[Federal Register: March 6, 2009 (Volume 74, Number 43)]
[Notices]
[Page 9843-9853]
[DOCID:fr06mr09-65]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59472; File No. SR-NYSEALTR-2008-14]

Self-Regulatory Organizations; NYSE Alternext US LLC; Notice of
Filing of Amendment No. 1 and Order Granting Accelerated Approval of
the Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To
Establish Rules for the Trading of Listed Options

February 27, 2009.

I. Introduction

    On December 19, 2008, NYSE Alternext US LLC (``Alternext'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend the rules governing the trading of
options on the Exchange. The proposed rule change was published for
comment in the Federal Register on December 31, 2008.\3\ The Exchange
filed Amendment No. 1 to the proposed rule change on February 27,
2009.\4\ The Commission received one comment on the proposal.\5\ This
notice and order provides notice of Amendment No. 1 and grants
accelerated approval to the proposed rule change, as modified by
Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 59142 (December 22,
2008), 73 FR 80494.
    \4\ For a discussion of Amendment No. 1, see infra Section
III.H.
    \5\ See letter from Jennifer M. Lamie, Assistant General
Counsel, Chicago Board Options Exchange (``CBOE''), to Florence E.
Harmon, Deputy Secretary, Commission, dated February 4, 2009.
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II. Description of the Proposal

    On October 1, 2008, NYSE Euronext--the parent company of the New
York Stock Exchange (``NYSE'')--through a series of mergers and related
transactions (``Mergers''), acquired the American Stock Exchange LLC
(``Amex''). Amex was renamed NYSE Alternext US LLC and became a
subsidiary of NYSE Euronext and an affiliate of NYSE.\6\ After the
Mergers, all physical and electronic access to Alternext's trading
facilities was made available to the former Amex's members through
temporary trading permits offered by Alternext. As Amex's principal
place of business at the time of the Mergers was 86 Trinity Place, New
York, New York, these temporary trading permits are known as ``86
Trinity Permits.''
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    \6\ See Securities Exchange Act Release No. 58673 (September 29,
2008), 73 FR 57707 (October 3, 2008) (order approving proposed rule
change relating to the acquisition).
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    Subsequently, Amex's cash equities trading floor was moved from 86
Trinity Place to NYSE's principal place of business at 11 Wall Street,
New York, New York, and co-located with the NYSE's cash equities
trading floor (``Equities Relocation''). The system that supports
Alternext's cash equities trading is now the same system that supports
NYSE's cash equities trading and is operated by the NYSE on behalf of
the Exchange. In connection with the Equities Relocation, the Exchange
adopted new trading and membership rules and offered each of its
members an Alternext cash equities trading license in exchange for a
valid 86 Trinity Permit.\7\
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    \7\ See Securities Exchange Act Release No. 58705 (October 1,
2008), 73 FR 58995 (October 8, 2008).
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    Alternext now proposes to move its options trading business from 86
Trinity Place to 11 Wall Street (``Options Relocation''). In connection
with the Options Relocation, the Exchange proposes to issue Amex
Trading Permits (``ATPs'') that will permit holders to effect options
transactions on the Exchange's trading facilities.\8\ A holder of an 86
Trinity Permit under the current rules will be issued an ATP upon
submission of the appropriate form to the Exchange.
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    \8\ In addition, the Exchange would allow access to the System
by ``Sponsored Participants.'' A Sponsored Participant is a person
that has entered into an agreement with a Sponsoring ATP Holder
through which it may execute transactions on the System. See
proposed Rule 902.1NY(c). This proposed rule is substantially
similar to Rule 6.2A of the Rules of NYSE Arca, Inc. (``NYSE
Arca'').
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    Trading on the Exchange's relocated facilities at 11 Wall Street
will continue to occur on a hybrid system, involving both a physical
floor and an electronic system, the NYSE Amex System (``System'').
Although the options trading floor will be physically separated from
the NYSE and Alternext cash equity trading floor, the options trading
floor will be managed and overseen by NYSE Euronext employees. Only ATP
Holders that have been approved to perform a floor function--Floor
Brokers and Floor Market Makers (including Specialists)--will be
authorized to enter into transactions on the trading floor.
    Alternext has proposed to update and reorganize its rules for
trading options in open outcry and to establish a new set of rules that
will govern trading on the System.\9\ The Exchange has submitted a
separate proposed rule change to delete certain existing Exchange
rules.\10\
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    \9\ In a separate filing, the Exchange described the
relationship between the Exchange and its routing broker and the
conditions related to its operation. The Commission is approving
that proposed rule change in a separate action today. See Securities
Exchange Act Release No. 59473 (February 27, 2009) (SR-NYSEALTR-
2009-18).
    \10\ See Securities Exchange Act Release No. 59454 (February 25,
2009) (SR-NYSEALTR-2009-17). The deletions effected by SR-NYSEALTR-
2009-17 will become operative simultaneously with the operativeness
of the rules proposed in this filing.
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    Alternext will retain many of its existing member rules, including
those relating to capital, margin, recordkeeping, customer protection,
and account maintenance. The Exchange also has proposed to keep certain
existing options-related rules, including rules on position and
exercise limits and listing standards. With respect to transactions in
Flexible Exchange Options (``FLEX Options'') conducted on the Trading
Floor, the Exchange stated that current NYSE Alternext Rules 900G
through 909G will remain operative.\11\
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    \11\ The Exchange noted that certain terms in existing NYSE
Alternext Rules 900G-909G will become outdated upon approval of the
rules proposed herein. The Exchange represented that it will review
these rules and will submit a separate filing to revise any outdated
references. See Amendment No. 1 at 6.

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III. Discussion

    After careful review, the Commission finds that the proposed rule
change is consistent with the Act and the rules and regulations
thereunder applicable to a national securities exchange.\12\ In
particular, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\13\ which requires that the
rules of an exchange be designed to facilitate transactions in
securities; to prevent fraudulent and manipulative acts and practices;
to promote just and equitable principles of trade; to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities; to remove impediments to and
perfect the mechanism of a free and open market and a national market
system; and, in general, to protect investors and the public interest;
and is not designed to permit unfair discrimination between customers,
issuers, brokers, or dealers. The Commission also finds that the
proposed rule change is consistent with Section 6(b)(8) of the Act \14\
in that it does not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.
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    \12\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 15 U.S.C. 78f(b)(8).
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    Discussed below are the most salient features of the proposal.

