[Federal Register: December 6, 2006 (Volume 71, Number 234)]
[Notices]
[Page 70824-70831]
[DOCID:fr06de06-116]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54820; File No. SR-NYSE-2006-65]

Self-Regulatory Organizations; New York Stock Exchange LLC; Order
Granting Approval of Proposed Rule Change and Amendment Nos. 1, 2, and
3 Thereto and Notice of Filing and Order Granting Accelerated Approval
of Amendment No. 5 Thereto Relating to Exchange Rules Governing Certain
Definitions, Systemic Processing of Certain Orders, and the
Implementation Schedule of the NYSE Hybrid Market

November 27, 2006.

I. Introduction

    On August 23, 2006, the New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder, \2\ a
proposed rule change to amend certain aspects of its Hybrid Market. On
September 11, 2006, September 15, 2006, and September 26, 2006, the
Exchange filed Amendment Nos. 1, 2, and 3 respectively. The proposed
rule change, as amended, was published for comment in the Federal
Register on September 29, 2006.\3\ On November 2, 2006, the Exchange
filed Amendment No. 5 to the proposed rule change.\4\ The Commission
received three comment letters from two commenters on the proposal.\5\
On November 2, 2006, the Exchange filed a response to the comment
letters.\6\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 54520 (September 27,
2006), 71 FR 57590. On November 1, 2006, the Exchange filed
Amendment No. 4 to the proposed rule change and subsequently
withdrew Amendment No. 4 on November 2, 2006 due to inaccurate
exhibits.
    \4\ See Partial Amendment dated November 2, 2006 (``Amendment
No. 5''). In Amendment No. 5, the Exchange: (1) Removed from
Amendment No. 3 an incorrect exhibit of the proposed rule text; (2)
reconciled the current rule text of the definition of an IOC Order
as modified by a prior proposed rule change that designated
Regulation NMS-compliant IOC orders; (3) corrected typographical
errors in proposed NYSE Rules 60(e) and NYSE Rule 123F(b)(ii); (4)
replaced the term ``NYSE Bonds'' with the term ``Automated Bond
System'' in its rules; and (5) specified in NYSE Rule 1000 that the
liquidity replenishment point (``LRP'') value would be calculated
every 30 seconds. See also Securities Exchange Act Release No. 54611
(October 16, 2006), 71 FR 62143 (October 23, 2006).
    \5\ See Letters from George Rutherfurd, Consultant, dated
September 10, 2006 (``Rutherfurd Letter I'') and November 16, 2006
(``Rutherfurd Letter II''), and Junius W. Peake, Monfort
Distinguished Professor Emeritus of Finance, Greeley, Colorado,
dated October 3, 2006 (``Peake Letter'').
    \6\ See Letter from Mary Yeager, Secretary, NYSE, to Nancy M.
Morris, Secretary, Commission, dated November 2, 2006 (``Response to
Comments'').
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    This order approves the proposed rule change, as amended by
Amendment Nos. 1, 2 and 3, and grants accelerated approval to Amendment
No. 5. The Commission is also providing notice and soliciting comments
on Amendment No. 5.

II. Description of Proposal

    On March 22, 2006, the Commission approved NYSE's proposal to
establish a Hybrid Market.\7\ In this proposed rule change, the
Exchange proposes to amend certain Hybrid Market rules and other NYSE
rules to reflect their operation in the Hybrid Market.
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    \7\ See Securities Exchange Act Release No. 53539, 71 FR 16353
(March 31, 2006) (``Hybrid Market Order'').
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A. Order Types

1. Auto Ex Order
    The Exchange proposes to amend its definition of Auto Ex Order to
clarify that an Auto Ex Order is an order that initiates an automatic
execution immediately upon entry into Exchange systems.\8\ Accordingly,
the Exchange also proposes to delete elected stop, stop limit orders,
and CAP-DI orders from the Auto Ex Order definition as these orders do
not initiate an automatic execution upon their entry on the Exchange.
Further, the Exchange proposes to clarify that ``non-auto-ex'' orders,
i.e., those orders that do not initiate an automatic execution
immediately upon entry into NYSE systems, would participate in
automatic executions in accordance with the rules governing their
operation. Finally, the Exchange proposes to amend NYSE Rules 1000-1004
to replace the term ``auto ex'' with the words ``automatically
executing'' to reflect that such rules govern all automatic executions,
not just those involving an Auto Ex Order.
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    \8\ See proposed NYSE Rule 13 (``Auto Ex Order'').
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2. Market Orders
    The current definition of an Auto Ex Order in NYSE Rule 13 includes
a

