Document ID: SEC-2007-1420-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange LLC
Posted Date: 2007-10-10T04:00Z

[Federal Register: October 10, 2007 (Volume 72, Number 195)]
[Notices]               
[Page 57622-57624]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10oc07-129]                         

[[Page 57622]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56599; File No. SR-NYSE-2007-93]

 
Self-Regulatory Organizations; New York Stock Exchange, LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
and Amendment No. 1 Thereto Relating to Rule 70 (Bids and Offers) and 
Rule 104 (Dealings by Specialists)

October 2, 2007.
    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 September 28, 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 and 
II below, which Items have been substantially prepared by the Exchange. 
On October 2, 2007, the Exchange filed Amendment No. 1 to the proposed 
rule change.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaces and supersedes the original filing 
in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to amend Exchange Rule 70 (Bids and 
Offers) and Exchange Rule 104 (Dealings by Specialists) to reduce the 
requirement that a Floor broker and a specialist, respectively, post 
1,000 shares of displayed liquidity at the Exchange best bid or offer 
in order to use the reserve function. The text of the proposed rule 
change is available on the NYSE's Web site (http://www.nyse.com), at 

the NYSE, 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, the Exchange 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. The Exchange 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 seeks to amend Exchange Rules 70.20 and 104(d) to 
reduce the requirement that a Floor broker and a specialist, 
respectively, post 1,000 shares of displayed liquidity at the Exchange 
best bid or offer in order to use the reserve function.
a. Current Ability to Use Reserve Function
    Currently, Floor brokers' interest is represented electronically by 
including these orders in a separate file (``Floor broker agency 
interest file'') within the Exchange's Display Book system.\4\ Floor 
brokers are permitted to place the liquidity representing customer 
orders at or outside the best bid or offer on the Exchange (``Exchange 
BBO''). Similarly, specialists have the ability to place in a separate 
file (``specialist interest file'') within the Display Book system 
their dealer interest at prices at or outside the Exchange BBO. 
Pursuant to Exchange Rules 70.20 and 104(d), some of the interest in 
either of these files that is at the Exchange BBO may, at the choice of 
the Floor broker or specialist, be non-displayed interest. That is, the 
Floor broker or specialist may decide to hold additional interest in 
``reserve'' and not have it be part of the published bid or offer. 
Reserve interest is eligible to participate in automatic executions on 
the Exchange after displayed interest on that side of the market 
trades. Reserve Floor broker interest and specialist interest 
participate on parity with each other when trading with contra-side 
interest.
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    \4\ The Display Book[supreg] system is an order management and 
execution facility. The Display Book system receives and displays 
orders to the specialists, contains the Book, and provides a 
mechanism to execute and report transactions and publish the results 
to the Consolidated Tape. The Display Book system is connected to a 
number of other Exchange systems for the purposes of comparison, 
surveillance, and reporting information to customers and other 
market data and national market systems.
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    Exchange Rules 70.20 and 104(d) further provide that Floor brokers 
and specialists, respectively, must display a minimum of 1,000 shares 
of interest at the Exchange BBO on the same side of the market in order 
to maintain undisplayed reserve interest at that price. For example, if 
a Floor broker or specialist were to choose to have non-displayed 
interest in their files at the Exchange bid, 1,000 shares must be made 
part of the disseminated bid.\5\ Both Rule 70.20 and Rule 104(d) 
require that, if an execution occurs that does not exhaust displayed 
Floor broker or specialist interest at the Exchange BBO, the displayed 
interest would automatically be replenished from any reserve interest 
so that at least 1,000 shares (or whatever amount remains if less than 
1,000 shares) would be displayed.
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    \5\ Specialists were originally required to have 2,000 shares of 
displayed interest at the Exchange BBO in order to have non-
displayed reserve interest. However, on June 30, 2006, the 
Commission approved a proposed rule change submitted by the Exchange 
to conform the minimum display to that for Floor brokers. See 
Securities Act Release No. 54086 (June 30, 2006), 71 FR 38953 (July 
10, 2006) (SR-NYSE-2006-24).
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b. Reduction of Minimum Display Requirement
    The Exchange is proposing to reduce the minimum display requirement 
that Floor brokers and specialists must meet to one round-lot (for most 
stocks, 100 shares) in order to have non-displayed interest in the 
Exchange market. The ability to have reserve interest was designed, in 
part, to allow Floor brokers flexibility to determine the best way in 
which to represent customer orders, especially larger customer orders. 
One way in which they can do this is to decide what portion of customer 
interest should be displayed based on the Floor broker's sense of the 
market in a particular security. The reserve gives customers the 
advantage of both auction market and automatic execution capability, 
without the risk of missing the market.
    The Exchanges believe that, for specialists, the reserve function 
allows the possibility of more liquidity at the best bid or offer price 
and facilitation of single-price executions on behalf of customers.
    The Exchange has found that the current display requirement may be 
acting as a hindrance to the utilization of Floor broker agency 
interest and specialist interest file reserve functionality. For many 
stocks traded on the Exchange, 1,000 shares would be a sizeable order 
or would represent a sizeable position commitment for a specialist 
based on the trading characteristics of the stock. In less active 
securities, there would be no ability to use the reserve functionality 
since there would not be a sufficient volume of shares available beyond 
the current minimum display requirement.
    This can have a compounding effect of inhibiting trading that could 
take place if reserves could be available for executions beyond the 
displayed