A. Market Participants

1. Floor Brokers
    A Floor Broker as defined in the proposed rules is an ATP Holder
who is registered with the Exchange for the purpose, while on the
floor, of accepting and executing options orders received from ATP
Holders and, in certain circumstances, orders from others.\15\ The
proposed rules governing Floor Brokers include general responsibilities
to exercise due diligence in representing an order and specific
responsibilities with respect to the handling of various order types.
These rules are substantially similar to those of NYSE Arca \16\ and do
not raise any novel or significant issues, and the Commission finds
that they are consistent with the Act.
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    \15\ See generally proposed Rules 930NY-933NY.
    \16\ See NYSE Arca Rules 6.43-6.46.
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2. Market Makers
    Currently, the Exchange has four general classifications of Market
Maker: Specialist, Registered Options Trader (``ROT''), Supplemental
Registered Options Trader (``SROT''), and Remote Registered Options
Trader (``RROT''). The Exchange states that these classifications will
remain essentially the same under the proposal, although ROTs and SROTs
would be combined into one classification as Floor Market Makers
(``FMMs''), and RROTs would become Remote Market Makers (``RMMs'').
    The general term Market Maker in the proposed rules includes
Specialists, e-Specialists, FMMs, and RMMs.\17\ The Exchange is
permitted to appoint one Specialist on the floor per option class,
additional e-Specialists, and any number of Market Makers in each
class, unless limited by quotation system capacity.\18\
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    \17\ See proposed Rule 920NY (as modified by Amendment No. 1).
    \18\ The proposed rules provide, however, that the Exchange will
not restrict access in any particular option class until the
Commission approves objective standards for restricting such access.
See proposed Rule 923NY(b).
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    The proposed rules governing Market Maker appointments and
obligations generally--including rules concerning evaluation of Market
Maker performance, suspension or termination of Market Maker
appointments, and appeal for review of Exchange actions adversely
affecting a Market Maker--are closely modeled on similar rules of NYSE
Arca.\19\
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    \19\ Regarding Market Maker appointments, see proposed Rule
923NY (based on NYSE Arca Rule 6.35). Regarding Market Maker
obligations, see proposed Rule 925NY (based on NYSE Arca Rule 6.37),
which outlines such obligations (i) generally, (ii) within a Market
Maker's appointed classes, and (iii) outside of a Market Maker's
appointed classes. See also proposed Rule 925.1NY (based on NYSE
Arca Rule 6.37B); proposed Rule 925.2NY (based on NYSE Arca Rule
6.37C). The proposed rules also provide a mechanism for limiting
Market Maker risk during periods of increased and significant
trading activity on the System in a Market Maker's appointment. See
proposed Rule 928NY. The Exchange would activate the mechanism in a
Market Maker's appointed class whenever a designated number of
executions (ranging between five and 100 executions) occurs within
one second. Orders and quotations received by the Exchange after the
mechanism is activated would not be executed against the Market
Maker. The proposed rule is similar to NYSE Arca Rule 6.40.
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    The Exchange represented that NYSE Alternext U.S. Rule 3(j), which
governs the use of material, non-public information, applies to ATP
Holders trading on the System. The Exchange also represented that Rule
3(j) requires a Market Maker to maintain information barriers--
reasonably designed to prevent the misuse of material, non-public
information by such Market Maker--between the Market Maker and any of
its affiliates that may act as specialist or market maker in any
security underlying the options in which the Market Maker makes a
market on the Exchange.\20\ The Exchange stated that it believes that
requiring information barriers between the Market Maker and its
affiliates with respect to transactions in the option and the
underlying security is important to reduce the opportunity for unfair
trading advantages or misuse of material, non-public information. The
Commission believes that the proposed rules relating to the duties and
obligations of Market Makers generally, and in particular the rules
that govern the use of material, non-public information, are consistent
with the Act.\21\
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    \20\ See Amendment No. 1 at 5.
    \21\ See Securities Exchange Act Release No. 47838 (May 13,
2003), 68 FR 27129, 27137 (May 19, 2003) (SR-PCX-2002-36).
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a. FMMs and RMMs
    FMMs and RMMs are required to apply and be approved for an
appointment in one or more options classes. The number of options
issues that an FMM or RMM may select is based on the number of ATPs the
FMM or RMM holds.\22\ In addition, an FMM is required to select an
appointment to a Trading Zone on the floor. FMMs and RMMs are required
to provide continuous, two-sided quotes in their appointed issues, in
accordance with maximum prescribed width requirements, for 60% of the
time the Exchange is open for trading in each issue, and to trade at
least 75% of their contract volume per quarter in classes within their
appointments.\23\ All transactions effected by an FMM in open outcry in
the FMM's designated Trading Zone will be considered as transactions
towards satisfying the rule requiring that an FMM trade at least 75% of
its contract volume per quarter in classes within its appointments.
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    \22\ See proposed Rule 923NY(d).
    \23\ See proposed Rule 923NY(i).
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    The Commission believes that the proposed rules governing Market
Maker activity on the Exchange are consistent with the Act.\24\
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    \24\ See supra note 19. See also Securities Exchange Act Release
No. 54236 (July 28, 2006), 71 FR 44758 (August 7, 2006) (order
approving similar rules on OX, NYSE Arca's automated options trading
system) (``OX Approval Order'').
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b. Specialists and E-Specialists
    The proposed rules include provisions governing the appointment and
activities of Specialists, who are assigned a location on the floor
where their issues will trade, and e-Specialists,

who are RMMs appointed to fulfill certain obligations required of
Specialists. Under the proposal, the Exchange is permitted to appoint
one Specialist and an unlimited number of other Market Makers per
class.\25\
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    \25\ See proposed Rule 923NY(b).
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    Any ATP Holder registered as a Market Maker with the Exchange is
eligible to be qualified as a Specialist \26\ and may be allocated any
one or more of the option issues opened for trading. The allocation of
issues among qualified applicants will be determined by the Exchange,
which will select the candidate that appears best able to perform the
functions of a Specialist in a particular option issue.
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    \26\ The provisions regarding Specialists are set forth
primarily in proposed Rules 925.1NY(b) and 927-927.3NY.
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    Each Specialist will be appointed to the Trading Zone designated
for its options classes. A Specialist is required, among other things,
to provide continuous two-sided quotations throughout the trading day
in its appointed issues for 90% of the time the Exchange is open for
trading \27\ and otherwise fulfill the obligations of Market Makers
generally. A Specialist's quotations must meet the legal quote
requirements specified in proposed Rule 925NY.\28\
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    \27\ These obligations will apply to all of the Specialist's
appointed issues collectively, rather than on an issue-by-issue
basis.
    \28\ There are exceptions to these quoting requirements for
systems failures and limitations and other mitigating circumstances.
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    In addition, the Exchange is permitted to designate e-Specialists
in an options class to fulfill certain obligations required of
Specialists.\29\ Factors to be considered in approving e-Specialists
include adequacy of resources; history of stability, superior
electronic capacity and superior operational capability; market making
and/or specialist experience in a broad array of securities; ability to
interact with order flow in all types of markets; existence of order
flow commitments; willingness to accept allocation as an e-Specialist
in options in at least 400 underlying securities; and willingness and
ability to make competitive markets on the Exchange and to promote the
Exchange in a manner that is likely to enhance the ability of the
Exchange to compete successfully for order flow in the options it
trades.
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    \29\ See generally proposed Rules 927.4-927.6NY.
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    Option classes that have been allocated to a Specialist may be
concurrently allocated to one or more e-Specialists,\30\ with the
Exchange to determine the appropriate number.\31\ Each e-Specialist
will be required to fulfill all the obligations set forth in proposed
Rules 925NY and 925.1NY. E-Specialists have the same 90% quoting
obligation as Specialists.\32\
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    \30\ Each e-Specialist organization is required to maintain a
sufficient number of ATPs to include appointments in classes where
the organization is acting as an e-Specialist.
    \31\ The Exchange will grant e-Specialists allocations in option
classes based on factors including performance, capacity,
performance commitments, efficiency, competitiveness, and
operational factors. See proposed Rule 927.4(b).
    \32\ See proposed Rule 927.5NY(a) (as modified by Amendment No.
1), which specifies that an e-Specialist is required to meet the 90%
quoting obligations of Specialists set forth in Rule 925.1NY(b).
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    The Commission believes that the proposed rules regarding
Specialists and e-Specialists raise no novel or significant issues and
are substantially similar to rules that it has previously approved for
other exchanges.\33\ The Exchange has based its proposed rules
regarding e-Specialists on rules the Commission has approved for
CBOE,\34\ and the Commission believes that they are consistent with the
Act.
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    \33\ See, e.g., NYSE Arca Rules 6.82-6.83 (regarding Lead Market
Makers); Securities Exchange Act Release No. 47838 (May 13, 2003),
68 FR 27129 (May 19, 2003) (order approving rules for the PCX Plus
options trading platform).
    \34\ See CBOE Rules 8.92-8.94. See also Securities Exchange Act
Release No. 49643 (April 30, 2004), 69 FR 25647 (May 7, 2004) (order
approving rules adding the category of e-DPMs to the types of market
makers trading on CBOE).
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c. Directed Order Market Makers
    As discussed in more detail below,\35\ the System will permit Order
Flow Providers \36\ to direct orders to ``Directed Order Market
Makers.'' A Directed Order Market Maker, who may be a Specialist or
other Market Maker, must provide continuous two-sided quotations
throughout the trading day, meeting legal width requirements,\37\ in
issues for which it receives Directed Orders for 90% of the time the
Exchange is open for trading in each issue.\38\
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    \35\ See infra Section III.B.1.c.
    \36\ An Order Flow Provider is defined in proposed Rule
900.2NY(57) to mean any ATP Holder that submits, as agent, orders to
the Exchange.
    \37\ See proposed Rule 925NY (as modified by Amendment No. 1).
    \38\ See proposed Rule 964.1NY (as modified by Amendment No. 1).
The above obligations will apply to all of the Directed Order Market
Maker's issues collectively for which it receives Directed Orders,
rather than on an issue-by-issue basis. Compliance with this
obligation will be determined on a monthly basis.
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B. Ranking and Execution of Orders