``market order designated for automatic execution.'' The Exchange
proposes to treat all market orders as Auto Ex Orders unless
specifically designated to be handled in the auction market as Auction
Market Orders. A market order, therefore, would no longer need to be
designated for automatic execution.
3. Maximum Size
    In the Hybrid Market, NYSE eliminated the size limitation for Auto
Ex Orders. NYSE systems, however, have a maximum order capacity of
3,000,000 shares. Therefore, NYSE proposes to gradually increase the
size of orders that may be entered for automatic execution to a maximum
of 3,000,000 shares.\9\ The Exchange proposes to phase in the maximum
order size eligibility for automatic executions, beginning with a
maximum size of 1,000,000 shares. The Exchange also proposes to move
the maximum order size limitation for automatic executions to NYSE Rule
1000.\10\
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    \9\ See proposed NYSE Rule 1000.
    \10\ The Exchange had implemented similar language as part of an
extended auto-ex pilot in Lucent. See Securities Exchange Act
Release No. 53791 (May 11, 2006), 71 FR 28732 (May 17, 2006)
(``Lucent Pilot'').
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4. Immediate or Cancel (``IOC'') Order
    In the Hybrid Market, the Exchange created two types of IOC
orders.\11\ The first type is an IOC order that complies with
Regulation NMS (``Reg. NMS'').\12\ A Reg. NMS IOC order would not be
routed during an Exchange execution to satisfy better priced protected
bids or offers \13\ displayed by other market centers; rather, a Reg.
NMS IOC order would be cancelled, as soon as its ability to receive an
execution on the Exchange ends. The second type of IOC order, an NYSE
IOC order, would route during a sweep to other markets to satisfy
better priced protected bids or offers and would cancel only when it is
no longer able to receive an execution.
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    \11\ See NYSE Rule 13.
    \12\ See Rule 600(b)(3), 17 CFR 242.600(b)(3).
    \13\ A protected bid and offer is defined in Rule 600(b)(57) of
Reg. NMS. See 17 CFR 242.600(b)(57).
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    The Exchange proposes to amend the definition of an NYSE IOC order
to clarify that Exchange systems would accept NYSE IOC orders for
participation in the re-opening trade after a trading halt.\14\
Specifically, NYSE IOC orders received during a trading halt would be
systemically maintained in order of their receipt for execution upon
the re-opening of the halted security. If an NYSE IOC order is not
executed as part of the re-opening trade, the order would be cancelled.
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    \14\ See proposed NYSE Rule 13.
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B. Sweeps

    As approved in the Hybrid Market Order, an incoming Auto Ex Order
of a size larger than the Exchange best bid or offer (``BBO'') would
receive an execution at two prices--the BBO price and the ``clean-up''
price.\15\ The Exchange proposes to allow an automatically executing
order to trade with all interest in the Display Book system at each
successive price outside of the Exchange BBO.\16\ As proposed, an
automatically executing order would trade with the Exchange BBO and at
each successive price until the order is filled, its limit price (if
any) is reached, an LRP is reached, or, in the case of a Reg. NMS IOC
order, trading at a particular price on the Exchange would require
cancellation because the order cannot be routed to another market
center.\17\
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    \15\ The ``clean-up'' price is the best price at which interest
in the Display Book system can trade with an Auto Ex Order outside
of the Exchange BBO. See NYSE Rule 1000(d)(iii).
    \16\ See proposed NYSE Rule 1000(d)(iii).
    \17\ See proposed NYSE Rule 1000(d)(ii)(C).
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    During a sweep, floor broker e-Quotes trade on parity with orders
in the Book at the clean-up price, but only to the extent of the size
the floor broker designated as displayable should the price become the
NYSE BBO.\18\ The size that would have been placed in reserve would
yield to orders in the Book.\19\ The Exchange proposes to eliminate
this distinction and allow all floor broker agency interest to trade on
parity, once the order with priority has been satisfied, with orders in
the Book at each successive price during a sweep.
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    \18\ See NYSE Rule 70.20(d)(i).
    \19\ See NYSE Rule 70.20(d)(ii).
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    The Exchange also proposes to clarify how and when CAP-DI orders
would participate in sweeps. Specifically, CAP-DI orders on the same
side as an automatically executing order would be elected at each
execution price that is part of the sweep.\20\ To the extent that the
sweeping order has volume remaining to be executed, the elected CAP-DI
orders would not participate in a transaction and would automatically
and systemically be unelected.\21\ If, at the last execution price
during a sweep, the sweeping order is filled or is otherwise unable to
continue executing, and there is contra side volume remaining on the
Display Book system or from contra-side elected CAP-DI orders, then the
same-side CAP-DI orders may participate in the final transaction.\22\
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    \20\ See proposed NYSE Rule 123A.30(a)(ii).
    \21\ See proposed NYSE Rule 123A.30(a)(ii).
    \22\ See proposed NYSE Rule 123A.30(a)(ii).
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    CAP-DI orders on the contra side of the sweeping order are also
elected at each execution price that is part of the sweep and would
participate at the electing price, if there is volume available from
the sweeping order on the Display Book system or from CAP-DI orders on
the same side of the market as the sweeping order.\23\
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    \23\ See proposed NYSE Rule 123A.30(a)(iv).
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C. Liquidity Replenishment Points

    The Exchange proposes to delete the two types of LRPs it proposed
to implement, and replace them with a single LRP. The proposed LRP
would be calculated by adding and subtracting a value (determined by
the Exchange) to the last sale price.\24\ The LRP value would not
change during the day, and the Exchange would disseminate the LRP
value.\25\ According to the Exchange, the LRP value would be based on
an examination of trading data and would vary based on the security's
NYSE average daily volume (``ADV''), price, and volatility. The
Exchange proposes a range of LRP values for securities with preset
characteristics of ADV, price, and volatility.\26\ The LRP would not be
calculated until there is a trade on the Exchange in a particular
security.\27\ If a security opens on a quote, and there are no trades
on the Exchange, the LRP value would not be set until there is a trade.
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    \24\ See proposed NYSE Rule 1000(a)(iv).
    \25\ See proposed NYSE Rule 1000(a)(iv).
    \26\ See proposed NYSE Rule 1000(a)(iv).
    \27\ See proposed NYSE Rule 1000(a)(iv).
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    The LRP value would be calculated automatically throughout the day,
as follows: (1) Every 30 seconds throughout the day; (2) after a manual
trade by the specialist; and (3) when automatic executions resume after
an LRP has been reached.\28\
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    \28\ See proposed NYSE Rule 1000(a)(iv).
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    Further, the Exchange proposes to change when automatic executions
and Autoquote would resume after an LRP has been reached. The Exchange
proposes that automatic executions and Autoquote would resume as soon
as possible after an LRP has been reached, but in no more than five to
ten seconds, unless the residual is able to trade at a price beyond the
LRP, and the price creates a locked or crossed market.\29\ In such
case, automatic executions would resume with a manual transaction.\30\
Finally, the Exchange proposes to make

conforming changes to other Exchange rules.\31\
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    \29\ See NYSE Rules 60(e)(ii) and 1000(b).
    \30\ See NYSE Rules 60(e)(ii) and 1000(b).
    \31\ See proposed NYSE Rules 60(e)(C)(iii), 60(e)(C)(iv),
60(d)(i) and (ii), 72(j)(i) and (j)(ii), and 1000(c).
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D. Stop Order and Stop Limit Order

