[Federal Register: November 22, 2004 (Volume 69, Number 224)]
[Notices]
[Page 67980-67999]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22no04-138]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-50667; File No. SR-NYSE-2004-05]
Self-Regulatory Organizations; Notice of Filing of Amendment Nos.
2 and 3 to a Proposed Rule Change by the New York Stock Exchange, Inc.
Relating to Enhancements to the Exchange's Existing Automatic Execution
Facility Pilot (NYSE Direct+)
November 15, 2004.
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 November 8, 2004, the New York Stock Exchange, Inc.
(``NYSE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') Amendment No. 2 \3\ to a proposed rule
change as described in Items I, II and III below, which Items have been
prepared by the NYSE. On November 9, 2004, the NYSE filed Amendment No.
3 to the proposed rule change.\4\ The Commission is publishing this
notice to solicit comments on the proposed rule change
[[Page 67981]]
as amended by Amendment Nos. 2 and 3 from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Form 19b-4 dated November 8, 2004 (``Amendment No. 2'').
Amendment No. 2 supplements the description of certain aspects of
the Exchange's hybrid market and proposes additional amendments to
the Exchange's rules.
\4\ See Partial amendment dated November 9, 2004 (``Amendment
No. 3''). In Amendment No. 3, the NYSE submitted the proposed rule
changes in the format required in Exhibit 5 to the Form 19b-4, which
was inadvertently omitted from Amendment No. 2.
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The proposed rule change was filed on February 9, 2004 and amended
by Amendment No. 1 on August 2, 2004.\5\ The proposed rule change as
amended by Amendment No. 1 was published for comment in the Federal
Register on August 16, 2004.\6\ On August 26, 2004, the Commission
extended the public comment period with respect to the Notice to
September 22, 2004.\7\ The Commission received 15 comment letters with
respect to the Notice.\8\
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\5\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE,
to Nancy J. Sanow, Assistant Director, Division of Market Regulation
(``Division''), Commission, dated July 30, 2004, and accompanying
Form 19b-4, which replaced the original filing in its entirety
(``Amendment No. 1'').
\6\ See Securities Exchange Act Release No. 50173 (August 10,
2004), 69 FR 50407 (``Notice'').
\7\ See Securities Exchange Act Release No. 50277 (August 26,
2004), 69 FR 53759 (September 2, 2004).
\8\ See letter to William Donaldson, Chairman, Commission, from
Donald E. Weeden, dated August 31, 2004; letters to the Commission
from: Kim Bang, President and Chief Executive Officer, Bloomberg
Tradebook LLC, dated September 22, 2004; and Eric D. Roiter, Senior
Vice President and General Counsel, Fidelity Management & Research
Company, dated October 26, 2004; letters to Jonathan G. Katz,
Secretary, Commission, from: Ari Burstein, Associate Counsel,
Investment Company Institute, dated September 22, 2004; Donald D.
Kittell, Executive Vice President, Securities Industry Association,
dated October 1, 2004; Ellen L.S. Koplow, Executive Vice President
and General Counsel, Ameritrade, Inc., dated September 22, 2004;
Bruce Lisman, Bear, Stearns & Co., Inc., dated September 28, 2004;
Edward J. Nicoll, Chief Executive Officer, Instinet Group
Incorporated, dated October 25, 2004; Thomas Peterffy and David M.
Battan, the Interactive Brokers Group, dated September 7, 2004; and
Lisa M. Utasi, President and Kimberly Unger, Executive Director, the
Security Traders Association of New York, Inc., dated September 22,
2004; and letter to Annette L. Nazareth, Director, Division,
Commission, and Robert L.D. Colby, Deputy Director, Division,
Commission, from Eric D. Roiter, Senior Vice President and General
Counsel, Fidelity Management & Research Company, dated August 10,
2003. See e-mails to Nancy Reich Jenkins, Managing Director, Market
Surveillance, NYSE, from George W. Mann Jr., Executive Vice
President and General Counsel, Boston Stock Exchange, Inc., dated
September 22, 2004; and e-mails to the Commission from: Jose L.
Marques, Ph.D., Managing Member, Telic Management LLC, dated
September 21, 2004; Junius W. Peake, Monfort Distinguished Professor
of Finance, Kenneth W. Monfort College of Business, University of
Northern Colorado, dated September 22, 2004; and James L.
Rothenberg, Esq., dated August 30, 2004.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes amendments to its rules governing NYSE
Direct+[reg] (``Direct+''), which were originally proposed in the
Notice, supplements the description of certain aspects of the
Exchange's hybrid market, and proposes additional amendments to the
Exchange's rules. Below is the text of the proposed rule change, as
amended by Amendment Nos. 2 and 3. Proposed new language is italicized;
proposed deletions are in brackets.\9\ Furthermore, examples of trading
under the proposed rules are attached hereto as Exhibit A.
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\9\ The rule text as set forth herein includes several minor
technical revisions that the Exchange has committed to correct by
filing an amendment. Telephone conversation between Cyndi Rodriguez,
Special Counsel, Division, Commission, and Jeff Rosenstrock, Senior
Special Counsel, Market Surveillance, NYSE, on November 15, 2004.
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* * * * *
Definitions of Orders
Rule 13
* * * * *
All or None Order
A market or limited price order [which] designated all or none is
to be executed in its entirety or not at all, but, unlike a fill or
kill order, is not to be treated as cancelled if not executed as soon
as it is represented in the Trading Crowd or automatically executed in
accordance with, and to the extent provided by, Exchange Rules 1000-
1004. The making of ``all or none'' bids or offers in stocks is
prohibited and the making of ``all or none'' bids or offers in bonds is
subject to the restrictions of Rule 61 and Rule 86.
* * * * *
Auction Limit Order
An auction limit order is an order that provides an opportunity for
price improvement.
The limit price of an auction limit order to buy should be at or
above the Exchange best offer at the time the order is entered on the
Exchange. The limit price of an auction limit order to sell should be
at or below the Exchange best bid at the time the order is entered on
the Exchange.
An auction limit order shall be quoted and executed in accordance
with Exchange Rules 15A.50, 123F and 79A.15.
Auto Ex Order
An auto ex order is:
(a) A market order designated for automatic execution or a limit
order to buy (sell) priced at or above (below) the Exchange best offer
(bid) at the time such order is routed to the Display Book[reg] or;
(b) An immediate or cancel order; or
(c) An elected stop or stop limit order systemically delivered to
the Display Book; or
(d) A buy ``minus'', sell ``plus'' or short sale order systemically
delivered to the Display Book; or
(e) An all or none order; or
(f) An elected or converted percentage order that is convertible on
a destabilizing tick and for which the entering broker has granted
permission for the specialist to be on parity with the order; or
(g) A part of round lot order (PRL); or
(h) Orders initially eligible for automatic execution that have
been cancelled and replaced in a stock, Investment Company Unit (as
defined by paragraph 703.16 of the Listed Company Manual), or Trust
Issued Receipt (as defined in Rule 1200), subject to [a limit order of
1099 shares or less priced at or above the Exchange's published offer
(in the case of an order to buy) or at or below the Exchange's
published bid (in the case of an order to sell), which a member or
member organization has entered for] automatic execution in accordance
with, and to the extent provided by, Exchange Rules 1000-1004[5].
[Pursuant to a pilot program to run until December 23, 2004, orders
in Investment Company Units (as defined in paragraph 703.16 of the
Listed Company Manual), or Trust Issued Receipts (as defined in Rule
1200) may be entered as limit orders in an amount greater than 1099
shares. The pilot program shall provide for a gradual, phased-in
raising of order size eligibility, up to a maximum of 10,000 shares.
Each raising of order size eligibility shall be preceded by a minimum
of a one-week advance notice to the Exchange's membership.]
* * * * *
Immediate or Cancel Order
A market or limited price order [which] designated immediate or
cancel is to be executed [in whole or in part] to the extent possible
as soon as such order is represented in the Trading Crowd or
automatically executed in accordance with, and to the extent provided
by, Exchange Rules 1000-1004, and the portion not so executed is to be
treated as cancelled. For the purposes of this definition, a ``stop''
is considered an execution.
A ``commitment to trade'' received [on the Floor] through ITS will
be automatically executable in accordance with, and to the extent
provided by, Exchange Rules 1000-1004, and shall be treated in the same
manner, and entitled to the same privileges, as [would] an immediate or
cancel order that [reaches the Floor] is systemically delivered to the
Display Book at the same time except as otherwise provided in the Plan
and except further that such a commitment may not be ``stopped.'' [and
the commitment shall remain irrevocable for the time period chosen
[[Page 67982]]
by the sender of the commitment.] After trading with the Exchange
published bid (offer), the unfilled balance of a commitment to trade
shall be automatically reported to ITS as cancelled.
Limit, Limited Order or Limited Price Order
An order to buy or sell a stated amount of a security at a
specified price, or at a better price, if obtainable after the order is
represented in the Trading Crowd.
A marketable limit order is an order on the Exchange that can be
immediately executed; that is, an order to buy priced at or above the
Exchange best offer or an order to sell priced at or below the Exchange
best bid.
A marketable limit order systemically delivered to the Display Book
is an auto ex order subject to automatic execution in accordance with,
and to the extent provided by, Exchange Rules 1000-1004.
Market Order
An order to buy or sell a stated amount of a security at the most
advantageous price obtainable after the order is represented in the
Trading Crowd or systemically delivered to the Display Book.
A market order is not an auto ex order unless so designated and
shall be quoted and executed in accordance with Exchange Rules 15A.50,
123F.
A market order designated for automatic execution is an auto ex
order and shall be executed in accordance with, and to the extent
provided by, Exchange Rules 1000-1004.
* * * * *
Percentage Order
A limited price order to buy (or sell) 50% of the volume of a
specified stock after its entry. There are four types of percentage
orders:
(a) Straight Limit Percentage Orders--Such an order is elected when
a transaction has occurred at the limit price or a better price. Unless
otherwise specified, only volume at or below the limit subsequent to
the receipt of the order will be applied in determining the elected
portion of buy orders. Conversely, only volume at or above the limit
will be calculated in determining the elected portion of sell orders.
(b) Last Sale Percentage Orders--The elected portion of an order
designated ``last sale'' shall be executed only at the last sale price
or at a better price, provided that such price is at or better than the
limit specified in the order. If the order is further designated ``last
sale-cumulative volume'', the elected portion shall be placed on the
book at the price of the electing sale, but if not executed, shall be
cancelled and re-entered on the book at the price of the subsequent
transactions on the Exchange, provided the price of such subsequent
transactions is at or better than the limit specified in the order.
(c) ``Buy Minus''-``Sell Plus'' Percentage Orders--The elected
portion of an order to ``buy minus'' shall be executed only on a
``minus'' or ``zero minus'' tick. Orders of this type must also be
qualified further by designating a limit price. The elected portion of
an order to ``sell plus'' shall be executed only on a ``plus'' or
``zero plus'' tick. Orders so designated are handled in the same manner
as an order to sell short. (See Rule 123A.71) Orders of this type must
also be further qualified by designating a limit price.
If so instructed by the entering broker(s), percentage orders to
buy will be converted into regular limit orders for transactions
effected on ``minus'' or ``zero minus'' ticks. Conversely, if so
instructed by the entering broker(s), percentage orders to sell will be
converted into regular limit orders for transactions effected on
``plus'' or ``zero plus'' ticks.
If further instructed by the entering broker(s), as provided in
Rule 123A.30, percentage orders to buy may be converted into regular
limit orders for transactions on ``plus'' or ``zero plus'' ticks.
Conversely, if so instructed by the entering broker(s), percentage
orders to sell may be converted into regular limit orders for
transactions on ``minus'' or ``zero minus'' ticks.
(See also Rule 123A.30.)
(d) ``Immediate Execution or Cancel Election'' Percentage Orders--
The elected portion of a percentage order with this designation is to
be executed immediately in whole or in part at the price of the
electing transaction. Any elected portion not so executed shall be
deemed cancelled, and shall revert to its status as an unelected
percentage order and be subject to subsequent election or conversion.
The converted portion of such a percentage order that is
convertible on a destabilizing tick (a ``CAP-DI order'') and which is
systemically delivered to the Display Book[reg] will be eligible to be
automatically executed in accordance with, and to the extent provided
by, Exchange Rules 1000-1004 consistent with the order's instructions.
* * * * *
Sell ``Plus''-Buy ``Minus'' Order
A market order to sell ``plus'' is a market order to sell a stated
amount of a stock provided that the price to be obtained is not lower
than the last sale if the last sale was a ``plus'' or ``zero plus''
tick, and is not lower than the last sale plus the minimum fractional
change in the stock if the last sale was a ``minus'' or ``zero minus''
tick. A limited price order to sell ``plus'' would have the additional
restriction of stating the lowest price at which it could be executed.
Sell ``plus'' limit orders which are systemically delivered to the
Display Book[reg] and sell ``plus'' market orders designated for
automatic execution will be eligible to be automatically executed in
accordance with, and to the extent provided by, Exchange Rules 1000-
1004 consistent with the order's instructions.
A market order to buy ``minus'' is a market order to buy a stated
amount of a stock provided that the price to be obtained is not higher
than the last sale if the last sale was a ``minus'' or ``zero minus''
tick, and is not higher than the last sale minus the minimum fractional
change in the stock if the last sale was a ``plus'' or ``zero plus''
tick. A limited price order to buy ``minus'' would have the additional
restriction of stating the highest price at which it could be executed.
Buy ``minus'' limit orders that are systemically delivered to the
Display Book[reg] and buy ``minus'' market orders designated for
automatic execution will be eligible to be automatically executed in
accordance with, and to the extent provided by, Exchange Rules 1000-
1004 consistent with the order's instructions.
Stop Order
A stop order to buy becomes a market order when a transaction in
the security occurs at or above the stop price after the order is
represented in the Trading Crowd. A stop order to sell becomes a market
order when a transaction in the security occurs at or below the stop
price after the order is represented in the Trading Crowd. Stop orders
that are systemically delivered to the Display Book[reg] will be
eligible to be automatically executed in accordance with, and to the
extent provided by, Exchange Rules 1000-1004 consistent with the
order's instructions.
Stop Limit Order
A stop limit order to buy becomes a limit order executable at the
limit price, or at a better price, if obtainable, when a transaction in
the security occurs at or above the stop price after the order is
represented in the Trading Crowd. A stop limit order to sell becomes a
limit order executable at the limit price or at a better price, if
obtainable, when a transaction in the security occurs at or
[[Page 67983]]
below the stop price after the order is represented in the Trading
Crowd. Stop limit orders that are systemically delivered to the Display
Book[reg] will be eligible to be automatically executed in accordance
with, and to the extent provided by, Exchange Rules 1000-1004
consistent with the order's instructions.