    As noted above, Alternext will trade options on an electronic
trading system and in open outcry on the floor.
1. Electronic Trading
a. Display Order Process
    The System will display all quotations and non-marketable limit
orders (unless an order type indicates otherwise) in the ``Display
Order Process'' of its book, at all price levels on an anonymous
basis.\39\ Bids and offers, including the displayed portion of Reserve
Orders,\40\ will be ranked and maintained in the Display Order Process
according to account type (e.g., Customer or non-Customer) \41\ and the
following priority rules:
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    \39\ The System also will disseminate consolidated quotations
and last-sale information, and such other market information as may
be made available from time to time pursuant to agreement between
the Exchange and other Market Centers, consistent with the Plan for
Reporting of Consolidated Options Last Sale Reports and Quotation
Information.
    \40\ A ``Reserve Order'' is defined in proposed Rule
900.3NY(d)(3) as a limit order with a portion of the size displayed
and with a reserve portion of the size that is not displayed on the
Exchange. Upon entry into the System, a marketable Reserve Order
will be executed in whole or in part up to its full size, regardless
of the reserve size. See Amendment No. 1 at 3.
    \41\ An order for the account of a ``Customer''--defined in
proposed Rule 900.2NY(18) as an individual or organization that is
not a broker-dealer--has priority over the bid or offer of a non-
Customer at the same price.
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    The highest bid will have priority over all other bids, and the
lowest offer will have priority over all other offers. Bids and offers
for Customer accounts, including the displayed portion of Customer
Reserve Orders, will have priority over other bids or offers at the
same price. If there is more than one highest bid or lowest offer for a
Customer account then such bid or offer will be ranked based on time
priority.
    A bid or offer for the account of a Directed Order Market Maker--
discussed below--will have second priority for a Directed Order if the
Directed Order Market Maker is eligible to receive a guaranteed
participation in such bid or offer.\42\ If there is no Directed Order
Market Maker guarantee, then bids or offers in the book for the
accounts of participants in the Specialist Pool \43\--also discussed
below--will have priority if the Specialist Pool is eligible to receive
a guaranteed participation in such bids or offers.\44\
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    \42\ See proposed Rule 964.1NY.
    \43\ The ``Specialist Pool'' is defined in proposed Rule
900.2NY(75) as the aggregated size of the best bid and best offer,
in a given series, among the Specialist and e-Specialists that match
in price.
    \44\ See proposed Rule 964.2NY.
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    Orders and Quotes with Size \45\ in the book for the accounts of
all other non-

Customers have next priority. If there is more than one highest bid or
lowest offer for the account of a non-Customer, then such bids or
offers will be afforded priority on a ``size pro rata'' basis and will
comprise the ``size pro rata pool.''
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    \45\ The term ``Quote with Size'' is defined in proposed Rule
900.2NY(65) to mean a quotation to buy or sell a specific number of
option contracts at a specific price that a Market Maker has
submitted to the System.
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b. Working Orders
    In addition to bids and offers that are displayed in the Display
Order Process, the System will accept ``Contingency Orders'' and
``Working Orders,'' which are orders that are contingent upon a
condition being satisfied or orders with a conditional or undisplayed
price and/or size. Contingency Orders and Working Orders are maintained
in the ``Working Order File'' of the book until eligible for execution
and/or display.\46\ Such orders include Reserve Orders, Stop
Orders,\47\ Stop Limit Orders,\48\ All-or-None Orders, and Tracking
Orders.\49\
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    \46\ See Amendment No. 1 at 3.
    \47\ A Stop Order is defined as an order that becomes a market
order when the market for a particular option contract reaches a
specified price (``triggering event''). A Stop Order to buy (sell)
becomes a market order when the option contract trades at or above
(below) the stop price on the Exchange or another Market Center or
when the Exchange bid (offer) is quoted at or above (below) the stop
price. See proposed Rule 900.3NY(d)(1).
    \48\ A Stop Limit Order is defined as an order that becomes a
limit order when the market for a particular option contract reaches
a specified price. A Stop Limit Order to buy (sell) becomes a Limit
Order when the option contract trades at or above (below) the stop
price on the Exchange or another Market Center or when the Exchange
bid (offer) is quoted at or above (below) the stop price. See
proposed Rule 900.3NY(d)(2).
    \49\ See infra notes 54-58 and accompanying text.
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    After displayed interest at a particular price has been executed,
orders in the Working Order File have next priority. However, such
orders do not have any priority or standing until they are eligible for
execution and/or display.\50\ For example, when the displayed portion
of a Reserve Order has been fully executed,\51\ the display is
refreshed from the reserve portion of the order (which had been
maintained in the Working Order File) up to the size of the original
display with a new time stamp.\52\ Stop Orders and Stop Limit Orders
are not eligible to execute against incoming orders, and become
eligible to execute via the Display Order Process only after the
incoming order is executed in full or rests in the book, or the Stop or
Stop Limit Order is sent to the Display Order Process at the end of a
triggering event.\53\
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    \50\ See proposed Rule 964NY(b)(2)(E) (as modified by Amendment
No. 1).
    \51\ See supra note 40.
    \52\ See proposed Rule 900.3NY(d)(3) (as modified by Amendment
No. 1).
    \53\ See proposed Rule 900.3NY(d)(1) (as modified by Amendment
No. 1).
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    A Tracking Order is defined as an undisplayed limit order that is
eligible for execution after the Display Order Process against orders
equal to or less than the size of the Tracking Order.\54\ A Tracking
Order is ranked according to its limit price, but is executable only at
a price matching the NBBO. It will not trade through the NBBO. If a
Tracking Order is executed but not exhausted, the remaining portion of
the order will be canceled, without routing the order to another Market
Center \55\ or market participant.\56\ Tracking Orders have last
priority and never become part of the Display Order Process.\57\ They
have standing only if contra-side interest in the System would
otherwise be routed to another market center at the NBBO.\58\ Tracking
Orders will not execute against incoming Linkage Orders.
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    \54\ See proposed Rule 900.3NY(d)(5) (as modified by Amendment
No. 1).
    \55\ A ``Market Center'' is defined in proposed Rule 900.2NY(36)
as a national securities exchange that has qualified for
participation in the Options Clearing Corporation (``OCC'') pursuant
to the provisions of the rules of the OCC.
    \56\ The Exchange provided two examples: (1) The NBBO market in
a series is 2.05-2.15. The Exchange's displayed bid is 2.00, but
there is a Tracking Order in the Working Order File bidding 2.10 for
10 contracts. An order is received on the Exchange to sell six
contracts at 2.05. This order would be matched against the 2.10-buy
Tracking Order at a price of 2.05, matching the NBBO. (2) After the
same initial scenario, a second Tracking Order to buy 20 contracts
paying 2.05 is placed in the book. An order is received to sell 15
contracts at 2.05. The incoming sell order, being larger in size
than the first Tracking Order, cannot be executed against it. The
incoming order is therefore matched against the second Tracking
Order, and will be executed at 2.05, the NBBO price.
    \57\ See proposed Rule 964NY(b)(2)(F) (as modified by Amendment
No. 1).
    \58\ As stated by the Exchange, Tracking Orders are intended
only to provide liquidity in the event a marketable order would
otherwise route to another exchange. See Amendment No. 1 at 7.
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    The proposed rules provide that, prior to or after submitting an
order to the System, an ATP Holder is not permitted to inform another
ATP Holder or any other third party of any of the terms of the
order.\59\ In addition, it will be a violation of Rule 935NY when an
ATP Holder enters a Tracking Order for the purpose of executing as
principal an order it also represents as agent.\60\
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    \59\ See proposed Rule 935NY, Commentary .04 (as added by
Amendment No. 1).
    \60\ See proposed Rule 935NY, Commentary .05 (as added by
Amendment No. 1).
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c. Participation Entitlements
    The System will include participation guarantees that, when the
requisite conditions are fulfilled, will entitle certain participants--
Specialists, e-Specialists, and Directed Order Market Makers--to a
certain percentage of each incoming order, after Customer Orders are
satisfied.
    Directed Order Market Makers. The System will permit Specialists
and Market Makers to receive ``Directed Orders.'' \61\ A Directed Order
is a marketable order that has been directed to a particular Market
Maker by an Order Flow Provider.\62\ If an incoming marketable order is
so directed, the Directed Order Market Maker will be entitled to
receive 40% (or such lower percentage as may be determined by the
Exchange) of the portion of an order remaining after Customer Orders in
the book have been satisfied, provided the Directed Order Market Maker
is quoting at the NBBO at the time the order is received by the
Exchange for at least that size.\63\
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    \61\ See proposed Rule 964.1NY.
    \62\ See proposed Rule 900.3NY(s).
    \63\ The Directed Order Market Maker will be allocated a number
of contracts equal to the greater of the guaranteed participation or
its ``size pro rata'' allocation, but in either case, no greater
than the size of the Directed Order Market Maker's disseminated
size.
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    To be eligible to receive Directed Orders, a Directed Order Market
Maker must provide continuous two-sided quotations throughout the
trading day in issues for which it receives Directed Orders for 90% of
the time the Exchange is open for trading in each issue.\64\
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    \64\ Such quotations must meet the legal quote width
requirements of Rule 925NY. These quoting obligations will apply
collectively to all series in all of the issues for which the
Directed Order Market Maker receives Directed Orders, rather than on
an issue-by-issue basis. Compliance will be determined on a monthly
basis. See proposed Rule 964.1NY(iv) (as added by Amendment No. 1).
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    Specialists and e-Specialists. In the System, the proposed rules
permit the Exchange to establish from time to time a participation
entitlement for Specialists and e-Specialists, known collectively as
the ``Specialist Pool.'' The Specialist Pool participation entitlement
will not apply when a Directed Order Market Maker receives a guaranteed
participation. To receive a participation entitlement, a Specialist (on
the trading floor) or e-Specialist must be quoting at the NBBO and may
not be allocated a total quantity greater than the quantity than it is
quoting at the NBBO. The Specialist Pool will be entitled to up to 40%
of the size of an incoming order (or such lower percentage as may be
determined by the Exchange) that remains after all Customer Orders in
the book at the best bid or offer have been satisfied.
    Within the Specialist Pool participation entitlement, the
Specialist and e-Specialists quoting at the NBBO will participate on a
size pro rata basis. However, the Specialist's size pro-rata
participation in the Specialist Pool will receive additional weighting,
as