    The Exchange proposes to modify how stop orders are handled and
processed on the Exchange. Specifically, the Exchange proposes that
specialists would no longer have access to information about stop
orders. In addition, the Exchange proposes to no longer accept stop
limit orders.
1. Processing of Stop Orders
    Currently, stop orders are entered on the Exchange primarily
through SuperDOT \32\ and routed directly to the Display Book system,
where they reside awaiting election. The specialist assigned to each
security knows the prices at which stop orders would be elected and
their sizes. Because the specialist has access to this information that
is not available to other market participants, NYSE Rule 123A.40
requires that, in certain circumstances described below, the specialist
must guarantee the execution of elected stop orders at the electing
price.
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    \32\ SuperDot is an electronic order-routing system used by NYSE
member firms to send market and limit orders to the NYSE.
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    The Exchange proposes to restrict the ability of specialists and
their systems employing algorithms (``specialist algorithms'') to view
information regarding stop orders. Specialists would no longer view the
electing price and size of stop orders, nor possess any unique
information regarding stop orders. Stop orders would be maintained in a
``blind file'' in the sequence of their receipt. When a transaction on
the Exchange results in the election of a stop order, the elected stop
order would be sent as a market order to the Display Book system and
the specialist algorithms, and would be handled in the same way as any
other market order.
    The Exchange also proposes to modify its opening and closing
procedures to reflect that specialists would no longer have access to
stop order volume that would be elected by the opening or closing
transaction. Currently, the specialist calculates the opening price
based in part on the stop order volume that would be elected by the
opening trade.\33\ On the close, the specialist calculates the closing
price based in part on the stop order volume that would be elected and
the volume of buy and sell market-at-the-close/limit-at-the-close
(``MOC/LOC'') \34\ orders that would be executed as a result of the
closing price.\35\
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    \33\ See, e.g., NYSE Rule 123D.
    \34\ MOC order is a market order, which is to be executed in its
entirety at the closing price, on the Exchange, of the stock named
in the order, and if not so executed, is to be treated as cancelled.
A LOC order is a limit order, which may or may not receive execution
on the close depending on the closing price and depth of contra side
interest. The term ``at the close order'' also includes a limit
order that is entered for execution at the closing price, on the
Exchange, of the stock named in the order, pursuant to such
procedures as the Exchange may from time to time establish.
    \35\ See, e.g., NYSE Rule 116.40.
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    The Exchange proposes that at the open, the specialist or his or
her trading assistants would indicate to Exchange system the price at
which the specialist contemplates opening the stock. The Exchange
system then would calculate the volume of shares available for
execution on the open at that price, including stop orders that would
be elected by an execution at such price. There would be no indication
what, if any, portion of the total volume accounts for stop orders.
There would only be one opening print and would include stop orders
that are elected by the opening trade.
    Similarly, prior to the close, the Exchange proposes that the
specialist or his or her trading assistants would indicate to Exchange
system the price at which the specialist is contemplating closing the
stock. In turn, Exchange system would calculate the volume of shares
executable on the close at that price, including stop order volume that
would be elected by an execution at that price. There would be no
indication what, if any, portion of the total volume accounts for stop
orders. The unelected stop orders would only be included in the total
volume of shares available to trade on the close five minutes prior to
the close.
    The Exchange proposes to add NYSE Rule 115A.10 and NYSE Rule 116.50
to prohibit specialists, trading assistants, and anyone on their behalf
from using the opening and closing process in a manner designed to
inappropriately discover information about unelected stop orders.\36\
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    \36\ The proposed opening and closing processes for stop order
handling are not available intraday; therefore, during the trading
day, it is not possible for these processes to be employed in a
manner designed to inappropriately discover information about
unelected stop orders.
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2. Elimination of Specialist's Guarantee and Floor Official Approval
    Currently, NYSE Rule 123A.40 prohibits a specialist from making a
transaction for his own account in a stock in which he is registered
that would result in putting into effect any stop orders he may have on
his book. However, a specialist may be party to the election of a stop
order only: (i) When his bid or offer has the effect of bettering the
market, when he guarantees that the stop order will be executed at the
same price as the electing sale, and with Floor Official approval if
the transaction is more than 0.10 point away from the prior
transaction; or (ii) when the specialist purchases or sells stock for
his own account solely for the purpose of facilitating completion of a
member's order at a single price, where the depth of the current bid or
offer is not sufficient to do so. When the specialist is acting in this
manner, he shall not be required to guarantee that the stop order will
be executed at the same price as the electing sale. In addition,
current NYSE Rule 13.30, which applies to stop orders in Investment
Company units, requires a specialist to obtain Floor Official approval
prior to making a bid or offer for its proprietary account that would
elect a stop order and is more than 0.10 point away from the last sale.
    Because specialists will no longer be privy to information about
stop orders, the Exchange proposes to eliminate the requirement that
specialists guarantee the execution price of stop orders elected by
their trades and the requirement that they receive Floor Official
approval for certain proprietary quotes and trades.
3. Floor Broker Stop Order Processing
    Under the proposal, floor brokers would continue to be permitted to
represent stop orders. However, the Exchange proposes that stop orders
represented by floor brokers in the Crowd may not be included in e-
Quote.\37\
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    \37\ See proposed NYSE Rule 70.20(a)(i).
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4. Elimination of Stop Limit Orders
    Finally, the Exchange proposes to eliminate stop limit orders as an
acceptable order type. The Exchange proposes to make conforming changes
to other Exchange rules to reflect the elimination of stop limit
orders.\38\
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    \38\ See proposed NYSE Rules 13, 118(2), 123(e)(7), 123(f),
132B(a)(9), 132B(b)(9), and 476A.
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E. Other Changes

