Document ID: SEC-2006-0931-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange LLC
Posted Date: 2006-07-21T04:00Z

[Federal Register: July 21, 2006 (Volume 71, Number 140)]
[Notices]               
[Page 41493-41496]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21jy06-87]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54142; File No. SR-NYSE-2006-46]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change to 
Revise Equity Transaction Fees and to Exempt Specialist Firms From ETF 
Transaction Fees

July 13, 2006.
    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 July 10, 2006, the New York Stock Exchange LLC (``Exchange'' or 
``NYSE'') 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 by the Exchange. The 
Exchange has designated this proposal as one establishing or changing a 
due, fee, or other charge imposed by the Exchange under Section 
19(b)(3)(A)(ii) of the Act \3\ and Rule 19b-4(f)(2) thereunder,\4\ 
which renders the proposed rule change effective upon filing with the 
Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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 I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes (i) to revise the fees it charges to its 
member organizations in connection with transactions in equity 
securities, and (ii) to exempt specialist firms from the fees it 
charges to its member organizations in connection with transactions in 
Exchange Traded Fund (``ETF'') securities. The fee changes will take 
effect on August 1, 2006. The text of the proposed rule change is 
available on NYSE's Web site (http://www.nyse.com), at NYSE's principal 

office, 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 and 
discussed any comments it received on 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 proposes (i) to revise the fees it charges to its 
member organizations in connection with transactions in equity 
securities, and (ii) to exempt specialist firms from the fees it 
charges to its member organizations in connection with transactions in 
ETF securities. The fee changes will take effect on August 1, 2006. The 
amended section of the 2006 Exchange Price List was filed with the 
Commission as Exhibit 5 to the proposed rule filing. The fee changes 
are also described below.
    The Exchange proposes to implement a more simplified transaction 
fee structure for equities that it believes will make its fees more 
transparent and will distribute costs more equitably across our 
customer base. In place of the current policy of charging a variable 
fee on equity transactions depending on the number of shares traded, 
the Exchange intends to implement a flat fee of $0.00025 per share, 
which will continue to be subject to the current $80 per transaction 
cap. System trades (trades executed electronically) for less than 2,100 
shares, which were previously exempt from Exchange transaction fees, 
will be subject to the same $0.00025 per share fee as all other equity 
transactions. The Exchange is also eliminating the 1.2% rebate on floor 
brokerage (fees a member organization receives from another member 
organization for which it executes a transaction) previously paid to 
the member organization that had paid the floor brokerage.
    Monthly equity transaction fees are currently capped at the lesser 
of: (i) $600,000 per month or (ii) 2% of the member organization's 
self-reported monthly net commissions.\5\ The Exchange proposes to 
increase the cap, for the first time since 2003, from $600,000 to 
$750,000 per month and to eliminate the 2% cap alternative, which has 
been in place since 1981. The Exchange believes that doing so will 
enable it to grow its trading revenues

[[Page 41494]]

