[Federal Register: October 29, 2008 (Volume 73, Number 210)]
[Notices]
[Page 64379-64392]
[DOCID:fr29oc08-103]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58845; File No. SR-NYSE-2008-46]

Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing of Amendment Nos. 2 and 3 and Order Granting
Accelerated Approval to a Proposed Rule Change, as Modified by
Amendment Nos. 1, 2, and 3, To Create a New NYSE Market Model, With
Certain Components To Operate as a One-Year Pilot, That Would Alter
NYSE's Priority and Parity Rules, Phase Out Specialists by Creating a
Designated Market Maker, and Provide Market Participants With
Additional Abilities To Post Hidden Liquidity

October 24, 2008.

I. Introduction

    On June 12, 2008, the New York Stock Exchange LLC \1\ (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \2\ and Rule 19b-4
thereunder,\3\ a proposed rule change to establish a new market model
(``New Model''). The New Model would implement significant changes in
NYSE's market structure, including, most notably: (i) The phasing out
of the specialist system and adopting a Designated Market Maker
(``DMM'') structure; (ii) the alteration of NYSE's priority and parity
rules, most significantly to allow DMMs to trade on parity with orders
on NYSE's Display Book[supreg] (``Display Book''); and (iii) the
introduction of new order functionality, including the DMM Capital
Commitment Schedule (``CCS'') and hidden orders.\4\
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    \1\ Formerly known as the New York Stock Exchange, Inc.
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
    \4\ Currently, specialists must yield to customer orders on the
Display Book. See NYSE Rule 92(a).
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    On July 15, 2008, the Exchange filed Amendment No. 1 to the
proposed rule change. The proposed rule change, as modified by
Amendment No. 1, was published for public comment in the Federal
Register on July 23, 2008.\5\ The Exchange filed Amendment No. 2 to the
proposed rule change on August 29, 2008. The Exchange filed Amendment
No. 3 to the proposed rule change on October 7, 2008. The Commission
received no comment letters regarding proposed rule change. This order
provides notice of filing of Amendment Nos. 2 and 3 to the proposed
rule change, and grants accelerated approval to the proposed rule
change, as modified by Amendment Nos. 1, 2 and 3.
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    \5\ Securities Exchange Act Release No. 58184 (Jul. 17, 2008),
73 FR 42853 (``Notice'').
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II. Description of the Proposal

A. Background: NYSE's Hybrid Market and the Evolution of Electronic
Trading

    Section 11(b) of the Act \6\ allows the rules of a national
securities exchange to permit a member to be registered as a specialist
and act as both a broker and a dealer. Historically, the NYSE
specialist was responsible for overseeing the execution of all orders
coming into the Exchange, for conducting auctions on the Floor, and for
maintaining an orderly market in assigned securities. Specialists'
dealer activities are governed, in part, by the negative and
affirmative trading obligations. Rule 11b-1 under the Act \7\ requires
exchanges that permit members to register as specialists to have rules
governing specialists' dealer transactions so that their proprietary
trades conform to the negative and affirmative obligations. The
negative obligation as set forth in Rule 11b-1 under the Act requires
that a specialist's dealings be restricted, so far as practicable, to
those reasonably necessary to permit the specialist to maintain a fair
and orderly market.\8\ The affirmative obligation as set forth in Rule
11b-1 under the Act requires a specialist to engage in a course of
dealings for its own account to assist in the maintenance, so far as
practicable, of a fair and orderly market.\9\ NYSE has adopted these
obligations in its current Rule 104.\10\ In 2006, the Exchange began
implementation of its NYSE HYBRID MARKETSM (``Hybrid
Market''),\11\ under which Exchange systems assumed the function of
matching and executing electronically-entered orders. As part of the
Hybrid Market, the Exchange programmed its systems to provide
specialists with an order-by-order advance ``look'' at incoming orders.
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    \6\ 15 U.S.C. 78k(b).
    \7\ 17 CFR 240.11b-1.
    \8\ 17 CFR 240.11b-1(a)(2)(iii).
    \9\ 17 CFR 240.11b-1(a)(2)(ii).
    \10\ NYSE Rule 104(a) reflects NYSE's adoption of the negative
obligation and states that ``no specialist shall effect on the
Exchange purchases or sales of any security in which such specialist
is registered, for any account in which he or his member
organization * * * is directly or indirectly interested, unless such
dealings are reasonably necessary to permit such specialist to
maintain a fair and orderly market * * *.''
    \11\ See Securities Exchange Act Release No. 53539 (March 22,
2006), 71 FR 16353 (March 31, 2006) (SR-NYSE-2004-05).
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    The rise of the electronic Hybrid Market has fundamentally altered
NYSE's trading environment. Traditionally, price discovery on the
Exchange took place almost exclusively on the Floor in the form of
face-to-face interactions among brokers and specialists. These
interactions have diminished as electronic trading has become more
important on the Exchange.
    In addition, information that once was exclusive to the Floor, such
as the most up-to-date quotes and last sale prices, is now widely
available off the Floor through electronic means. At the same time, the
Exchange believes that it is no longer the dominant trading market for
many NYSE-listed securities, as competition from other market centers
has increased.
    The increase in electronic executions on the Exchange as well as
the increase in the use of smart routing engines by market participants
of all types has reduced the advantages once enjoyed by Floor brokers
and specialists. Indeed, NYSE has argued that the informational
advantage has shifted ``upstairs'' where

orders are now first ``shopped'' within a firm and then to others
before being sent to the Floor for execution and, even then, orders are
likely to be sent in pieces to multiple markets.\12\
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    \12\ See Notice, supra note 5, at 42861.
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    Because of these changes, NYSE is proposing to adopt its New Model,
which the Exchange believes would provide a more robust trading model
on the Floor while preserving the existing framework for trading and
some of the key responsibilities of its market participants that NYSE
believes make it unique. The Exchange believes that the proposed
changes would improve market quality in the form of tighter spreads,
greater liquidity, and opportunities for price improvement.

B. Proposed Changes to Exchange Systems

1. Overview of NYSE's Proposed New Model
    The Exchange proposes to eliminate the ``specialist'' category of
market participants and create a new category of market participants,
DMMs.\13\ The Exchange intends to implement the New Model in two
phases: Phase 1, beginning as of the date of this order (``Approval
Date'') and ending no more than five weeks after the Approval Date, and
Phase 2, beginning upon completion of the Phase 1 implementation and
ending no more than ten weeks after the Approval Date.\14\ Though DMMs
would still be ``specialists'' during Phase 1, once Phase 1 has been
fully implemented and Phase 2 begins, DMMs would no longer be
``specialists'' under the Act. Once Phase 2 has been implemented, DMMs
would no longer serve on the Exchange in the capacity of responsible
broker-dealer for orders on NYSE's book, and DMM trading activity on
the Exchange would be limited to proprietary trading.\15\ In addition,
during Phase 2, the Exchange will eliminate the order-by-order advance
``look'' specialists currently receive. Because, with the
implementation of Phase 2, they would no longer be specialists, DMMs
would not be subject to a specialist's negative obligation not to trade
for its own account unless reasonably necessary to the maintenance of a
fair and orderly market.\16\ The Exchange believes this would give the
DMM greater freedom to manage the trading risks associated with their
reduced responsibilities to the NYSE market. Like specialists today,
DMMs would be able to generate orders through an algorithm that
interacts directly with the Display Book. In addition, in the New
Model, DMMs would be able to commit additional liquidity in advance to
fill incoming orders via the Capital Commitment Schedule or CCS. The
CCS is a liquidity schedule setting forth various price points where
the DMM is willing to interact with incoming orders.
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    \13\ See infra Section II.B.2.(a) for a more detailed
description of the Exchange's proposal regarding DMMs.
    \14\ The Exchange proposes to roll out each phase of the New
Model initially in three or four securities, with progressive
implementation of the New Model rules for additional securities over
the duration of each phase. Certain provisions of the proposed rules
for the New Model would be implemented on a one-year pilot basis.
See infra Section II.B.5 for a more detailed description of the
implementation of the proposed New Model.
    \15\ The DMM would also be responsible for effecting manual
executions in certain circumstances on the Exchange. See infra notes
38-39 and accompanying text.
    \16\ See supra, notes 8-10 and accompanying text. The Exchange
has determined to impose certain affirmative obligations on DMMs
(including an obligation to provide quotes at the National Best Bid
or Offer (``NBBO'') a minimum percentage of the trading day).
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    As part of the redesign of its market, NYSE proposes to amend the
rules governing allocation of shares among the participants in a trade
with an incoming order.\17\ First, NYSE's proposal would amend the
Exchange's priority rules relating to displayed interest that
establishes the Exchange's best bid or best offer (collectively
``Exchange BBO'' \18\), most notably by providing such priority
interest with the first 15% of any execution and by allowing such
interest to maintain priority until it is exhausted.\19\ Second, in the
proposed New Model, all market participants would receive executions on
an equal basis (``parity'') with other interest available at that
price.\20\ Similar to the NYSE's current market model, the Exchange
would classify each individual Floor broker and the DMM registered in a
security as separate market participants, while all off-Floor orders
entered in Exchange systems for such security would together constitute
a single market participant (``Off-Floor Participant'') for the purpose
of share allocation. The Exchange's proposed parity rule represents a
significant change from its current requirement that specialists yield
to all off-Floor orders on the Display Book.
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    \17\ Proposed NYSE Rule 72 (Priority of Bids and Offers and
Allocation of Executions).
    \18\ The term ``Exchange BBO'' refers to the best bid or the
best offer on NYSE. It should not be confused with the defined terms
``national best bid'' and ``national best offer'' as defined in Rule
600(b)(42) of Regulation NMS Rule 242.600(b)(42) under the Act.
    \19\ See infra Section II.B.3.(b) for a more detailed
description of the Exchange's proposal regarding priority.
    \20\ See infra Section II.B.3.(b) for a more detailed
description of the Exchange's proposal regarding parity.
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    The Exchange also proposes to provide all market participants with
the ability to maintain non-displayed ``hidden interest''--i.e.,
reserve interest without a minimum display requirement.\21\ Along with
the DMM's CCS interest, the Exchange believes this ability of market
participants to maintain hidden interest on NYSE's book will contribute
to the Exchange's liquidity and depth of market.
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    \21\ See infra Section II.B.3.(a) for a more detailed
description of the Exchange's proposal regarding reserve interest.
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2. Updating the Roles of the Various Exchange Market Participants
    As indicated above, the New Model proposal includes proposed
changes to the roles of the Exchange's various market participant
groups to reflect new patterns of trading and new obligations. These
include the phasing out of NYSE's specialist system and the adoption of
a Designated Market Maker structure. In addition, the Exchange is
making changes to the role of, and tools available to, Floor brokers,
and is giving new tools to off-Floor participants that will enable them
to participate in the market more directly. These changes are described
in more detail below.
(a) Designated Market Makers
(1) Overview
    The Exchange believes that its new market model requires a new type
of market maker \22\--the Designated Market Maker--with the ability
(and affirmative obligation) to contribute liquidity in a security by
trading competitively for its dealer account. The Exchange therefore
proposes to phase out the existing specialist system and to replace
specialists with Designated Market Makers who would be employees of
Designated Market Maker Units (``DMM Units'').\23\
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    \22\ The term ``market maker'' shall have the same meaning as
that term in Section (3)(a)(38) of the Act.
    \23\ As of the implementation of Phase 2, pursuant to proposed
Rule 104(f)(iv), DMMs will be designated as ``market makers'' on the
Exchange for purposes of the Act.
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    As described in further detail below, the Exchange proposes to give
DMM Units tools and opportunities that are not available to specialists
currently, along with modified obligations, that the Exchange believes
are more commensurate with trading in electronic markets. At the same
time, the Exchange would preserve several aspects of the specialist
system that it believes are beneficial to the market and the investing
public.