1. Autoquote
    Currently, when Autoquote is suspended due to a gap quote, NYSE
Rule 60(e)(iv)(C) provides that Autoquote would continue to update the
NYSE BBO in certain situations.\39\ According to the Exchange, however,
Autoquote does not continue to update

the BBO when NYSE has a gapped quote. Thus, the Exchange proposes to
amend its rule to provide that when the NYSE quote is gapped, Autoquote
would be suspended on both sides of the market.\40\
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    \39\ See NYSE Rule 60(e)(iv)(c).
    \40\ See proposed NYSE Rule 60(e)(iii)(c).
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2. Exchange Crossing Rule
    The Exchange proposes to amend its Rule 76 to provide that it would
not apply to automatic executions.\41\ Currently, when a member has an
order to buy and an order to sell the same security, NYSE Rule 76
requires that the member offer such security at a price which is higher
than his bid by the minimum variation before making a transaction with
himself to enable the Crowd to trade with the order at such price.
Since automatic executions cannot accommodate verbal Crowd
participation, the Exchange proposes to specify that NYSE Rule 76 only
applies to manual transactions.
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    \41\ See proposed NYSE Rule 76.
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3. High Priced Securities
    The Exchange proposes to amend the definition of the price of high-
priced securities, which are not eligible for automatic executions, as
the closing price of a security, or if the security did not trade, the
closing bid price of the security on the Exchange on the immediate
previous trading day, that is $1,000 or more.\42\ Currently, the
Exchange considers securities with a closing price, or a closing bid
price if the security did not trade, of $300 or more as high-priced.
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    \42\ See proposed NYSE Rule 1000(a)(vi).
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F. Hybrid Market Implementation Schedule

    The Exchange is in the process of implementing Phase 3 of the
Hybrid Market. The Exchange proposes to amend the Phase 3
implementation schedule \43\ to add the following additional features:
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    \43\ See Hybrid Market Order, supra note 7.
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     Elimination of Direct+ suspension when a better bid or
offer is displayed by another market center;
     Implementation of sweeps (as redefined herein);
     Implementation of the LRP (as redefined herein); and
     Implementation of new stop order processing (as discussed
herein).

Exchange Rule 1002 (``Availability of Automatic Execution Feature'')
would be available for all stocks through the close upon implementation
of Phase 3 of the Hybrid Market.

IV. Summary of Comments and NYSE's Response

    The Commission received three comment letters from two commenters
on the proposed rule change,\44\ and the Exchange filed the Response to
Comments.\45\ One commenter continued to reiterate his objections to
the NYSE's Hybrid Market,\46\ many of which relate to aspects of the
Hybrid Market that the Commission has already approved.\47\ In the
recent letters, the commenter raised objections to two aspects of the
current proposal--the processing of stop orders and the proposed sweep
methodology.
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    \44\ See supra note 5. One commenter raised concerns with
respect to floor brokers' ability to enter discretionary
instructions with regard to orders they represent. See Peake Letter.
The Commission considered the issues raised by the commenter in its
order approving the floor broker's ability to enter discretionary
instructions. See Securities Exchange Act Release No. 54577 (October
5, 2006), 71 FR 60208 (October 12, 2006) (``d-Quote Order'').
    \45\ See supra note 6.
    \46\ See Rutherfurd Letters I and II, supra note 5.
    \47\ For example, the commenter continues to object to
specialists' ability to trade in the Hybrid Market.
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    With regard to the proposed stop order processing, the commenter
noted that the proposal to remove a specialist's ability to see stop
orders minimizes the specialist's ability to improperly elect and then
trade with stop orders. The commenter, however, believes that
specialists have an exclusive ability to trade with elected stops in
the Hybrid Market. The commenter believes that because the specialist
algorithms will receive information about elected stops, which will be
routed to the Display Book system as market orders, the specialists
would also be provided with an opportunity to trade with these orders
before other market participants. The commenter argues that the
specialist's ability to algorithmically trade with elected stop orders
before other market participants would violate the specialist's
negative obligation. NYSE noted that the commenter's belief was
erroneous and that specialists do not have an exclusive ability to
trade with elected stops.
    The commenter also argues that the Exchange needs to discuss the
proposed stop order processing with the elimination of the specialist
guarantee in the context of the affirmative and negative obligations of
the specialists. The commenter argues that the specialist guarantee
provides a benefit to the market by minimizing price dislocation that
may result from an influx of elected stop orders into the market.
Absent the specialist guarantee, the elected stop orders may trade at a
price away from the last sale that may be precluded under current
Exchange rules, which could add to market volatility. NYSE responded
that the reason the specialist is required to guarantee the price of
execution for certain elected stops is due to its access to information
about the stop orders that would be executed by its proprietary trade.
Since the specialists would no longer have access to electing price and
size information for stop orders, the reason for the price guarantee
would no longer exist and thus should be eliminated. The Exchange
argued that eliminating the specialist's knowledge of information about
these orders would create a more even playing field for market
participants in the Hybrid Market, and as the commenter has
acknowledged, would reduce the possibility of the specialists having a
trading advantage or a conflict of interest.
    With respect to the sweeps, the commenter raises several issues.
First, the commenter argues that the proposed sweep methodology is
fundamentally unfair to orders in the Book because they must split
executions with undisplayed e-Quotes. The commenter states that floor
brokers are given a competitive advantage because they can enter their
automated orders with full knowledge of limit orders in the Book, while
public customers do not have similar knowledge about floor brokers'
agency interest outside the BBO. The commenter believes that this is
unfair, as public customers are not provided an opportunity to set
their limit orders taking into account interest in the floor broker
agency interest files.
    Second, the commenter argues that the Exchange's parity rules are
unfair to the Book because the commenter believes that each individual
order represented in the floor broker agency interest file is entitled
to a split.\48\ Third, the commenter argues that the Book should be
executed in price and time priority, and that non-displayed floor
broker agency interest should be executed after displayed orders in the
Book. The commenter argues that orders in the Book attract liquidity,
and they should be executed ahead of non-displayed orders.\49\
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    \48\ The Commission notes that the commenter is unclear as to
whether he believes that each individual order that is represented
by a floor broker and placed in the agency interest file gets a
split, or if the commenter believes that each individual floor
broker agency interest file, that may include multiple customers,
gets a split. Under NYSE's Hybrid Market rules, the latter is the
correct way parity splits are determined.
    \49\ The Commission notes that the commenter also argued that
specialist interest should not be able to trade on parity with floor
broker agency interest. The commenter continues to argue that this
is inconsistent with Section 11A of the Act and the specialist's
negative obligation. The Commission approved this aspect of the
Hybrid Market, and NYSE has not proposed to change the approved
parity rule in the instant proposed rule change. See Hybrid Market
Order, supra note 7.