* * * * *
(Remainder of rule unchanged)
ITS ``Trade-Throughs'' and ``Locked Markets''
Rule 15A
* * * * *
Supplementary Material
.10 Nothing in paragraph (d)(2)(B) above is intended to discourage
a locking member from electing to ship if the complaint requests him to
do so.
.20 The fact that a transaction may be cancelled or the price
thereof may be adjusted pursuant to the provisions of paragraph (b)(2)
of this Rule 15A, shall not have any effect, under the rules, on other
transactions or the execution of orders not involved in the original
transaction.
.30 The provisions of this Rule 15A shall supersede the provisions
of any other Exchange Rule which might be construed as being
inconsistent with Rule 15A.
.40 For the purposes of this Rule:
i. The terms ``Exchange trade-through'' and ``Third participating
market center trade-through'' do not include the situation where a
member who initiates the purchase (sale) of an ITS security at a price
which is higher (lower) than the price at which the security is being
offered (bid) in another ITS participating market, sends
contemporaneously through ITS to such ITS participating market a
commitment to trade at such offer (bid) price or better and for at
least the number of shares displayed with that market center's better-
priced offer (bid); and
ii. A trade-through complaint sent in these circumstances is not
valid, even if the commitment sent in satisfaction cancels or expires,
and even if there is more stock behind the quote in the other market.
.50 Where a better bid or offer is published by another ITS
participating market center or centers in which an automatic execution
is immediately available or such bid or offer is otherwise protected
from a trade-through by Securities and Exchange Commission rule or ITS
Plan, and the price associated with such published better bid or offer
has not been systemically matched by the specialist, the Exchange will
automatically route to such other market center or centers as a
commitment to trade any order or portion thereof that satisfies such
better published bid or offer, unless the member entering the order
indicates in such manner as required by the Exchange that it is
contemporaneously satisfying the better published bid or offer.
* * * * *
Dissemination of Quotations
Rule 60
* * * * *
(e) Autoquoting of highest bid/lowest offer and automated
adjustment of size of liquidity bid and offer. The Exchange will
autoquote the NYSE's highest bid or lowest offer whenever a limit order
is transmitted to the specialist's book at a price higher (lower) than
the previously disseminated highest (lowest) bid (offer). When the
NYSE's highest bid or lowest offer has been traded with in its
entirety, the Exchange will autoquote a new bid or offer reflecting the
total size of orders on the specialist's book at the next highest (in
the case of a bid) or lowest (in the case of an offer) price. The size
of any liquidity bid or offer shall be systemically increased to
reflect any additional limit orders transmitted to the specialist's
book at prices ranging from the liquidity bid or offer price to the
highest bid (lowest offer). The size of any liquidity bid or offer
shall be systematically decreased to reflect the execution of any limit
orders on the specialist's book at prices ranging from the liquidity
bid or offer price to the highest bid (lowest offer). However, de
minimis increases or decreases in the size of limit orders on the book,
as determined by the specialist, will not result in automated
augmenting or decrementing of the size of the liquidity bid or offer
where such bid or offer continues to reflect the actual size of limit
orders on the book.
[In any instance where the specialist disseminates a proprietary
bid (offer) of 100 shares on one side of the market, the bid or offer
on that side of the market shall not be autoquoted. In such an
instance, any better-priced limit orders received by the specialist
shall be manually displayed, unless they are executed at a better price
in a transaction being put together in the auction market at the time
that the order is received.]
Autoquote will be suspended when the specialist has gapped the
quotation in accordance with Exchange policies and procedures, a block
size transaction as defined in Rule 127 that involves orders on the
book is being reported manually or when a liquidity replenishment point
(``LRP'') as defined in Exchange Rule 1000 (a)(v)(A) has been reached.
After the specialist has gapped the quotation, autoquote will
resume with a manual transaction or the publication of a non-gapped
quotation.
Autoquote will resume as soon as possible after a LRP has been
reached, but in no more than five seconds, where the auto ex order that
reached the LRP is executed in full, or any unfilled balance of such
order is not capable of trading at a price above (in the case of a buy
order) or below (in the case of a sell order) the LRP. Where the
unfilled balance of an auto ex order is able to trade at a price above
(below) the LRP, but the price does not create a locked or crossed
market, autoquote will resume upon a manual transaction or the
publication of a new quote by the specialist, but in any event in no
more than 10 seconds. Where the unfilled balance of an auto ex order is
able to trade at a price above (below) the LRP and the price creates a
locked or crossed market, autoquote will resume upon a manual
transaction or the publication of a new quote by the specialist.
Autoquote will resume as soon as possible after a momentum
liquidity replenishment point, as defined in Exchange Rule
1000(a)(v)(B), is reached, but in no more than ten seconds unless a
locked or crossed market exists. In such case, autoquote will resume
upon a manual transaction.
Autoquote will resume immediately after a manual report of a block
size transaction is reported.
* * * * *
[Below Best] Bids [-] and [Above Best] Offers
Rule 70
When a bid is clearly established, no bid or offer at a lower price
shall be made. When an offer is clearly established, no offer or bid at
a higher price shall be made.
All bids made and accepted, and all offers made and accepted, in
accordance with Exchange Rules [45 to 86] shall be binding.
Supplementary Material
.10 Except for bids and offers made by a specialist pursuant to
Rule 104 (b) and (c), [A]any bid (offer) systemically delivered to the
Display Book which is made at the same or higher (lower) price of the
prevailing offer (bid) shall result in an automatic execution
[transaction at the offer price in an amount equal to the lesser of the
bid or offer. The same principle shall apply when an offer is
[[Page 67984]]
made at the same or lower price as the bid.] in accordance with, and to
the extent provided by, Exchange Rules 1000-1004.
.20 (a) A Floor broker may place within the Display Book system a
broker agency interest file at varying prices at or outside the
Exchange best bid and offer with respect to orders he or she is
representing on the Floor, except that the agency interest file shall
not include any ``G'' order interest or customer interest that
restricts the specialist's ability to be on parity pursuant to Exchange
Rule 104.10(6)(i)(C).
(b) All Floor broker agency interest at the same price shall be on
parity, except agency interest that established the Exchange best bid
or offer shall be entitled to priority for one trade in accordance with
Exchange Rule 72. No Floor broker agency interest in the file shall be
entitled to precedence based on size.
(c) The Floor broker agency interest file shall become part of the
quotation when it is at or becomes the Exchange best bid or offer and
shall be executed in accordance with Exchange Rule 72. Such interest
will be displayed in its entirety if less than 1,000 shares, and if
greater than 1,000 shares, will be displayed for 1,000 shares or a
greater amount chosen by the Floor broker. That portion of the interest
displayed at the best bid or offer shall be on parity with other
displayed interest at such best bid or offer. That portion not
displayed will yield to all other interest on the book, in the Crowd or
of the specialist eligible to trade at the published bid or offer.
Once an execution has taken place against the interest represented
by a Floor broker in the agency interest file, if the remaining
displayed interest represented by that Floor broker is for less than
1,000 shares and the Floor broker represents additional interest in the
Floor broker's agency interest file, such additional interest will be
automatically displayed in its entirety if less than 1,000 shares or
for 1,000 shares or a greater amount chosen by the Floor broker.
Any unfilled portion of an incoming order that was executed
automatically at the displayed bid or offer shall be executed against
any undisplayed contra side interest residing in the broker agency
interest file at the same price in a transaction directly following the
automatic execution.
(d) A Floor broker's agency interest not at the Exchange best bid
or offer shall be on parity with orders on the book, the Crowd and the
specialist layered interest file if executed as part of a sweep in
accordance with, and to the extent provided by, Exchange Rules 1000-
1004.
(e) A Floor broker may have an agency interest file in only one
Crowd, as determined by the Exchange, at any given time. A Floor broker
may trade on behalf of his or her orders as part of the Crowd at the
same price and on the same side of the market as his or her agency
interest file only to the extent that the volume traded verbally in the
Crowd is not included in the agency interest file.
(f) A Floor broker's agency interest file must be cancelled when he
or she leaves the Crowd. Failure to do so is a violation of Exchange
rules. If the Floor broker leaves the Crowd without canceling his or
her agency interest file and one or more executions occur with the
agency interest, the Floor broker shall be held to such executions.
(g) A Floor broker has discretion to exclude his or her agency
interest from the aggregated agency file interest information available
to the specialist.
(h) Broker agency interest excluded from the aggregated interest
information available to the specialist is able to participate in
automatic executions, but will not participate in a manual execution
unless the broker representing this interest verbally trades on its
behalf as part of the Crowd and may trade at a price that is inferior
to the price of such transaction.
(i) Nothing in this rule shall be interpreted as modifying or
relieving the Floor broker from his or her agency obligations and
required compliance with all Exchange rules, policies and procedures.
.30 Definition of Crowd A Floor broker will be considered to be in
a Crowd if he or she is present at any one of five contiguous panels at
any one post where securities are traded.
* * * * *
Miscellaneous Requirements on Stock and Bond Market Procedures
Rule 79A
Supplementary Material
.10 Request to make better bid or offer.--When any Floor broker
does not bid or offer at the limit of an order which is better than the
currently quoted price in the security and is requested by his
principal to bid or offer at such limit, he shall do so.
.15 With respect to limit orders received by specialists, each
specialist shall publish immediately (i.e., as soon as practicable,
which under normal market conditions means no later than 30 seconds
from time of receipt) a bid or offer that reflects;
(i) The price and full size of each customer limit order that is at
a price that would improve the specialist's bid or offer in such
security; and
(ii) The full size of each limit order that
(A) Is priced equal to the specialist's bid or offer for such
security;
(B) Is priced equal to the national best bid or offer; and
(C) Represents more than a de minimis change (i.e., more than 10
percent) in relation to the size associated with the Exchange's bid or
offer.
[Each specialist shall keep active at all times the quotation
processing facilities (known as ``Quote Assist'') provided by the
Exchange. A specialist may deactivate the quotation processing
facilities as to a stock or a group of stocks provided that Floor
Official approval is obtained. Such approval to deactivate Quote Assist
must be obtained no later than three minutes from the time of
deactivation.]
Limit orders received by the specialist that improve the Exchange
then-current bid or offer or change the size of the Exchange bid or
offer, other than de minimis increases or decreases, shall be
autoquoted in accordance with Exchange Rule 60(e). The Exchange shall
activate the autoquote facility in each specialty stock by initiating a
liquidity quote. Each specialist shall keep active at all times the
autoquote facility provided by the Exchange, except that a specialist
may cause the deactivation of the autoquote facility by gapping the
quote in accordance with the policies and procedures of the Exchange.
Autoquoting will also be automatically suspended when a liquidity
replenishment point, as defined in Exchange Rule 1000(a)(v), is
reached.
The requirements with respect to specialists' display of limit
orders shall not apply to any customer limit order that is[;]:
(1) Executed upon receipt of the order;
(2) Placed by a customer who expressly requests, either at the time
the order is placed or prior thereto pursuant to an individually
negotiated agreement with respect to such customer's orders, that the
order not be displayed;
(3) An odd-lot order;
(4) Delivered immediately upon receipt to an exchange or
association-sponsored system or an electronic communications network
that complies with the requirements of Securities and Exchange
Commission Rule 11Ac1-1(c)(5)(ii) under the Securities Exchange Act
with respect to that order;
[[Page 67985]]
(5) Delivered immediately upon receipt to another exchange member
or over-the-counter market maker that complies with the requirements of
Securities and Exchange Commission Rule 11Ac1-4 under the Securities
Exchange Act with respect to that order;
(6) An ``all or none'' order;
(7) A limit order to buy at a price significantly above the current
offer or a limit order to sell at a price significantly below the
current bid that is handled in compliance with Exchange procedures
regarding such orders, (``too marketable limit orders''); or
(8) An order that is handled in compliance with Exchange procedures
regarding gap quoting or block crosses at significant premiums or
discounts from the last sale.
* * * * *
(Remainder of rule unchanged)
Dealings by Specialists
Rule 104
* * * * *
(b) Specialists shall have the ability to establish an external
quote application interface (``Quote API'') which utilizes proprietary
algorithms that allow the specialist, on behalf of the dealer account,
to systematically update the Exchange published bid or offer within the
Display Book system in Investment Company Units (as defined in
paragraph 703.16 of the Listed Company Manual), or Trust Issued
Receipts (as defined in Rule 1200). [Nothing in this rule shall be
interpreted as modifying or relieving the specialist from his or her
obligations and required compliance with all Exchange rules, policies
and procedures.]
(c) Except as otherwise provided in paragraph (b) above,
specialists shall have the ability to establish an external quote
application interface (``Quote API'') which utilizes proprietary
algorithms that allow the specialist, on behalf of the dealer account,
to systemically:
(i) When not reacting to an order entering the Display Book[reg],
establish the best bid or offer on the Exchange;
(ii) When not reacting to an order entering the Display Book[reg],
withdraw the specialist interest at the best bid or offer on the
Exchange;
(iii) Supplement the size of the existing Exchange published best
bid or offer;
(iv) Provide price improvement to automatic executions subject to
the conditions outlined below;
(v) Match bids and offers published by other market centers;
(vi) Facilitate a single-price execution at the Exchange published
best bid or offer, provided the specialist purchases or sells all of
the remaining volume on the order being facilitated; or
(vii) Place within the Display Book[reg] system a specialist
interest file at varying prices outside the published Exchange
quotation.
The specialist Quote API may permit the specialist dealer account
to systemically participate in a transaction to provide price
improvement as provided in (iv) only when:
(A) The quotation spread is .03 or greater;
(B) The specialist's interest at the Exchange published bid or
offer in that security is the lesser of 10,000 shares or twenty percent
of the size of the market on the side which the transaction will take
place;
(C) The size of the order to be executed is 2,000 shares or less;
(D) The specialist satisfies the entire order; and
(E) The price improvement to be supplied by the specialist's
participation is at least .02 where the quotation spread at the time of
the transaction is .03 to .05, is at least .03 where the quotation
spread at the time of the transaction is .06 to .10, is at least .04
where the quotation spread at the time of the transaction is .11 to
.20, and is at least .05 where the quotation spread at the time of the
transaction is greater than .20.