determined by the Exchange and announced via Regulatory Bulletin, but
in no case greater than 66\2/3%\ if there is only one e-Specialist, and
no more than 50% if there are two or more e-Specialists.
    For all orders of five contracts or fewer, the Specialist Pool will
be allocated any balance of the order after any Customer Orders on the
book have been satisfied, provided the Specialist Pool is quoting at
the NBBO and a Directed Order Market Maker did not receive a guaranteed
allocation. These orders of five contracts or fewer, or any balances
thereof after Customer Orders in the book have been satisfied, will be
allocated to each participant in the Specialist Pool on a rotating
basis, provided the recipient Specialist's quoted size is equal to or
greater than the size of the allocation.\65\
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    \65\ Commentary .01 to proposed Rule 964NY provides that, on a
quarterly basis, the Exchange will evaluate what percentage of the
volume executed on the Exchange is composed of orders for five
contracts or fewer that is allocated to the Specialist Pool, and
will reduce the size of the orders included in this entitlement if
such percentage is over 40%.
---------------------------------------------------------------------------

d. Additional Provisions
    If an incoming limit order is not entirely filled after trading
against any eligible interest in the Working Order File, the balance of
the order will be executed at the next available price level or, if the
limit order locks or crosses the NBBO, matched against any available
Tracking Order (prior to being routed) or routed to the away market(s)
displaying the NBBO.\66\ If the above conditions do not apply, and the
order is no longer marketable, or if the order has been designated as
an order type that is not eligible to be routed away, the order would
be placed in the book or, if it would lock or cross the NBBO,
canceled.\67\
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    \66\ If an incoming market order is not entirely filled after
trading against any eligible interest in the Working Order File, the
balance of the order will be executed at the next available price
level based on split-price execution or, if such order is marketable
against the NBBO, the order would be executed against any eligible
Tracking Order or routed away. E-mail from Andrew Stevens, Chief
Counsel--U.S. Equities & Derivatives, NYSE Euronext, Inc., to
Michael Gaw, Assistant Director, Division of Trading and Markets,
Commission, on February 26, 2009.
    \67\ See proposed Rule 964NY(c)(2) (as modified by Amendment No.
1).
---------------------------------------------------------------------------

    The proposed rules also include a provision providing that ATP
Holders may not execute as principal orders they represent as agent on
the System unless (i) agency orders are first exposed on the Exchange
for at least three seconds; or (ii) the user has been bidding or
offering on the Exchange for at least three seconds prior to receiving
an agency order that is executable against such bid or offer.\68\
---------------------------------------------------------------------------

    \68\ See proposed Rule 935NY. The Exchange stated that attempts
to use a Tracking Order to execute a cross transaction is considered
a violation of Rule 935NY, as that rule requires an order to be
exposed (displayed) if it is part of a cross transaction. See
Amendment 1 at 7. See also supra note 60 and accompanying text.
---------------------------------------------------------------------------

    The Commission believes that the Exchange's proposed priority and
allocation rules are consistent with the Act. The Commission has
previously approved participation guarantees for Market Makers, to
which orders are directed by other exchange members, of up to 40% of
the size of such directed orders (after any Customer Orders have been
satisfied), provided such Market Maker is quoting at the NBBO when the
order is received by the Exchange and meets specified, higher quoting
obligations.\69\ In its comment letter, CBOE stated that the proposed
Directed Order Market Maker program is similar to other options
exchanges' programs, but noted that the Alternext proposal, unlike the
rules of other exchanges, appeared not to require Directed Order Market
Makers to be subject to a heightened quoting requirement to qualify as
Directed Order Market Makers. In Amendment No. 1, the Exchange added a
provision that establishes such a heightened standard.\70\
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    \69\ See Securities Exchange Act Release No. 57844 (May 21,
2008), 73 FR 30988 (May 29, 2008) (directed orders on NASDAQ OMX
PHLX). Other exchanges have similar directed order or ``preferred
market maker'' programs. See, e.g., CBOE Rule 8.13; International
Securities Exchange (``ISE'') Rule 713; current Exchange Rule 997-
ANTE.
    \70\ See proposed Rule 964.1NY(iv) (as added by Amendment No.
1).
---------------------------------------------------------------------------

    The Commission has also previously approved Specialist Pool
participations of up to 40% of the size of incoming orders (after any
Customer Orders have been satisfied and only when the Directed Order
guarantee has not been applied), provided that the Specialist Pool is
quoting at the NBBO when the order is received by the Exchange. The
Commission believes that these guarantees strike a reasonable balance
between rewarding certain participants for making markets (in the case
of Specialists and e-Specialists) or bringing liquidity to the exchange
(in the case of Directed Order Market Makers), with providing other
market participants an incentive to quote aggressively.
    The Commission also believes that the proposed rules providing for
the allocation of orders of five contracts or fewer to the Specialist
Pool are consistent with the Act.\71\
---------------------------------------------------------------------------

    \71\ Other exchanges have similar rules. See, e.g., ISE Rule
713; NASDAQ OMX PHLX Rule 1014(g).
---------------------------------------------------------------------------

    With regard to Working Orders and their conditions of execution,
the Commission has previously approved most of the order types that the
Exchange proposes to implement. Although the Commission has not
previously approved an order type in the options markets with exactly
the same features as the Tracking Order,\72\ the Commission also finds
the proposed rules relating to Tracking Orders to be consistent with
the Act. As set forth in the proposed rules, an incoming order will
never be executed against a Tracking Order at a price that is inferior
to the NBBO. Thus, an execution against a Tracking Order would never
trade through the best price available on another market. An incoming
order also will never be executed at a price better than the NBBO.
Thus, Tracking Orders do not constitute hidden interest at a better
price than the publicly disseminated market.
---------------------------------------------------------------------------

    \72\ Similar orders have previously been approved in the
equities markets. See Securities Exchange Act Release No. 53117
(January 13, 2006), 71 FR 3910 (January 24, 2006) (SR-PCX-2005-87).
---------------------------------------------------------------------------

    Tracking Orders are intended only to provide liquidity in the event
a marketable order would otherwise route to another exchange. Tracking
Orders provide participants on the System the ability to pre-set orders
to automatically ``step up'' to the NBBO to trade against an incoming
order when no other interest at that price is available on the
Exchange, before the order is routed to another exchange. In this
regard, the use of Tracking Orders is similar to automatic step-up
features on other exchanges that the Commission has approved.\73\
---------------------------------------------------------------------------

    \73\ See, e.g., CBOE Rule 6.8, Interpretations and Policies
.02(b).
---------------------------------------------------------------------------

    In its comment letter on the proposed rule change,\74\ CBOE
expressed its understanding that, because Tracking Orders are not
exposed in the System, they should not be eligible for crossing
pursuant to proposed Rule 935NY.\75\ In Amendment No. 1, the Exchange
responded to this comment by adding a new Commentary .05 to proposed
Rule 935NY stating explicitly that it will be a violation of Rule 935NY
when an ATP Holder enters a Tracking Order for the purpose of executing
as principal an order it also represents as agent. The Commission
believes that this provision

is reasonably designed to prevent use of Tracking Orders to circumvent
the general requirement to expose agency orders before executing
against them as principal, and is therefore consistent with the Act.
The Exchange also added a new Commentary .04 to proposed Rule 935NY to
provide that, prior to or after submitting an order to the System, an
ATP Holder is not permitted to inform another ATP Holder or any other
third party of any of the terms of the order. The Commission believes
that this provision is consistent with the Act because it is reasonably
designed to prevent ATP Holders from providing material, non-public
information to third parties and to promote compliance with the
Commission's Quote Rule.\76\
---------------------------------------------------------------------------

