[Federal Register: April 17, 2003 (Volume 68, Number 74)]
[Notices]
[Page 19063-19065]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17ap03-137]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47667; File No. SR-NYSE-2003-09]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the New York Stock Exchange,
Inc. Relating to Elimination of the Exception to Rule 123(e) for
Exchange-Traded Funds
April 11, 2003.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is
hereby given that on April 9, 2003, the New York Stock Exchange, Inc.
(``NYSE'' or the ``Exchange'') filed with the Securities and Exchange
Commission the proposed rule change as described in Items I and II
below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NYSE proposes to eliminate the exception to NYSE Rule 123(e),
which provided that orders in Exchange-Traded Funds (``ETFs'') must be
entered into an electronic data base (front end systemic capture, or
``FESC'') on the Floor within 90 seconds of execution. This amendment
originally became effective on a pilot basis for one year.\3\
Thereafter the pilot was extended for an additional year, and is set to
expire on January 5, 2004.\4\
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\3\ See Securities Exchange Act Release No. 45246 (January 7,
2002), 67 FR 1527 (January 11, 2002) (SR-NYSE-2001-52), adopting
Supplementary Material .23 of NYSE Rule 123(e).
\4\ See Securities Exchange Act Release No. 46713 (October 23,
2002), 67 FR 66033 (October 29, 2002) (SR-NYSE-2002-48).
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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. The
text of these statements may be examined at the places specified in
Item IV below. The NYSE has prepared summaries, set forth in sections
A, B, and C below, of the most significant aspects of such statements.
[[Page 19064]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
NYSE Rule 123(e) provides that all orders in any security traded on
the Exchange be entered into an electronic database (front end systemic
capture, or ``FESC'') before they can be represented in the Exchange's
auction market.
On December 20, 2001, the Exchange filed a proposed rule change (a
one-year pilot) to amend Rule 123(e) to provide that orders in ETFs
must be entered into FESC within 90 seconds of execution.\5\ The pilot
was subsequently extended for an additional year and is set to expire
on January 5, 2004.\6\ The NYSE submitted the proposed rule change to
make the pilot effective on the premise that ETF products are
derivatively priced, and trade very rapidly in response to changes in
the underlying value of fund components and prices of options and
futures contracts on the funds. In addition, the proposed rule change
was in response to market participants who thought that the FESC
requirement might possibly be a disincentive to sending order flow to
the Exchange as it may have been perceived as unduly slowing down the
trading process and interfering with trading strategies dependent upon
speed of execution. Market participants noted that the Exchange is
competing for order flow with other market centers that do not have any
FESC-type requirements. In the Exchange's experience, however, that
rule change did not have a material impact on the Exchange's market
share in ETF products. Thus, the Exchange is proposing to remove the
exception from NYSE Rule 123(e) at this time .\7\ In addition, removal
of the exception will aid in the Exchange's ability to surveil for on-
Floor trading in ETF products if the Commission approves the Exchange's
proposal to allow portable phones on the Floor.\8\
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\5\ See note 3, supra.
\6\ See note 4, supra.
\7\ Telephone conversation between Don Siemer, Director, Market
Surveillance, NYSE, and Marc McKayle, Special Counsel, Division of
Market Regulation, Commission, on April 9, 2003.
\8\ See File No. SR-NYSE-2002-11. In NYSE-2002-11 the Exchange
proposes to authorize the use of and provide portable phones on the
Exchange Floor on a six-month pilot basis. Originally under the
proposed rule change, the Exchange proposed not to permit portable
communications at the point of sale for orders in Investment Company
Units (as defined in Section 703.16 of the Listed Company Manual),
also known as ETFs, since under an exception to NYSE Rule 123(e)
orders in ETFs can first be executed and then entered into an
electronic data base (FESC). To implement this facet of the
proposal, the Exchange proposed creating technical restraints to
block the use of portable phones in the Expanded Blue Room, where
ETFs trade. However, due to an inability to develop technical
restraints to prevent the use of portable phones where ETFs
currently trade, the Exchange amended the filing, in Amendment No. 2
to NYSE-2002-11, to allow the use of portable phones for orders in
ETFs in conjunction with this proposal to eliminate the NYSE Rule
123 ETF FESC entry exception.
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The Exchange believes that requiring orders in ETFs to be first
entered into FESC before execution or representation on the Floor will
place them on an equal footing with orders in other securities with
respect to order entry and recording procedures. The Exchange notes
that the same surveillance procedures applicable to trading in all
other equities will also apply to ETFs.