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V. Discussion

    After careful review and consideration of the comments, the
Commission finds that the proposed rule change, as amended, is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange
and, in particular, with the requirements of Section 6(b) of the
Act.\50\ Specifically, the Commission finds that approval of the
proposed rule change, as amended, is consistent with Section 6(b)(5) of
the Act \51\ in that the proposal is designed to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, 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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    \50\ 15 U.S.C. 78f(b). In approving this proposal, the
Commission has considered the proposed rules' impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
    \51\ 15 U.S.C. 78f(b)(5).
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    The adoption of the Hybrid Market has fundamentally altered NYSE's
market structure to a predominately electronic market. As the Exchange
continues to roll out the implementation phases of the Hybrid Market,
it has also proposed changes to certain aspects of the Hybrid Market
based on its experience and the various needs of its customers and
members. As discussed more fully below, the Commission believes that
the proposed changes to the Hybrid Market are consistent with the Act.

A. Changes to Order Types

    The Exchange proposes to amend the following order types: (1) Auto
Ex Orders; (2) market orders; (3) Auction Market Orders; and (4) IOC
Orders. First, with respect to Auto Ex Orders, the Exchange proposes to
clarify that Auto Ex Orders are orders that initiate automatic
executions immediately upon arrival into Exchange systems. The
Commission finds that this change clarifies NYSE's rule by specifying
how the orders NYSE accepts will be handled. Second, the Exchange
proposes to consider all market orders as Auto Ex Orders and therefore
would no longer need to require that they be specifically designated
for automatic execution. The Commission finds this change could enhance
automated access to liquidity on the Exchange, and facilitate the
efficient execution of market orders on the Exchange. As a result of
the change to market orders, NYSE also proposes to add a definition for
Auction Market Orders for those market orders that are to be handled in
the auction market. The Commission finds that this change is consistent
with the Act because it provides investors with the option to seek
price improvement through these orders. Third, the Exchange proposes to
amend the definitions of IOC orders to identify Reg. NMS-compliant IOC
orders and to amend the definition of an NYSE IOC order to clarify that
Exchange systems will accept NYSE IOC orders for participation in the
re-opening trade after a trading halt. The Commission finds that these
changes are consistent with the Act because they clarify how these
orders will be handled. Finally, the Exchange proposes to gradually
increase its order size eligibility for automatic executions to a
maximum size of 3,000,000 shares. The Commission finds that this
proposal is consistent with the Act and reflects in NYSE's rules its
systems limitations.

B. Sweeps

    The Exchange proposes to allow an Auto Ex Order to trade with all
interest in the Display Book system at each successive price outside of
the Exchange BBO instead of receiving an execution at the BBO price and
the clean up price. The Exchange also proposes to allow all floor
broker agency interest to trade on parity with orders in the Book at
each successive price during a sweep. Further, the Exchange clarified
the participation of CAP-DI orders during a sweep.
    One commenter objected to the floor broker's ability to trade on
parity with the orders in the Book.\52\ Specifically, this commenter
believed that non-displayed interest, such as the floor broker agency
interest file, should yield to displayed orders in the Book. The
commenter also believed that floor brokers have a competitive advantage
over public customers because they can enter their agency interest with
knowledge of orders in the Book, while public customers would not be
aware of floor broker agency interest outside of the BBO.
---------------------------------------------------------------------------

    \52\ See Rutherfurd Letters I and II, supra note 5.
---------------------------------------------------------------------------

    The Commission notes that it has previously approved the Exchange's
proposal to allow Auto Ex Orders to sweep the Display Book system in
the Hybrid Market Order. In the Hybrid Market Order, the Commission
noted that NYSE's proposal to allow Auto Ex Orders to sweep the Display
Book system was a significant expansion of the availability and speed
of automatic executions on the Exchange and should facilitate more
efficient transactions on the Exchange. The Commission continues to
believe that these execution efficiencies could result in the Hybrid
Market. The Exchange stated that its customers indicated that they
would not utilize the sweep functionality as originally approved.\53\
Accordingly, NYSE made the decision to amend its rule to allow incoming
orders to trade at each price in the Display Book system. The
Commission believes that the decision to make this change is consistent
with the Act, and within the realm of business judgment typically left
to individual markets.
---------------------------------------------------------------------------

    \53\ The Commission notes that commenters to the original Hybrid
Market proposal raised this issue. See Hybrid Market Order, supra
note 7.
---------------------------------------------------------------------------