    \74\ See supra note 5.
    \75\ Proposed Rule 935NY provides that, with respect to orders
routed to the System, users may not execute as principal orders they
represent as agent unless (i) agency orders are first exposed on the
Exchange for at least three seconds or (ii) the user has been
bidding or offering on the Exchange for at least three seconds prior
to receiving an agency order that is executable against such bid or
offer.
    \76\ 17 CFR 242.602. The Quote Rule, in relevant part, requires
a national securities exchange to collect, process, and make
available to vendors the best bid, the best offer, and aggregate
quotation sizes for each subject security that is communicated on
any national securities exchange by a responsible broker or dealer.
A ``bid'' or ``offer'' is defined as ``the bid price or the offer
price communicated by a member of a national securities exchange or
member of a national securities association to any broker or dealer,
or to any customer.* * *'' 17 CFR 242.600(b)(8). Because Tracking
Orders and the non-displayed size of Reserve Orders are sent only to
the Exchange systems and not ``communicated * * * to any broker,
dealer, or customer,'' such orders are not ``bids'' or ``offers.''
Thus, the Quote Rule does not require the Exchange to disseminate
information about Tracking Orders and the non-displayed size of
Reserve Orders. However, if an ATP Holder were to inform a third
party of the terms of a Tracking Order or the non-displayed size of
a Reserve Order, such Orders would become ``bids'' or ``offers''
subject to the Quote Rule.
---------------------------------------------------------------------------

    CBOE also argued that, prior to effecting any transactions in open
outcry, Exchange members should be required to electronically ``sweep''
the book for any Tracking Order interest in the System, so as not to
violate the priority of such orders. CBOE pointed to rules at other
exchanges that require members seeking to trade in open outcry to
electronically sweep the book for any penny interest from ``penny price
improvement orders'' \77\ before executing an order. The Exchange
responded that a Tracking Order does not have any standing with regard
to open-outcry trading, as it is not displayed and, unlike price-
improving orders and quotations, is not represented by a displayed bid
or offer at an indicative price. The Commission agrees with the
distinction made by the Exchange. As set forth in the proposed rules, a
Tracking Order has standing only if contra-side interest in the System
would otherwise be routed to another market center at the NBBO.\78\ The
Commission also notes that Tracking Orders can be entered in the System
only at standard trading increments, and thus cannot be used to gain
priority over displayed interest by a sub-increment amount.
---------------------------------------------------------------------------

    \77\ ``Penny price improvement'' rules permit members of an
exchange to submit bids and offers that provide price improvement in
one cent increments that are not displayed in the book, in options
in which the standard increment is more than one cent. Such bids and
offers are displayed by rounding to the nearest standard increment.
    \78\ See proposed Rule 900.3NY(d)(5).
---------------------------------------------------------------------------

    CBOE further questioned the proposed provision that, when a
Tracking Order in the System is at a better price than another Tracking
Order, but cannot be executed due to insufficient size, it does not
have priority. CBOE also questioned in general why an incoming order
does not trade against a Tracking Order at a price better than the NBBO
when the Tracking Order is submitted at such a price. In Amendment No.
1, the Exchange responded that the order handling instruction on a
Tracking Order is that it is to be executed only at a price that
matches the NBBO on the same side of the market, and only against
lesser or equal-sized contra-side interest. The limit price on a
Tracking Order serves only to provide a boundary on the order's
possible execution price and to establish its ranking. The Commission
believes that the Exchange's response adequately addresses CBOE's
question, and that it is consistent with the Act for the Exchange to
offer an order type with these conditions.
e. Open-Outcry Trading
    Proposed Rule 963NY describes priority and order allocation for
open-outcry trading, including procedures to be followed when there is
interest at the same price in the book as on the trading floor. The
proposed rules governing open-outcry trading on the Exchange floor are
similar to those at other exchanges with trading floors, and the
Commission finds that they are consistent with the Act.
    When a Floor Broker or Market Maker makes a bid or offer or calls
for a market and more than one ATP Holder responds at the same best
price, the Floor Broker or Market Maker must designate the sequence in
which responses are vocalized. As between two bids or offers at the
same best price, priority is afforded in the sequence they are
made.\79\ If they were made simultaneously or it is impossible to
determine clearly the order in which they were made, such orders would
be deemed to be on parity, and priority will be afforded, insofar as
practicable, on an equal basis. However, a Customer Order displayed in
the book at the same price as the best price in the crowd will have
priority over any bid or offer at the post. After any Customer Orders
displayed in the book at the best bid or offer in the crowd are
satisfied, the Specialist is entitled to trade with 40% of the order,
provided the Specialist has vocally responded to the Floor Broker's
call for a market and has responded with a price that is the best bid
or offer. Bids and offers of broker-dealers (including Quotes with Size
and orders of Market Makers displayed on the book) would have priority
after all trading crowd interest is exhausted.
---------------------------------------------------------------------------

    \79\ Thus, for example, the bid or offer of a non-Customer in
the trading crowd that was made before that of a Customer
represented by a Floor Broker in the trading crowd would take
priority over the Customer Order (provided the requirements of
Section 11(a) of the Act and the rules thereunder are met).
---------------------------------------------------------------------------

    Customer-to-Customer Crosses. The proposed rules include procedures
by which a Floor Broker who holds a Customer Order to buy and a
Customer Order to sell may cross such orders on the floor.\80\ After
providing an opportunity for bids and offers to be made by members of
the trading crowd, the Floor Broker must bid above the highest bid in
the crowd and offer below the lowest offer in the crowd. After
satisfying all better priced bids or offers on the book and any
Customer Orders on the book at the same price, the Floor Broker is
permitted to cross the orders at such higher bid or lower offer by
announcing by open outcry that he is crossing orders on behalf of
Customers, and giving the quantity and price. The Floor Broker is
permitted to cross the orders at split prices if the rules governing
split price transactions are met.\81\
---------------------------------------------------------------------------

    \80\ See proposed Rule 934NY(a).
    \81\ See proposed Rule 963NY(f).
---------------------------------------------------------------------------

    Non-Facilitation (Regular Way) Crosses. The proposed rules also
include procedures by which a Floor Broker who holds a Customer Order
and a non-Customer order may cross such orders.\82\ After providing an
opportunity for bids and offers to be made by members of the trading
crowd, the Floor Broker must expose the Customer Order by bidding above
the highest bid in the crowd or offering below the lowest offer in the
crowd, by at least one minimum price variation (``MPV''). After
satisfying all better priced bids or offers on the book, any Customer
Orders on the book at the same price, and any interest by members of
the trading crowd at such higher bid or lower offer, the Floor Broker
is permitted to cross the orders (or any part remaining unexecuted) at
such higher bid or lower offer by announcing by open outcry that he is

crossing the orders, and giving the quantity and price.
---------------------------------------------------------------------------

    \82\ See proposed Rule 934NY(b).
---------------------------------------------------------------------------

    Facilitation Crosses. The proposed rules further include procedures
by which a Floor Broker who holds a Customer Order and a Facilitation
Order may cross such orders.\83\ After providing an opportunity for
bids and offers to be made by crowd members, the Floor Broker, on
behalf of the Customer whose order is subject to facilitation, must
disclose any contingencies with respect to the order, identify the
order as being subject to facilitation, and establish priority by
either bidding or offering at or between the best bid or offer in the
market. After all other crowd members are given an opportunity to
accept the bid or offer made on behalf of the Customer, the Floor
Broker is permitted to cross all or any remaining part of such order
and the Facilitation Order at the price of the Customer's bid or offer
by announcing by open outcry that he is crossing such orders, and
stating the quantity and price.
---------------------------------------------------------------------------

    \83\ See proposed Rule 934.1NY. A ``Facilitation Order'' is an
order represented on behalf of an ATP Holder that may be executed in
whole or in part in a cross transaction with the ATP Holder's
Customer Order and that is clearly designated as a Facilitation
Order.
---------------------------------------------------------------------------

    Notwithstanding the above, if the proposed cross transaction meets
the eligible size requirement of 50 contracts or larger, a Facilitation
Order can trade with up to 40% of the Customer Order, after satisfying
all better-priced bids or offers on the book or in the trading crowd
and any Customer Orders at the same price.\84\
---------------------------------------------------------------------------

    \84\ If a trade pursuant to proposed Rule 934.1NY occurs at the
Specialist's vocalized bid or offer in its appointed class, the
Specialist's guaranteed participation will apply only to the number
of contracts remaining after all Customer Orders that trade ahead of
the cross transaction and the number of contracts crossed have been
satisfied. The Specialist's guaranteed participation will be a
percentage that, when combined with the percentage the originating
firm crossed, does not exceed 40% of the order. See proposed Rule
934.1NY(4)(C).
---------------------------------------------------------------------------

    ``At-Risk'' Crosses. The proposed rules establish an alternative to
the Facilitation Cross procedures for a Floor Broker that seeks to
cross a Customer Order with an order from the ATP Holder from which the
Customer Order originated.\85\ After providing an opportunity for bids
and offers to be made by members of the trading crowd, the Floor Broker
must represent the Customer Order to the trading crowd, indicating that
it is a Customer Order and providing the order's size, side of the
market, and a price. After giving the trading crowd an opportunity to
improve its quote, the Floor Broker may improve the crowd's market on
behalf of the ATP Holder to one MPV away from the Customer Order and
thereby establish priority over the crowd at this new price. The crowd
may trade with the Customer Order at that order's price, or trade with
the ATP Holder's order at its proposed price. To the extent the crowd
does not trade with the Customer Order, the Floor Broker may effect the
cross.
---------------------------------------------------------------------------

