[Federal Register: July 21, 2006 (Volume 71, Number 140)]
[Notices]
[Page 41493-41496]
[DOCID:fr21jy06-87]

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SECURITIES AND EXCHANGE COMMISSION

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

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

July 13, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 10, 2006, the New York Stock Exchange LLC (``Exchange'' or
``NYSE'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Exchange has designated this proposal as one establishing or changing a
due, fee, or other charge imposed by the Exchange under Section
19(b)(3)(A)(ii) of the Act \3\ and Rule 19b-4(f)(2) thereunder,\4\
which renders the proposed rule change effective upon filing with the
Commission. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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 I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

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

office, and at the Commission's Public Reference Room.

 II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.

 A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

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

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

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

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

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

    The foregoing proposed rule change has become effective upon filing
pursuant to Section 19(b)(3)(A) of the Act \22\ and Rule 19b-4(f)(2)
\23\ thereunder because it establishes or changes a due, fee, or other
charge imposed by the Exchange. At any time within 60 days of the
filing of the proposed rule change, the Commission may summarily
abrogate such rule change if it appears to the Commission that such
action is necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the purposes of
the Act.
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    \22\ 15 U.S.C. 78s(b)(3)(A).
    \23\ 17 CFR 19b-4(f)(2).
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 IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to<EMAIL_ADDRESS>Please include

File No. SR-NYSE-2006-46 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-2006-46. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commissions Internet Web site (http://www.sec.gov/rules/sro.shtml).

Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room. Copies of such filing also will be
available for inspection and copying at the principal office of the
NYSE. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
NYSE-2006-46 and should be submitted on or before August 11, 2006.

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

BILLING CODE 8010-01-P