    With respect to a floor broker's ability to maintain non-displayed
interest that is available for execution, the Commission notes that it
has not required complete disclosure of all trading interest, and that
it has previously permitted the use of undisplayed order types. For
example, in the auction market, floor brokers may hold significant
trading interest that is not broadly disclosed but is available for
execution and participation in a transaction on the Exchange. The
Commission found in the Hybrid Market Order that e-Quotes could trade
on parity with orders in the Book consistent with the requirements of
the Act.\54\ While the Exchange now proposes, under the amended sweep
functionality, to permit the full size of an e-Quote to trade on parity
with orders in the Book at each successive price, the Commission
continues to believe that NYSE's rules provide floor brokers with
incentives to place liquidity in the Display Book system and
effectively represent their customers' orders, and are consistent with
the Act.\55\
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    \54\ During a sweep in the current Hybrid Market, only e-Quotes
that would be displayed if the price becomes the Exchange BBO would
trade on parity with orders in the Book.
    \55\ Like in the auction market, each floor broker's e-Quote,
which may reflect several customers' orders, would be considered one
bidder/offerer, and the Book would likewise be considered one
bidder/offerer. This aspect of NYSE's parity rule remains unchanged,
and the Commission believes it continues to be consistent with the
requirements of the Act.
---------------------------------------------------------------------------

    The commenter believes that e-Quotes should not be entitled to
parity because floor brokers have the ability to change

the prices of their e-Quotes in response to information about orders in
the Book, while public customers are not provided information about the
floor brokers' interest outside the BBO. The Commission, however, notes
that NYSE's proposal does not alter the information that is currently
available to floor brokers or investors. Public customers entering
limit orders have access to the same information as floor brokers
regarding the Book, and can change their orders in response to that
information. Floor brokers have information about their own customers'
orders, as they always have had, but do not have information about
other floor broker interest. Accordingly, the Commission does not
believe that floor brokers have an inappropriate informational
advantage.
    The Commission believes that exchanges have a certain degree of
flexibility to determine the methods of order interaction on their
markets so long as the requirements of the Act are met. Floor brokers
represent customers that are also providing liquidity for execution.
Floor brokers' customers often do not want their orders disclosed and
rely on floor brokers to use their judgment to represent their
interest. As noted above, the Commission has not required disclosure of
this liquidity outside the BBO, and, in the auction market, orders
represented by floor brokers have been entitled to parity with orders
in the Book. Accordingly, the Commission finds that NYSE's proposal to
allow floor broker agency interest to trade on parity at each
successive price with orders in the Book during a sweep is consistent
with the requirements of the Act.

C. Stop Orders

    Currently, the specialist acts as agent for stop orders and, as
agent, has exclusive access to information about the election price and
size of the stop orders. Because the specialist has exclusive access to
this information, the Exchange requires the specialist, in certain
situations, to guarantee the price of an elected stop order. The
Exchange now proposes to modify the manner in which stop orders are
handled and processed on NYSE by removing the specialist's access to
information about stop orders, and eliminating the requirement that the
specialist guarantee the stop order's election price in certain
situations. In addition, NYSE proposes to eliminate the requirement
that the specialist receive Floor Official approval of certain
specialist proprietary trades that would elect stop orders. NYSE also
proposes to modify its opening and closing procedures and eliminate
stop limit orders as an order type on the Exchange.
    One commenter believed that, under the proposal, the specialist
would have an exclusive ability to trade with elected stop orders since
it would receive information about elected stop orders through the
specialist algorithm prior to other market participants.\56\ This
belief is incorrect. Specialists in the Hybrid Market can only trade
algorithmically in certain specified instances that are set forth in
NYSE Rule 104. Under the proposal, specialists and the specialist
algorithm would be restricted from viewing information regarding the
stop orders. Stop orders would instead be maintained in a ``blind
file'' in the sequence of their receipt, and, once elected, the elected
stop order would be sent by the Exchange system as a market order to
the Display Book system. Information about the market order also would
be sent to the specialist algorithm. The market order would be handled
in the same manner as previously approved for market orders in the
Hybrid Market. Accordingly, in order to trade against an incoming
market order, the specialist algorithm would have to: (1) Provide
``additional specialist volume'' to partially or completely fill the
market order at the Exchange BBO; (2) match better bids and offers
published by other market centers where automatic executions are
immediately available; or (3) provide price improvement to the market
order.\57\
---------------------------------------------------------------------------

    \56\ See Rutherfurd Letters I and II, supra note 5. In his
second letter, the commenter stated that floor broker d-Quotes would
not be able to trade against incoming market orders and that NYSE's
rules provide that d-Quotes can only trade against published NYSE
interest. The Commission notes that this statement is erroneous.
NYSE Rule 70.25(b)(i) specifically states that ``[a] [f]loor broker
may set a discretionary price range within the Exchange best bid and
offer that specifies the prices at which they are willing to trade.
This discretion will be used, as necessary, to initiate or
participate in a trade with an incoming order capable of trading at
a price within the discretionary price range'' (emphasis added).
Accordingly, d-Quotes are capable of trading with incoming market
orders, and specialists do not maintain an exclusive trading ability
with incoming market orders.
    \57\ In order to provide price improvement, the specialist would
have to be represented in the BBO in a significant size and would be
required to provide a minimum amount of price improvement. See NYSE
Rule 104(b).
---------------------------------------------------------------------------