    \85\ The proposed rule for At-Risk Crosses applies only to
equity options. The minimum eligible order size for an At-Risk Cross
is 50 contracts. See proposed Rule 934.2NY.
---------------------------------------------------------------------------

    The Commission finds that the Exchange's proposed crossing rules
are consistent with the Act. They are similar to other crossing rules
that the Commission has previously approved for Amex and other
exchanges \86\ and do not appear to raise any novel or significant
issues.
---------------------------------------------------------------------------

    \86\ See, e.g., Amex Rule 950-ANTE(d), Commentaries .02-.04;
CBOE Rule 6.74; NYSE Arca Rule 6.47.
---------------------------------------------------------------------------

    Solicited Orders. The proposed rules include procedures by which a
Floor Broker representing an order (``originating order'') may cross it
with an order solicited from another ATP Holder or non-member broker-
dealer outside the trading crowd (``solicited party'').\87\ The Floor
Broker must announce to the trading crowd the same terms and conditions
about the originating order as disclosed to the solicited party. The
Floor Broker would also announce the price at which he is prepared to
buy from or sell to the solicited party. After all other market
participants are given a reasonable opportunity to accept the bid or
offer, the solicited party may trade with any remaining part of the
originating order.
---------------------------------------------------------------------------

    \87\ See proposed Rule 934.3NY.
---------------------------------------------------------------------------

    Generally, non-solicited market participants and Floor Brokers
holding non-solicited discretionary orders in the crowd have priority
over the solicited party or the solicited order to trade with the
original order at the best bid or offer price. However, if the
solicited order improved the crowd's quoted market, the Floor Broker
would be permitted to cross the solicited order against the Customer
Order to the extent of 40% of the contracts remaining after any
Customer Orders have been filled. The eligible order size for this
guarantee to apply is a minimum of 50 contracts.\88\
---------------------------------------------------------------------------

    \88\ See proposed Rule 934.3 (as modified by Amendment No. 1).
---------------------------------------------------------------------------

    The Exchange's proposed rules for solicited orders, which are
similar to rules the Commission has previously approved,\89\ do not
appear to raise any novel or substantive issues, and the Commission
believes they are consistent with the Act.
---------------------------------------------------------------------------

    \89\ See, e.g., Amex Rule 950-ANTE(d), Commentaries .02 and .04.
---------------------------------------------------------------------------

C. Section 11(a) Compliance

    Section 11(a)(1) of the Act \90\ prohibits a member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated person exercises discretion (each, a
``covered account,'' and collectively, ``covered accounts''), unless an
exemption applies. Sections 11(a)(1)(A)-(I) of the Act \91\ and the
rules thereunder provide certain exemptions from the general
prohibition, including the exemptions set forth in Rules 11a2-2(T) and
11a1-1(T) under the Act.\92\
---------------------------------------------------------------------------

    \90\ 15 U.S.C. 78k(a)(1).
    \91\ 15 U.S.C. 78k(a)(1)(A)-(I).
    \92\ 17 CFR 240.11a2-2(T) and 240.11a1-1(T).
---------------------------------------------------------------------------

    With respect to the general prohibition and exemptions of Section
11(a)(1) and the rules thereunder, the Exchange proposes to adopt new
Rule 910NY. The proposed rule states that an ATP Holder must ensure
that each of its transactions complies with Section 11(a) of the Act,
which generally prohibits an ATP Holder from effecting a transaction
trading for a covered account unless a valid exemption in the statute
or the rules thereunder applies. The proposed rule further states that,
when relying on the exemption set forth in Rule 11a2-2(T) under the
Act, a Floor Broker may not enter into the System any order for a
covered account, including an order sent to it by an affiliated ATP
Holder from off the floor, if the order is for such affiliated ATP
Holder's own account, the account of an associated person, or an
account over which it or its associated person exercises discretion. In
addition, the proposed rule provides that, in cases where a Floor
Broker's transaction would occur at the same price as one or more
orders on the book, the Floor Broker, if it can rely on no exception
other than the exemption in Section 11(a)(1)(G) of the Act and Rule
11a1-1(T) thereunder (as discussed in more detail below) must, in
addition to complying with the other requirements of such exemption,
yield to all orders in the book at the same price if the Floor Broker
has no ability to determine that an order in the book is not the order
of a non-ATP Holder. Proposed Rule 910NY also states that, where an ATP
Holder submits an order to the book (or an order is submitted on its
behalf) and such ATP Holder is relying on the G Exemption, the order
must be entered as immediate-or-cancel.
    The Exchange has represented that it has analyzed its rules
proposed

hereunder, which include proposed Rule 910NY, and has determined that
they are consistent with Section 11(a) of the Act and rules
thereunder.\93\ For the reasons set forth below, the Commission
believes that the proposed rules are consistent with the requirements
of Section 11(a) of the Act and the rules thereunder.
---------------------------------------------------------------------------

    \93\ See Amendment No. 1 at 7.
---------------------------------------------------------------------------

1. Rule 11a2-2(T)
    Rule 11a2-2(T) under the Act,\94\ known as the ``effect versus
execute'' rule, provides exchange members with an exemption from the
Section 11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange
member, subject to certain conditions, to effect transactions for
covered accounts by arranging for an unaffiliated member to execute the
transactions on the exchange. To comply with the conditions of Rule
11a2-2(T), a member: (i) Must transmit the order from off the exchange
floor; (ii) may not participate in the execution of the transaction
once it has been transmitted to the member performing the execution;
\95\ (iii) may not be affiliated with the executing member; and (iv)
with respect to an account over which the member has investment
discretion, neither the member nor its associated person may retain any
compensation in connection with effecting the transaction except as
provided in the rule. The Exchange has requested that the Commission
concur with its conclusion that orders for covered accounts entered
into the System satisfy the conditions of Rule 11a2-2(T). Rule 11a2-
2(T)'s first condition is that orders for covered accounts be
transmitted from off the exchange floor. The Exchange represents that
orders sent to the System will be transmitted from remote terminals
directly to the System by electronic means. In the context of other
automated trading systems, the Commission has found that the off-floor
transmission requirement is met if a covered account order is
transmitted from a remote location directly to an exchange's floor by
electronic means.\96\ With respect to such orders transmitted
electronically from remote terminals directly to the System, the
Commission believes that the System satisfies the off-floor
transmission requirement.
---------------------------------------------------------------------------

    \94\ 17 CFR 240.11a2-2(T).
    \95\ The member may, however, participate in clearing and
settling the transaction.
    \96\ See, e.g., Securities Exchange Act Release Nos. 59154
(December 23, 2008), 73 FR 80468 (December 31, 2008) (SR-BSE-2008-
48) (approving, among other things, the equity rules of the Boston
Stock Exchange (``BSE'')); 57478 (March 12, 2008), 73 FR 14521
(March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-080)
(approving rules governing the trading of options on The NASDAQ
Options Market); 49068 (January 13, 2004), 69 FR 2775 (January 20,
2004) (SR-BSE-2002-15) (approving the Boston Options Exchange as an
options trading facility of BSE); 15533 (January 29, 1979), 44 FR
6084 (January 31, 1979) (approving the Amex Post Execution Reporting
System, the Amex Switching System, the Intermarket Trading System,
the Multiple Dealer Trading Facility of the Cincinnati Stock
Exchange, the PCX Communications and Execution System, and the
Philadelphia Stock Exchange Automated Communications and Execution
System) (``1979 Release''); and 14563 (March 14, 1978), 43 FR 11542
(March 17, 1978) (approving NYSE's Designated Order Turnaround
System) (``1978 Release'').
---------------------------------------------------------------------------