over time, as it will be able to charge fees on certain transactions 
that are currently free because a significant number of member 
organizations routinely exceed the 2% cap. Since trading volume has 
increased substantially since 2003, the average fee per share executed 
by member organizations paying the $600,000 cap has deceased 
significantly over that period. The proposed increase is intended to 
raise the average fee per share paid by member organizations that pay 
under the cap to a level that is closer to the historical average paid 
by those member organizations. Raising the cap to $750,000 compensates 
the Exchange for additional system usage, but continues to reward 
customers that significantly enhance the NYSE liquidity pool.
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    \5\ A member organization's net commissions are calculated as 
the difference between gross commissions charged and commissions 
payable to other members.
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    Under the Exchange's historical structure as a member-owned New 
York not-for-profit corporation, the 2% fee cap was a requirement of 
Article X, Section 4 of the Exchange's constitution. At the annual 
members' meeting of the Exchange on April 7, 2005, the members of the 
Exchange adopted an amendment to Article X, Section 4 to eliminate the 
2% cap. The Exchange's membership at the time of its 2005 annual 
meeting was composed largely of representatives of the Exchange's 
current member organizations. As such, while the Exchange is no longer 
a member-owned not-for-profit corporation, the Exchange's member 
organizations have previously accepted the removal of the 2% cap. The 
constitutional amendment approved by the members at the 2005 annual 
members' meeting specified that the Exchange's board would determine 
the effective date of the removal of the 2% cap. Although approved last 
year by the members, the Exchange has not implemented the elimination 
of the cap to this point as it had always intended to do so in 
conjunction with a broader revision of Exchange pricing.
    The 2% cap was originally introduced in 1981 when the Exchange 
first moved away from charging members a fee based on their net 
commissions and introduced the variable, transaction-related fee 
structure in use today. The cap was intended to alleviate concerns of 
certain members at that time that the variable fee structure would 
result in substantially higher fees, thereby rendering trading activity 
unprofitable. However, as a result of the dramatic reduction in 
commission rates, a shift to business models not based on commissions, 
and a greater emphasis on principal trading as a source of revenue 
since 1981, many member organizations who continue to pay transaction 
fees based on the 2% cap currently pay disproportionately low 
transaction fees. The Exchange believes that the elimination of the 2% 
cap will allow it to more equitably allocate fees among member 
organizations based on system usage rates.
    Since the implementation of the decimalization of equities trading 
in 2001 and the growing influence of program and algorithmic trading, 
there has been an increasing trend towards smaller order sizes. The 
average execution size on the Exchange is now less than 600 shares per 
trade. System orders constituted 72% of the Exchange's equity trading 
volume in the first six months of 2006, and in the week of June 26, 
2006, 95% of system orders were for less than 2,100 shares. The 
Exchange expects even more trades to be executed in the form of system 
orders as its hybrid market initiative is fully implemented. In light 
of this trend, it is not a sustainable business model for the Exchange 
to continue to exempt these trades from fees. Given the Exchange's 
investment in technology and system redundancy, it is essential that 
the Exchange generate revenue from this large and growing aspect of the 
equities trading business.
    The Exchange proposes to exempt specialists from the fees payable 
with respect to transactions in ETF securities. This is consistent with 
the Exchange's current policy of charging no fees in connection with 
trading by specialists in equity securities. The Exchange believes that 
the specialists are paying a sufficient amount for their transactions 
through the specialist trading privilege fee in connection with each 
stock or ETF for which they act as specialist.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \6\ in general and furthers the objectives 
of Section 6(b)(4) \7\ in particular in that it is intended to provide 
for the equitable allocation of reasonable dues, fees, and other 
charges among its members and other persons using its facilities.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange has carefully considered the impact of the proposed 
fee changes on member organizations and does not believe that the 
proposed rule change will impose any burden on competition that is not 
necessary or appropriate in furtherance of the purpose of the Act. The 
proposed fee changes are not designed to adversely impact any 
particular business model or any individual member organization or 
category of member organizations. In contrast with the current pricing 
system, under which some trades are completely free of charge, all 
trades will be charged the same $0.00025 per share fee. The $750,000 
fee cap is a bulk discount to attract more business to the Exchange, 
which furthers competition among markets and is consistent with the 
Exchange's own historical fee structure and general industry practice. 
The Exchange's fee cap has not been changed in response to the large 
growth in trading volume since it was last increased in 2003, so the 
average fee per share executed by member organizations paying the cap 
has deceased significantly over that period. The proposed increase is 
intended to raise the average fee per share paid by member 
organizations that pay under the cap to a level that is closer to the 
historical average paid by those member organizations.
    The Exchange has received written comments from two parties on the 
proposed rule change.\8\ In addition, the Exchange has been provided 
with a letter that was submitted directly to the Commission.\9\ The 
commenters argue that subjecting system trades of less than 2,100 
shares to the same per share fee as all other transactions is unfairly 
discriminatory to smaller member organizations and smaller 
investors.\10\ Moreover, they believe the proposed pricing will be 
advantageous to large member organizations whose fee obligations will 
be limited by the monthly cap.\11\ One letter also notes that member 
organizations will lose the benefit of the cap of 2% of monthly 
commissions.\12\
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    \8\ See letter from Mark D. Fitterman, Partner, Morgan, Lewis & 
Bockius LLP, to John A. Thain, CEO, and Catherine R. Kinney, 
President and Co-COO, NYSE Group, Inc., dated June 27, 2006 (on 
behalf of Jeffries Execution Services, Inc.) (``Jeffries Letter''); 
and e-mail from Joseph McCaffrey, CEO and Managing LLC Member, Bay 
Crest Partners, LLC, to Bob Airo, Vice President, and Laura 
Morrison, Managing Director, NYSE Group, dated July 6, 2006 (``Bay 
Crest Letter'').
    \9\ See letter from Mark D. Fitterman, Partner, Morgan, Lewis & 
Bockius LLP, to Nancy M. Morris, Secretary, Commission, dated June 
30, 2006 (on behalf of RBC Capital Markets Corporation) (``RBC 
Letter'').
    \10\  See Jeffries Letter at 2; RBC Letter at passim.
    \11\ See Jeffries Letter at 2; RBC Letter at 1; Bay Crest Letter 
at passim.
    \12\ See RBC Letter at 2.
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    The Exchange does not believe that it is anticompetitive or 
discriminatory to impose fees on system orders for less than 2,100 
shares. The average execution size on the Exchange is now less than 600 
shares per trade and the

[[Page 41495]]