(d) Quote API pursuant to paragraphs (b) and (c) above:
(i) Must not enable the specialist to trade at the best bid or
offer except as permitted in (c)(vi) above;
(ii) Must be designed and must operate in such a manner that its
functionality is based on the consideration of only the order most
recently accessed by or available to the Quote API at the time the
Quote API is generating a message;
(iii) Must identify the order it is reacting to in a manner
prescribed by the Exchange;
(iv) Must not be operative during the time a block size trade as
defined in Rule 127 involving orders on the book is being reported
pursuant to manual procedures or at any time that autoquoting or
automatic executions are not available on the Exchange; and
(v) Must be able to participate in a trade in a manner that
complies with all Exchange rules, policies and procedures with respect
to the specialist's ability to establish, increase or liquidate a
position.
The identification of a particular order that the Quote API is
reacting to when it sends a message will not guarantee that the
specialist will trade with that order or that the specialist will have
priority in trading with that order. Specialist interest established by
the Quote API that does not trade with a particular order it identifies
will be automatically cancelled by the Exchange.
* * * * *
(Remainder of rule unchanged)
Disclosure of Specialists' Orders
Rule 115
A member acting as a specialist may disclose any information in
regard to the order entrusted to the specialist:
(i) For the purpose of demonstrating the methods of trading to
visitors to the Floor;
(ii) To other market centers in order to facilitate the operation
of ITS or any other Application of the System; and
(iii) While acting in a market making capacity, to provide
information about buying or selling interest in the market, including
aggregated buying or selling interest contained in any broker agency
interest file other than interest the broker has chosen to exclude from
the aggregate buying and selling interest in response to an inquiry
from a member conducting a market probe in the normal course of
business. Information regarding stop orders may be provided if the
specialist has a reasonable basis to believe that the member intends to
trade the security at a price at which stop orders would be relevant. A
specialist shall make information available in a fair and impartial
manner to any member while on the Floor. A specialist shall not
disclose the identity of any buyer or seller represented on his book if
expressly requested not to do so by the broker who entered the order
with the specialist.
* * * * *
(Remainder of rule unchanged)
Orders of Members To Be in Writing
Rule 117
No member on the Floor shall make any bid, offer or transaction for
or on behalf of another member except pursuant to a written or
electronically recorded order. If a member to whom an order has been
entrusted leaves the Crowd without actually transferring the order to
another member, the order shall not be represented in the market during
his or her absence, except with respect to any portion of his or her
agency interest file that was not cancelled before the member left the
Crowd, notwithstanding that such failure to cancel an agency interest
file is a violation of Exchange rules.
[[Page 67986]]
Supplementary Material
.10 Absence from Crowd.--When a member keeps an order in his or her
possession and leaves the Crowd in which dealings in the security are
conducted, the member is not entitled during his or her absence to have
any bid, offer or transaction made in such security on his or her
behalf or to have dealings in the security held up until he or she is
summoned to the Crowd, except that the member shall be held to any
executions involving his or her agency interest file. To insure
representation of an order in the market during his or her absence, a
member must therefore actually turn the order over to another member
who will undertake to remain in the Crowd. If a member keeps the order
in his or her possession and during his or her absence from the Crowd
the security sells at or through the limit of his or her order, the
member will be deemed to have missed the market.
* * * * *
(Remainder of rule unchanged)
Record of Orders
Rule 123
* * * * *
(e) System Entry Required
Except as provided in paragraph .21 and .22 below, no Floor member
may represent or execute an order on the Floor of the Exchange or place
an agency interest file within the Display Book[reg] system unless the
details of the order and the agency interest file have been first
recorded in an electronic system on the Floor. Any member organization
proprietary system used to record the details of the order and agency
interest file must be capable of transmitting these details to a
designated Exchange data base within such time frame as the Exchange
may prescribe.
The details of each order required to be recorded shall include the
following data elements, any changes in the terms of the order and
cancellations, in such form as the Exchange may from time to time
prescribe:
1. Symbol;
2. Clearing member organization;
3. Order identifier that uniquely identifies the order;
4. Identification of member or member organization recording order
details;
5. Number of shares or quantity of security;
6. Side of market;
7. Designation as market, limit, stop, stop limit[;], auction
limit;
8. Any limit price and/or stop price;
9. Time in force;
10. Designation as held or not held;
11. Any special conditions;
12. System-generated time of recording order details, modification
of terms of order or cancellation of order;
13. Such other information as the Exchange may from time to time
require.
The Floor member must identify which orders or portions thereof are
being made part of the agency interest file pursuant to such procedures
as required by the Exchange.
* * * * *
(Remainder of rule unchanged)
Miscellaneous Requirements
Rule 123A
* * * * *
.30 A specialist may accept one or more percentage orders.--
* * * * *
(a) The elected or converted portion of a ``percentage order that
is convertible on a destabilizing tick and designated immediate
execution or cancel election'' (``CA-DI order'') may be automatically
executed and may participate in a sweep.
(i) An elected or converted CAP-DI order on the same side of the
market as an automatically executed electing order may participate in a
transaction at the bid (offer) price if there is volume associated with
the bid (offer) remaining after the electing order is filled in its
entirety. An elected or converted CAP-DI order on the same side of the
market as an automatically executed electing order that sweeps the book
will participate in a transaction at the sweep clean up price if there
is volume remaining on the book or from contra-side elected CAP-DI
orders at that price.
(ii) An elected or converted CAP-DI order on the contra-side of the
market as an automatically executed electing order may participate in a
transaction at the bid (offer) price and the sweep clean up price, if
any.
* * * * *
(Remainder of rule unchanged)
Order Handling--Auction Limit Orders and Market Orders
Rule 123F
(a) Auction Limit Orders
(1) An auction limit order will be automatically executed or routed
pursuant to Rule 15A.50 upon entry if there is a minimum variation
quotation on the Exchange at the time the order reaches the book or the
national best bid (offer) is displayed by another ITS participating
market center and such bid (offer) creates a minimum variation market
compared with the Exchange best offer (bid).
(2) If not executed upon entry, an auction limit order to buy with
a limit price that is at or above the Exchange best offer when it
reaches the book shall be autoquoted the minimum variation better than
the Exchange best bid at the time and an auction limit order to sell
with a limit price that is at or below the Exchange best bid when it
reaches the book shall be autoquoted the minimum variation better than
the Exchange best offer at that time, thereby becoming the new Exchange
best bid or offer.
The size associated with a subsequent auction limit order to buy
with a limit price that is at or above the Exchange best offer when it
reaches the book will be added to the bid. The size associated with a
subsequent auction limit order to sell with a limit price that is at or
below the Exchange best bid when it reaches the book will be added to
the offer.
(3) The arrival of a subsequent order on the same side of the
market capable of trading at a price better than the auction limit
order is bidding (offering), the execution of an order on the same
side, of the market as an auction limit order that exhausts some or all
of the contra-side volume available in the Exchange quotation, the
cancellation of some or all of the contra-side volume, or a change in
the price of the contra-side of the quotation that would enable an
execution of the auction limit order with price improvement shall cause
the auction limit order to be automatically executed in accordance
with, and to the extent provided by, Exchange Rules 1000-1004.
(4) An auction limit order that has not been executed within 15
seconds after it reaches the book shall be automatically executed in
accordance with, and to the extent provided by, Exchange Rules 1000-
1004.
(5) An auction limit order may be executed at a price inferior to
the market price prevailing at the time it was entered.
(6) An auction buy limit order with a limit price that is not at or
above the Exchange best offer when it reaches the book or an auction
limit order to sell with a limit price that is not at or below the
Exchange best bid when it reaches the book shall be displayed on the
book at its limit price. An auction limit order that is unable to
automatically execute because of its limit price shall be handled as a
regular limit order.
(b) Market Orders
(1) A market order designated for automatic execution will be
automatically executed in accordance with and to the extent provided by
Exchange Rules 1000-1004.
[[Page 67987]]
(2) A market order not designated for automatic execution but
delivered systemically to the Display Book[reg] will be automatically
executed or routed pursuant to Rule 15A.50 upon entry if there is a
minimum variation quotation on the Exchange at the time the order
reaches the Display Book[reg] or the national best bid (offer) is
displayed by another ITS participating market center and such bid
(offer) creates a minimum variation market compared with the Exchange
best offer (bid).
(3) If not executed upon entry, such market order to buy shall be
autoquoted the minimum variation better than the Exchange best bid and
such market order to sell shall be quoted the minimum variation better
than the Exchange best offer at that time, thereby becoming the new
Exchange best bid or offer.
(4) The arrival of a subsequent order on the same side of the
market capable of trading at a better price than such market order is
bidding (offering), the execution of an order on the same side of the
market as such market order, that exhausts some or all of the contra-
side volume available in the Exchange quotation, the cancellation of
some or all of the contra-side volume, or a change in the price of the
contra-side of the quotation that would enable an execution of such
market order with price improvement shall cause such market order to be
automatically executed in accordance with, and to the extent provided
by, Exchange Rules 1000-1004.
(5) A market order that has not been executed within 15 seconds
shall be automatically executed in accordance with, and to the extent
provided by, Exchange Rules 1000-1004.
(6) A market order may be executed at a price inferior to the
market price prevailing at the time it was entered.
* * * * *
Odd-Lot Orders
Rule 124
* * * * *
Supplementary Material
* * * * *
.50 [The odd-lot portion of PRL (part of round lot) orders will be
executed at the same price as the round lot portion and will be
processed through the round lot system.] The round lot portion of a
part of round lot (PRL) order will be automatically executed in
accordance with, and to the extent provided by, Exchange Rules 1000-
1004. The odd lot portion will be executed with the specialist as
contra party.
* * * * *
(Remainder of rule unchanged)
NYSE Direct+[reg] Automatic Execution of Limit Orders Against Orders
Reflected in NYSE Published Quotation
Rule 1000
(a) [Only straight limit orders without tick restrictions are
eligible for entry as auto ex orders. Auto ex orders to buy shall be
priced at or above the price of the published NYSE offer. Auto ex
orders to sell shall be priced at or below the price of the NYSE bid.]
An auto ex order shall receive an immediate, automatic execution
against orders reflected in the Exchange['s] published quotation,
orders on the book, Floor broker agency interest file and specialist
interest file, in accordance with, and to the extent provided by,
Exchange Rules 1000-1004 and shall be immediately reported as [NYSE]
Exchange transactions, unless:
(i) The [NYSE's] Exchange published quotation is in the non-firm
quote mode;
[(ii) The execution price would be more than five cents away from
the last reported transaction price in the subject security on the
Exchange];
[(iii)] (ii) With respect to a single-sided auto ex order, a better
[price exists] bid or offer is published in another ITS participating
market center where an automatic execution is immediately available or
where such better bid or offer is otherwise protected from a trade-
through by Securities and Exchange Commission rule or ITS Plan and such
better bid or offer has not been systemically matched on the Exchange,
unless the member entering the order indicates in such manner as
required by the Exchange that it is contemporaneously satisfying such
better bid or offer;
[(iv) With respect to a single-sided auto ex order, the NYSE's
published bid or offer is 100 shares;]
[(v) A transaction outside the NYSE's published bid or offer
pursuant to Rule 127 is in the process of being completed, in which
case the specialist should publish a bid and/or offer that is more than
five cents away from the last reported transaction price in the subject
security on the Exchange];
[(vi)] (iii) Trading in the subject security has been halted;
[(vi)] (iv) The specialist has gapped the quotation in accordance
with the policies and procedures of the Exchange;
(v) A liquidity replenishment point has been reached. A liquidity
replenishment point (``LRP'') is reached when:
(A) The price of an automatic execution would be above (below) a
minimum of five cents from the Exchange bid (offer), rounded to the
nearest five-cent increment, or
(B) An automatic execution reaches a momentum liquidity
replenishment point (``MLRP'') or an automatic execution would result
in a transaction at a price on that side of the market outside a MLRP
range. A MLRP range is calculated based on high and low transaction
prices on the Exchange in a security within the prior 30 seconds. A
MLRP is reached when the execution price of a security has moved the
greater of twenty-five cents or 1% of its price (rounded to the nearest
cent) on the Exchange within 30 seconds or less;
(vi) A block size transaction as defined in Rule 127 that involves
orders on the book is being reported manually; or
(vii) The order is for a security whose price on the Exchange is
more than $300.00.
(b)(i) Auto ex orders to buy shall trade with the Exchange
published best offer. Auto ex orders to sell shall trade with the
Exchange published best bid.
(ii) Where the volume associated with the Exchange published best
bid (offer) is insufficient to fill an auto ex order in its entirety,
other than an incoming commitment to trade received through ITS, the
unfilled balance of such order (the ``residual'') shall ``sweep'' the
book i.e., trade with orders on the book and any broker agency interest
file and/or specialist interest file capable of execution in accordance
with Exchange rules until it is executed in full, its limit price if
any is reached, or a liquidity replenishment point is reached,
whichever occurs first. After trading with the Exchange published best
bid (offer), the unfilled balance of any incoming commitment to trade
received through ITS shall be automatically cancelled.
(iii) The residual shall trade with the orders on the book and any
broker agency interest file and/or specialist interest file capable of
execution in accordance with Exchange rules at a single price, such
price being the best price at which such orders and files can trade
with the residual to the extent possible, or a liquidity replenishment
point, whichever comes first (``clean up price''). Orders on the book
and Floor broker agency interest trading with the residual shall be on
parity and receive the clean up price. If no orders remain on the book
capable of trading at the clean up price, specialist interest may trade
and will be on parity to the extent permitted by Exchange rules with
broker agency interest at that price if any. Any specialist interest
that remains after the residual has traded at the clean up price
[[Page 67988]]
will be immediately cancelled automatically by the Exchange. Where a
bid or offer published by another ITS participating market center where
an automatic execution is immediately available is better than the
sweep clean up price or where such better bid or offer is otherwise
protected from a trade-through by Securities and Exchange Commission
rule or ITS Plan, the portion of the sweeping residual that satisfies
the size of such better priced bid or offer will be automatically
routed as a commitment to trade to the ITS participating market center
publishing such better bid or offer.
(iv) Any auto ex order residual remaining after the sweep described
in (ii) above shall be bid (offered) at the order's limit price, if
any, or the LRP whichever is lower (higher), unless the order is
designated immediate or cancel, in which case the residual shall be
automatically cancelled.