    Current NYSE Rule 104, relating to specialist dealings, will be
amended and renamed 104T and will be operative and effective through
the end of Phase 1. The Exchange also proposes a new Rule 104 that will
be implemented during Phase 2.\24\
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    \24\ See infra Section II.B.5 for a more detailed description of
the phased implementation of the proposed New Model.
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(2) DMMs and DMM Units Approved by the Exchange
    The Exchange proposes to require that member organizations who want
to operate a DMM Unit file an application in writing and be approved by
NYSE Regulation prior to operating a DMM Unit. The application and
approval requirement would be waived for existing NYSE specialist firms
that decide to create a DMM Unit.\25\ In deciding whether to approve an
application, NYSE Regulation will consider, among other things, the
member organization's market making ability, the capital that the
member is willing or able to make available for market making and such
other factors as NYSE Regulation deems appropriate.\26\
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    \25\ See Proposed NYSE Rule 103(b)(ii).
    \26\ See Proposed NYSE Rule 103(b)(i).
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    DMMs employed by DMM Units to work on the Floor of the Exchange
will be required to be approved and registered with the Exchange. In
order to obtain such approval, applicants will need to submit an
application to NYSE Regulation, Inc., which will assess an applicant's
regulatory fitness, and successfully complete a qualifications
examination prescribed by the Exchange.\27\
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    \27\ For a full discussion of the DMM registration and approval
process, including provisions for Relief DMMs and Temporary DMMs,
see Notice, supra note 5, at 42862.
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(3) DMMs Not Responsible Broker-Dealer
    The Exchange proposes to amend the provision in Exchange rules that
makes specialists the ``responsible broker-dealer'' for purposes of
Limit Order Display and other obligations under both the Act and
regulations promulgated thereunder. Under NYSE Rule 60, specialists are
currently solely responsible for quoting the highest bids and lowest
offers on the Exchange for all reported securities.
    The Exchange is of the view that this rule is appropriate in a
manual trading environment, where the specialist post is the primary
locus for trading in securities and where the specialist oversees the
reporting of all executions. The Exchange believes this rule makes less
sense in an automated market. Market participants who are not
specialists post their interest electronically in the form of DOT
orders or e-Quotes (broker agency interest files), and Exchange systems
process and publish that interest automatically. The Exchange's quote
today now includes the Floor broker's agency interest, specialist
interest, and electronically entered interest of off-Floor
participants, and all interest included in the Exchange's quote is
identifiable by the Exchange's systems.
    Given the automated processing of participant orders, quotations,
and executions, the Exchange believes that the notion that the
specialist is the sole responsible broker-dealer is obsolete. And,
because various obligations may attach based on whether a participant
is designated as the responsible broker-dealer, the Exchange believes
that designating the DMM as the ``responsible broker-dealer'' could
place these obligations on a nominal participant while relieving the
logically responsible participant of that same obligation. To address
these limitations, NYSE is proposing to amend NYSE Rule 60 to reflect
that the member or member organization entering a bid or offer in a
security is the ``responsible broker-dealer'' to the extent of such bid
or offer.\28\
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    \28\ See 17 CFR Sec.  240.602(b)(i).
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(4) DMMs' Affirmative Obligation
    Although the Exchange does not propose to require DMMs to act as
``responsible broker-dealers,'' the Exchange does propose to impose on
each DMM affirmative obligations with respect to the quality of the
markets in securities assigned to it. The Exchange's proposed Rule 104
sets forth the DMMs' affirmative obligation as follows:

    The function of a member acting as a DMM on the Floor of the
Exchange includes the maintenance, in so far as reasonably
practicable, of a fair and orderly market on the Exchange in the
stocks in which he or she is so acting. The maintenance of a fair
and orderly market implies the maintenance of price continuity with
reasonable depth, to the extent possible consistent with the ability
of participants to use reserve orders, and the minimizing of the
effects of temporary disparity between supply and demand. In
connection with the maintenance of a fair and orderly market, it is
commonly desirable that a member acting as DMM engage to a
reasonable degree under existing circumstances in dealings for the
DMM's own account when lack of price continuity, lack of depth, or
disparity between supply and demand exists or is reasonably to be
anticipated.\29\
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    \29\ See Proposed NYSE Rule 104(f)(ii).

    In addition, DMM Units would be required to maintain adequate
minimum capital \30\ based on their registered securities, and would be
required to use their capital to engage in a course of dealings for
their own accounts to assist in the maintenance, so far as practicable,
of a fair and orderly market. Transactions on the Exchange by a DMM for
the DMM Unit's account are to be effected in a reasonable and orderly
manner in relation to the condition of the general market and the
market in the particular stock.\31\ To support this requirement, the
Exchange would continue to provide depth guidelines \32\ for each
security, and NYSE Regulation would continue to surveil for and enforce
DMM compliance with the guidelines.\33\
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    \30\ The proposed capital requirements for DMMs are identical to
the current capital requirements computed for specialists in
accordance with Rule 15c3-1 and current NYSE Rule 104. The Exchange
proposes to move the placement of these requirements into proposed
NYSE Rule 103.
    \31\ See Proposed NYSE Rule 104(g)(i).
    \32\ Currently, the Exchange provides each security with a daily
depth guideline and depth sequence size that reflects its individual
trading characteristics including intra-day price volatility. Depth
sequence sizes over which depth is calculated and the depth
guidelines against which the calculated depth movements are compared
are dynamically updated each day for each symbol based on the
symbol's recent trading characteristics. These characteristics
include: its previous NYSE closing price; its NYSE adjusted volume;
and its intra-day consolidated high/low range. Systemic calculations
of these values occur each day and are used in the creation of a
formulaic individualized depth guideline and depth sequence size
that is unique for each security. The Exchange proposes to provide
DMMs with the same information pursuant to proposed NYSE Rule
104(f)(iii).
    \33\ Specialist compliance with the depth guidelines is reviewed
by the Market Surveillance division of NYSE Regulation on a patterns
and practices basis. A specialist's failure to comply with the
guidelines may result in referral to NYSE Regulation's Enforcement
division for investigation and possible disciplinary action.
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    DMMs would further be required to maintain a bid or offer at the
National Best Bid or National Best Offer (``inside'') for securities in
which the DMM is registered for a certain percentage of the trading day
based on the average daily volume of the security. For securities that
have a consolidated average daily volume of less than one million
shares per calendar month, a DMM Unit must maintain a bid or an offer
at the NBBO for at least 10% of the trading day (calculated as an
average over the course of a calendar month). For securities that have
a consolidated average daily volume of equal to or greater than one
million shares per calendar month, a DMM Unit must maintain a bid or an
offer at the NBBO for at least 5% or more of the trading day
(calculated as an average over the courts of a calendar month). Reserve
or