[[Page 57623]]

quotation. In addition, the Exchange is aware that concerns associated 
with possible signaling of interest have arisen in connection with the 
display requirement. The Exchange states that, as trade and quote sizes 
have declined on the Exchange,\6\ analysis of displayed amounts or the 
absence of a displayed amount can signal that there is no reserve 
available and inform a trader or an algorithm that order size can be 
limited at a particular price point. Additional interest may then be 
priced at higher or lower prices, creating more volatility.
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    \6\ The average size of quotes on the Exchange has declined from 
2,146 shares to 1,231 shares in the period from November 2006 to 
August 2007. Average execution size has declined from 334 shares to 
254 shares during the same period.
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    The Exchange believes that the reduction of the minimum display 
requirement will not have a detrimental impact on trading or quoting on 
the Exchange. There remains an incentive for displaying interest, 
versus non-display of interest, in that displayed interest has priority 
in execution over non-displayed interest. Reduction of the display 
requirement will also allow Floor brokers and specialists the 
flexibility to align their strategies more closely to the trading 
characteristics of individual stocks and the market in general without 
an imposed minimum of 1,000 shares.
    The Exchange is retaining the ability to automatically replenish 
the displayed amount of interest at the Exchange BBO when trades reduce 
or exhaust such displayed interest. As is currently the case today, the 
displayed quantity will be replenished based on the initial 
instructions from the Floor broker or specialist. For example, assume a 
Floor broker or specialist had originally placed 2,000 shares in 
reserve and had given instructions to maintain 500 shares as a 
displayed amount in the quote. If an execution takes place which 
reduces the displayed amount to 200 shares, 300 shares would be shifted 
from the reserve to replenish the displayed amount. If the reserve 
quantity is less than the amount to be displayed, the remainder of the 
reserve interest will be displayed in full. In the aforementioned 
example, if only 200 shares of the original reserve interest remains, 
then the displayed quantity will be replenished by the final 200 
shares, bringing the total displayed amount to 400 shares. In this way, 
Floor brokers and specialists will have the flexibility to replenish 
liquidity that is in keeping with the market need at the specific time 
and at that price point. Moreover, if Floor brokers and specialists are 
able to display liquidity in keeping with the current trading 
characteristics of the security, then there is more incentive for them 
to use the reserve function and thus provide additional liquidity to 
the market.
    The Exchange further believes that the reduction of the display 
requirement to use the reserve function will not adversely impact 
current quoted size. The Exchange understands that specialists have not 
been using reserves to any great extent and, thus, the reduction of the 
minimum display requirement will not have any impact on the displayed 
quotes representing specialist interest.
    Lastly, the Exchange is not aware of any other domestic securities 
market that has a minimum display requirement for the use of its 
reserve function on the same scale as that currently required by the 
NYSE, yet many of these markets have sizeable displayed liquidity.\7\
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    \7\ For example, American Stock Exchange (``Amex'') Rule 131(s)-
AEMI (Types of Orders) defines a reserve order and allows the 
visible size of the reserve to be ``* * * not less than one lot* * 
*''. See also The NASDAQ Stock Market LLC (``Nasdaq'') Rule 
4751(e)(3) (defining ``non-displayed order'').
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2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \8\ that the 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. The proposed rule change also is 
designed to support the principles of Section 11A(a)(1) \9\ in that it 
seeks to assure economically efficient execution of securities 
transactions, make it practicable for brokers to execute investors' 
orders in the best market and provide an opportunity for investors' 
orders to be executed without the participation of a dealer.
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    \8\ 15 U.S.C. 78f(b)(5).
    \9\ 15 U.S.C. 78k-l(a)(1).
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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

    Because the proposed rule change: (i) Does not significantly affect 
the protection of investors or the public interest; (ii) does not 
impose any significant burden on competition; and (iii) does not become 
operative for 30 days after the date of the filing, or such shorter 
time as the Commission may designate if consistent with the protection 
of investors and the public interest, the proposed rule change has 
become effective pursuant to Section 19(b)(3)(A) of the Act \10\ and 
Rule 19b-4(f)(6) thereunder.\11\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6). Pursuant to Rule 19b-4(f)(6)(iii) 
under the Act, the Exchange is required to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied the five-day pre-filing requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \12\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \13\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The NYSE has 
requested that the Commission waive the 30-day operative delay. The 
Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because NYSE's proposed minimum display requirement for reserve orders 
is similar to the minimum display requirement of another exchange.\14\ 
For these reasons, the Commission designates that the proposed rule 
change become operative on October 2, 2007, the date the Exchange filed 
Amendment No. 1.\15\
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    \12\ 17 CFR 240.19b-4(f)(6).
    \13\ 17 CFR 240.19b-4(f)(6)(iii).
    \14\ See Amex Rule 131(s)-AEMI. See also Nasdaq Rule 4751(e)(3).
    \15\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate the rule change if it 
appears to the

[[Page 57624]]

Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.\16\
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    \16\ For purposes of calculating the 60-day period within which 
the Commission may summarily abrogate the proposed rule change, the 
Commission considers the period to commence on October 2, 2007, the 
date on which the Exchange filed Amendment No. 1.
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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-2007-93 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSE-2007-93. 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, on official business 
days between the hours of 10 a.m. and 3 p.m. Copies of the 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-2007-93 and should be submitted on or before October 31, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E7-19908 Filed 10-9-07; 8:45 am]

BILLING CODE 8011-01-P