By requiring orders to be first entered into FESC before execution
or representation on the Floor, the Exchange can track more accurately,
via systemic records, the time an order is received on the Floor.
Therefore, the Exchange's ability to surveil for anomalous trading
situations--such as on-Floor trading and the creation of inaccurate
records, frontrunning of orders and improper execution of customers'
orders--would be enhanced.
2. Statutory Basis
The basis under the Exchange Act for this proposed rule change is
the requirement under section 6(b)(5)\9\ that an Exchange have rules
that are designed to promote just and equitable principles of trade, to
remove impediments to and perfect the mechanism of a free and open
market and a national market system and, in general, to protect
investors and the public interest.
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\9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes that the proposed rule change would not
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Exchange Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has not solicited, and does not intend to solicit,
comments regarding the proposed rule change. The Exchange has not
received any unsolicited written comments from members or other
interested parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule: (1) Does not significantly
affect the protection of investors or the public interest; (2) does not
impose any significant burden on competition; and (3) does not become
operative for 30 days or such shorter time as the Commission may
designate, if consistent with the protection of investors and the
public interest, and the Exchange provided the Commission with written
notice of its intent to file the proposed rule change at least five
days prior to the filing date, the proposed rule change has become
effective pursuant to section 19(b)(3)(A) of the Act,\10\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\11\ At any time within 60
days of the filing of the proposed rule change the Commission may
summarily abrogate such rule change if it appears to the Commission
that such action is necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of the Act.
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\10\ 15 U.S.C. 78s(b)(3)(A).
\11\ 17 CFR 240.19b-4(f)(6).
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The Exchange requests that the Commission waive the 30-day delayed
operative date of Rule 19b-4(f)(6)(iii). Waiver of this period will
allow the Exchange to discontinue the exception to FESC under NYSE Rule
123(e) for ETFs. The Exchange believes this will enhance its ability to
surveil for anomalous trading situations such as on-Floor trading and
the creation of inaccurate records, frontrunning of orders and improper
execution of customers' orders. In addition, this will aid the
Exchange's ability to surveil the market if the Commission approves the
Exchange's proposal to allow Exchange-provided and authorized portable
phones on the Floor. The Exchange believes that this is in the public
interest.
The Commission believes that it is consistent with the protection
of investors and the public interest to waive the 30-day operative
delay and make this proposed rule change immediately effective as of
April 9, 2003.\12\ The Commission believes that the elimination of the
ETF FESC entry exception to NYSE Rule 123 will enhance the Exchange's
ability to meet its surveillance obligations under the Exchange Act and
the SEC Order relating to NYSE's floor broker regulatory program.\13\
The waiver of the
[[Page 19065]]
30-day operative delay will permit the NYSE to implement this change
immediately, which should benefit the public, investor protection and
improve the NYSE's surveillance capabilities for ETFs.\14\
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\12\ For purposes of only accelerating the operative date of
this proposal, the Commission has considered the proposed rule's
impact on efficiency, competition and capital formation. 15 U.S.C.
78c(f).
\13\ See In the Matter of New York Stock Exchange, Inc., SEC
Release No. 34-41574, June 29, 1999; Administrative Proceeding File
No. 3-9925 (``SEC Order'').
\14\ The Commission emphasizes that when a self-regulatory
organization (``SRO'') determines that the rationale for an
exception to an important regulatory initiative such as FESC order
entry is no longer applicable, that SRO is expected to submit a
proposed rule change to reflect the change in circumstances as soon
as practicable.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Exchange Act. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549. 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. Copies of such
filing will also be available for inspection and copying at the
principal office of the above-mentioned self-regulatory organization.
All submissions should refer to the File No. SR-NYSE-2003-09 and should
be submitted by May 8, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-9474 Filed 4-16-03; 8:45 am]
BILLING CODE 8010-01-P