other hidden orders entered by the DMM would not be included in the
inside quote calculations.\34\
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    \34\ For a more detailed discussion of how DMM compliance with
the quoting requirement is measured and an example of a quoting
requirement calculation, see Notice, supra note 5, at 42863-4.
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    The Exchange further proposes that DMMs retain the re-entry
requirements currently imposed on specialists contained in NYSE Rule
104. As such, DMMs effecting Neutral, Non-Conditional and Conditional
transactions would still be required to re-enter liquidity on the
opposite side of the market depending on the type of transaction
executed by the DMM.\35\
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    \35\ Pursuant to proposed NYSE Rule 104(g)(i)(A), DMMs would be
subject to the same requirements currently imposed on specialists in
current NYSE Rule 104.10(5)-(6). Currently Conditional Transactions
operate as a separate pilot; through this filing the Exchange seeks
to incorporate those provisions into the New Model Pilot through
proposed NYSE Rule 104(g)(i)(A).
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(5) DMMs and Order Information
    Once Phase 2 has been implemented, DMMs would not receive an order-
by-order advance ``look'' at incoming orders.\36\ The DMM Unit's
trading algorithms would have access to information with respect to
orders entered on the Exchange, Floor broker agency interest files, or
reserve interest to the extent such information is made publicly
available. DMM unit algorithms would receive the same information that
is disseminated to the public by the Exchange, at the same time that it
is available to other market participants, with respect to orders
entered on the Exchange, Floor broker agency interest files, or reserve
interest.\37\
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    \36\ In SR-NYSE-2008-67, the Exchange modified the order flow
sent to the Specialist Application Programmed Interface, or
``SAPI.'' Commencing with two securities (to ultimately apply to all
Exchange securities), the Exchange's systems will send only copies
of the following types of orders to the Specialist Algorithm: (i)
market orders; (ii) buy limit orders priced at the NYSE bid price or
sell limit orders priced at the NYSE offer price; (iii) limit orders
priced in between the NYSE bid price and the NYSE offer price; and
(iv) limit orders that are priced at or through the opposite side
quote (i.e., below the bid in the case of an order to sell or at or
above the offer in the case of an order to buy). See Securities
Exchange Act Release No. 58628 (July 30, 2008), 73 FR 46122 (August
7, 2008).
    \37\ The Exchange notes that the DMM algorithm would receive
``Book State'' information, which is the same information that is
available to other market participants that subscribe to NYSE market
data feeds, and shows aggregated displayed interest at various price
points.
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    Although the DMM would no longer receive order by order
information, there are certain times during which the Exchange believes
human interaction is essential to market quality and maintaining a fair
and orderly market; specifically, during opening and re-opening
transactions, closing transactions, block transactions, gap quote
situations, and when trading reaches liquidity replenishment points
(``LRPs'') that would lock or cross the market.\38\ During these
specific situations, DMMs would be responsible for determining the
price \39\ and effecting executions of orders at that price.
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    \38\ See Proposed NYSE Rule 104(a)(2)-(5).
    \39\ In an opening and reopening trade, Display Book would
verify that all interest that must be executed in the opening or
reopening can be executed at the price chosen by the DMM. If all the
interest that must be executed in the transaction cannot be executed
at that price, the Display Book would block the execution. In
addition, when executing blocks (10,000 shares or more or value of
$200,000 or more), trading out of a gap quote situation or an LRP
that locks or crossed the market, the Display Book may adjust the
execution price if there is enough interest on the Display Book to
complete the transaction at a better price.
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(6) DMMs Would Not Retain the Specialists' Negative Obligation
    The Exchange believes that due to the transformation of the
equities markets in the United States, the specialists' negative
obligation no longer makes sense and should be eliminated.
Historically, in a manual, floor-based market, specialists often had a
significant informational advantage from being at the center of
substantially all of the exchange's activity in a given security.
Similarly, in the Hybrid Market, the specialist's advance ``look'' at
incoming orders provided the specialist with a unique and potentially
significant informational advantage over other market participants.
    Given the real-time availability of market information and
resultant increase in market transparency in today's markets and the
Exchange's proposed elimination of the advance ``look'' at incoming
orders by the DMM, the Exchange believes that the imposition of a
negative obligation on DMMs is unnecessary. Accordingly, the Exchange
is proposing that, beginning with the implementation of Phase 2, DMMs
would no longer be deemed to be ``specialists'' or to be subject to the
negative obligation.
    DMMs, however, would continue to facilitate manual transactions on
the Exchange. When DMMs are facilitating manual transactions, Exchange
systems would provide DMMs the total volume of all orders eligible to
participate \40\ in the transaction. All eligible orders would be
aggregated by the Exchange system and shown to DMMs as interest
available to participate in the manual execution. With this tool, DMMs
would have the necessary information to appropriately price opening,
re-opening, and closing transactions and to trade out of gap quote and
certain LRP situations. DMMs would not have access to such information
on an order-by-order basis, as Exchange specialists do today.\41\
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    \40\ This information would not include customers' Non-Displayed
Reserve Orders and Floor broker agency interest that is designated
``Do Not Display.'' See infra Section II.B.3.(a).(2).
    \41\ Odd-lot orders are a temporary exception to this principle,
due to limitations of the Exchange's systems that process odd-lot
orders. See infra notes 57-60 and accompanying text.
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(7) DMMs Interest for Quoting and Trading
    Although DMMs would no longer be restricted by a negative
obligation, DMMs would have an affirmative obligation to contribute to
the maintenance of a fair and orderly market by committing capital in
order to add liquidity to the market when there is little or no
liquidity, and bridge the gaps in supply and demand by trading for
their own account. To assist DMMs in meeting these market making
responsibilities, DMMs would be permitted to maintain systems that
employ algorithms to make trading and quoting decisions (``DMM
Interest'') on behalf of each DMM.
    DMM Interest would be permitted to: (i) Supplement the size of the
existing Exchange BBO; (ii) maintain displayed and non-displayed DMM
Interest, as described more fully below; \42\ (iii) layer interest at
varying prices outside the Exchange BBO; (iv) partially or completely
fill an order at the Exchange BBO or at a sweep price; (v) trade at and
through the Exchange BBO; (vi) trade in a sweep transaction; (vii)
provide price improvement; and (viii) match better bids and offers
published by other market centers where automatic executions are
immediately available. Exchange systems would prevent DMM Interest from
executing against itself (i.e., executing wash trades).
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    \42\ See infra Section II.B.3.(a).
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(8) DMM Capital Commitment Schedule
    In addition to DMM Interest, DMMs would be permitted to transmit to
the Display Book a Capital Commitment Schedule (``CCS'') setting forth
additional liquidity that the DMM would be willing to provide at
specific price points. The CCS would inform the Display Book of the
amount of shares that the DMM is willing to trade at price points
outside, at, and inside the Exchange BBO. The CCS is separate and
distinct from the DMM Interest. DMM algorithms would send the Exchange
this schedule of additional non-displayed trading interest.
    CCS interest would be accessed by the Exchange's systems in two
ways,

depending on whether an incoming order is inside, at, or through the
NYSE BBO. When an order is received that would trade at or through the
NYSE BBO, the Exchange's system would review all the liquidity
available on the Display Book, including CCS interest, and determine
the price at which the full size of the order can be satisfied (the
``completion price''). When determining the completion price, Exchange
systems would take into account all eligible displayed and non-
displayed interest available in the Display Book (inside, at, and
through the NYSE BBO); any protected bids or offers on markets other
than the Exchange (``away interest''); and the DMM's CCS interest at a
particular price. Exchange systems would then compare the amount of
liquidity required from the DMM's CCS at the completion price with the
number of CCS shares offered at the next price that is one minimum
price variation (``MPV'') \43\ or more higher (in the case of an order
to sell) or lower (in the case of an order to buy) (the ``better
price'').
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    \43\ Pursuant to NYSE Rule 62, the MPV is currently one cent
($0.01) except that, with respect to equity securities trading on
the Exchange at a price of $100,000 or greater, the minimum price
variation shall be ten cents ($0.10).
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    If the number of shares that would be allocated to the CCS interest
at the better price is greater than the number of shares that would be
allocated to the CCS interest at the completion price, then the CCS
interest would participate at the better price (with CCS interest
yielding to any other interest in Exchange systems at that price). Any
remaining balance of the incoming order would be executed at the
completion price against displayable and non-displayable interest
pursuant to NYSE Rule 72.\44\ If the number of shares that would be
allocated to the CCS interest at the completion price is equal to or
greater than the number of shares that would be allocated to the CCS
interest at the better price, the CCS interest will participate at the
completion price (with CCS interest yielding to any other interest in
Exchange systems at that price).\45\
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    \44\ A DMM's CCS interest may only participate once in the
execution of an incoming order. As such, CCS interest that may exist
at the completion price is ineligible to trade with any remaining
balance of the incoming order if the DMM's CCS interest was included
in the execution of any portion of such order at the better price.
    \45\ For examples of the CCS, see Notice, supra note 5, at
42866-67.
---------------------------------------------------------------------------

    A DMM's CCS interest inside the Exchange BBO would be accessed by
Exchange systems to provide price improvement to incoming orders and to
match better-priced bids and offers if available on away market
centers. DMMs would not be required to be represented in the bid or the
offer in order to provide CCS interest inside the Exchange BBO.
    Pursuant to proposed NYSE Rule 1000(e), CCS interest priced inside
the Exchange BBO could trade with interest arriving in the Exchange
market that: (i) Is eligible to trade at or through the Exchange BBO;
(ii) is eligible to trade at the price of non-displayable reserve
interest of Reserve Orders and Floor broker agency interest files
reserve interest (``hidden interest''); or (iii) is eligible to route
to away market interest for execution, if the total volume of CCS
interest, d-Quote interest in Floor broker agency interest files, and
any other hidden interest would be sufficient to fully execute the
incoming order at a price inside the Exchange BBO. The Display Book
would determine the price point inside the Exchange BBO at which the
maximum volume of CCS interest would trade, taking into account the
available d-Quotes and hidden interest. The CCS interest would then
participate at that price, on parity with all other interest at that
price (i.e., d-Quotes and non-displayed reserve interest). Any reserve
interest of the DMM that is also eligible to trade at the price inside
the Exchange BBO at which the CCS interest would participate would be
aggregated with the DMM's CCS interest at that price when the trade
execution is allocated. In this manner, an incoming order may be
executed at multiple price points inside the Exchange BBO against d-
quotes, non-displayable reserve interest of all participants, and CCS
interest. However, CCS interest may only participate once if more than
one execution is required to fill the order.
(b) Floor Brokers
(1) Elimination of Percentage Orders
    The Exchange proposes to amend NYSE Rule 13 and to delete NYSE
Rules 70.25(d)(i)(A), 123A.30 and 1000(d)(2)(D) to eliminate percentage
orders. As a result of these proposed amendments, Floor brokers would
no longer be permitted to enter CAP-DI orders. In place of this order
type, the Exchange intends to provide Floor brokers access to
algorithmic technology that would replicate the trading strategy
achieved by the use of CAP-DI orders through the Floor broker's
handheld electronic device.
    The Exchange believes that this change is necessary to improve the
efficiency of the Display Book. CAP-DI orders require the system to
monitor and calculate many variables, and passively converted CAP-DI
orders impede the specialist's ability to function efficiently in an
automated market because the specialist must manually complete the
passive conversion.\46\
---------------------------------------------------------------------------

    \46\ For additional discussion regarding the Exchange's proposed
elimination of CAP-DI orders, see Notice, supra note 5, at 42868.
---------------------------------------------------------------------------

(2) d-Quote Trading With Non-Marketable IOC Orders and at the Open and
Close
    The Exchange further proposes to amend NYSE Rule 70 to enhance the
functionality of the Floor broker d-Quote to increase the liquidity
available for executions on the Exchange. Specifically, the Exchange
proposes to allow d-Quotes to partially or completely fill a non-
marketable immediate or cancel order (``IOC''), which includes NYSE
IOC, Reg NMS IOC, and Intermarket Sweep Orders,\47\ that are within the
d-Quote's discretionary range.\48\ In allowing the d-Quote to interact
with a non-marketable IOC, the Exchange seeks to provide the IOC an
opportunity to receive a partial or complete execution with price
improvement. In instances where the d-Quote only partially completes
the order, the remaining portion of the non-marketable IOC will be
automatically and immediately cancelled.
---------------------------------------------------------------------------

    \47\ See NYSE Rule 13. By their definition, these order types
are never quoted but must be automatically executed. Any remaining
unfilled portion is immediately and automatically cancelled. Non-
marketable IOC orders are immediately and automatically cancelled.
    \48\ See Proposed NYSE Rule 70.25(d)(ix).
---------------------------------------------------------------------------

    To further increase the liquidity available at the opening and
closing transaction, the Exchange proposes to amend NYSE Rule
70.25(a)(ii) to allow d-Quotes to be active in the opening and closing
transactions.
(3) Floor Broker Interest Published to OpenBook
    The Exchange proposes to have Floor broker interest published in
the OpenBook system at every price point (unless designated ``Do Not
Display'' or ``DND''). The displayable portions of Floor broker
interest that is designated DND will only be published in OpenBook when
such interest is at the Exchange BBO. Floor broker agency interest
employing Non-Displayed Reserve functionality, as described further
below,\49\ will not be published in OpenBook.
---------------------------------------------------------------------------