Exchange expects even more trades to be executed in the form of system 
orders as its hybrid market initiative is fully implemented. System 
orders constituted 72% of the Exchange's equity trading volume in the 
first six months of 2006, and in the week of June 26, 2006, 95% of 
system orders were for less than 2,100 shares. This increasing trend 
towards smaller order sizes is largely attributable to changes in 
trading behavior in response to the introduction of the decimalization 
of equities trading in 2001 and the growing influence of program and 
algorithmic trading. In light of this trend, it is not a sustainable 
business model for the Exchange to continue to exempt these trades from 
fees. Given the Exchange's investment in technology and system 
redundancy, it is essential that the Exchange generate revenue from 
this large and growing aspect of the equities trading business.
    The dramatic reduction in commission rates, a shift to business 
models not based on commissions, and a greater emphasis on principal 
trading as a source of revenue since the introduction of the 2% cap in 
1981 has allowed many member organizations who continue to pay 
transaction fees based on the 2% cap to pay disproportionately low 
transaction fees. Rather than seeking to discriminatorily increase the 
fees levied on those member organizations, the Exchange is actually 
eliminating the 2% cap so as to more equitably allocate fees among 
member organizations.
    The Exchange has examined the impact of the proposed fee changes on 
its member organizations by analyzing how much each member organization 
would pay based on its trading activity for the second half of 2005. 
The small number of member organizations that currently pay the 
Exchange's $600,000 fee cap would all reach the new $750,000 cap and 
would therefore pay $150,000 more in fees per month. The majority of 
member organizations would pay more in fees under the proposed fee 
structure. As is clear from these statistics, the Exchange is not 
seeking to discriminate in favor of the largest member organizations or 
against those that are smaller. Rather, the impact of the fee changes 
on a particular member organization will result from a number of 
variables, including its business model and the volume of trades it 
sends to the Exchange.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants or Others \13\
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    \13\ The Commission notes that subsequent to the filing of this 
proposed rule change, the Commission received a comment letter from 
Lek Securities Corporation, a NYSE member. See letter from Samuel F. 
Lek, CEO, Lek Securities Corporation, to Nancy M. Morris, Secretary, 
Commission, dated July 6, 2006.
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    The Exchange has not solicited written comments on the proposed 
rule change and has received the two written comments and the letter 
addressed to the Commission described above.\14\ The letters focus 
primarily on the commenters' belief that the proposed fees are 
anticompetitive, which is discussed in Section II.B. above. In 
addition, two commenters argued that it is inappropriate for the 
proposed fee changes to be filed for immediate effectiveness pursuant 
to Section 19(b)(3)(A) of the Act \15\ and that the filing should be 
subject to the public notice and comment process of Section 19(b)(1) of 
the Act \16\ prior to becoming effective.\17\ The Exchange believes it 
is appropriate to file the proposed fee changes for immediate 
effectiveness pursuant to Section 19(b)(3)(A) of the Act. Pursuant to 
Section 19(b)(3)(A)(ii) of the Act \18\ and Rule 19b-4(f)(2) 
thereunder,\19\ a proposed rule change may take effect upon filing with 
the Commission if properly designated by the self-regulatory 
organization as establishing or changing a due, fee, or other charge 
applicable to a member. The proposed fee changes are of the type 
contemplated by Rule 19b-4(f)(2) and it has been the Exchange's 
consistent historical practice to file such fee changes for immediate 
effectiveness. The Exchange does not believe that there is any reason 
to do otherwise in this instance.
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    \14\ See supra notes 8 and 9 and accompanying text.
    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 15 U.S.C. 78s(b)(1).
    \17\ See Jeffries Letter at 3; RBC Letter at 2.
    \18\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \19\ 17 CFR 240.19b-4(f)(2).
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    One letter asks why the Exchange has determined to exempt 
specialists from fees in connection with their trades in ETF 
securities.\20\ This is consistent with the Exchange's current policy 
of charging no fees in connection with trading by specialists in equity 
securities. The Exchange believes that the specialists are paying a 
sufficient amount for their transactions through the specialist trading 
privilege fee in connection with each stock or ETF for which they act 
as specialist.
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    \20\ See RBC Letter at 2.
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    Two commenters claim that member organizations have had little 
notice of the proposed changes and a limited ability to provide 
input.\21\ The Exchange notes that the elimination of the 2% cap, which 
is the most significant change, was voted on by the membership at the 
Exchange's April 2005 annual meeting. Member organizations were clearly 
aware from that time that the Exchange intended to eliminate the cap. 
Furthermore, the Exchange has communicated with member organizations 
since mid-2005 about its intention to undertake a significant revision 
of its pricing structure, soliciting member organizations' views on a 
number of proposed pricing structures since then. Indeed, the changes 
the commenters oppose have been among those the Exchange has discussed 
openly with member organizations during that period.
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    \21\ See Jeffries Letter at 1; RBC Letter at 2.
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 III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing proposed rule change has become effective upon filing 
pursuant to Section 19(b)(3)(A) of the Act \22\ and Rule 19b-4(f)(2) 
\23\ thereunder because it establishes or changes a due, fee, or other 
charge imposed by the Exchange. At any time within 60 days of the 
filing of the proposed rule change, the Commission may summarily 
abrogate such rule change if it appears to the 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.
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    \22\ 15 U.S.C. 78s(b)(3)(A).
    \23\ 17 CFR 19b-4(f)(2).
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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 No. SR-NYSE-2006-46 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary,

[[Page 41496]]

Securities and Exchange Commission, 100 F Street, NE., Washington, DC 
20549-1090.

All submissions should refer to File Number SR-NYSE-2006-46. 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 Commissions 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 
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-2006-46 and should be submitted on or before August 11, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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 Jill M. Peterson,
 Assistant Secretary.
 [FR Doc. E6-11575 Filed 7-20-06; 8:45 am]

BILLING CODE 8010-01-P