordingly, the Exchanges propose to 
amend Rule 48(c)(2) to delete the requirement that the qualified 
Exchange officer undertake reasonable efforts to consult with 
Commission staff before declaring an extreme market volatility 
condition. As required by the rule, each Exchange will continue to 
inform the Commission staff, as promptly as practicable under the 
circumstances, when it has declared a Rule 48 extreme market volatility 
condition.

III. Commission's Findings and Order Granting Approval of the Proposed 
Rule Change

    After careful review, the Commission finds that the proposed rule 
changes are consistent with the requirements of the Act and the rules 
and regulations thereunder applicable to a national securities 
exchange.\18\ In particular, the Commission finds that the proposed 
rule changes are consistent with Section 6(b)(5) of the Act \19\ in 
that they 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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    \18\ In approving these proposed rule changes, the Commission 
notes that it has considered the proposed rules' impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \19\ 15 U.S.C. 78f(b)(5).
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    The Exchanges propose to eliminate the requirement that an Exchange 
first declare a Floor-wide extreme market volatility condition before 
it can consider, on a security-by-security basis, whether to 
temporarily suspend either Rule 52 or Rule 123C(1) or (2). The 
Commission notes that an extreme order imbalance at the close may be 
the result of Floor-wide volatility, but may also be a result of 
isolated volatility in a particular security, or of a single large 
order received close to the scheduled close. Therefore, the Commission 
agrees that the requirement that a Floor-wide extreme market volatility 
condition precede the invocation of temporary suspensions pursuant to 
Rule 128(c)(8) could hamper the Exchanges' ability to use Rule 
128(c)(8) to help ensure a fair and orderly close in a specific 
security.
    The Exchanges propose to make permanent and move to Rule 
123C(8)(a)(1) the temporary provisions permitting the Exchanges to 
suspend Rule 52, regarding hours of operation, to permit DMMs to 
solicit and enter orders into Exchange systems after the scheduled 
close in order to offset an extreme order imbalance. As described 
above, because Exchange systems are not configured to accept orders 
electronically after 4 p.m., any offsetting interest submitted by 
Exchange members in response to a solicitation for offsetting interest 
are required by Rule 123C(8)(a)(iii) to be represented by a Floor 
broker.
    The Exchanges have argued in their respective Notices that 
requiring Floor brokers to represent offsetting interest does not 
unfairly discriminate against any market participants. The Exchanges 
state that the requirement to use a Floor broker, who would be acting 
only as an agent, does not deny anyone access to trading at the 
Exchange. And while the Commission notes that submitting order through 
a Floor broker might be more costly for some members than directly 
entering the offsetting interest orders electronically, the Exchanges 
assert that the Exchange customers that would typically respond to a 
solicitation request are sophisticated market participants who likely 
already have, or could easily arrange for, a relationship with a Floor 
broker to represent orders on their behalf, and that furthermore such 
customers have the wherewithal to enter into arrangements with Floor 
brokers that are financially competitive with entering orders directly 
into Exchange systems, e.g., via reduced commissions or pass through of 
Floor broker rebates.
    The Exchanges also state that, though it would be possible to 
reconfigure Exchange systems to accept orders electronically after 4 
p.m., to do so would be costly, and that the benefit to such a 
reconfiguration would be limited, since the temporary suspension of 
Rule 52 to attract offsetting interest is intended to be used for 
extreme, and likely rare, circumstances where there exists such a large 
imbalance at the close that the DMM could not close the security 
without significant price dislocation.\20\ While the elimination of the 
Floor-wide declaration of an extreme market volatility condition as a 
prerequisite for suspending Rule 52 may increase the likelihood of Rule 
52 suspensions on the Exchange, the Commission notes that other 
elements of Rule 128(c)(8), such as Executive Floor Governor oversight, 
are designed to restrict suspension of Rule 52 to situations where it 
is necessary to maintain a fair and orderly market.
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    \20\ For example, NYSE reports that, in the period from October 
2, 2008, when the Exchange adopted the amendments to Rule 48, to 
February 19, 2009, when NYSE filed their proposed rule change, NYSE 
invoked Rule 48 (i.e., declared a floor-wide extreme market 
condition) at the close eight times. However, because the DMM does 
not know what the actual imbalance will be until 4 p.m., during that 
time NYSE solicited offsetting interest for only one security on one 
such trading day.
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    The Commission notes that the Exchanges have proposed to implement 
Rule 128(c)(a)(1) for a six-month pilot period, and have agreed to 
provide to the Commission information regarding how many times a Rule 
52 temporary suspension under proposed Rule 123C(8)(a)(1) has been 
invoked during such period. Such information should assist the 
Commission in making a determination as to whether the requirement that 
only Floor brokers may represent offsetting interest is

[[Page 18012]]

appropriate. Thus, the Commission approves Rule 123C(8)(a)(1) on a 
Pilot basis, to end six months after the date of this order.
    The Commission finds the proposal to permanently establish the 
provisions allowing for temporary suspension of Rule 123C's restriction 
on canceling or reducing market-at-the-close and limit-at-the-close 
orders to be consistent with the Act. The Exchanges' ability to suspend 
these restrictions is narrowly drawn--it would only affect MOC or LOC 
orders that are both clearly erroneous and would cause a significant 
dislocation in the closing price--in order to ensure its use will be 
consistent with the removal of impediments to, and perfection of the 
mechanism of, free and open markets on the Exchanges. Similarly, the 
requirement for overview by an Executive Floor Governor or qualified 
NYSE Euronext employee should help to ensure that only in extreme 
situations involving significant price dislocation at the close are the 
provisions of Rule 128(C)(8) employed.
    Finally, given that the Exchanges anticipate their uses of Rule 
123C(8) to suspend Exchange rules will be infrequent and, moreover, 
given the quick decisions required in many cases where an extreme 
market condition is declared, the Commission accepts the Exchanges' 
assertion that requiring the Exchange to notify Commission staff in 
advance may be unduly burdensome. Accordingly, the Commission finds the 
proposed amendment to Rule 48(c)(2), requiring each Exchange to notify 
Commission staff of the declaration of an extreme market condition as 
soon as practicable after the fact, to be consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule changes, as amended (SR-NYSE-2009-18 
and SR-NYSEAltr-2009-15) be, and they hereby are, approved.
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    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-8878 Filed 4-17-09; 8:45 am]

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