    \49\ See infra Section II.B.3.(a).(2).
---------------------------------------------------------------------------

3. Changes to NYSE Order Types and Order Processing
(a) Additional Undisplayed Liquidity
    Floor brokers, off-Floor participants, and DMMs would continue to
have the

ability to maintain reserve liquidity on the Exchange; however, NYSE
proposes to modify each market participant's ability to provide reserve
interest. As a threshold matter, the Exchange proposes to amend NYSE
Rule 13 to label all undisplayed off-Floor interest ``Reserve Orders.''
Within that category, the Exchange proposes to create two types of
reserve interest, ``Minimum Display'' and ``Non-Displayed Reserve.''
(1) Minimum Display Orders
    Under the proposed rule change, ``Minimum Display Orders'' require
that a minimum of one round lot of the order be designated for display.
The Exchange proposes to make permanent NYSE Rule 13 governing Reserve
Orders, and also proposes to provide Floor brokers and DMMs with
equivalent functionality via a conforming amendment to proposed NYSE
Rules 70(e) and 104. Collectively, this minimum display reserve
functionality is referred to as ``Minimum Display Interest.'' Each time
a Minimum Display Order is replenished from reserve interest, a new
time-stamp is created for the replenished portion of that Minimum
Display Order, while the remaining reserve interest retains the time-
stamp of its original entry. Minimum Display Interest would be eligible
to participate in manual executions, but would not be identifiable to
the DMM on an order-by-order basis. Exchange systems would include all
Minimum Display Interest in the aggregate order information available
for execution at a price point when the DMM facilitates a manual
transaction.
    The Exchange further proposes that the aggregate of Minimum Display
Interest be included in the aggregate interest available to be seen by
the DMM in order to provide information about orders available in
Exchange systems for response to a Floor broker's market probe request
pursuant to NYSE Rule 115. Currently, during a manual execution, Floor
broker DND reserve interest that has a displayed quantity and Reserve
Orders pursuant to NYSE Rule 13 are included in the aggregated order
information displayed to the specialist only during manual executions
(e.g., the opening and closing trade on the Exchange, resuming trades
after a LRP is reached, or during a gap quote situation). Pursuant to
Exchange Rule 70.20(h), access to the Display Book system for
information on reserve interest is only for the purpose of effecting
transactions that are reasonably imminent.\50\ The Exchange proposes to
amend NYSE Rules 13, 70.20 and 115 to specifically state that the
aggregated Minimum Display Interest will be included in the information
disseminated in response to a Floor broker's market probe request
pursuant to NYSE Rule 115.
---------------------------------------------------------------------------

    \50\ NYSE Rule 70.20(h)(ii) provides, ``Specialists, trading
assistant and anyone acting on their behalf are prohibited from
using the Display Book system to access information about Floor
broker agency interest excluded from the aggregated agency interest
other than for the purpose of effecting transactions that are
reasonably imminent where such Floor broker agency interest
information is necessary to effect such transaction.''
---------------------------------------------------------------------------

    Pursuant to NYSE Rule 115(iii) a specialist may provide information
about orders contained in the Display Book, referred to also as a
market probe, to provide information about buying or selling interest
in the market. This information can include aggregated buying or
selling interest contained in Floor broker agency interest files other
than interest the broker has chosen to exclude from the aggregated
buying and selling interest in response to an inquiry from a member
conducting a market probe in the normal course of business.
    The Exchange further proposes to amend NYSE Rule 70.20(h)(ii) to
remove the prohibition against specialist's ability to provide
information about Floor broker reserve interest. The Exchange proposes
that all Floor broker interest not designated DND be included in the
information eligible for dissemination pursuant to NYSE Rule 115.
(2) Non-Displayed Reserve Orders
    In addition to Minimum Display Interest, the Exchange further
proposes to provide all market participants with the ability to
maintain non-displayed interest. This proposed type of reserve interest
would not require any of the order to be designated for display and
would be available to all market participants. The Exchange proposes to
create the ``Non-Displayed Reserve Order'' for off-Floor participants
and provide Floor brokers and DMMs with equivalent functionality. Non-
Displayed Reserve Orders of off-Floor customers would not be included
in the information available to the DMM for manual execution.
    Floor brokers would also be able to utilize non-displayed reserve
functionality to enter reserve interest. If the Floor broker uses this
functionality, there is no interest displayed in the published
quotation, but the interest will be eligible for manual executions
because the DMM has the ability to view the Floor broker agency
interest in the aggregate. Floor broker agency interest file reserve
interest may also be designated as Do Not Display or ``DND,'' meaning
such interest will not be available to the DMM for manual executions.
As such, Non-Displayed Reserve Orders and Floor broker non-displayed
reserve interest that is designated DND would not participate at the
open or the close, during a gap quote situation, or when a manual
execution is required to trade out of an LRP that locks or crosses the
market. Therefore, these types of interest may be executed at an
inferior price, and will not be protected in any manual trade--at the
choice of the customer. DMM interest employing Non-Displayed Reserve
functionality would, however, be eligible to participate in a manual
transaction.
    Off-Floor participants that want to have non-displayed liquidity
participate in a manual transaction would be required to send a Minimum
Display Order. Similarly, Floor brokers that choose to have non-
displayed liquidity participate in a manual transaction must not
designate such interest DND.
(b) Execution of Bids and Offers
    The Exchange proposes to amend NYSE Rule 72 to provide to all
market participants the ability to receive executions on an equal basis
with other interest available at that price. As with NYSE's current
parity rules, individual Floor brokers and the DMM registered in the
security would each constitute a single market participant, but all
orders received by the Display Book directly from off-Floor
participants would together constitute a single market participant, the
Off-Floor Participant, for the purpose of share allocation. However,
unlike specialist interest, which under current NYSE rules must yield
to all off-Floor interest residing on the Display Book, DMM Interest
would be on parity and would not be required to yield to any off-Floor
interest.
(1) Priority and Parity for Setting Interest
    Proposed NYSE Rule 72 would modify the concept of priority to
provide that, where there is more than one bidder (offerer)
participating in an execution and one of the bids (offers) was
established as the first at a particular price and such bid or offer is
the only interest when such price is or becomes the best bid or offer
published by the Exchange (the ``Setting Interest''), the displayed
portion of such Setting Interest is entitled to priority. In order to
qualify as Setting Interest, it must have been the only \51\ interest
quoted at

a price. Only the quoted (i.e., displayed) portion of the Setting
Interest is entitled to priority (``Priority Interest'').
---------------------------------------------------------------------------

    \51\ If, at the time of quoting, Non-Displayed Reserve Orders,
Floor broker interest or DMM interest employing Non-Displayed
Reserve Functionality exist at the price point along with a single
order or quote that has a published quantity, the single order would
be deemed to be a setting order even if the Hidden Reserve Orders
and Floor broker and DMM interest employing Hidden Reserve
Functionality arrived first. In addition, if prior to quoting, there
are two orders at the price point and one of those orders cancels,
the remaining order that is the only interest quoted at the price
would be considered the Setting Interest. See Proposed Rule
72(a)(ii).
---------------------------------------------------------------------------

    Exchange systems would allocate the first 15% of any execution
(subject to a minimum of one round lot) \52\ at that price to the
Priority Interest. For the remainder of that execution, Setting
Interest would receive executions on parity with other interest
available at that price. Exchange systems would repeat the allocation
logic for the Setting Interest until the Priority Interest is
completely executed. Any remaining non Priority Interest of the Setting
Interest would be executed on parity.
---------------------------------------------------------------------------

    \52\ All allocations will be done on a round lot basis. If 15%
would result in the Priority Interest receiving a mixed lot,
Exchange systems will round up to the nearest round lot.
---------------------------------------------------------------------------

    The Exchange proposes to have Priority Interest retain its standing
even if the Exchange BBO moves away from the price point. In this case,
if the Exchange BBO returns to that price point later in the same
trading session, the remaining portion of the Priority Interest would
again enjoy priority until it is executed or cancelled, trading in the
stock is halted, the trading session ends, or the BBO moves away again.
    Partial cancellations would count first against the non-Priority
Interest of any Setting Interest. All allocations to the Setting
Interest would be decremented from the Priority Interest first whether
the allocation is based on priority or parity. Setting Interest may be
executed on parity with no priority allocation if the quote moves to a
better price point and thereafter an incoming order exceeds the shares
available for execution at the newly established Exchange BBO. In those
instances, the Setting Interest will be executed on parity and the
Priority Interest will be decremented first.
(2) Priority and Parity in the Absence of Setting Interest
    Where there is no Setting Interest, Exchange systems would divide
the size of the executing order by the number of participants. The
total number of shares to be allocated to each participant (i.e., the
single Off-Floor Participant, the DMM, and each Floor broker) would be
distributed equally among the market participants, subject to the need
to allocate in round lots. Within the single Off-Floor Participant,
shares executed would be allocated in order of time priority of receipt
of orders from off-Floor customers into Exchange systems. Executions
would be allocated in round lots. In the event the number of shares to
be executed at the price point is insufficient to allocate round lots
to all the participants eligible to receive an execution at the price
point, the Exchange systems would create an allocation wheel of the
eligible participants at the price point and the available shares would
be distributed to the participants in turn.
    On each trading day, the allocation wheel for each security would
be set to begin with the participant whose interest is entered or
retained first on a time basis. Thereafter, participants would be added
to the wheel as their interest joins existing interest at a particular
price point. If a participant cancels its interest and then rejoins,
that participant would join as the last position on the wheel at that
time.
    Non-displayed interest at price points within the Exchange BBO
would also trade on parity at each price point. Thus, non-displayed
interest that is priced within the Exchange BBO would be eligible to be
executed on parity at each price point against incoming orders.
    The Exchange further proposes to modify its overall allocation
logic to require that, for all executions at or through the Exchange
BBO, displayable interest trades ahead of non-displayable interest
available for execution at the same price point. Once all displayable
interest has been satisfied at a given price point, the remainder of
the incoming order would execute against non-displayable interest at
that price point. All categories of non-displayable interest would
trade on parity, with the exception of the DMM's CCS interest, which
yields to all other interest at the same price.
4. Additional Proposed Rule Changes
    In addition to the proposed rule changes discussed above, the
Exchange has proposed numerous minor substantive changes and conforming
changes throughout the Exchange's rule book in order to conform NYSE's
rules to the proposed New Model.\53\
---------------------------------------------------------------------------

    \53\ For a full discussion of these additional proposed rule
changes, see the Notice, supra note 5, at 42870-1.
---------------------------------------------------------------------------