    The Exchange further represents that there may be instances where
an ATP Holder on the physical floor of the Exchange may electronically
submit an order for a covered account to the System. The Exchange
states that, to rely on the exemption set forth in Rule 11a2-2(T), an
ATP Holder must ensure that it sends its orders from off the floor to
an unaffiliated ATP Holder on the floor for execution, in addition to
meeting the rule's other requirements. If an ATP Holder sends its order
from off the floor to an affiliated member that is on the floor, who
then directs the order into the System for execution, the off-floor ATP
Holder may not rely on the exemption set forth in Rule 11a2-2(T). The
Commission believes that, based on the foregoing, those orders for
covered accounts sent by ATP Holders to the System for execution from
off the Exchange floor satisfy the off-floor transmission requirement
for the purposes of the ``effect versus execute'' rule. The Commission
notes that an ATP Holder that submits an order for a covered account
for execution on the physical floor of the Exchange and who wishes to
rely on the exemption in Rule 11a2-2(T) also must submit the order from
off the floor.
    Second, Rule 11a2-2(T) requires that the member not participate in
the execution of its order once the order is transmitted to the floor
for execution. The Exchange represents that, upon submission to the
System, an order will enter the queue and be executed against another
order or quote in the book based on an established matching algorithm.
The Exchange states that execution depends not on whether an order is
for the account of an ATP Holder, but rather upon what other orders are
entered into the System at or around the same time as the subject
order, what orders are resident in the book, and where the order is
ranked based on, among other criteria, a price-time priority ranking
algorithm. As such, the Exchange represents that at no time following
the submission of an order to the System is an ATP Holder able to
acquire control or influence over the result or timing of an order's
execution.\97\ Accordingly, the Commission believes that an Exchange
member does not participate in the execution of an order submitted into
the System. The Commission notes that an ATP Holder that submits an
order for a covered account for execution on the physical floor of the
Exchange and that wishes to rely on the exemption in Rule 11a2-2(T) is
similarly restricted from participating in the execution of such order
after the order has been transmitted to the System.
---------------------------------------------------------------------------

    \97\ See Amendment No. 1 at 9. The Commission notes that an ATP
Holder may cancel or modify the order, or modify the instructions
for executing the order. The Commission has stated that the non-
participation requirement is satisfied under such circumstances so
long as such modifications or cancellations are also transmitted
from off the floor. See 1978 Release, id. (stating that the ``non-
participation requirement does not prevent initiating members from
canceling or modifying orders (or the instructions pursuant to which
the initiating member wishes orders to be executed) after the orders
have been transmitted to the executing member, provided that any
such instructions are also transmitted from off the floor'').
---------------------------------------------------------------------------

    Third, Rule 11a2-2(T) requires that the order be executed by an
exchange member who is unaffiliated with the member initiating the
order. The Commission has stated that the requirement is satisfied when
automated exchange facilities, such as the System, are used, as long as
the design of these systems ensures that members do not possess any
special or unique trading advantages in handling their orders after
transmitting them to the Exchange.\98\ The Exchange has represented
that the design of the System ensures that ATP Holders do not have any
special or unique trading advantages in the handling of their orders
after transmission.\99\ Based on the Exchange's representations, the
Commission believes that the System satisfies this requirement. The
Commission notes that, if an ATP Holder submits an order for a covered
account for execution on the physical floor of the Exchange, to comply
with this requirement of Rule 11a2-2(T), such order would have to be
sent to an

unaffiliated ATP Holder on the Exchange floor.
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    \98\ In considering the operation of automated execution systems
operated by an exchange, the Commission noted that while there is no
independent executing exchange member, the execution of an order is
automatic once it has been transmitted into the systems. Because the
design of these systems ensures that members do not possess any
special or unique trading advantages in handling their orders after
transmitting them to the exchange, the Commission has stated that
executions obtained through these systems satisfy the independent
execution requirement of Rule 11a2-2(T). See 1979 Release, supra
note 96.
    \99\ See Amendment No. 1 at 9.
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    Fourth, in the case of a transaction effected for an account with
respect to which the initiating member or an associated person thereof
exercises investment discretion, neither the initiating member nor any
associated person thereof may retain any compensation in connection
with effecting the transaction, unless the person authorized to
transact business for the account has expressly provided otherwise by
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T).\100\ The Exchange recognizes that ATP Holders trading for covered
accounts over which they exercise investment discretion must comply
with this condition to rely on the rule's exemption.\101\ The Exchange
represents that it will enforce this requirement pursuant to its
obligation under Section 6(b)(1) of the Act to enforce compliance with
the federal securities laws.\102\
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    \100\ 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written
contract to retain compensation, in connection with effecting
transactions for covered accounts over which such member or
associated person thereof exercises investment discretion, to
furnish at least annually to the person authorized to transact
business for the account a statement setting forth the total amount
of compensation retained by the member in connection with effecting
transactions for the account during the period covered by the
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra
note 96 (stating ``[t]he contractual and disclosure requirements are
designed to assure that accounts electing to permit transaction-
related compensation do so only after deciding that such
arrangements are suitable to their interests'').
    \101\ See Amendment No. 1 at 10.
    \102\ See id.
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2. Section 11(a)(1)(G) and Rule 11a1-1(T)
    Section 11(a)(1)(G) of the Act provides an additional exemption
from the general prohibition set forth in Section 11(a)(1) for any
transaction for a member's own account, provided that: (i) Such member
is primarily engaged in certain underwriting, distribution, and other
activities generally associated with broker-dealers and whose gross
income is derived principally from such business and related
activities; and (ii) the transaction is effected in compliance with the
rules of the Commission, which, as a minimum, assure that the
transaction is not inconsistent with the maintenance of fair and
orderly markets and yields priority, parity, and precedence in
execution to orders for the account of persons who are not members or
associated with members of the exchange.\103\ In addition, Rule 11a1-
1(T) under the Act specifies that a transaction effected on a national
securities exchange for the account of a member which meets the
requirements of Section 11(a)(1)(G)(i) of the Act is deemed, in
accordance with the requirements of Section 11(a)(1)(G)(ii), to be not
inconsistent with the maintenance of fair and orderly markets and to
yield priority, parity, and precedence in execution to orders for the
account of non-members or persons associated with non-members of the
exchange, if such transaction is effected in compliance with certain
requirements.\104\
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    \103\ See 15 U.S.C. 78k(a)(1)(G).
    \104\ Rule 11a1-1(T)(a)(1)-(3) provides that each of the
following requirements must be met: (1) A member must disclose that
a bid or offer for its account is for its account to any member with
whom such bid or offer is placed or to whom it is communicated, and
any member through whom that bid or offer is communicated must
disclose to others participating in effecting the order that it is
for the account of a member; (2) immediately before executing the
order, a member (other than the specialist in such security)
presenting any order for the account of a member on the exchange
must clearly announce or otherwise indicate to the specialist and to
other members then present for the trading in such security on the
exchange that he is presenting an order for the account of a member;
and (3) notwithstanding rules of priority, parity, and precedence
otherwise applicable, any member presenting for execution a bid or
offer for its own account or for the account of another member must
grant priority to any bid or offer at the same price for the account
of a person who is not, or is not associated with, a member,
irrespective of the size of any such bid or offer or the time when
entered. See 17 CFR 240.11a1-1(T)(a)(1)-(3).
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    Proposed Rule 910NY provides that, in cases where the transaction
of an ATP Holder on the physical floor would occur at the same price as
one or more orders on the book and where such ATP Holder can rely on no
exemption other than the exemption set forth in Section 11(a)(1)(G) of
the Act and Rule 11a1-1(T) thereunder, such ATP Holder must, in
addition to complying with the other requirements of Section
11(a)(1)(G) of the Act and Rule 11a1-1(T) thereunder, yield to all
orders in the book at the same price, if such ATP Holder cannot
determine that an order in the book is not the order of a non-ATP
Holder.\105\ The Exchange represents that, in such cases, if an ATP
Holder seeks to rely on the exemption set forth in Section 11(a)(1)(G)
of the Act and Rule 11a1-1(T) thereunder for the execution of an order
for its own account, such order may be executed only on the physical
floor of the Exchange or must be entered into the System as an IOC
order.\106\ The Commission notes that this exemption is available only
for orders for the account of an Exchange member.\107\
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    \105\ See proposed Rule 910NY.
    \106\ See Amendment No. 1 at 10.
    \107\ See supra notes 103-104 and accompanying text.
---------------------------------------------------------------------------

D. Complex Orders

    The proposed rules also include provisions governing transactions
in Complex Orders, which are defined as orders involving the
simultaneous purchase and/or sale of two or more different option
series having the same underlying security, for the same account, in a
ratio that is equal to or greater than one-to-three (0.333) and less
than or equal to three-to-one (3.00), and for the purpose of executing
a particular investment strategy.\108\ These proposed rules are similar
to those the Commission has previously approved for NYSE Arca,\109\ and
raise no novel or significant issues. The Commission finds that they
are consistent with the Act.
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    \108\ See proposed Rule 900.3NY(e).
    \109\ See proposed Rule 963NY(d) (based on NYSE Arca Rule
6.75(e); proposed Rule 963.1NY (based on NYSE Arca Rule 6.75,
Commentary 0.1, and NYSE Arca Rule 6.91, Commentaries .01 and .02).
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    The proposed rules also include provisions regarding transactions
in NDX or RUT Combination Orders \110\ that are virtually identical to
current Amex rules governing such transactions that the Commission
previously approved.\111\ The Commission expects the Exchange to
monitor compliance with the requirement in these proposed rules that,
at time of the execution of an NDX or RUT combination order, no
individual leg of the order trades ahead of the corresponding bid or
offer in the NDX or RUT limit order book.
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    \110\ See proposed Rule 965NY(b).
    \111\ See Securities Exchange Act Release No. 57384 (February
26, 2008), 73 FR 11688 (March 4, 2008).
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E. Trading Auctions and Trading Halts