[Auto ex orders that cannot be immediately executed shall be
displayed as limit orders in the auction market. An auto ex order equal
to or greater than the size of the NYSE's published bid or offer shall
trade against the entire published bid or offer, and a new bid or offer
shall be published pursuant to Rule 60(e). The unfilled balance of the
auto ex order shall be displayed as a limit order in the auction
market.]
[During a pilot program in 2003, NYSE Direct+ shall not be
available in the following five stocks: American Express (AXP), Pfizer
(PFE), International Business Machines (IBM), Goldman Sachs (GS), and
Citigroup (C). The Exchange will announce in advance to its membership
the time the pilot will run.]
* * * * *
Execution of Auto Ex Orders
Rule 1001
(a) Subject to Rule 1000, auto ex orders shall be executed
automatically and immediately reported. The contra side of the
execution shall be [orders reflected in the Exchange's published
quotation], as follows:
(i) The first contra side bid or offer at a particular price shall
be entitled to time priority, but after a trade clears the Floor, all
bids and offers at such price shall be on parity with each other;
(ii) All bids or offers on parity shall receive a split of
executions in accordance with Exchange Rule 72;
(iii) The [specialist shall be responsible for assigning]
assignment of the number of shares to each contra side bidder and
offeror as appropriate, in accordance with Exchange Rule 72, with
respect to each automatic execution of an auto ex order shall be done
systemically;
(iv) The specialist shall be the contra party to any automatic
execution of an auto ex order where interest reflected in the published
quotation against which the auto ex order was executed is no longer
available, except with respect to transactions occurring with the
broker agency interest file;
[(v) A universal contra shall be reported as the contra to each
automatic execution of an auto ex order.]
[(b) If the depth of the published bid or offer is not sufficient
to fill an auto ex order in its entirety, the unfilled balance of the
order shall be routed to the Floor and shall be displayed in the
auction market.]
[(c)] (b) No published bid or offer shall be entitled to claim
precedence based on size with respect to executions against auto ex
orders.
* * * * *
Availability of Automatic Execution Feature
Rule 1002
[Orders designated as ``a] Auto ex[''] orders in a particular
stock, Investment Company Unit (as defined in paragraph 703.16 of the
Listed Company Manual), or Trust Issued Receipt (as defined in Rule
1200) shall be eligible to receive an automatic execution if entered
after the Exchange has disseminated a published bid or offer, until
3:59 p.m. for stocks and Trust Issued Receipts, or 4:14 p.m. for
Investment Company Units, or within one minute of any other closing
time of the Exchange's floor market. [Orders designated as ``a] Auto
ex[''] orders in a particular stock, Trust Issued Receipt, or
Investment Company Unit that are entered prior to the dissemination of
a bid or offer, or after 3:59 p.m. for stocks and Trust Issued
Receipts, after 4:14 p.m. for Investment Company Units, or within one
minute of any other closing time, shall be [displayed as limit orders]
displayed as market or limit orders as applicable [in the auction
market] unless it is an incoming commitment to trade received through
ITS or an auto ex order designated as immediate or cancel, in which
case such order would be cancelled .
* * * * *
Application of Tick Tests
Rule 1003
If a transaction has been agreed upon in the auction market, and an
automatic execution involving auto ex orders is reported at a different
price before the auction market transaction is reported, any tick test
applicable to such auction market transaction shall be based on the
last reported trade on the Exchange prior to such execution of auto ex
orders.
* * * * *
Election of Stop Orders and Percentage Orders
Rule 1004
Automatic executions of auto ex orders shall elect stop orders,
stop limit orders and percentage orders electable at the price of such
executions. Any stop orders so elected shall be automatically executed
pursuant to [the] Exchange['s auction market procedures] rules, and
shall not be guaranteed an execution at the same price as subsequent
automatic executions of auto ex orders.
* * * * *
[Orders May Not Be Broken Into Smaller Amounts]
[Rule 1005
An auto ex order for any account in which the same person is
directly or indirectly interested may only be entered at intervals of
no less than 30 seconds between entry of each such order in a stock,
Investment Company Unit (as defined in paragraph 703.16 of the Listed
Company Manual), or Trust Issued Receipt (as defined in Rule 1200),
unless the orders are entered by means of separate order entry
terminals, and the member or member organization responsible for entry
of the orders to the Floor has procedures in place to monitor
compliance with the separate terminal requirement.]
* * * * *
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 NYSE 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
In the Notice, the Exchange proposed enhancements to the operation
of
[[Page 67989]]
Direct+, the Exchange's electronic execution facility, and to other
Exchange rules. The Exchange believes that, taken together with
Amendment Nos. 2 and 3, the proposal would create a unique, integrated
market--a hybrid market--that would improve on the speed and efficiency
of technology by preserving the advantages of human knowledge and
expertise that are central to the agency-auction process. The Exchange
believes that by increasing the array of available trading choices, the
hybrid market would benefit all customers, from the smallest investors
to the largest institutions.
The Exchange believes that the proposed enhancements to Direct+
would offer immediate execution at the best bid and offer without
restrictions on order size or order frequency, as well as anonymity and
speed to the extent of the displayed volume associated with the bid and
offer. Under the proposal, any residual would sweep existing orders on
the Display Book[reg] (``book'') until either the order is filled, its
limit price (if any) is reached, or a liquidity replenishment point
(``LRP'') is reached.
The Exchange describes LRPs as pre-determined price points at which
electronic trading would briefly convert to auction market trading.
LRPs could be triggered by an electronic sweep or if electronic trading
results in rapid price movement over a short period. Because the LRP
would convert the market solely to an auction market on a temporary
basis, it would moderate volatility by permitting new orders, as well
as Crowd and specialist interest, to add liquidity. The Exchange
believes that this would promote reasonable continuity and foster the
market quality that is a hallmark of the Exchange.
The Exchange believes that the hybrid market proposal would
preserve the best aspects of the agency-auction market. For example,
customers who want the opportunity for price improvement provided by
the auction process would still be able to access the full extent of
the book and liquidity represented by brokers on the Floor. The
interaction of specialists and brokers in the Crowd would create a
value proposition by offering opportunities for price improvement that
are central to the auction market process. For instance, by committing
capital and adding depth to the market in response to customer demands,
specialists would continue to stabilize prices and reduce volatility.
Their ability and commitment to inject liquidity into the market, in
order to bridge temporary gaps in supply and demand, would keep the
market fair and orderly, which is in the interest of all customers.
Floor brokers would also continue to play a critical role in the price
discovery process. Competition between orders represented by Floor
brokers in the Crowd would help ensure fair, orderly, and liquid
markets. Interaction between Floor brokers and specialists would
provide a flow of information regarding changing market conditions and
would serve as a catalyst to trading.
In short, the Exchange believes that the hybrid market would
combine the benefits of specialist and Floor broker expertise with the
speed and certainty of electronic execution to create a system offering
maximum choice to customers without eliminating time-tested trading
procedures that have proven immensely successful in providing stable,
liquid, and less volatile markets.
The manner in which the Exchange's hybrid market would operate has
been described in the Notice. Amendment Nos. 2 and 3 supplement the
description of certain aspects of the hybrid market and makes further
amendments to the Exchange's rules.
Specifically, the Exchange discusses the following aspects of the
hybrid market:
Execution of auction limit orders and market orders;
Tick-restricted orders, stop orders, and other orders
eligible for automatic execution;
The broker agency interest file;
Definition of the Crowd;
The specialist interest file and algorithm;
Sweeps and LRP;
Gap quoting; and
Availability of automatic executions and autoquote.
Auction Limit Orders and Market Orders
According to the Exchange, proposed Auction Limit (``AL'') orders
and market orders not designated for automatic execution would provide
an opportunity for price improvement, thereby preserving a very
important choice for customers. The objective would be for specialists
to represent these orders in the auction market, where the Crowd could
offer an opportunity for execution at a price better than the Exchange
bid or offer, while retaining as a backup the electronic functionality
of automatic execution in case the specialist is unable to interact
with the order immediately. Price improvement could also result from
the order's participation in an automatic execution. AL and market
orders could provide price improvement to the contra-side of an
execution.
Under the proposal, AL and market orders would be electronically
executed when they arrive at the book if the Exchange quotation is the
minimum variation (e.g., 20.45 bid, offered at 20.46). Where the
national best bid (offer) is published by another market center,\10\
and it causes a minimum variation market when compared with the
Exchange best offer (bid), an AL or market order (or the requisite
portion thereof) would be automatically routed to such other market
center for execution unless the specialist matches the price of the
better away offer (bid) (e.g., Assume that an AL or market order to buy
arrives, and the Exchange quotation is 20.45 bid, offered at 20.50, and
a 20.46 offer is published by another market center. The AL or market
order would be electronically routed to such other market center unless
the specialist matches the away offer of 20.46).
---------------------------------------------------------------------------
\10\ The other market center must be an Intermarket Trading
System (``ITS'') participant in which an automatic execution is
immediately available or such bid (offer) is otherwise protected
from a trade-through by a Commission rule or ITS Plan. For the
purpose of Amendment Nos. 2 and 3, any discussion of another market
center or an away market refers only to those fitting this
description.
---------------------------------------------------------------------------
Under the Exchange's proposal, if not automatically executed or
routed away upon entry, AL and market orders to buy would be autoquoted
the minimum variation above the Exchange best bid, and those to sell
would be autoquoted the minimum variation below the Exchange best
offer, thereby becoming the Exchange best bid or offer (e.g., If the
quote is 20.45 bid, offered at 20.50, and a market order to buy or an
AL buy order with a limit of 20.51 arrives, then the new quote would be
20.46 bid, offered at 20.50. Similarly, if the quote is 20.45 bid,
offered at 20.50 and a market order to sell or an AL sell order with a
limit of 20.45 arrives, the new quote would be 20.45 bid, offered at
20.49).
Under the proposal, the fact that the bid (offer) is on behalf of
an AL or market order would not be shown on NYSE OpenBook. An AL or
market order would be shown in the quote at the price it is bidding
(offering). An AL order's limit price would be available to the
specialist, who would require such information in order to properly
represent the order.
Furthermore, the size associated with the bid or offer would be the
size of the AL or market order. The size of subsequent AL and market
orders on the same side of the market would be aggregated in the bid
(offer) and executed based on time priority,
[[Page 67990]]
consistent with AL orders' limit prices.\11\
---------------------------------------------------------------------------
\11\ See Exhibit A.
---------------------------------------------------------------------------
Although an AL or market order would risk missing the market in its
attempt to obtain price improvement, the Exchange believes that
electronic representation would limit that possibility. Once on the
book, an AL or market order could participate in any execution,
including automatic executions and sweeps (e.g., Assume that the quote
is 20.46 bid, offered at 20.50, 2,500 x 2,000, and the bid is an AL
order. If a market order designated for automatic execution (an ``NX''
market order) to sell 2,500 shares arrives, that order would
automatically execute against the AL order's bid at 20.46).\12\
---------------------------------------------------------------------------
\12\ Id.
---------------------------------------------------------------------------
If an AL or market order has not been executed within 15 seconds of
being quoted, the order would automatically execute like any other auto
ex order (e.g., Buy orders would execute against the displayed offer,
and sell orders would execute against the displayed bid), provided
autoquote and automatic executions are available. In addition, three
events would cause automatic execution of an AL or market order before
15 seconds has elapsed. The three events are: (i) the arrival of a
subsequent order at a better price on the same side of the market as an
AL or market order; (ii) the execution of an order on the same side of
the market as an AL or market order that exhausts some or all of the
displayed contra-side volume or the cancellation of some or all of the
displayed contra-side volume; and (iii) the displayed contra-side price
improves, creating a minimum variation market or allowing execution of
the AL or market order with price improvement. In these situations, the
order causing the AL or market order to automatically execute would
trade first. Where the limit of an AL order would prevent it from
automatically executing, it would be placed on the book at its limit
price and handled as a regular limit order.
The Exchange proposes to renumber proposed NYSE Rules 60(h) and
60(i), describing AL and market orders, as proposed NYSE Rules 123F(a)
and 123F(b). The application of (ii) above to market orders would amend
proposed NYSE Rule 123F(b). Furthermore, the NYSE proposes additional
amendments to proposed NYSE Rules 13 and 123F to clarify the operation
of AL and market orders.
Tick-Restricted Orders, Stop Orders, and Other Orders Eligible for
Automatic Execution
As proposed, tick-restricted orders on the book would be filed
electronically and participate in automatic executions and sweeps as
their ticks and limits, if any, allow. The direction of the sweep
relative to the automatic execution would be in the correct direction:
buy sweeps would cause short sales and sell plus orders to be executed
above the offer, while sell sweeps would cause buy minus orders to be
executed below the bid. Sell short orders, other than those involving
Regulation SHO \13\ pilot securities, would not sweep the book after
automatically executing against bid, as the sweep transaction would
occur on a minus tick.\14\
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\13\ See Securities Exchange Act Release No. 50103 (July 28,
2004), 69 FR 48008 (August 6, 2004).
\14\ See Exhibit A.
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Under the proposal, stop orders, including stop limit orders
(``stop orders'') on the book would be electronically elected and
participate in automatic executions and sweeps by appropriately-priced
electing manual or automatic execution transactions.\15\ Stop orders
would be elected by an automatic execution at the bid or offer price
and would trade after the sweep, if any. The sweep price could also
elect stop orders. The Exchange proposes amendments to NYSE Rules 13
and 1004 to reflect this. Stop orders elected on the contra-side of the
market would trade as part of the sweep because they would add
liquidity.
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\15\ Investment Company Units, as defined in paragraph 703.16 of
the Exchange Listed Company Manual, and Trust Issued Receipts
(together, Exchange-Traded Funds) are elected based on bids or
offers, rather than transactions. See NYSE Rule 13.30.
---------------------------------------------------------------------------
Furthermore, stop orders and CAP-DI orders (convert and parity
percentage orders) could be elected at the same time by automatic
executions and sweeps. If there is insufficient volume to fill the
elected orders, stop orders could be executed first as they become
market or marketable limit orders upon their election, whereas the
elected portion of CAP-DI orders would revert to CAP-DI status if it is
unable to trade. In addition, CAP-DI orders would trade on parity with
each other,\16\ which could also affect the sequence in which elected
stop and CAP-DI orders would trade.
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\16\ See NYSE Rule 123A.30.
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The Exchange proposes to amend NYSE Rule 13 to clarify the types of
orders that would be eligible for automatic execution in the hybrid
market.\17\ These would include auto ex market orders, marketable limit
orders, incoming ITS commitments, ``all or none'' (AON) orders, CAP-DI
orders, stop orders, stop limit orders, tick-sensitive orders and part
of round lot orders.\18\ In addition, orders initially eligible for
automatic execution that have been cancelled and replaced would remain
eligible for automatic execution.