5. Implementation Schedule
    The proposed amendments herein require the Exchange to make
significant modifications to Exchange systems. The Exchange therefore
proposes that the proposed rule change be implemented in stages
pursuant to the schedule outlined below.
(a) Non-Pilot Rules
    The Exchange proposes that the amendments to NYSE Rule 13 regarding
the establishment of Reserve Order types and the elimination of CAP
orders would be implemented upon Commission approval as permanent
changes to the NYSE rulebook. Similarly, all conforming changes to
other Exchange rules to enable Floor brokers and DMMs to use equivalent
reserve order functionality would be implemented upon Commission
approval as permanent changes to the NYSE rulebook. In addition, the
Exchange proposes that amendments to NYSE Rules 2 and 103 establishing
the DMMs and DMM units also would be implemented upon Commission
approval as permanent changes to the NYSE rulebook.
    The Exchange further proposes that the proposed amendments to NYSE
Rule 70 that: (i) Allow for the publication of Floor broker interest to
OpenBook; (ii) allow d-Quote instructions to be active during the open
and close; and (iii) allow d-Quotes to trade with non-marketable IOC
orders would be implemented upon Commission approval as a permanent
change to the NYSE rulebook.
(b) Pilot Rules
    The Exchange further proposes to implement certain provisions of
the New Model proposal on a pilot basis (``New Model Pilot'') upon
Commission approval of the proposed rule change. The New Model Pilot
would operate until October 1, 2009.
    During Phase 1 of the New Model Pilot, the Exchange would implement
proposed NYSE Rule 72 and proposed NYSE Rule 104T.\54\ During the
operation of Phase 1, pursuant to proposed Rule 72, all market
participants, including DMMs, would have the ability to receive
executions on parity with other interest available at that price. In
addition, during Phase 1, DMMs would still receive the order-by-order
``look'' that the specialists currently receive. During this period,
DMMs would still be considered ``specialists'' under the Act, subject
to applicable affirmative and negative obligations.
---------------------------------------------------------------------------

    \54\ Proposed NYSE Rule 104T is a temporary rule that would
operate through the end of Phase 1 and cease operation with the
implementation of Phase 2.
---------------------------------------------------------------------------

    With the implementation of Phase 2, NYSE Rule 104T would cease
operation and new NYSE Rule 104 would supersede it. Beginning in Phase
2, the

DMM would no longer receive any order-by-order information. In
addition, under proposed Rule 104, DMMs would no longer be subject to a
negative obligation. Also as of that date, the portion of Rule 1000
relating to the DMM's CCS interest would be implemented.
    During the operation of the New Model Pilot, the Exchange has
committed to provide the Commission's Division of Trading and Markets
and Office of Economic Analysis with statistics related to market
quality, trading activity, and sample statistics as requested by the
Commission.

C. Amendment No. 2

    In Amendment No. 2 to the proposed rule change, the Exchange
proposes to: (i) Clarify how odd-lot information will be transmitted to
the DMM Unit algorithm prior to the opening; (ii) retain and expand the
restriction, currently applicable to specialists, trading assistants,
and anyone acting on their behalf from accessing certain Exchange
systems and apply it to DMMs, trading assistants, and anyone acting on
their behalf; (iii) make technical amendments to NYSE Rules 13, 52, 72,
299A, and 1000; (iv) reconcile the rule language of NYSE Rules 98, 98A,
99, 104T, 105, 113 and 460 with amendments approved by the Commission
pursuant to filing SR-NYSE-2008-45 (``2008-45 Amendments''); \55\ (v)
reconcile the rule language of NYSE Rule 104T with the NYSE's immediate
effectiveness filing SR-NYSE-2008-73 (``2008-73 Amendments''); \56\ and
(vi) describe the data that the Exchange will provide the Commission to
monitor the New Model Pilot.
---------------------------------------------------------------------------

    \55\ See Securities Exchange Act Release No. 58328 (August 7,
2008), 73 FR 48260 (August 18, 2008) (SR-NYSE-2008-45).
    \56\ See Securities Exchange Act Release No. 58351 (August 13,
2008), 73 FR 48416 (August 19, 2008) (SR-NYSE-2008-73).
---------------------------------------------------------------------------

    Specifically, Amendment No. 2 proposes to clarify that, while the
individual DMM would have access only to aggregate order information as
it pertains to round-lot and odd-lot orders, the DMM Unit algorithm
would receive odd-lot information on an order-by-order basis prior to
the opening. Odd-lot orders on the Exchange are processed in a separate
system from the Exchange systems that execute round-lot orders. Odd-
lots are executed systemically by Exchange systems designated solely
for odd-lot orders (the ``odd-lot System'').\57\ The odd-lot System
executes all odd-lot orders against the specialist \58\ as the contra
party. In order for the DMM Unit algorithm to effectively facilitate an
opening transaction, the DMM Unit algorithm would also be provided odd-
lot information prior to the opening. Constraints inherent in the odd-
lot System require that odd-lot information be transmitted to the DMM
Unit algorithm on an order-by-order basis prior to the opening.\59\ As
such, prior to the opening, Exchange systems will transmit to the DMM
Unit algorithm odd-lot order information excluding e-Quote odd-lots,
odd-lot cancellations, Stop odd-lot orders and Good 'til Cancel odd-lot
orders.\60\ Once the security is opened, Exchange systems would not
provide any order-by-order odd-lot information to the DMM Unit
algorithm.
---------------------------------------------------------------------------

    \57\ See NYSE Rule 124(a).
    \58\ Odd-lot orders will continue to be executed against the DMM
as the contra. See proposed NYSE Rules 104(e) and 124(a).
    \59\ The Exchange is currently working on modifications to its
odd-lot system that would allow for the transmission of aggregate
odd-lot information to DMM unit algorithms in the third quarter of
2009 so that order-by-order transmission would no longer be
required.
    \60\ See proposed NYSE Rule 104 Supplementary Material .05.
---------------------------------------------------------------------------

    In addition, Amendment No. 2 proposes to clarify that the Exchange
seeks to retain and expand the restriction, currently applicable to
specialists, trading assistants, and anyone acting on their behalf from
accessing certain Exchange systems other than for the purpose of
effecting transactions that are reasonably imminent, and apply it to
DMMs, trading assistants, and anyone acting on their behalf.\61\ In
addition, the Exchange seeks to add information pertaining to Minimum
Display Reserve Orders to the restriction and move the restriction from
NYSE Rule 70 to the rules governing DMM requirements.\62\ The proposed
rule would prohibit DMMs, trading assistants, and anyone acting on
their behalf from using the Display Book system to access information
about Floor broker agency interest excluded from the aggregated agency
interest and Minimum Display Reserve Order information other than for
the purpose of effecting transactions that are reasonably imminent, and
where such Floor broker agency and Minimum Display Reserve Order
interest information is necessary to effect such transaction.
---------------------------------------------------------------------------

    \61\ Specifically, NYSE Rule 70.20(h)(ii) provides in pertinent
part that:``Specialists, trading assistants and anyone acting on
their behalf are prohibited from using the Display Book[supreg]
system to access information about Floor broker agency interest
excluded from the aggregated agency interest other than for the
purpose of effecting transactions that are reasonably imminent where
such Floor broker agency interest information is necessary to effect
such transaction.''
    \62\ See proposed NYSE Rules 104T(j) and 104(a)(6).
---------------------------------------------------------------------------

    Amendment No. 2 also proposes technical corrections to the rule
text. Specifically, the Exchange proposes to change the word
``specialist'' to ``DMM'' in NYSE Rule 13 because during the editing
process the word specialist was inadvertently left in this rule. The
Exchange further amended their proposal to remove previously proposed
changes to NYSE Rule 52 that the Exchange instead intends to be the
subject of a separate future filing. Also, rule language designating
proposed Rule 72 as operating in the New Model Pilot was inadvertently
not underscored. The Exchange proposes to add the required underscoring
to designate that text as new language pursuant to this filing. In
addition, Amendment 2 reflects the Exchange's proposal to delete
subparagraph (b)(2) of the Supplemental Material .10 of NYSE Rule 299A
because, similarly to specialists under the current NYSE market model,
DMMs will not be allowed to ``stop'' stock. Further, in order to
correct lettering errors in NYSE Rule 1000, the Exchange proposes to
move the language denoting the Rule as operating in the New Model Pilot
to directly after the name of the rule and retain the original
lettering.
    On August 7, 2008, the Commission approved the 2008-45 Amendments
which, among other things, modified the rule text of NYSE Rules 98,
98A, 99, 104T, 105, 113 and 460. Through Amendment No. 2, the Exchange
seeks to change the term ``specialist'' to DMM in NYSE Rules 98 and 98A
to reflect the new language approved in the 2008-45 Amendments.
    In addition, on August 13, 2008, the Exchange filed with the
Commission for immediate effectiveness a proposal to amend NYSE Rule
104(b) to provide for an automated opening message that is effectuated
through the specialist Application Programmed Interface to allow
specialists to automatically open a security on a transaction. Through
Amendment No. 2, the Exchange proposes to amend Rule 104T(b)(ii) to
incorporate the rule language from the 2008-73 Amendments.
    Finally, during the operation of the New Model Pilot, the Exchange
is committed to providing the Commission's Division of Trading and
Markets and the Office of Economic Analysis with statistics related to
market quality, trading activity, and sample statistics. The metrics
discussed below, along with any other metrics the Exchange may choose
to provide, will be transmitted to the Commission on a monthly basis.
The Exchange will maintain average measures for each

trading day during a particular month \63\ in order to provide such
information to the Commission upon request.
---------------------------------------------------------------------------

    \63\ The average per security may be provided across volume
deciles.
---------------------------------------------------------------------------

    On or before the 20th day of the second calendar month following
the Approval Date,\64\ the Exchange will provide the Commission with
the data described below, which will include data for all the trades in
the two months prior to the commencement of the New Model Pilot. The
data to be provided on such date will include the following:
---------------------------------------------------------------------------

    \64\ The timing of the provision of the market quality, trading
activity, andother statistics to the Commission was set forth in
Amendment No. 3.
---------------------------------------------------------------------------

    1. The specialist time at the NBBO by security.
    2. The effective spread by security.
    3. The specialist volume broken out by ``specialist interest type''
(e.g., s-Quote and s-Quote employing reserve functionality). The
Exchange will further provide the total shares traded expressed in
twice total volume (``TTV'') where both the buy and sell shares are
counted for each trade to allow the Commission to track the direction
of the overall specialist participation rate over time.
    4. The average depth at the NBBO for specialists.
    On the 20th day of the month following the initial provision of
data, the Exchange will provide the Commission with the data described
below, which will include data for all the trade dates in the months
directly following the Approval Date through the last trade date of the
previous month. On the same date, the Exchange will additionally
provide data related to the average depth at the NBBO for Floor brokers
and orders represented in the Display Book for the two months prior to
the commencement of the New Model Pilot.\65\ Thereafter the Exchange
will provide the data described below on the 20th day \66\ of each
calendar month until the end of the New Model Pilot. The data will
reflect the trading activity of the prior calendar month. The specific
data to be provided until the end of the New Model Pilot is as follows:
---------------------------------------------------------------------------

    \65\ The Exchange represents that it is unable to provide this
data in therequested format prior to this date.
    \66\ In the event the 20th day of the calendar month is a non-
business day,the Exchange would provide the data on the next
business day following the 20th day of that month.
---------------------------------------------------------------------------

    1. The DMM time at the NBBO by security.
    2. The effective spread by security.
    3. The DMM volume broken out by ``DMM interest type'' (e.g., CCS,
s-Quote). The Exchange will further provide the total shares traded
expressed in TTV where both the buy and sell shares are counted for
each trade to allow the Commission to track the direction of the
overall DMM participation rate over time.
    4. The average depth at the NBBO by market participant (DMMs, Floor
brokers, and orders represented in the Display Book).
    5. The ratio of (i) shares not executed on the Display Book due to
DMM execution to (ii) the shares executed by the DMM.
    6. Effective spread for: (a) orders that involve DMM liquidity
provision and (b) orders that are executed without DMM liquidity (for
similar order size categories).