    The proposed rules on trading auctions and on procedures for
halting or suspending trading are closely modeled on similar rules of
NYSE Arca that have been previously approved by the Commission,\112\
and the Commission believes they are consistent with the Act.
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    \112\ See proposed Rules 952NY and 953NY (based on NYSE Arca
Rules 6.64 and 6.65 respectively).
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F. Linkage and Routing

    The proposed rules relating to the intermarket options linkage
(``Linkage'') operated pursuant to the Plan for the Purpose of Creating
and Operating an Intermarket Option Linkage are closely modeled on
similar rules of NYSE Arca, which previously have been approved by the
Commission.\113\ In addition, existing NYSE Alternext Rule 940 (Options
Intermarket Linkage) will continue to apply. The proposed rules

relating to a routing broker also are consistent with similar rules of
NYSE Arca, which previously have been approved by the Commission.\114\
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    \113\ See proposed Rules 990NY-993NY (based on NYSE Arca Rules
6.93-6.96).
    \114\ See proposed Rule 923NY (based on NYSE Arca Rule 6.35);
proposed Rule 964NY(c) (consistent with NYSE Arca Rule 6.76A).
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    If an incoming marketable order has not been executed in its
entirety on the Exchange and has been designated as an order type that
is eligible to be routed away, the order would be routed, either in its
entirety or as component orders, for execution to other Market
Center(s) displaying the NBBO, either through the Linkage or through a
broker-dealer affiliate of the Exchange that acts as an agent for
routing orders entered into the System (``Routing Broker''),\115\
according to a proprietary algorithm and subject to Exchange rules.
Where an order or portion of an order is routed away and is not
executed either in whole or in part at the other Market Center, the
order upon its return would be ranked and displayed in the book in
accordance with its terms.\116\ The Exchange's proposed Linkage and
routing rules do not raise any novel or substantive issues, and the
Commission finds them to be consistent with the Act.
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    \115\ In a separate filing, the Exchange has proposed to use
Archipelago Securities LLC as its Routing Broker and described the
relationship between the Exchange and the Routing Broker and the
conditions related to its operation. The Commission is approving
that proposal in a separate action today. See supra note 9.
    \116\ See proposed Rule 964NY(c)(2)(E). See also supra note 66
and accompanying text.
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G. Disciplinary Proceedings

    Existing Alternext Rules 475, 476, and 477 will continue to govern
the Exchange's disciplinary proceedings related to the options trading.
Alternext Rule 476A (Imposition of Fines for Minor Violation(s) of
Rules) will continue to govern imposition of fines. The Exchange
proposes to amend Rule 476A to include options rule violations and
their applicable fines that will be in effect after the Options
Relocation.
    The Commission finds that the disciplinary procedures, as applied
to the options trading on the Exchange, are consistent with the Act, in
particular Sections 6(b)(6) and 6(b)(7) of the Act.\117\ The Commission
believes that Rules 475, 476, and 477, as applied to the trading of
options on the Exchange, will continue to provide due process for ATP
Holders involved in any disciplinary proceeding. The Commission,
therefore, believes that these rules will continue to provide the
Exchange with the ability to comply, and with the authority to enforce
compliance by its members and persons associated with its members, with
the provisions of the Act, the rules and regulations thereunder, and
the rules of the Exchange, consistent with Section 6(b)(1) of the
Act.\118\ In addition, because Rule 476A as revised by this filing
provides procedural rights to contest the fine and permits disciplinary
proceedings on the matter, the Commission believes that this rule
provides a fair procedure for the disciplining of ATP Holders and
persons associated with ATP Holders, consistent with Sections 6(b)(7)
and 6(d)(1) of the Act.\119\
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    \117\ 15 U.S.C. 78f(b)(6) and 78f(b)(7).
    \118\ 15 U.S.C. 78f(b)(1).
    \119\ 15 U.S.C. 78f(b)(7) and 78f(d)(1).
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    Finally, the Commission finds that the proposed changes to Rule
476A are consistent with the public interest, the protection of
investors, or otherwise in furtherance of the purposes of the Act, as
required by Rule 19d-1(c)(2) under the Act,\120\ which governs minor
rule violation plans. The Commission believes that Rule 476A will
strengthen the Exchange's ability to carry out its oversight and
enforcement responsibilities as a self-regulatory organization in cases
where full disciplinary proceedings are unsuitable in view of the minor
nature of the particular violation.
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    \120\ 17 CFR 240.19d-1(c)(2).
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H. Amendment No. 1 and Accelerated Approval

    In Amendment No. 1, the Exchange made certain revisions to the
proposed rule text and corresponding changes to the Purpose Section of
its Form 19b-4 describing the proposed rule change. In particular,
Amendment No. 1:
     Revised the definition of Reserve Order in proposed Rule
900.3NY(d)(3) to clarify how the displayed portion of a Reserve Order
is refreshed from the reserve size, and to add that, upon entry into
the System, a marketable Reserve Order will be executed in whole or in
part up to its full size, regardless of the reserve size;
     Eliminated Stock Contingency Orders from the proposed rule
change;
     Revised the definitions of certain Contingency Orders and
clarified how such orders are held and processed by the System;
     Revised the definition of Tracking Order in proposed Rule
900.3NY(d)(5) to clarify the function of such orders, prohibit an ATP
Holder from informing third parties of any terms of such orders, and
provide that it is a violation of Rule 935NY for an ATP Holder to enter
a Tracking Order for purposes of executing as principal an order it
also represents as agent;
     Revised proposed Rule 902NY concerning an ATP Holder's
conduct on the Options Trading Floor to add restrictions on possession
of NYSE Floor Broker Hand Held Terminals while on the Options Trading
Floor;
     Revised the definition of Market Maker to clarify, among
other things, that the definition applies to an e-Specialist;
     Revised proposed Rule 934.3NY to add that the eligible
order size for the 40% guaranteed participation for solicited orders
will be not less than 50 contracts;
     Clarified procedures for routing orders to away market
centers and for handling the routed orders that are not executed and
are returned to the book;
     Eliminated references to Exchange Official from Rule 970NY
as that term is now obsolete;
     Clarified the quoting obligations of a Directed Order
Market Maker to state it must provide continuous two-sided quotations
throughout the trading day in issues for which it receives Directed
Orders for 90% of the time the Exchange is open for trading in each
issue;
     Added a new proposed Rule 910NY, which obligates all ATP
Holders to ensure that each of their transactions complies with Section
11(a) of the Act;
     Clarified that existing Exchange rules relating to the
trading of FLEX Options would continue to apply; and
     Corrected the list of existing Exchange rules that would
be superseded by new rules proposed in this filing.
    In addition to making certain revisions to the proposed rule text
as described above, in Amendment No. 1 the Exchange also made certain
representations:
     The Exchange represented that NYSE Alternext US Rule 3(j),
which governs the use of material, non-public information, applies to
ATP Holders trading on the System. The Exchange also represented that
Rule 3(j) requires a Market Maker to maintain information barriers--
reasonably designed to prevent the misuse of material, non-public
information by such Market Maker--between the Market Maker and any of
its affiliates that may act as specialist or market maker in any
security underlying the options in which the Market Maker makes a
market on the Exchange; and
     The Exchange represented that it had analyzed its rules
proposed hereunder, which include proposed Rule 910NY, and had
determined that they are consistent with Section 11(a) of the Act and
rules thereunder.
    The Commission finds good cause, pursuant to Section 19(b)(2) of
the

Act,\121\ for approving the proposal, as modified by Amendment No. 1,
prior to the thirtieth day after the date of publication of notice of
filing of Amendment No. 1 in the Federal Register. The changes made by
Amendment No. 1 are designed to clarify the proposed rules and do not
raise any novel or substantive issues. The proposal has otherwise been
subject to a full comment period. Therefore, the Commission believes
that good cause exists to approve the amended proposal on an
accelerated basis.
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    \121\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the filing, as
modified by Amendment No. 1, is consistent with the Act. Comments may
be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to<EMAIL_ADDRESS>Please include
File Number SR-NYSEALTR-2008-14 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEALTR-2008-14. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room 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; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-NYSEALTR-2008-14 and should be submitted on or before
March 27, 2009.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-NYSEALTR-2008-14), as amended, be,
and hereby is, approved on an accelerated basis.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\122\
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    \122\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-4778 Filed 3-5-09; 8:45 am]

BILLING CODE 8011-01-P