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\17\ This revises the descriptions of orders ineligible for
automatic execution as stated in footnotes 22 and 45 of the Notice
and the accompanying text. See note 6, supra.
\18\ A part of round lot (``PRL'') order is an order for one or
more units of trading plus an amount less than a unit of trading.
NYSE Rule 55 defines a unit of trading as 100 shares unless
otherwise designated. Accordingly, an example of a PRL would be an
order to buy (sell) 517 shares. The specialist is the contra-side of
the odd-lot portion of a PRL.
---------------------------------------------------------------------------
Orders that would be ineligible for automatic execution at this
time include ``opening only'' (OPG), ``fill or kill'' (FOK), ``limit on
close'' (LOC), ``market on close'' (MOC), ``basis'' (BAS), and odd lot
orders. In addition, orders in high-priced securities, currently
defined as securities priced above $300, would be ineligible for
automatic execution. These would include: Berkshire Hathaway Inc.
(BRK.A), Berkshire Hathaway Inc. (BRK.B), Wyeth $2 Convertible
Preferred Stock (WYEPR), Markel Corporation (MKL), Pitney Bowes Inc.
(PBIPR), The Washington Post Company (WPO), and White Mountains
Insurance Group, Ltd. (WTM).
Broker Agency Interest File
The proposed rules provide Floor brokers on the Exchange with the
ability to express electronically that which they are currently able to
do in the Crowd--represent customer interest at varying prices at or
outside the quote with respect to the orders they are handling.
According to the Exchange, the broker agency interest file would
serve the public interest by giving customers the benefit of Floor
broker knowledge and trading expertise in ``working'' their orders,
while not precluding them from participating in electronic executions
and sweeps. It would give customers choice and Floor brokers
flexibility in representing orders over time at the point of sale,
thereby maximizing their ability to obtain the best execution possible.
In this way, the hybrid market would meld the value of the agency-
auction with the benefits of automatic execution.
Under the proposal, the broker agency interest would not be
displayed publicly unless it is at or becomes the Exchange best bid or
offer. This is consistent with
[[Page 67991]]
the Commission's Quote Rule.\19\ When a broker's agency interest is at
or becomes the Exchange best bid or offer, a minimum of 1,000 shares
per broker would be displayed for agency interest greater than or equal
to 1,000 shares and would be included in the quote. A broker would have
the discretion to display more than 1,000 shares of his or her agency
interest at the best bid or offer. The actual amount of a broker's
agency interest, if less than 1,000 shares, would be displayed and
included in the quote. The displayed agency interest at the best bid or
offer would be entitled to parity with displayed orders at the bid or
offer price, other than an order or broker interest entitled to
priority in accordance with NYSE Rule 72. Broker agency interest at the
best bid or offer that is not displayed (``reserve interest'') would
yield to displayed interest in the best bid or offer, but would
participate in automatic executions provided there is sufficient
contra-side liquidity. An auto ex order would trade against the
displayed interest in the quote and any reserve at the bid or offer
price before it would sweep the book. This would amend proposed NYSE
rules.
---------------------------------------------------------------------------
\19\ Rule 11Ac1-1, 17 CFR 240.11Ac1-1.
---------------------------------------------------------------------------
After an execution, if there is less than 1,000 shares of broker
agency interest displayed at the best bid/offer, but additional amount
in the reserve, the displayed amount would replenish so that at least
1,000 shares of agency interest at the best bid/offer would be
displayed. For example, if there are 1,000 shares of broker agency
interest displayed at the best bid/offer, and 500 shares of reserve
(undisplayed at that price), and a 500 share order executes against the
1,000 share of displayed interest, the remaining 500 shares of reserve
interest would be added to the 500 shares of remaining broker agency
interest at the best bid/offer to total 1,000 shares displayed interest
at the best bid/offer.
If what is remaining in the displayed broker agency interest and
the reserve at the best bid/offer do not equal 1,000 shares, all of the
reserve and remaining displayed broker agency interest at that price
would be displayed. For example, if there are 1,600 shares of broker
agency interest displayed at the best bid/offer, and 300 shares of
reserve interest (undisplayed at that price), and a 1,500 share order
executes against the 1,600 shares of displayed broker agency interest,
then the remaining 100 shares of broker agency interest plus the full
amount of the reserve interest (300 shares), totaling 400 shares, would
be displayed at the best bid/offer.
In addition, where there is reserve interest at the best bid
(offer) and an incoming contra-side auto ex order arrives to trade,
there would be two separate Tape prints at the bid (offer) price, if
the amount of the incoming order exceeds the displayed interest at the
best bid (offer). In such case, the first print would be at the best
bid (offer) price for the amount of the displayed interest. The second
print, also at the best bid (offer) price, would include any contra-
side CAP-DI orders \20\ elected by the first print and reserve
interest. Any residual remaining on the incoming order would then sweep
the book until executed, its limit price, if any, is reached, or an LRP
is reached. For example, there are 5,000 shares of broker agency
interest at the best bid (offer) consisting of 1,000 shares of
displayed interest, which is the best bid, and 4,000 shares of reserve
interest. The specialist has a CAP-DI order for 10,000 shares to buy
with a limit price, which allows it to trade at the best bid (offer).
If an auto-ex order to sell 5,000 shares arrives, it would be
automatically executed as follows: 1,000 shares at the best bid prints
first. This automatically elects 1,000 shares of the CAP-DI order and
then 4,000 shares print at the best bid price. The 4,000 shares consist
of 1,000 shares elected from the buy CAP-DI order and 3,000 shares of
the reserve interest. The incoming order would have traded a total of
5,000 shares at the bid price. 1,000 shares would remain in the reserve
interest.
---------------------------------------------------------------------------
\20\ CAP-DI orders on the same side of the market as the
incoming order could also be elected by this print, but would not
trade unless additional interest remains after the incoming order is
executed at the bid (offer) price.
---------------------------------------------------------------------------
Furthermore, displayed agency interest in the broker file that
establishes the Exchange best bid or offer would be entitled to
priority at that price for one trade, as is the case with any other bid
or offer. Broker agency interest that is outside the quote would
participate on parity during sweeps, providing liquidity to the market.
Floor broker agency interest at the same price would be on parity
with each other unless the interest was entitled to priority under NYSE
Rule 72, and no interest would be able to invoke precedence based on
size.
In addition, Floor brokers with an agency interest file would be
required to be in the Crowd, representing those orders. The agency
interest file would allow Floor brokers to represent their customers as
they do in the auction market, negotiating execution prices without
being required to disclose their intentions. The Exchange believes that
parity is the agency-auction principle designed as an incentive for
Crowd participation in the price discovery process, to deepen liquidity
particularly as it relates to the working of orders with potential
market impact. It has the very positive effect of lowering execution
costs for customers by providing the opportunity to leverage human
judgment for price improvement, potentially on both sides of a trade,
lowering market volatility.
The broker agency interest file would not be publicly disseminated
except for the amount of agency interest displayed at the best bid or
offer. The only information concerning the broker agency interest file
available to the specialist would be the aggregate amount of agency
interest at each price. This aggregate information, which would include
any reserve interest at the Exchange best bid or offer unless excluded
from the aggregate as described below, could be included in a
specialist's response to a member's market probe in accordance with
NYSE Rule 115, as amended.
Proposed NYSE Rule 70.20 is amended to provide a Floor broker with
the discretion to remove his or her agency interest, including any
reserve interest at the best bid (offer), from the aggregate
information available to the specialist. Broker agency interest removed
from the aggregate would be displayed as described above when it
becomes, or is at, the Exchange best bid or offer. If a better bid or
offer is made on the Exchange, such interest would no longer be
displayed and would not be included in the aggregate information unless
the Floor broker chooses otherwise. Broker agency interest removed from
the aggregate information would participate in automatic executions and
sweeps. It would be the responsibility of the broker representing
interest not included in the aggregate information to ensure that such
interest is properly represented with respect to any manual trade that
may occur because the specialist would not have any knowledge of such
interest.
Furthermore, the broker agency file could not include G order \21\
interest or customer interest that prevents the specialist from trading
on parity with the Crowd pursuant to NYSE Rule 104.10(6)(i)(C).
---------------------------------------------------------------------------
\21\ ``G'' orders refer to proprietary orders represented
pursuant to Section 11(a)(1)(G) of the Act, 15 U.S.C. 78k(a)(1)(G).
---------------------------------------------------------------------------
Proposed NYSE Rule 70.20 has been amended to reflect the matters
noted above.
[[Page 67992]]
Definition of the Crowd
Floor brokers would be permitted to have agency interest files in
only one Crowd at a time. The Exchange proposes an amendment to
proposed NYSE Rule 70.30 to add that a Crowd would consist of five
contiguous panels at a single post where securities are traded.
Specialist Interest File and Algorithms
The Exchange believes that specialists provide value to the market,
committing capital to add liquidity and stabilize prices. Specialists'
ability and commitment to absorb short-term fluctuations by bridging
temporary gaps in supply and demand keeps the Exchange market fair and
orderly and lowers volatility.
To assist specialists in this effort and to enable them to more
readily comply with their market-making responsibilities, the Exchange
proposes to provide specialists with the ability to implement an
external quote application interface (Quote API) which would utilize
proprietary algorithms based on predetermined parameters that would
enable them to electronically represent their dealer account,
replicating electronically some of the things specialists are permitted
to do manually. This would allow specialists to provide value and
liquidity within the context of an electronic market.
Based on predetermined parameters, the algorithms could only: (i)
Generate a bid (offer) that would improve the Exchange best bid (offer)
price; (ii) withdraw a previously made best bid (offer), provided the
algorithmic decision to improve or withdraw a bid or offer is not based
on a particular order entering the book; (iii) supplement the size of
an existing best bid (offer); (iv) match better bids (offers) published
by other market centers; (v) facilitate a single-priced execution at
the Exchange best bid or offer, provided the entire order is filled;
(vi) layer specialist interest at prices outside the quote, enabling
the specialist, to the extent permitted by Exchange rules, to
participate in or price improve a sweep; and (vii) provide meaningful
price improvement to orders, as described below.
The algorithms would not be able to hit bids or take offers. All
specialist trading whether manual or electronically generated by
algorithms would have to be in accordance with Exchange Rules. Items
(i)-(vii) above reflect proposed amendments to NYSE Rule 104.
The algorithms would enable the specialists on behalf of the dealer
account to electronically provide price improvement to automatic
executions, provided the following conditions are met: (i) The
quotation spread is at least three cents; (ii) the specialist is
represented in the published bid or offer in a meaningful amount: the
lesser of 10,000 shares or 20% of the respective bid (offer) size;
(iii) the order receiving price improvement is of ``retail'' order
size, i.e., 2,000 shares or less and the specialist fills the order;
and (iv) the price improvement provided by the specialist is (a) at
least .02 where the quote spread is .03-.05, (b) at least .03 where the
quote spread is .06-.10, (c) at least .04 where the quote spread is
.11-.20, and (d) at least .05 where the quote spread is more than .20.
After a sweep, existing specialist interest below the sweep price,
in the case of a buy sweep, or above the sweep price, in the case of a
sell sweep, that was not included in the sweep due to yielding
requirements, would be immediately cancelled so that this interest
would not be autoquoted as the Exchange best bid or offer. The
algorithms could send a separate message in order to bid or offer at a
price inferior to the sweep price, provided Exchange rules governing
specialist trading permit bidding or offering at that price.
Furthermore, the algorithms could be designed to have access to
public information as well as orders entering the system. As noted
above, an algorithmic message improving the Exchange best bid (offer)
or withdrawing a previously established best bid (offer) could not be
based on an incoming order. Such new bid (offer) could be the minimum
variation or more than the previous best bid (offer). An algorithmic
message to provide price improvement to an automatic execution
generated in reaction to an incoming order would have to comply with
the conditions noted above, including price improvement of more than
the minimum variation. Electronic messages could not be generated by
algorithms while a manual block-size trade is being reported or when
autoquote and automatic executions are unavailable. Specialists' use of
algorithms would be subject to review by the Exchange's regulatory
division.
The algorithms could also generate messages only in reaction to one
order at a time and only as that order is entering the system.
Algorithms would be required to identify, in the manner required by the
Exchange, the specific order to which they are reacting. The fact that
algorithms would have generated a message in response to a particular
order would not guarantee that the specialist interest would be able to
interact with that order, nor would it give the specialist interest
priority in trading with that order. Specialist interest that does not
trade with the order identified by the algorithms, for example, because
the specialist order did not arrive at the book in time, or the
specialist has to yield to the book, would be automatically cancelled.
The Exchange believes that the algorithms and specialist interest
file would enhance market quality by enabling the specialist to
interact with orders electronically, providing capital and liquidity to
the market as they do today. Proposed NYSE Rule 104 has been amended to
clarify these rules.
Sweeps and Liquidity Replenishment Points
The Exchange believes that LRPs would protect customers by
moderating volatility resulting from electronic executions. Where
specialists and Floor brokers participate in the price discovery
process, volatility moderators would not be necessary, and auction
market transactions would not be subject to them. The Exchange
represents that the LRP parameters have been selected by the Exchange
after careful evaluation and discussions with market participants. They
would be designed to impact automatic executions infrequently. When
reached, LRPs would allow buyers and sellers to react to fast changing
market conditions and provide an opportunity for orders to interact
with Crowd interest not encompassed in the broker agency interest file
and with specialist interest, enabling the auction market to supplement
liquidity and lower volatility. Consistent with the Exchange's goal of
expanding customer choice, IOC orders would be cancelled automatically
when automatic execution is suspended as a result of a LRP.\22\ This
would provide customers with the opportunity to obtain an automatic
execution in another market, even if that price is inferior to the
Exchange best bid or offer consistent with Regulation NMS
proposals.\23\
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\22\ IOC orders would be cancelled in all instances when
automatic executions are unavailable.
\23\ See Securities Exchange Act Release No. 49325 (February 26,
2004), 69 FR 11126 (March 9, 2004). See also Securities Exchange Act
Release No. 49749 (May 20, 2004), 69 FR 30142 (May 26, 2004).
---------------------------------------------------------------------------
The Exchange proposes two LRPs: a price-based or sweep LRP and a
momentum-based LRP.\24\ The Exchange represents that the most
restrictive LRP would be disseminated via NYSE
[[Page 67993]]
OpenBook[reg] or another data distribution channel.