D. Amendment No. 3

    In Amendment No. 3 to the proposed rule change, the Exchange
proposes to: (i) Modify the dates that the Exchange is required to
provide data to the Commission; (ii) amend the operative dates of
certain rules; (iii) clarify the implementation schedule of the New
Model Pilot; and (iv) make technical amendments to NYSE Rules 98 and 98
Former (e.g., changing the term ``specialty stocks'' to ``registered
security'').
    In Amendment No. 3, the Exchange clarified that the implementation
of the New Model Pilot would occur in two phases, Phase 1 and Phase 2.
Each phase of the New Model Pilot would commence initially in three or
four securities. The Exchange proposes that after a period of
monitoring the system operation, NYSE would progressively implement
each phase of the New Model Pilot in additional securities until that
phase is operative in all securities traded on the Floor. The rules
applicable to each phase of the New Model Pilot would apply to trading
in securities as they are added to each phase. Implementation of Phase
1 will be completed no later than five weeks after the Approval Date,
and implementation of Phase 2 will be completed no later than ten weeks
after the Approval Date.

III. Discussion and Commission Findings

    After careful review, we find 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. In particular, we find that the proposed rule change, as
amended, is consistent with Section 6(b)(5) of the Act \67\ which
requires, among other things, an exchange to 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; and are not designed to permit unfair discrimination
between customers, issuers, brokers, or dealers.\68\ The Commission
also finds that the proposed rule change is consistent with Section
6(b)(8) of the Act,\69\ which requires that the rules of an exchange
not impose any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \67\ 15 U.S.C. 78f(b)(5).
    \68\ In approving the proposed rule change, the Commission has
consideredits impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
    \69\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

A. Redefinition of the Role of the Specialist; Designated Market Makers

    One major element of NYSE's New Model is the elimination of
specialists and the introduction of Designated Market Makers. DMMs
would be assigned affirmative obligations, some of which are similar to
those currently imposed on specialists. Specifically, DMMs would have
an obligation to use the firm's own capital to contribute to the
maintenance of a fair and orderly market on the Exchange in its
assigned securities, would be subject to depth guidelines,\70\ and
would have an obligation to maintain a bid or an offer at the National
Best Bid or National Best Offer for a certain percentage of the trading
day.\71\ In addition, DMMs would be required to facilitate transactions
in their assigned securities during certain specified periods, namely
for opening and re-opening transactions, closing transactions, block
transactions, gap quote situations and when trading reaches LRPs that
would lock or cross the market. DMMs would be responsible for choosing
the price and for the executions of the orders at that price during
those specific situations. The Exchange has also proposed to eliminate
for DMMs the advance ``look'' at incoming orders that NYSE specialists
currently receive during Phase 2 of the implementation, which will be

completed within ten weeks of the Approval Date.\72\
---------------------------------------------------------------------------

    \70\ For more information regarding depth guidelines, see
Notice, supra note 5, at 42863, n. 115.
    \71\ For securities that have a consolidated average daily
volume of less thanone million shares per calendar month, a DMM Unit
would be required to maintain a bid or an offer at the NBBO for at
least 10% of the trading day (calculated as an average over the
course of a calendar month). For securities that have a consolidated
average daily volume of equal to or greater than one million shares
per calendar month, a DMM Unit would be required to maintain a bid
or an offer at the NBBO for at least 5% or more of the trading day
(calculated as an average over the course of a calendar month). See
supra note 34 and accompanying discussion.
    \72\ For so long as DMMs retain the ``look'' for
particularsecurities, they would still be considered ``specialists''
under the Act in such securities, subject to applicable affirmative
and negative obligations.
---------------------------------------------------------------------------

    In exchange for these obligations, NYSE has proposed that DMMs be
permitted to freely trade for their own account on parity with other
market participants (i.e., the negative obligation and the requirement
to yield to public customer orders on the Display Book, imposed on
specialists under NYSE's current market model, would be
eliminated).\73\ The Exchange would no longer consider DMMs to be the
``responsible broker-dealer'' with respect to executions on the
Exchange. In addition, a DMM would be permitted to transmit to the
Display Book a Capital Commitment Schedule for its assigned securities
setting forth additional liquidity that the DMM commits to provide at
specific price points.\74\ This proposed functionality would permit a
DMM to participate in executions against incoming orders that would
execute at or through the NYSE BBO, and allow the DMM to participate at
the incoming order's completion price (or at the price one minimum
price variation better, depending upon the circumstances). CCS interest
priced inside the Exchange BBO could also be accessed by Exchange
systems to provide price improvement to incoming orders and to match
better-priced bids and offers available on away market centers.
---------------------------------------------------------------------------

    \73\ In addition, the proposed parity and allocation rules would
provideDMMs with preferential allocations to the extent that there
are multiple orders of off-Floor customers in the Display Book at
the execution price. See infra Part III.B.
    \74\ See supra Part II.B.2.a.(8).
---------------------------------------------------------------------------

    Section 6(b)(5) of the Act requires that the rules of a national
securities exchange protect investors and the public interest.\75\ In
addition, the Act requires that such rules promote just and equitable
principles of trade and not be designed to permit unfair discrimination
between customers, issuers, brokers, or dealers.\76\ Likewise, Section
11A of the Act emphasizes that the national market system should
promote the public interest, the protection of investors, and the
maintenance of fair and orderly markets.\77\ In considering the
proposed rules of a national securities exchange, we must therefore
take into account their effect not only on the participants of the
given market, but their impact on investors and the public interest
generally.
---------------------------------------------------------------------------

    \75\ 15 U.S.C. 78f(b)(5).
    \76\ Id.
    \77\ 15 U.S.C. 78k-1(a)(2).
---------------------------------------------------------------------------

    We recognize that the participation of market makers in exchange
markets may benefit public customers by promoting more liquid and
efficient trading, and that an exchange may legitimately confer
benefits on market participants willing to accept substantial
responsibilities to contribute to market quality.\78\ However, while
the rules of an exchange may confer special or unique benefits to
certain types of participants, they must ensure, among other things,
that investors and the public interest are protected.\79\
---------------------------------------------------------------------------

    \78\ See Securities Exchange Act Release No. 58092 (July 3,
2008), 73 FR 40144 (July 11, 2008) at 40148.
    \79\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    We carefully review trading rule proposals that seek to offer
special advantages to market makers. Although an exchange may reward
such participants for the benefits they provide to the exchange's
market, such rewards must not be disproportionate to the services
provided.\80\ In considering NYSE's New Model provisions relating to
DMMs, we have assessed whether the rewards granted to DMMs--including
granting DMMs parity with respect to orders from off-Floor participants
and giving DMMs unique hidden interest functionality via the proposed
CCS--are commensurate with their obligations under the New Model.
---------------------------------------------------------------------------

    \80\ See Securities Exchange Act Release No. 58092 (July 3,
2008), 73 FR 40144 (July 11, 2008) at 40148 (``Market makers can
play an important role in providing liquidity to the market, and an
exchange can appropriately reward them for that as well as the
services they provide to the exchange's market, so long as the
rewards are not disproportionate to the services provided.'')
(citation omitted).
---------------------------------------------------------------------------

    Under NYSE's current market model, specialists are designated as
the ``responsible broker-dealer'' for orders resting on the Display
Book. NYSE specialists, by virtue of their advance ``look'' at incoming
orders and their position on the trading floor, also have an
informational advantage over other market participants which, if
unchecked, could permit them to adjust their trading interest to the
disadvantage of orders residing on the book. Because of this,
specialists are required to yield to all off-Floor participant orders
on the Display Book and are subject to the negative obligation not to
trade for their own account in any security in which the specialist is
registered ``unless such dealings are reasonably necessary to permit
such specialist to maintain a fair and orderly market.'' \81\
---------------------------------------------------------------------------

    \81\ See current Rule 104(a).
---------------------------------------------------------------------------

    In support of its proposal to eliminate the negative obligation and
allow the specialists' successors, DMMs, to trade on parity with public
customer orders, NYSE argues that the negative obligation is ``an
outmoded vestige of trading in a wholly different market environment
and is unnecessary.'' \82\ The Exchange believes that advances in
technology, including electronic trading and the availability of real-
time market information, make it difficult, if not impossible, for any
single market participant, including a specialist, to have a time-and-
place advantage over other market participants. In addition, the
Exchange believes that the fragmentation of liquidity in the
marketplace has lessened the importance of the specialist's influence
over its registered securities. Moreover, NYSE proposes to eliminate
for DMMs, during Phase 2 of the implementation, the advance ``look'' at
incoming orders that specialists currently receive under the Exchange's
current rules.
---------------------------------------------------------------------------

    \82\ See Notice, supra note 5, at 42865.
---------------------------------------------------------------------------

    We generally agree that, given the widespread adoption of
electronic, automated trading, the ability of market participants to
avail themselves of robust real-time market information, and the
reduction in NYSE's market share in recent years, the historic time-
and-place advantage of specialists has been reduced in today's market
environment, though we do not believe that such advantage has been
completely eliminated.\83\ The Exchange has proposed to fully eliminate
the advance ``look'' specialists currently receive during Phase 2 of
the implementation. In doing so, the Exchange has represented that,
other than for odd-lot orders,\84\ a DMM Unit's algorithm would receive
the same information with respect to orders entered on the Exchange,
Floor broker agency interest files, or reserve interest as is
disseminated to the public by the Exchange, and would receive such
information no sooner than it is available to other market
participants.
---------------------------------------------------------------------------