    The commenter also argued that eliminating the guarantee implicates
the specialist's affirmation obligation in that, without the specialist
guarantee, elected stop orders could trade at a price away from the
last sale and add to market volatility. The Commission finds it
reasonable and appropriate that NYSE eliminate the specialist price
guarantee when the specialist is a party to the election of stop
orders, since specialists would no longer have information regarding
the electing price and size of stop orders. With respect to the
commenter's concern that removing the specialist price guarantee would
necessarily impact the specialist's affirmative obligations, NYSE
explained that the specialist price guarantee was a requirement
originally put in place due to the specialist's ability to view the
electing price and sizes of all stop orders in a stock, information
that is not available to other market participants. Requiring the
specialist to guarantee the price at which these orders are executed
removed any incentives for the specialist to effect proprietary trades
that would inappropriately elect stop orders. Accordingly, the Exchange
believes that, since the specialists would no longer have access to
electing price and size information for stop orders under this
proposal, the reason for the price guarantee would no longer exist and
thus should be eliminated. The Commission notes that a specialist in
the Hybrid Market remains obligated to comply with NYSE Rule 104.10,
which includes the maintenance, in so far as reasonably practicable, of
a fair and orderly market. Under NYSE Rule 104.10(2), in connection
with the maintenance of a fair and orderly market, a specialist should
engage to a reasonable degree under existing circumstances in dealings
for its own account when lack of price continuity, lack of depth, or
disparity between supply and demand exists or is reasonably to be
anticipated. The elimination of the specialist guarantee for executing
certain elected stops at the electing price would not alter this
affirmation obligation.
    The Commission also believes that eliminating the specialist's
ability to view the prices at which stop orders would be elected and
their sizes would minimize the specialist's unique informational
advantage over other market participants with respect to stop orders.
The Commission finds that the proposal would create a more level
playing field for market participants in the Hybrid Market.
    The Exchange has proposed a reasonable method by which specialists
can continue to effectively open and close the market by allowing
specialists to query the system, at discrete times, to determine the
total number of shares available for execution (including stop orders)
at a proposed opening or closing price. NYSE has proposed to
specifically prohibit in its rules specialists, trading assistants, and
anyone on their behalf from using the amended opening and closing
process

in a manner designed to inappropriately discover information about
unelected stop orders. The Commission believes that the Exchange's
enforcement of this provision and surveillance for its compliance will
provide investors with additional protection against any remaining
potential trading abuses related to the election and execution of stop
orders.
    Similarly, because the specialist would no longer have access to
information about stop orders, the Commission believes it is
appropriate for NYSE to remove the requirement that the specialist
obtain Floor Official approval prior to trading or making a bid or
offer \58\ for its proprietary account that would elect a stop order
and is more than 0.10 point away from the last sale.
---------------------------------------------------------------------------

    \58\ Stop orders in ETFs may be elected by a quote. See NYSE
Rule 13.30.
---------------------------------------------------------------------------

    Finally, the Commission believes it is reasonable for NYSE to no
longer accept the stop limit order type in Exchange systems given their
infrequent use. Accordingly, the Commission finds it appropriate for
NYSE to eliminate the definition and all references to stop limit
orders from its rules.

D. Liquidity Replenishment Point

    The Exchange proposes to replace the two types of LRPs approved in
the Hybrid Market Order--the sweep LRP and the momentum LRP--with a
single LRP that would be calculated by adding and subtracting a value
to the security's last sale price. NYSE proposes that the value would
not change intraday and would be disseminated by the Exchange. The
Exchange also proposes to change when Autoquote and automatic
executions would resume after an LRP has been reached.
    The Commission believes that the proposed LRP changes are within
the realm of business judgments generally left to the discretion of
individual markets. The Commission has previously approved the
Exchange's use of LRPs in its Hybrid Market model.\59\ The Commission
believes that the proposal to change the calculation of the LRP is
consistent with the requirements of the Act. By providing for a single
LRP and simplifying its calculation, the Commission believes that the
proposal may assist market participants in determining when automatic
executions and Autoquote may be halted on the Exchange. The Commission
also notes that the specific value ranges used to calculate the LRP
have been incorporated into proposed NYSE Rule 1000(a)(iv) and that the
LRP values will be disseminated by the Exchange.
---------------------------------------------------------------------------

    \59\ See Hybrid Market Order, supra note 7.
---------------------------------------------------------------------------

E. Other Changes

    Finally, the Exchange proposes to amend NYSE Rule 60 to indicate
that Autoquote will not update the BBO when the quote has been gapped
in accordance with Exchange procedures. The Commission notes that this
proposed change to NYSE Rule 60 is consistent with NYSE Rule 79A.15
regarding gapped quotes. The purpose of a gapped quote is to provide
public notice of an order imbalance and to minimize short-term price
dislocation associated with such imbalance by allowing for entry of
offsetting orders or the cancellation of orders on the side of the
imbalance. The Commission has previously found that NYSE rules do not
have to require that both sides of its quote be updated to reflect
better priced limit orders when the quote is gapped.\60\ The Commission
continues to believe that it is consistent with the Act to disengage
Autoquote when the quote is gapped to allow the specialist to
disseminate an order imbalance.
---------------------------------------------------------------------------

    \60\ See Securities Exchange Act Release No. 39129 (September
25, 1997), 62 FR 51497 (October 1, 1997).
---------------------------------------------------------------------------

    The Exchange also proposes to make clear that the crossing
requirements in NYSE Rule 76 would only apply to manual transactions.
The Commission finds it appropriate for NYSE to amend this rule to
exclude automatic executions since they cannot accommodate verbal Crowd
participation.
    Finally, the Exchange proposes to increase the dollar threshold for
high-priced securities, which are not eligible for automatic
executions, from $300 to $1,000. The Commission believes that
increasing the dollar threshold for high-priced securities is
consistent with the Act and could expand the eligibility of orders for
automatic executions on the Exchange.