---------------------------------------------------------------------------
\24\ In this amendment, the NYSE proposes to eliminate NYSE Rule
1000(a)(ii), which prohibits automatic executions at a price more
than five cents away from the last reported transaction price on the
Exchange in the relevant security.
---------------------------------------------------------------------------
Priced-Based or Sweep LRP
The sweep LRP would be set at the nearest five-cent increment
outside the Exchange best bid and offer, that is at least five cents
away from the Exchange best bid and offer (e.g., If the Exchange quote
is 20.05 bid, offered at 20.10, then the sweep LRP would be 20.00 and
20.15. If the Exchange quote is 20.04 bid, offered at 20.11, then the
sweep LRP would be 19.95 and 20.20). When a LRP is reached, the
sweeping order would trade at that price to the extent of the volume
available and then the market would be autoquoted at the LRP if there
is stock remaining on the order. If not, the next best bid (offer)
would be autoquoted. Automatic executions and autoquote would be
suspended, but incoming orders and cancellations would continue to be
reflected automatically on the book. If the displayed bid (offer) on
the contra-side cancels, a new bid (offer) would be autoquoted, in
effect overriding the suspension (partial autoquote).
Under the proposal, automatic executions and autoquote would resume
in no more than five seconds where the sweeping order is filled in its
entirety (e.g., no residual exists), where the residual is cancelled
(e.g., the sweeping order is IOC), or where the residual's limit price
is the LRP price, unless the specialist manually trades or quotes the
market before five seconds have elapsed.
Similarly, automatic executions and autoquote would resume in no
more than 10 seconds where a residual exists and its limit price is
above the LRP price, but it does not create a locked or crossed market,
unless the specialist has manually traded or quoted the market before
10 seconds have elapsed. It is expected that the specialist would quote
or trade before 10 seconds have elapsed, unless an imbalance exists, a
trade is being put together in the Crowd, or market conditions
otherwise prevent. In any event, automatic executions and autoquote
would resume after 10 seconds.
Finally, where a residual exists limited to a price above the LRP,
and the limit price creates a locked or crossed market, or when a
locked or crossed market results from the entry of orders and
cancellations during the 5 and 10-second periods described above,
automatic executions and autoquote would resume with a manual trade. If
the locking or crossing residual order cancels, automatic executions
and autoquote would resume within the relevant 5 or 10-second timeframe
described above, unless a manual trade or quote occurs before then.
Sweeps and Price Protection
The Exchange believes that nothing in this filing or in the
operation of sweeps would be inconsistent with or undermine the
fundamental tenet of the trade-through rules (``TTR'')--that betters
bids and offers published by other market centers are entitled to
protection. The proposals, including automatic electronic routing of
orders to the market centers displaying better priced bids and offers,
would be consistent with the TTR. Best bids (offers) published by away
markets that are better than a sweep price would be satisfied in their
entirety.\25\ As is today, best bids and offers in these markets (i.e.,
``top of the book'') would be entitled to price protection. The
Exchange believes that intermarket price-time priority has been
extensively debated,\26\ but has not been viewed to be in the best
interest of the national market system. In any event, Regulation NMS
proposes to permit customers to sweep multiple markets
contemporaneously to access better priced liquidity that may be
available.\27\
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\25\ This presumes that the order is not labeled as an
intermarket sweep consistent with the proposed Regulation NMS
concept of an intermarket sweep order. Telephone conversation
between Kelly Riley, Assistant Director, Division, Commission, and
Jeff Rosenstrock, Senior Special Counsel, Market Surveillance, NYSE,
on November 15, 2004.
\26\ See, e.g., Securities Exchange Act Release No. 42450
(February 23, 2000), 65 FR 10577 (February 28, 2000) (Commission
request for comment on issues relating to market fragmentation).
\27\ See note 23, supra.
---------------------------------------------------------------------------
The ability of the specialist to match a better published bid or
offer rather than shipping an order to that bid or offer is permitted
today. According to the Exchange, the proposed rules would simply speed
the process by permitting the specialist to electronically match or
ship. During the sweep, a commitment to trade that would satisfy the
full amount of any better bid or offer that is published as the best
bid or offer by another market center would be auto-routed to such
market (if a trade-through would otherwise occur). According to the
Exchange, this would be similarly consistent with the TTR.
According to the Exchange, it has been suggested that the proposed
rules would enable the specialist to avoid complying with the TTR by
publishing what has been termed a ``preemptive'' 100-share bid or
offer. The Exchange believes that this is erroneous. For example,
assume that the Exchange quotation is 19.91 bid, offered at 20.01, 100
x 500, and that there are offers on the book to sell 100 shares at
20.04, 500 shares at 20.05, 300 shares at 20.07, 100 shares at 20.08,
and 1,000 shares at 20.09. If another market center also has published
an offer to sell for 500 shares at 20.01, and an NX order to buy 2,000
shares arrives at the Exchange, then 500 shares would automatically
execute at 20.01 on the Exchange, and 500 shares would be automatically
routed to the other market center as a commitment to trade at 20.01.
The remaining 1,000 shares would sweep the Exchange book, trading at
20.08, providing price improvement to the orders on the book.\28\
Alternatively, the specialist algorithms could determine to execute the
entire order on the Exchange at 20.00. This example presumes that only
one market center has a better published bid (offer) than the Exchange
best bid (offer) or sweep price. All market centers that have a better
published bid (offer) than the price the Exchange would trade at would
be satisfied.
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\28\ Telephone conversation between Cyndi Rodriguez, Special
Counsel, Division, Commission, and Don Siemer, Director, Market
Surveillance, NYSE, on November 10, 2004.
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Momentum LRP (``MLRP'')
The Exchange believes that excessive volatility could occur in
situations other than electronic sweeps. For this reason, the Exchange
proposes a LRP based on price movement over a period of time.
A MLRP would be reached when the price of a security has moved the
greater of twenty-five cents or 1% of its price,\29\ within 30 seconds
or less. For example, a MLRP would be reached in a security that is
trading at 18.00 when the price moves 0.25 in 30 seconds or less. Also,
a MLRP would be reached in a security that is trading at 81.00 when the
price moves 0.81 in 30 seconds or less. Intraday price changes would be
taken into account and could widen or narrow the MLRP range. (e.g., a
security could start the day with an MLRP range of twenty-five cents,
with intraday price changes expanding the MLRP range to 1% of its
price).
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\29\ When calculating 1% of a security's price, the result will
be rounded to the nearest cent using usual rounding conventions. For
example, if a security is trading at $26.49, and 1% of its price is
calculated, this would be rounded down to 0.26. If a security is
trading at $26.53 and 1% of its price is calculated, this would be
rounded up to 0.27.
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MLRP ranges would be calculated using the high and low trades on
the Exchange within the prior 30 seconds. The MLRP range could change
based on an event (e.g., a new trade) or the passage of time.\30\
---------------------------------------------------------------------------
\30\ See Exhibit A.
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After the auto ex order reaching a MLRP price trades at that price
to the extent possible, automatic executions and autoquote would be
suspended. The
[[Page 67994]]
book would be automatically updated by incoming orders and
cancellations. Automatic executions and autoquote would resume in no
more than 10 seconds unless the specialist has quoted or traded before
then. As noted above, the specialist would be expected to trade or
requote the stock in less than 10 seconds unless conditions in the
stock prevent this. Where incoming orders and cancellations cause a
locked or crossed market, autoquote and automatic executions would
resume with a trade.\31\
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\31\ Id.
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In addition, a MLRP could cause the suspension of automatic
executions on the side of the market where the bid or offer is at a
price beyond the MLRP range, as an automatic execution could not occur
at that price. For example, if the market is 20.05 bid, offered at
20.10, and the last sale is 20.08, and the MLRP range is 19.80-20.09
based on high and low trades within the operative 30-second period, a
trade could take place at the bid price because it would fall within
the MLRP range, but a trade could not take place at the offer price
(20.10) because it would fall outside the MLRP range. As a result,
automatic executions would be suspended on the offer side, but continue
on the bid side. This would be indicated systemically in the same way
as any other time an automatic execution is unavailable. Autoquoting
would continue and orders and cancellations would update the book.
Automatic executions would resume when a bid or offer within the MLRP
range is autoquoted or the MLRP range changes as a result of the moving
30-second timeframe.
Gap Quoting
Gap quotes \32\ would be used by specialists in response to trading
scenarios in which price dislocation is expected. Gap quotes would be
used to signal the potential price movement so as to attract contra-
side liquidity in an attempt to mitigate volatility. Gap quote
situations would involve clearly large imbalances compared with the
typical trading volume in a security. The size of an imbalance suitable
for gapped quoting would be at least 10,000 shares or a quantity of
stock having a value of $200,000 or more, although depending on the
trading characteristics of the security, the appropriate conditions for
gapped quoting could be higher.
---------------------------------------------------------------------------
\32\ For a complete description of Gap quotes, see footnote 18
of the Notice, supra note 6.
---------------------------------------------------------------------------
The specialist determines when to gap the quotation based on
certain market conditions such as a sudden influx of orders on one side
of the market, one or more large-size orders with no off-setting
interest, or when a member proposes to effect a one-sided block
transaction or a cross at a significant premium or discount to the
prevailing market. Specialists could only gap the quotation in
accordance with Exchange procedures. When the quotation is gapped,
automatic executions and autoquote would be suspended, although
incoming orders and cancellations would update the book electronically.
Better priced orders would be taken into account in the transaction
resulting from the gapped quotation. Floor Officials would oversee the
gap quote process, including its duration.
Availability of Automatic Executions and Autoquote \33\
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\33\ This discussion presumes the Direct+ facility is available.
NYSE Rule 1002 provides that automatic executions are available if
entered after the Exchange has disseminated a published bid or offer
in that stock and until one minute before the closing time of the
Exchange's Floor market. In the unlikely event of an equipment
failure preventing automatic executions during a time they would
otherwise be available, a systemic indication of auto ex
unavailability would be made.
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The Exchange believes that autoquote and automatic executions would
be suspended infrequently and only in certain, limited circumstances:
when trading on the Exchange reaches a LRP; when the quote is gapped in
accordance with Exchange procedures; when trading in a security has
been halted; or when the quote is not firm. A systemic indication would
be disseminated when automatic executions are unavailable. Each of
these circumstances would serve the public interest; the rationale for
and benefit of LRPs and gap quotes are discussed above. No executions,
automatic or manual, would be possible when trading has been halted,
and it would not be in the customer's best interest to automatically
execute against a bid or offer that is not firm. \34\
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\34\ The Exchange believes that trading halts and non-firm
quotations occur extremely infrequently. For example, during the
first nine months of 2004, there have been only four non-firm quote
situations. One or more Floor Governors or senior Floor Officials
must oversee trading halts and non-firm quotes. See NYSE Rule 60.
Exchange rules regarding trading halts and non-firm quotes have been
approved by the Commission and are in accordance with Rule 11Ac1-1
of the Act, 17 CFR 240.11Ac1-1.
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Autoquote, but not automatic executions, would be suspended during
the extremely brief moment it would take to manually report a block-
sized transaction.\35\ Automatic executions would continue until the
size of the bid (offer) decrements to 100 shares. Autoquote (and
automatic executions, where the quote has decremented to 100 shares)
would resume when the manual reporting is concluded. This would be the
only instance in which manual reporting would cause the suspension of
autoquote and could cause the suspension of automatic executions. This
would protect customer orders on the specialist's book during the
execution of block transactions pursuant to NYSE Rules 72(b) and 127
and would facilitate orderly executions in limited ``breakout''
situations when liquidity is present but conditions are such that the
existence of a fair and orderly market would depend on the ability of
the specialist to quickly and efficiently effect block-size trades that
could involve multiple parties.
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\35\ NYSE Rule 127 defines a ``block'' size as at least 10,000
shares or a quantity of stock having a market value of $200,000 or
more, whichever is less.
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The Exchange represents that once the hybrid market is implemented,
all other instances of manual reporting,\36\ autoquote, and automatic
executions would continue to operate without suspension. The quote
would automatically update to reflect the entry of better bids and
offers and cancellations. Automatic executions would continue to take
place in the manner described in this proposal. This represents a
change to the operation of autoquote and automatic executions as
described in Amendment No. 1 of this filing.\37\ Although the Exchange
expects autoquote and automatic executions to be available at least
99.7% of the time as originally proposed, the Exchange believes that
maximizing their availability even more would benefit the Exchange's
customers.
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\36\ Trades occurring within the Crowd or between the Crowd and
the specialist, as either agent or dealer, are reported manually.
\37\ See Amendment No. 1, supra note 5.
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Furthermore, when autoquote and automatic executions are suspended,
incoming orders and cancellations would continue to arrive at the book,
which would be electronically updated to reflect these changes. When
the Exchange best bid or offer cancels during a time when autoquote is
suspended, the next best bid (offer) on the book would be autoquoted.
Auto ex orders, other than IOC orders, would be placed on the book. IOC
orders would be cancelled automatically, as are incoming ITS
commitments to trade.\38\
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\38\ The Exchange believes that this would be consistent with
concepts discussed in proposed Regulation NMS. See note 23, supra.
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The continuation of automatic executions while a manual trade is
being reported could result in the manual trade being reported to the
Tape out of its proper sequence. Out of sequence trades would be
identified as
[[Page 67995]]
such. If a bid or offer at a better price arrives at the book before a
manual report is concluded, the system would automatically report the
trade at such better price (e.g., Assume that the quote is 20.05 bid,
offered at 20.10, and a broker in the Crowd takes the offer, but before
the report of the trade is completed, an offer to sell 1,000 shares at
20.09 arrives at the book. The system would automatically report the
trade at 20.09, with the seller being the newly-arriving better offer.)
2. Statutory Basis
The Exchange believes that the proposed rule change, as amended, is
consistent with Section 6(b) of the Act \39\ in general, and furthers
the objectives of Section 6(b)(5) of the Act \40\ in particular,
because it is 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 Exchange also believes that the
proposed rule change is designed to support the principles of Section
11A(a)(1) of the Act \41\ in that it seeks to assure economically
efficient execution of securities transactions, makes it practicable
for brokers to execute investors' orders in the best market, and
provides an opportunity for investors' orders to be executed without
the participation of a dealer.
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\39\ 15 U.S.C. 78f(b).
\40\ 15 U.S.C. 78f(b)(5).