    \83\ The Commission notes that, while NYSE's overall market
share in NYSE-listed securities has fallen dramatically in recent
years, it continues to execute a higher percentage of the volume in
certain of these securities than any other single exchange. In
addition, while the move to largely electronic trading has
substantially reduced the information advantage gained from a
presence on the Exchange Floor, DMMs retain some informational
advantage to the extent there continue to be manual negotiations and
executions on the Floor.
    \84\ See supra Part II.C.
---------------------------------------------------------------------------

    We believe that the proposed elimination of the specialist's
``look''--when viewed in conjunction with the obligations imposed upon
DMMs, including a general affirmative obligation on the DMM to use its
capital to contribute to the maintenance of a fair and orderly market
in its assigned securities; an obligation to quote at the

National Best Bid or National Best Offer for a certain percentage of
time; an obligation to facilitate transactions during specified
periods; and depth guidelines \85\--reflects an appropriate balance of
DMM obligations against the benefits provided to DMMs under this
proposal, including providing DMMs parity with other market
participants (and preferential allocations to the extent there are
multiple orders of off-Floor participants in the Display Book at the
execution price) and providing DMMs unique functionality through the
CCS. However, given the significant advantage DMMs would receive by
being on parity with market participants (discussed below in Part
III.B), we are seeking further evidence that the benefits proposed for
DMMs are not disproportionate to their obligations.\86\
---------------------------------------------------------------------------

    \85\ The Commission notes that the proposed obligations of DMMs
would also differ significantly from those imposed on specialists
currently on the Exchange in that DMMs would no longer be the
``responsible broker-dealer'' for orders resting on the Display Book
and the specialists' negative obligation would be eliminated. We
note that the DMM's duties in connection with order executions on
Hybrid are substantially reduced under the proposed rules. Whereas
Rule 60 currently requires the specialist, as ``responsible broker-
dealer,'' to collect, process, and publish quotations, in fact in
the current automated market, virtually all orders submitted to the
Display Book are processed, published, and executed automatically,
with no handling by the specialist. Given the substantially reduced
duties of the DMM in connection with order executions, the
Commission believes it is appropriate for the Exchange to no longer
consider the DMM to be the ``responsible broker-dealer'' for orders
on the Display Book, and instead consider the broker-dealer that
submitted the order to the Exchange to be in such a position.
    \86\ For a description of the metrics the Exchange has agreed to
provide, see supra Part II.C.
---------------------------------------------------------------------------

    In addition, while we believe that the proposed operation of the
DMM's unique CCS functionality is designed to provide a slightly better
execution price for a portion of a large incoming order because that
portion of the order could receive an execution price of a penny better
than it would have received absent the CCS interest, we note that the
CCS would provide DMMs the opportunity to obtain its CCS execution at
an advantageous price with minimal risk, and with no contribution to
the visible depth of the market.
    Accordingly, we are approving the proposal's provisions with regard
to the elimination of specialists and the creation of DMMs, but we are
approving certain key provisions on a pilot basis until October 1,
2009, as discussed more fully below in Part III.D.

B. Order Allocation

    NYSE proposes to revise the order allocation methodology of Rule 72
to provide that: (i) All market participants would receive executions
on parity; (ii) ``Setting Interest'' that establishes the Exchange BBO
would be entitled to priority and would receive the first 15% of any
incoming order (subject to a minimum of one round lot) in advance of
the regular allocation of such order; and (iii) for executions
occurring outside the Exchange BBO, all displayable interest would be
executed before any non-displayable interest.
    One of the most significant changes in the Exchange's proposal is
the elimination of the requirement currently imposed upon specialists
to yield to off-Floor participant orders on the Display Book. Once the
specialist's advance ``look'' at incoming orders is fully eliminated,
and DMMs are no longer subject to the specialist's agency
responsibilities with respect to orders on the Display Book, we agree
that it would no longer be necessary to require DMMs to yield to off-
Floor participant orders on the Display Book. However, the Exchange's
proposal does not merely eliminate the requirement to yield to off-
Floor participants, but rather provides DMMs with a substantial
advantage over off-Floor orders sent to the Display Book. As the
Exchange stated in its proposal, it is amending its Rule 72 ``to
provide to all market participants the ability to receive executions on
an equal basis (`parity') with other interest available at that
price.'' \87\ The Exchange's concept of parity hinges on its definition
of ``market participant.'' According to the Exchange's definition, the
DMM registered in a given security and each individual Floor broker
representing orders in such a security would each constitute a single
market participant. In contrast to the Exchange's DMM and Floor
brokers, all off-Floor orders would be aggregated together to
constitute a single market participant, the Off-Floor Participant.\88\
Because of the aggregated nature of the Off-Floor Participant, in many
cases a DMM's interest would be assured of receiving some execution
while the Off-Floor Participant, even if composed of multiple Display
Book orders and even if such orders constituted a large volume of
shares, would receive an allocation equal to that received by the DMM.
Particularly in instances when there is more than one off-Floor order
resting in the Display Book at a particular price point at the time of
execution, the result would likely be that some orders in the Display
Book would remain unexecuted, despite potentially having been entered
into the Display Book prior to the DMM's interest having been
submitted.
---------------------------------------------------------------------------

    \87\ See Notice, supra note 5, at 42869.
    \88\ See id.; see also proposed Rule 72(c)(ii).
---------------------------------------------------------------------------

    In addition, NYSE's proposal would permit an interim period--from
the approval of this proposed rule change through completion of Phase
2--when DMMs would have parity with other market participants (i.e.,
including off-Floor orders) while retaining the current specialists'
advance ``look.'' \89\ This period, albeit short, would provide DMMs
with a significant informational advantage over other market
participants, while also providing them parity in executing their
interest.
---------------------------------------------------------------------------

    \89\ The Exchange will eliminate the ``look'' for a particular
security upon implementation of Phase 2 for such security. Amendment
No. 3 to the proposed rule change establishes a deadline of ten
weeks after the Approval Date for completion of Phase 2. Any
extension of this deadline would require NYSE to file a proposed
rule change under Section 19(b) of the Exchange Act for Commission
review.
---------------------------------------------------------------------------

    For these reasons, we are concerned about the effects the proposed
parity rule may have on market quality, book depth, and the execution
rates of public customer orders posted to Display Book. Therefore, we
have determined to approve proposed Rule 72 on a pilot basis, as
discussed more fully below in Part III.D.
    With respect to the priority provisions for Setting Interest under
proposed Rule 72(a), in addition to the proposed 15% priority
allocation, the Setting Interest would also participate on parity with
other market participants (as it would even if it were not the Setting
Interest) in the allocation of the remaining 85% of an incoming
order.\90\ Moreover, the Setting Interest maintains its priority status
until the interest is completely executed. Thus, proposed Rule 72(a) is
designed to reward aggressive quoting by market participants--which
contributes to market quality--by allowing the price setter to take the
first portion of an execution at that price. We believe that the
proposed priority rule constitutes an appropriate approach, consistent
with the Act, for incentivizing and rewarding market participants who
quote aggressively to set the Exchange BBO.
---------------------------------------------------------------------------

    \90\ The Commission also notes that there is a requirement that
the Setting Interest receive a minimum of one round lot, typically
100 shares. See proposed NYSE Rule 72(c)(iii). Given the reduction
in average execution sizes on the Exchange recently, the Commission
notes that the Setting Interest would likely often receive more than
15% because of the round lot minimum requirement. See, e.g.,
Securities Exchange Act Release No. 56599 (October 2, 2007), 72 FR
57622 (October 10, 2007) (SR-NYSE-2007-93) at fn. 6 (noting that
average execution size had declined from 334 shares in November 2006
to 254 shares in August 2007).
---------------------------------------------------------------------------

    Finally, we believe that the proposed provisions designed to ensure
that all

displayable interest trades ahead of any non-displayable interest for
executions occurring outside the Exchange BBO are consistent with the
Act. Currently, NYSE rules are designed to ensure that all displayed
interest at the Exchange BBO is fully executed prior to any execution
of undisplayed interest at the Exchange BBO. We believe that these
proposed amendments to Rule 72, which are designed to ensure that the
same requirement is applied to executions outside the Exchange BBO, are
consistent with the Act, since preferencing interest that is displayed
or designated for display over hidden interest should contribute to
price discovery, and thus is consistent with the requirements of
Section 6(b)(5) of the Act that exchange rules be designed to perfect
the mechanism of a free and open market and the national market system
and not be unfairly discriminatory.

C. Reserve Order Functionality

    In April 2008, the Exchange implemented a pilot program that
provides reserve order functionality for orders with a minimum display
quantity of one round lot, now proposed to be called Minimum Display
Reserve Orders, to off-Floor market participants.\91\ Minimum Display
Reserve Orders give off-Floor participants a reserve functionality
substantially similar to the reserve functionality of Floor brokers' d-
Quote and specialists' s-Quotes. The Exchange now proposes to make this
pilot program permanent. In addition, the Exchange proposes to create
hidden interest functionality (i.e., with no minimum display
requirement), known as Non-Displayed Reserve Orders, for off-Floor
participants. This functionality would also be available to Floor
brokers and DMMs.
---------------------------------------------------------------------------

    \91\ See Securities Exchange Act Release No. 57688 (April 18,
2008), 73 FR 22194 (April 24, 2008) (SR-NYSE-2008-30).
---------------------------------------------------------------------------

    We believe that extending the hidden interest functionality of
Minimum Display and Non-Displayed Reserve Orders to all market
participants would help level the playing field among NYSE members on
and off the Floor, and is consistent with the Section 6(b)(5) of the
Act, because it is designed to promote just and equitable principles of
trade among Exchange customers and members and is not unfairly
discriminatory. In addition, we agree that these additional order
types, by expanding the opportunities for market participants to post
different types of liquidity on the exchange, should result in deeper
liquidity and thus may contribute to overall market quality. We note
that the rules of other national securities exchanges also provide for
similar order functionality.\92\
---------------------------------------------------------------------------

    \92\ See NYSE Rule 13. See also, e.g., Nasdaq Rules 4756(c)(3)
and 4757; NYSE Arca Equities Rule 7.31(h)(3); and ISE Rule
715(g)(1).
---------------------------------------------------------------------------

    However, the Exchange's proposed treatment of hidden interest is
not identical among market participants, particularly with respect to
manual executions.\93\ While all Minimum Display interest is included
in the manual execution template, the same is not true of hidden
interest. A DMM's hidden interest would be eligible to participate in
manual transactions since this interest would always be known to the
DMM. In contrast, Non-Displayed Reserve Orders of off-Floor
participants, which would be fully hidden from the DMM, would never be
eligible for participation in manual transactions. Finally, Floor
brokers' hidden interest would be included in the manual execution
template and eligible to participate in manual transactions unless the
Floor broker, at his or her option, marked the order ``Do Not
Display.'' \94\
---------------------------------------------------------------------------