F. Hybrid Market Implementation Plan

    The Exchange proposes to alter the Hybrid Market implementation
plan to add additional features to Phase 3. Specifically, NYSE proposes
to implement the amended sweeps and LRP, original planned for Phase 4,
earlier in Phase 3. In addition, the Exchange proposes to implement in
Phase 3 the new stop order processing and eliminate Direct+ suspension
when a better bid or offer is displayed by another market center. NYSE
also proposes that Exchange Rule 1002 be available for all stocks
through the close upon implementation of Phase 3.
    The Commission finds that the proposed changes to the Hybrid Market
implementation plan are consistent with the Act. The Commission notes
that it approved on a pilot basis for a limited number of securities
the changes to the implementation plan, including the changes to NYSE
rules proposed herein.\61\ The Exchange has represented that the
implementation of Phase 3 has not incurred any significant problems to
date.
---------------------------------------------------------------------------

    \61\See Securities Exchange Act Release Nos. 54578 (October 5,
2006), 71 FR 60216 (October 12, 2006) and 54675 (October 31, 2006),
71 FR 65019 (November 6, 2006).
---------------------------------------------------------------------------

VI. Accelerated Approval of Amendment No. 5

    The Commission finds good cause to accelerate approval of the
changes in Amendment No. 5. prior to the thirtieth day after the
amendment is published for comment in the Federal Register pursuant to
Section 19(b)(2) of the Act \62\ for the reasons discussed below. In
Amendment No. 5, NYSE proposes to: (1) Remove from Amendment No. 3 an
incorrect exhibit of the proposed rule text; (2) reconcile the current
rule text of the definition of an IOC Order as modified by a prior
proposed rule change that designated Reg. NMS-compliant IOC orders;
\63\ (3) correct typographical errors in proposed NYSE Rules 60(e) and
123F(b)(ii); (4) correct the term ``NYSE Bonds'' that was used in the
prior amendments to designate the automated system in which bonds trade
and replace it with ``Automated Bond System'' in order to reflect the
current name of the system and existing NYSE rule text; \64\ and (5)
incorporate in NYSE Rule 1000 that the LRP value would be calculated
every 30 seconds.
---------------------------------------------------------------------------

    \62\15 U.S.C. 78s(b)(2).
    \63\See Securities Exchange Act Release No. 54611, supra note 4.
    \64\See Securities Exchange Act Release No. 54615 (October 17,
2006), 71 FR 62338 (October 24, 2006) (pending proposed rule change
to rename the automated system in which bonds would trade as ``NYSE
Bonds'').
---------------------------------------------------------------------------

    The Commission finds good cause to accelerate approval of NYSE's
proposal to correct its exhibit of proposed rule text and the
definition of an IOC Order, to make technical corrections in proposed
NYSE Rules 60(e) and 123F(b)(ii), and to replace the term ``NYSE
Bonds'' with ``Automated Bond System'' prior to the thirtieth day after
publication in the Federal Register because it would accurately reflect
NYSE's existing rule text and raises no new regulatory issues. In
addition, the Commission finds good cause to accelerate approval of
NYSE's proposal to incorporate in NYSE Rule 1000 the 30-second time
period in which the LRP

would be calculated because it would codify into NYSE's rules the
manner in which the LRP would be determined and provide clarity and
specificity to its operation.

VII. Solicitation of Comments on Amendment No. 5

    Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 5, including whether such amendment
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<EMAIL_ADDRESS>Please include

File Number SR-NYSE-2006-65 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSE-2006-65. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all

written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room. 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-2006-65 and should be submitted on or before
December 27, 2006.

VIII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\65\ that the proposed rule change (SR-NYSE-2006-65) and Amendment
Nos. 1, 2, and 3, are approved and that Amendment No. 5 thereto is
approved on an accelerated basis.
---------------------------------------------------------------------------

    \65\15 U.S.C. 78s(b)(2).
    \66\17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\66\
Nancy M. Morris,
Secretary.
 [FR Doc. E6-20619 Filed 12-5-06; 8:45 am]

BILLING CODE 8011-01-P


[Federal Register: December 23, 2005 (Volume 70, Number 246)]
[Notices]
[Page 76274-76275]
[DOCID:fr23de05-54]

-----------------------------------------------------------------------

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. RP05-512-002]

Northwest Pipeline Corporation; Notice of Compliance Filing

December 13, 2005.
    Take notice that on December 7, 2005, Northwest Pipeline
Corporation (Northwest) tendered for filing as part of its FERC Gas
Tariff, Third Revised Volume No. 1, Third Revised Sheet No. 4, to be
effective December 7, 2005.

    Northwest states that the purpose of this filing is to comply with
the Commission's letter order dated November 30, 2005 in Docket Nos.
RP05-512-000 and 001.
    Northwest states that a copy of this filing has been served on
parties on the official service list in the above-captioned proceeding.
    Any person desiring to protest this filing must file in accordance
with Rule 211 of the Commission's Rules of Practice and Procedure (18
CFR 385.211). Protests to this filing will be considered by the
Commission in determining the appropriate action to be taken, but will
not serve to make protestants parties to the proceeding. Such protests
must be filed in accordance with the provisions of section 154.210 of
the Commission's regulations (18 CFR 154.210). Anyone filing a protest
must serve a copy of that document on all the parties to the
proceeding.
    The Commission encourages electronic submission of protests in lieu
of paper using the ``eFiling'' link at http://www.ferc.gov. Persons

unable to file electronically should submit an original and 14 copies
of the protest to the Federal Energy Regulatory Commission, 888 First
Street, NE., Washington, DC 20426.
    This filing is accessible on-line at http://www.ferc.gov, using the

``eLibrary'' link and is available for review in the Commission's
Public Reference Room in Washington, DC. There is an ``eSubscription''
link on the Web site that enables subscribers to receive e-mail
notification when a document is added to a subscribed docket(s). For
assistance with any FERC Online service, please e-mail
<EMAIL_ADDRESS>or call<PHONE_NUMBER> (toll free). For

TTY, call<PHONE_NUMBER>.

Magalie R. Salas,
Secretary.
[FR Doc. E5-7746 Filed 12-22-05; 8:45 am]

BILLING CODE 6717-01-P