\41\ 15 U.S.C. 78k-1(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, as
amended, 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 Exchange consents, the Commission will:
(A) By order approve the 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 as amended by Amendment Nos. 2 and 3 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-2004-05 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-NYSE-2004-05. 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 Section, 450 Fifth
Street, NW., Washington, DC 20549. 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-2004-05 and should be submitted on or before December 13, 2004.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\42\
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\42\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
Exhibit A--Trading Examples
AL Orders and Market Orders
1. AL and market orders on the same side of the market are
aggregated in the quote and executed based on time priority:
The quotation is 20.45 bid, offered at 20.50, 500 x 2,000. An AL
order to buy 1,000 shares with a limit of 20.55 arrives. The market
is autoquoted the minimum variation (one cent) better than the
existing bid, 20.46 bid, offered at 20.50, 1,000 x 2,000. An AL
order to buy 500 shares at a limit of 20.57 and a market order to
buy 1,000 shares arrive. The market is autoquoted 20.46 bid, offered
at 20.50, 2,500 x 2,000, aggregating the volume of the AL and market
buy orders. An NX \43\ market order to sell 1,500 shares arrives and
automatically executes against the bid, filled by the first two AL
orders. The market is autoquoted 20.46 bid, offered at 20.50, 1000 x
2000.\44\
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\43\ Automatic execution orders are designated NX.
\44\ The Commission corrected a typographical error in this
example. Telephone conversation between Kelly Riley, Assistant
Director, Division, Commission, and Don Siemer, Director, Market
Surveillance, NYSE, on November 12, 2004.
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2. The execution of an order on the same side of the market that
exhausts some or all of the displayed contra-side volume will cause
an AL or market order to automatically execute:
The quotation is 20.46 bid, offered at 20.50, 1,000 x 500. The
bid is an AL order limited to 20.52. The next best offer on the book
is 20.51 for 1,000 shares. An NX market order to buy 500 shares
arrives. The NX order automatically executes against the offer at
20.50. The AL buy order automatically executes against the next best
offer, 20.51. If 1,000 shares had been offered at 20.50 instead of
500 shares, the AL order automatically executes at 20.50 for 500
shares and 500 shares at 20.51, presuming the AL order's limit
permits it to trade at 20.51.
3. The arrival of an order at a better price on the same side of
the market as an AL or market order causes the AL or market order to
automatically execute:
The quote is 20.46 bid, offered at 20.50. The next best offer on
the book is at 20.51. The bid is an AL order. An order to buy at
20.47 arrives. A new bid of 20.47 is autoquoted. The buy AL order
automatically executes against the 20.50 offer.
4. A change in the displayed contra-side price that creates a
minimum variation market or allows execution of the AL or market
order with price improvement causes the AL or market order to
automatically execute:
The quote is 20.46 bid, offered at 20.50. The bid is comprised
of an AL or market order. A limit order to sell at 20.49 arrives
[[Page 67996]]
on the book. The AL or market order automatically executes against
this new offer, to the extent of the volume associated with the new
offer and then sweeps the book until filled, an LRP is reached or,
in the case of an AL order, its limit price is reached.
5. Where the limit of an AL order prevents it from trading, the
AL order will be quoted and handled as a regular limit order on the
book:
The quote is 20.05 bid, offered at 20.09, 2,000 x 2,000. An AL
order arrives to buy 3,000 shares at 20.12, which is autoquoted as
the best bid, 20.06 for 3,000 shares. Also on the book are the
following offers: 1,500 shares at 20.10, 1,500 shares at 20.11,
1,000 shares at 20.12 and 1,000 shares at 20.13. An NX market order
to buy 6,000 shares arrives, automatically executing 2,000 shares at
20.09, with 4,000 shares sweeping the book, executing at 20.12. This
execution depletes the liquidity on the book at 20.12. The original
AL order is pushed to trade by the NX order, but its limit, 20.12,
prevents it from trading at the next available offer price, 20.13.
The AL order goes on the book as a regular limit order and the
market is autoquoted 20.12 bid, offered at 20.13, 3,000 x 1,000.
Broker Agency Interest File
6. A minimum of 1,000 shares of broker agency interest per
broker at the Exchange best bid or offer will be displayed at that
price and be on parity with other displayed interest, other than
interest entitled to priority:
The quote is 20.05 bid, offered at 20.07, 1,500 x 1,000. A Floor
broker enters interest in the agency interest file to buy 2,000
shares at 20.04 and to buy 1,000 shares at 20.05. The quote
automatically updates to show 2,500 shares to buy at 20.05, which
includes the 1,000 shares of broker agency interest to buy at 20.05
because it is at the best bid; the amount shown on NYSE
OpenBook[reg] to buy at 20.04 will not change as broker agency
interest will not be disseminated. The aggregate broker file
information available to the specialist will show 2,000 shares to
buy at 20.04, unless the broker has excluded it from the aggregate
information. An order arrives on the book to buy 1,500 shares at
20.06. The market autoquotes 20.06 bid, offered at 20.07, 1,500 x
1,000. Only 1,500 shares to buy at 20.05 is shown on NYSE
OpenBook,[reg] which does not include any broker agency interest.
The aggregate broker information available to the specialist will
show 1,000 shares to buy at 20.05 and 2,000 shares to buy at 20.04
unless one or both have been excluded from the aggregate information
by the broker.
7. Brokers have discretion to display more than 1,000 shares at
the best bid or offer. The displayed size is entitled to parity.
Undisplayed reserve at the best bid or offer yields to displayed
interest at the best bid or offer.
The quote is 20.31 bid, offered at 20.36, 1,500 x 7,000. The
7,000 share offer side consists of 2,000 shares on the book and
5,000 shares of specialist interest. A Floor broker enters interest
in the agency interest file to sell 10,000 shares at 20.36. 1,000 of
the shares are displayed and the reserve interest, 9,000 shares, is
not displayed. An NX market order to buy 8,000 shares arrives. The
following automatic executions take place: 2,000 shares from the
book, 1,000 shares from the displayed interest of the Floor broker,
and 5,000 shares from the specialist interest trade at 20.36. The
9,000 shares of reserve broker file sell interest does not
participate in the trade, since the entire buy order can be filled
by the displayed interest.
8. Broker agency interest participates on parity during sweeps:
(a) The quote is 20.05 bid, offered at 20.07, 1,500 x 1,000. The
book also shows bids of 1,600 shares to buy at 20.04, 2,000 shares
to buy at 20.03, and 1,000 shares to buy at 20.02. Broker agency
interest to buy 2,600 shares at 20.04 arrives. An order to sell
4,700 shares at 20.03 arrives and automatically executes. 1,500
shares trade at the bid of 20.05 and the remaining 3,200 shares
trade at 20.04, with the book receiving 1,600 shares and the broker
agency interest receiving 1,600 shares. 1,000 shares to buy remain
in the broker agency interest file at 20.04. The market is
autoquoted 20.04 bid, offered at 20.07, 1,000 x 1,000. The volume
associated with the bid is the 1,000 shares remaining in the broker
agency interest file.
(b) The quote is 20.05 bid, offered at 20.07, 1,500 x 1,000.
Also shown on the book is 2,000 shares bid at 20.03 and 1,000 shares
bid at 20.02. The broker agency interest file has 2,000 shares bid
at 20.04. An order to sell 5,000 shares at 20.03 arrives and
automatically executes. 1,500 shares trade at 20.05 (the bid price)
and the remainder of the sell order, 3,500 shares, trades at 20.03,
the sweep price. Trading at 20.03 are the 2,000 shares of broker
agency interest that was in the file to buy at 20.04 and 1,500
shares on the book to buy at 20.03.
Specialist Interest and Algorithm \45\
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\45\ All specialist trading, whether manual or electronically
generated by algorithms, must be in accordance with Exchange Rules.
These examples presume compliance with these rules.
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9. Specialist interest may automatically supplement the size of
the Exchange best bid and offer, but always yields to orders on the
book:
The quote is 20.05 bid, offered at 20.07, 1,500--1,000. The bid
is comprised of limit orders on the book. The specialist algorithm
automatically generates a bid for 1,000 shares at 20.05. The size of
the bid automatically changes to 2,500. A new limit order to buy 500
shares at 20.05 arrives and the size associated with the bid
automatically changes to 3,000 shares. Agency interest to buy 1,500
shares at 20.05 is entered in the broker agency interest file.
Assuming the broker displays all 1,500 shares, the bid size
automatically changes again, to 4,500 shares. The first 1,500 share
buy limit order on the book has priority, the 500 share buy limit
order on the book and the 1,500 share broker agency buy interest are
on parity. The specialist interest must yield to the book. An order
to sell 3,500 shares at 20.05 arrives and automatically executes at
20.05. The contra-side consists of the first 1,500 shares to buy,
the second order to buy 500 shares and the broker agency buy
interest for 1,500 shares.
10. The specialist algorithm may automatically facilitate a
single price execution at the Exchange best bid or offer:
The quote is 20.05 bid, offered at 20.07, 1,000 x 1,000. The
next best bid on the book is 2,000 shares at 20.03. An NX market
order to sell 2,000 shares arrives and the preset parameters of the
algorithm determine to facilitate an execution of the sell order at
a single price. The sell order automatically executes against the
bid and the specialist automatically buys the remaining 1,000 shares
at the bid price of 20.05. Had the specialist not done so, the sell
order would have traded at two prices--1,000 shares at 20.05 and
1,000 shares at 20.03. By facilitating a single price execution, the
specialist gave price improvement to the sell order.
11. Specialist algorithm may provide price improvement between
the bid and offer if certain conditions are met:
(i) The quotation spread is at least three cents;
(ii) The specialist is represented in the published bid or
offer: The lesser of 10,000 shares or 20% of the respective bid/
offer size;
(iii) The order receiving price improvement is 2,000 shares or
less and the entire order is filled; and
(iv) The price improvement provided by the specialist is (a) at
least .02 where the quote spread is .03-.05, (b) at least .03 where
the quote spread is .06-.10, (c) at least .04 where the quote spread
is .11-.20, and (d) at least .05 where the quote spread is more than
.20.
The market is 20.31 bid, offered at 20.36, 1,500 x 3,000. The
offer size includes 1,000 shares on behalf of the specialist. The
specialist interest represents 33% of the offer size (1,000 shares/
3,000 shares at 20.36). A limit order arrives to buy 2,000 shares at
20.36. The algorithm determines to provide price improvement to this
order and 2,000 shares automatically execute at 20.34. The market
then is autoquoted 20.31 bid, offered at 20.36, 1,500 x 3,000.
12. Better priced specialist interest yields to the book at a
worse price during a residual sweep:
The quotation is 20.05 bid, offered at 20.07, 1,500 x 1,000.
1,000 shares to buy at 20.04 arrives in the broker agency interest
file. Specialist interest arrives to buy 1,000 at 20.04. 2,000
shares to buy are on the book at 20.03. A limit order to sell 3,600
shares at 20.03 arrives and automatically executes, as follows:
1,500 trades against the bid at 20.05, with the remaining amount,
2,100 shares, sweeping the book to trade at 20.03. Orders on the
book trade 1,100 shares and the broker agency file trades 1,000
shares. This leaves 900 shares on the book to buy at 20.03. The
specialist interest to buy at 20.04 does not trade even though it is
better priced, because orders remain on the book to buy at 20.03 and
the specialist must yield. If no buy orders on the book capable of
trading at 20.03 remained and the sell order had not been filled,
the specialist interest would be able to trade as part of the sweep
on parity with any broker agency interest at that price.
13. Specialist interest trades during a sweep, adding liquidity
and improving a sweep price:
[[Page 67997]]
The quotation is 20.05 bid, offered at 20.07, 1,500 x 1,000.
1,000 shares to buy at 20.04 arrived in the broker agency interest
file. Specialist interest to buy 1,000 shares at 20.04 arrives.
2,000 shares are on the book to buy at 20.03. A limit order to sell
3,500 shares at 20.03 arrives and automatically executes as follows:
1,500 shares trade against the bid at 20.05, with the remaining
2,000 shares trading with the broker agency buy interest and
specialist buy interest at 20.04.
14. During sweeps, specialist interest trades if no orders
remain on the book at the sweep price:
The quote is 20.05 bid, offered at 20.07, 1,600 x 1,000. Broker
agency interest to buy 800 shares at 20.04 arrives. Specialist
interest to buy 800 shares at 20.04 arrives. The book shows 1,000
shares to buy at 20.03. A limit order to sell 3,600 shares at 20.03
arrives. The sell order automatically executes 1,600 shares against
the bid at 20.05, with the residual, 2,000 shares, sweeping the book
at 20.03. The book trades 1,000 shares, the broker file trades 800
shares and the specialist file trades 200 shares.
15. During a sweep, specialist interest trades on parity with
broker interest, as long as no orders on the book at the sweep price
remain:
The quote is 20.05 bid, offered at 20.07, 1,500 x 1,000. Broker
agency interest to buy 2,000 shares at 20.03 arrives. Specialist
interest to buy 2,000 shares at 20.03 arrives. The book shows 1,000
shares to buy at 20.03. A limit order to sell 5,500 shares at 20.03
arrives. The sell order automatically executes 1,500 shares against
the bid at 20.05, with the residual, 4,000 shares, sweeping the book
to trade at 20.03. The book and the broker file are on parity and
each trade 1,000 shares. Once the buy order on the book is filled at
20.03, the specialist interest can trade, on parity with the broker
file. The remaining 1,000 shares of broker buy interest and 1,000
shares of specialist buy interest also trade.
16. During a sweep, the best bid or offer displayed on each ITS
market center is checked to avoid a trade-through:
The Exchange quote is 20.05 bid, offered at 20.07, 2,000 x
1,000. The ITS best offer is also 20.07 for 1,000 shares, published
by market center B. A third market center, P, displays 500 shares to
sell; at an inferior offer of 20.08. Also on the book are offers at
20.08 for 1,000 shares, at 20.09 for 1,000 shares, and at 20.10 for
3,000 shares. An NX market order arrives on the Exchange to buy
5,000 shares. 1,000 shares automatically execute against the
Exchange offer at 20.07. 1,000 shares of the order are auto routed
as a commitment to buy at 20.07 to market center B. The remainder,
3,000 shares, sweep the book to 20.10. However, because the sweep
price, 20.10, is inferior to the best offer displayed by market
center P (20.08), 500 shares of the buy order residual are auto
routed as a commitment to buy at 20.08 to market center P and only
2,500 shares of the buy order trade at 20.10 on the Exchange. If
both auto routed commitments are satisfied, the executions are as
follows: 1,000 shares at 20.07 on the Exchange, 1,000 shares at
20.07 on market center B, 500 shares at 20.08 on market center P,
and 2,500 shares at 20.10 on the Exchange. If all or part of one or
both commitments are not satisfied, they will return to the Exchange
and trade at the prices then available. Under proposed Regulation
NMS,\46\ had the member entering the order indicated that it was
contemporaneously satisfying better prices away, none of the order
would have been auto routed. A new quote is autoquoted, 20.05 bid,
offered at 20.10, 2,000 x 2,500.