    \93\ In the New Model, DMMs would continue to facilitate manual
transactions on the Exchange in a limited number of situations. See
supra, Part III.A. Orders eligible for manual execution are
aggregated by Exchange systems and shown to the DMM in the Display
Book's manual execution template.
    \94\ In Amendment No. 2, the Exchange proposed to prohibit DMMs,
their trading assistants, and others acting on their behalf from
using Display Book to access information about Floor broker agency
interest excluded from the aggregated agency interest and Minimum
Display Reserve Order information other than for the purpose of
effecting transactions that are reasonably imminent where such
information is necessary to effect the transaction. Because this
restriction is designed to prevent DMMs from gleaning an
informational advantage from access to ordinarily hidden information
on the Display Book that is not necessary to the performance of
their obligations, we find that the retention and expansion of this
provision is consistent with the Act, including Section 6(b)(5)
thereunder, which requires that proposed rules promote just and
equitable principles of trade, and not be designed to permit unfair
discrimination between customers, issuers, brokers, and dealers.
---------------------------------------------------------------------------

    Though these functionality differences exist in the proposed
implementation of hidden interest among different market participants,
we note that all participants have the ability to ensure that their
interest participates in manual transactions if they so choose. Floor
brokers could do so by not designating their hidden interest as ``Do
Not Display,'' while off-Floor participants could instead send their
interest to the Exchange as a Minimum Display Reserve Order, which
requires the display of one round lot and is eligible to participate in
its entirety in manual transactions. Accordingly, we believe that
NYSE's proposed rules regarding reserve functionality are not unfairly
discriminatory and otherwise are consistent with the Act.

D. New Model Pilot Program

    As discussed in Part II.B.5.(b) above, several key provisions of
the Exchange's New Model proposal are being approved today on a pilot
basis (collectively, the ``Pilot provisions''). The New Model Pilot
will include: (i) The changes to NYSE's priority and order allocation
structure under proposed Rule 72; (ii) the dealings and
responsibilities of DMMs, including the affirmative obligation to
market quality, the quoting obligation, the re-entry requirements
following certain transactions for the DMM's own account, and,
implicitly, the elimination of the negative obligation, set forth in
proposed Rule 104; and (iii) the provisions related to DMM CCS interest
set forth in proposed Rule 1000.
    As discussed above, we have concerns regarding certain aspects of
the Exchange's proposal and are therefore approving the provisions
described above on a pilot basis for a period ending October 1, 2009.
Before we decide what action to take on any NYSE proposal to extend the
operation of the Pilot provisions or to establish the Pilot provisions
on a permanent basis, we believe that NYSE must provide data and
analysis on the impact of the Pilot provisions. Specifically, we
believe that to be able to take any further action on an NYSE proposal
with regard to the Pilot, NYSE must provide to us on a regular, ongoing
basis, statistics relating to market quality and trading activity.\95\
The Exchange has committed to providing us with these metrics on a
monthly basis. The Exchange has also represented that it will maintain
average measures for each trading day during a particular month in
order to provide such information to us upon request.\96\ Analysis of
the requested statistics will assist the Commission, among other
things, in evaluating the effects of the Pilot provisions on NYSE's
market quality, and in determining whether the New Model Pilot should
be permanently approved, if so requested by the Exchange, with or
without adjustments, consistent with the Act.
---------------------------------------------------------------------------

    \95\ For a description of the metrics the Exchange has agreed to
provide, see supra Part II.C.
    \96\ The average per security may be provided across volume
deciles.
---------------------------------------------------------------------------

    The Commission intends to closely examine these statistics and
other information relating to the impact of the Pilot provisions on
investors and other market participants. If the Commission

determines, upon expiration of the Pilot period or at any earlier time,
that implementation of the New Model Pilot is having a detrimental
effect on investors or other market participants, the Commission will
consider what action it should take to address any detrimental effect.

E. Other Proposed Changes

    Several of NYSE's proposed changes, such as the approval procedures
for DMMs and DMM Units, elimination of Floor broker percentage orders,
changes to the handling of Floor broker d-Quotes, and inclusion of
additional Floor broker interest in OpenBook, raise policy issues that
we have considered previously, and resolve such policy issues in a
manner consistent with our prior approvals. The remainder of NYSE's
proposed changes are technical, non-substantive changes intended, for
example, to update the terminology of NYSE's existing rules to conform
them to the proposed New Model, or to delete archaic rule provisions or
provisions that have sunset according to their terms. We believe that
these proposed changes are consistent with the Act.

IV. Accelerated Approval

    We find good cause, pursuant to Section 19(b)(2) of the Act,\97\
for approving the proposed rule change, as modified by Amendment Nos.
1, 2 and 3, prior to the thirtieth day after publication of notice of
filing of Amendment Nos. 2 and 3 in the Federal Register.
---------------------------------------------------------------------------

    \97\ 15 U.S.C. 78s(b)(2). Pursuant to Section 19(b)(2) of the
Act, the Commission may not approve any proposed rule change, or
amendment thereto, prior to the thirtieth day after the date of
publication of the notice thereof, unless the Commission finds good
cause for so doing.
---------------------------------------------------------------------------

    In Amendment No. 2, the Exchange proposes to clarify how odd-lot
information will be transmitted to the DMM Unit algorithm prior to the
opening. The Exchange has represented that current technical
constraints in its odd-lot System require that odd-lot information be
transmitted to the DMM Unit algorithm on an order-by-order basis prior
to the opening. The Exchange has represented that it is currently
working on modifications to its systems that would allow the
transmission of odd-lot order information on an aggregated basis prior
to the open. The Exchange has stated that these system changes will be
effective by the third quarter of 2009, at which time odd-lot
information on an order-by-order basis would no longer be required for
the DMM Unit algorithm to effectively facilitate the opening. We find
that the clarification with respect to the way in which odd-lot
information would be transmitted to the DMM Unit algorithm is
consistent with the Act \98\ and note that the Exchange has committed
to implement the necessary technical changes to its system that will
obviate the need for the sending of order-by-order odd-lot information
to the DMM Unit algorithm.
---------------------------------------------------------------------------

    \98\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In Amendment No. 2, the Exchange has also proposed to retain the
restriction currently applicable to specialists prohibiting them, their
trading assistants, and others acting on their behalf from using the
Display Book system to access information about Floor broker agency
interest excluded from the aggregated agency interest other than for
the purpose of effecting transactions that are reasonably imminent
where such Floor broker agency interest information is necessary to
effect such transaction. The Exchange's proposal would apply this
restriction to DMMs and include information pertaining to Minimum
Display Reserve Orders within the restriction. Because this restriction
is designed to prevent DMMs from gleaning an informational advantage
from their access to ordinarily hidden information on the Display Book
that is not necessary to the performance of their obligations, we find
that the retention and expansion of this provision is consistent with
the Act, including Section 6(b)(5) thereunder, which requires that
proposed rules promote just and equitable principles of trade, and not
be designed to permit unfair discrimination between customers, issuers,
brokers, and dealers.
    In this amendment, the Exchange has made minor edits to its rule
text (in particular, in NYSE Rules 13, 52, 72, 299A and 1000) that are
technical or clarifying in nature. Finally, in Amendment No. 2, the
Exchange has committed to provide us with specific metrics on an
ongoing basis that relate to market quality and certain of its rules
that are subject to the New Model Pilot. We believe that this data will
be important in helping the Commission analyze the impact of the New
Model Pilot, and in determining whether to permanently approve or
modify it, if so requested by the Exchange. Therefore, we find that
these proposed changes are consistent with the Act.
    In Amendment No. 3, the Exchange modified the dates that the
Exchange is required to provide data to the Commission, amended the
implementation dates of certain rules, and clarified the implementation
schedule of the New Model Pilot. Finally, in Amendment No. 3, the
Exchange proposed technical changes to Rule 98 and 98 Former to replace
the term ``specialty stocks'' with ``registered security.''
    The Exchange has requested that the proposed rule change, as
modified by Amendment Nos. 1, 2, and 3, be approved prior to the 30th
day after publication of notice of filing of Amendment Nos. 2 and 3 in
the Federal Register. The changes proposed in Amendment Nos. 2 and 3,
discussed above, are either technical in nature, raise policy issues
that we have considered previously (and address them in a manner
consistent with our prior approvals), do not differ substantively from
the changes proposed in the original filing as modified by Amendment
No. 1, notice of which was published for public comment in the Federal
Register on July 23, 2008, or strengthen the proposal.
    For example, NYSE's commitment in Amendment No. 2 to provide
certain data to enable us to evaluate the effects of the Pilot
provisions strengthens the proposal by specifying what data the
Exchange must provide and when it must be provided. Clarification of
the Exchange's implementation schedule for the New Model Pilot in
Amendment No. 3 strengthens the proposal by setting a deadline of ten
weeks following the date of this order by which the Exchange will fully
implement the Pilot provisions, and thus eliminate the DMM's advance
``look'' at incoming orders.
    Accordingly, we find that good cause exists, consistent with
Sections 6(b)(5) of the Act,\99\ and Section 19(b) of the Act \100\ to
approve the proposed rule change, as modified by Amendment Nos. 1 2,
and 3 on an accelerated basis.
---------------------------------------------------------------------------

    \99\ 15 U.S.C. 78f(b)(5).
    \100\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning Amendment Nos. 2 and 3, including whether
Amendment Nos. 2 and 3 are 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-2008-46 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSE-2008-46. This file
number should be included on the subject line if e-mail is used. To
help us process and review your comments more efficiently, please use
only one method. We will post all comments on the SEC'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 us, and all written
communications relating to the proposed rule change between us 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 SEC's Public Reference Room, 100 F
Street, NE., Washington, DC 20549, on official business days between
the hours of 10 a.m. and 3 p.m. 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; we do
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-2008-46 and should be
submitted on or before November 19, 2008.

VI. Conclusion

    For the foregoing reasons, we find that the proposed rule change,
as amended, is consistent with the Act and the rules and regulations
thereunder applicable to a national securities exchange.
    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\101\ that the proposed rule change (SR-NYSE-2008-46), as modified
by Amendment Nos. 1, 2, and 3 be, and it hereby is,approved on an
accelerated basis.
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    \101\ 15 U.S.C. 78f(b)(2).

    By the Commission.
Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-25797 Filed 10-28-08; 8:45 am]

BILLING CODE 8011-01-P