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\46\ See note 23, supra.
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17. Orders are auto routed to multiple away markets publishing
better bids or offers:
The Exchange quote is 20.05 bid, offered at 20.08, 2,000 x
2,500. The national best offer, at 20.07 for 1,000 shares, is
published by market center B. A third market center, P, also
displays an offer to sell 500 shares at of 20.07. An NX market order
to buy 2,500 shares arrives on the Exchange. The specialist would
have two options: Match the better displayed offers or ship the
order to market centers B and P:
(a) If the better priced offers away are not electronically
matched by the specialist, 1,000 shares of the buy order are auto
routed as a commitment to buy to market center B and 500 shares of
the buy order are auto routed as a commitment to buy to market
center P. The remainder, 1,000 shares to buy, automatically executes
against the Exchange offer at 20.08.
(b) If the specialist matches the better price offers away, he
or she would have to fill the entire buy order of 2,500 shares at
20.07 before trading at 20.08.\47\
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\47\ Telephone conversation between Kelly Riley, Assistant
Director, Division, Commission, and Jeff Rosenstrock, Senior Special
Counsel, Market Surveillance, NYSE, on November 15, 2004.
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18. Specialist algorithm may automatically match the better
displayed ITS bid or offer or ship the order:
The Exchange quotation is 20.05 bid, offered at 20.07, 2,000 x
1,000. The better displayed ITS offer to sell 400 shares at 20.06 is
published by another market center. A market order to buy 1,400
shares arrives and based on predetermined parameters, the specialist
algorithm decides to match or ship:
Option 1--The specialist matches the better displayed offer,
automatically executing 1,400 at 20.06.
Option 2--The specialist sends 400 shares of the buy order to
the other market center, satisfying the better displayed offer. The
remaining 1,000 shares of the buy order is automatically executed
against the offer at 20.07.
Sweep LRP
19. Where the order sweeping the book is filled after trading at
the LRP price or a residual exists limited to the LRP price,
automatic executions and autoquote automatically resume in no more
than five seconds:
The quotation is 20.30 bid, offered at 20.36, 1,500 x 2,000. The
LRP is 20.45. The next best offer is 20.46 for 14,000 shares. The
following offers are on the book: 1,000 shares to sell at 20.37,
4,000 shares to sell at 20.38, 1,500 shares to sell at 20.39, 5,000
shares to sell at 20.40, 500 shares to sell at 20.41, 2,000 shares
to sell at 20.42, 8,000 shares to sell at 20.43, 3,000 shares to
sell at 20.44, 3,000 shares to sell at 20.45, and 14,000 shares to
sell at 20.46. An IOC order arrives to buy 36,000 shares at 20.45.
2,000 shares automatically execute against the offer at 20.36. The
order sweeps the book to the LRP, trading 28,000 shares at 20.45.
The offers on the book from 20.37 to 20.44 receive price improvement
at 20.45. The residual, 6,000 shares, automatically cancels. The
market is autoquoted 20.30 bid, offered at 20.46, 1,500 x 14,000.
Automatic executions and autoquote resume automatically in five
seconds if the specialist has not manually traded or re-quoted the
market before then.
20. Where the sweeping order is not filled before the LRP is
reached, and is able to trade above (below) the LRP, but its limit
price does not create a locked or crossed market--automatic
executions and autoquote resumes automatically in no later than 10
seconds.
The quotation is 20.30 bid, 20.36 offered, 1,500 x 2,000. The
LRP is 20.45. The next best offers on the book are 1,000 shares to
sell at 20.37, 4,000 shares to sell at 20.38, 1,500 shares to sell
at 20.39, 5,000 shares to sell at 20.40, 500 shares to sell at
20.41, 2,000 shares to sell at 20.42, 8,000 shares to sell at 20.43,
3,000 shares to sell at 20.44, 3,000 shares to sell at 20.45, and
5,000 shares to sell at 20.47. An order to buy 36,000 shares at
20.46 arrives. The first 2,000 automatically executes against the
offer at 20.36. The remainder sweeps the book to the LRP at 20.45,
with 28,000 being executed. Offers at 20.37 through 20.45 trade at
the sweep price of 20.45, receiving price improvement. A residual of
6,000 shares to buy remains limited at 20.46. The market auto-quotes
20.45 bid, offered at 20.47, 6,000 x 5,000. Here, since a LRP is
reached and a residual capable of trading at a price above the LRP
remains, but the residual does not lock or cross the market,
automatic executions and autoquote will automatically resume in 10
seconds unless the specialist manually trades or re-quotes the
market before then.
21. Where the order sweeping the book is not filled during the
sweep, and is able to trade above (below) the LRP, but the limit
price creates a locked or crossed market, automatic executions and
autoquote are suspended until a manual trade occurs.
The quotation is 20.30 bid, offered at 20.36, 1,500 x 2000. The
LRP is 20.45. Also on the book are the following offers: 1,000
shares to sell at 20.37, 4,000 shares to sell at 20.38, 1,500 shares
to sell at 20.39, 5,000 shares to sell at 20.40, 500 shares to sell
at 20.41, 2,000 shares to sell at 20.42, 8,000 shares to sell at
20.43, 3,000 shares to sell at 20.44, 3,000 shares to sell at 20.45,
and 14,000 shares to sell at 20.46. An order to buy 36,000 shares at
20.46 arrives. 2,000 shares automatically execute against the offer
at 20.36. The remainder sweeps the book to the LRP at 20.45. Offers
on the book from 20.37 to 20.45, 28,000 shares, trade at 20.45,
receiving price improvement. The residual, 6,000 shares to buy
cannot continue sweeping because the LRP has been reached. The
market is autoquoted the LRP, 20.45, offered at 20.46, the next
available offer on the book. Because the residual's limit price,
20.46, creates a locked market, a manual trade or quote is required
for automatic execution and autoquote to resume.
[[Page 67998]]
22. Specialist interest trades during a sweep, adding liquidity
and improving a sweep price:
The quotation is 20.30 bid, offered at 20.36, 1,500 x 2,000. The
sweep LRP is 20.45. Specialist interest to sell 5,000 shares at
20.37 arrives. The book consists of 1,000 shares offered at 20.37,
4,000 shares offered at 20.38, 1,500 shares offered at 20.39, 5,000
shares offered at 20.40, 500 shares offered at 20.41, 2,000 shares
offered at 20.42, 8,000 shares offered at 20.43, 3,000 shares
offered at 20.44, and 3,000 shares offered at 20.45. A limit order
to buy 29,000 shares at 20.45 arrives. 2,000 shares automatically
execute at 20.36, with the residual of the buy order, 27,000 shares,
sweeping the book, executing at 20.43. The 5,000 shares of
specialist sell interest at 20.37 participate in the sweep. Without
the specialist sell interest, the book would have been swept to
20.45 (the LRP), a worse price for the buyer.
23. Momentum Liquidity Replenishment Point (MLRP).
[GRAPHIC] [TIFF OMITTED] TN22NO04.001
24. MLRP may be reached during an automatic execution, pausing a
sweep:
At 10:05:36, the bid is 20.05, offered at 20.09, 1,500 x 1,000.
The books shows additional offers of 500 shares to sell at 20.13,
1,000 shares to sell at 20.17, 1,500 shares to sell at 20.21, 1,000
shares to sell at 20.22, and 2,000 shares to sell at 20.25. The MLRP
range, based on the high and low trades during the prior 30 seconds
(20.15 and 19.92 for the purposes of this example) are 19.90 and
20.17.
An NX market order to buy 1,500 shares arrives. 1,000 shares
automatically execute at 20.09 and the residual, 500 shares, sweeps
the book, trading at 20.13. The quote automatically updates to 20.05
bid, offered at 20.17, 1,500 x 1,000.
A second later, at 10:05:37, the high and low trades within the
new 30-second period are 19.95 and 20.15 and the corresponding new
MLRP range is 19.90 and 20.20.
At 10:05:40, a limit order arrives to buy 2,000 shares at 20.21.
This crosses the market as the offer is at 20.17. The crossing buy
order automatically executes against the offer (1,000 shares) at
20.17, creating a new high trade within the operative 30-second MLRP
time parameter. This new high price causes the MLRP to change from
19.90 to 19.92 (20.17 less .25) on the low side. The MLRP on the
high side, 20.20 has remained the same. The residual of the buy
limit order, 1,000 shares, cannot sweep the book to the next
available offer at 20.21, because that price is outside the MLRP
range. The market is autoquoted 20.20 bid (the MLRP) for 1,000
shares, 1,500 offered at 20.21. Automatic executions and autoquote
are suspended. As the order to buy is capable of trading at 20.21,
locking the market, a manual trade clearing the locked condition
will cause automatic executions and autoquoting to resume and the
quote automatically updates to 20.05 bid, offered at 20.21, 1,500 x
500.
25. MLRP may be reached during a sweep, providing a partial
sweep:
At 10:05:36, the bid is 20.05, offered at 20.09, 1,500 x 1,000.
The book shows additional offers of 500 shares at 20.13, 1,000
shares at 20.17, 2,000 shares at 20.18, 1,000 shares at 20.19, and
1,500 shares at 20.22. The MLRP range is 19.90-20.20, based on high
and low trades within the operative 30-second period (19.92 and
20.15 in this example).
An NX market order to buy 1,500 shares arrives and automatically
executes at 20.09. The residual, 500 shares, sweeps the book,
trading at the next best offer, 20.13. The quote automatically
updates to 20.05 bid, offered at 20.17, 1,500 x 1,000.
At 10:05:40, a limit order to buy 5,000 shares at 20.21 arrives
crossing the market. 1,000 shares automatically execute at the
offer, 20.17. This creates a new high price within the operative 30-
second parameter (20.17) causing the MLRP range to change from 19.90
on the low side to 19.92 (20.17 less .25). The MLRP on the high side
remains at 20.20. The buy order residual, 4,000 shares, sweeps the
book to 20.19. 3,000 shares trade at that price, exhausting the
available liquidity within the MLRP range. The quote automatically
updates, bidding the remaining size of the residual, 1,000 shares,
at 20.20, the MLRP, offering 1,500 shares at 20.22, the next best
offer on the book. An automatic execution cannot occur at 20.22 as
that price is outside the MLRP range, so automatic executions and
autoquote are suspended. Cancellations and orders are electronically
reflected on the book. Electronic executions and autoquote will
resume automatically in 10 seconds, unless the specialist manually
trades the security before then, or the MLRP range changes.
[[Page 67999]]
Once autoquote resumes, the bid will automatically change to 20.21
for 1,000 shares, the limit price and the size of the residual. The
offer remains 20.22 for 1,500 shares.
26. Gap Quote.
The quotation is 20.08 bid, offered at 20.09, 10,000 x 5,000,
last sale at 20.08. Crowd interest arrives to buy 350,000 shares at
the market. The specialist executes 5,000 shares at the offer,
20.09, then gaps the quote, making the bid price ``touch'' the last
sale price (20.09), showing the size of the imbalance in that bid
(345,000 shares). On the contra side, the specialist makes the offer
the price where stock may trade if no other sell interest arrives,
and the size as 100 shares, to draw in sellers. Thus, e.g., the gap
quote \48\ is 20.09 bid, offered at 20.30, 345,000 x 100. Automatic
executions and autoquote are suspended, but incoming orders and
cancellations are reflected electronically on the book. Crowd,
specialist interest and other liquidity providers are taken into
account in determining the price and size of the next transaction.
Automatic executions and autoquote then resume.
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\48\ See Securities Exchange Act Release No. 50237 (August 24,
2004), 69 FR 53123 (August 31, 2004) (SR-NYSE-2004-37) (Information
Memo 04-27--June 9, 2004). The gapped quote procedures provide that
a gapped quotation should remain in place for a reasonable time to
allow for interested parties to respond to the order imbalance. What
constitutes a reasonable time is determined by the unique
circumstances of each gapped quotation situation. However, the
gapped quotation generally should last at least 30 seconds unless
offsetting interest is received earlier, and generally should not
exceed two minutes, unless circumstances require otherwise. The
duration of a gapped quote is determined with input from a Floor
Official.
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27. Tick-restricted Orders.
(a) The quotation is 20.05 bid, offered at 20.07, 1,500 x 1,000.
Other orders on the book to sell include 1,000 at 20.09 (sell
short), and 1,000 at 20.11 (sell plus). An NX market order to buy
2,500 shares arrives. 1,000 shares of the buy order are
automatically executed against the 1,000 shares offered at 20.07.
The remaining 1,500 shares to buy sweep up to 20.11. The sell short
and sell plus orders are executable as the sweep occurs on a direct
plus tick. As a result, the 20.09 sell short offer on the book is
price improved to 20.11.
(b) The quotation is 20.05 bid, offered at 20.07, 1,500 x 1,000.
Also on the book to buy are 1,000 shares (buy minus) at 20.04, 1,000
shares to buy at 20.03 and 1,500 shares to buy at 20.01. An NX order
to sell 3,000 shares arrives, automatically executing 1,500 shares
against the bid at 20.05, sweeping down to 20.03. The 1,000 share
bid at 20.04 was executable as the sweep occurred on a minus tick.
(c) The quotation is 20.05 bid, offered at 20.07, 1,500 x 1,000.
Also on the book to buy are 1,000 shares at 20.04, 1,000 shares to
buy at 20.03, and 1,500 shares to buy at 20.01. The last sale is at
20.04. An NX order to sell short 3,000 shares arrives. The security
in question is not part of the Regulation SHO pilot.\49\ 1,500
shares automatically execute at 20.05. The residual, 1,500, cannot
sweep the book because that would violate short sale rules. The
market is autoquoted 20.04 bid, the next best bid on the book,
offered at 20.05, the price at which the sell short order can trade,
1,000 x 1,500.
\49\ See note 13, supra.
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[FR Doc. 04-25771 Filed 11-19-04; 8:45 am]
BILLING CODE 8010-01-P