[Federal Register: March 31, 2006 (Volume 71, Number 62)]
[Notices]
[Page 16353-16387]
[DOCID:fr31mr06-104]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53539; File No. SR-NYSE-2004-05]

Self-Regulatory Organizations; New York Stock Exchange LLC; Order
Approving Proposed Rule Change and Amendment Nos. 1, 2, 3, and 5
Thereto and Notice of Filing and Order Granting Accelerated Approval to
Amendment Nos. 6, 7, and 8 to the Proposed Rule Change to Establish the
Hybrid Market

March 22, 2006.
I. Introduction
II. Description of the Proposal
    A. Proposed Automated Market
    1. Automated Access to Display Book System
    2. Liquidity Available for Automatic Execution
    (a) Specialist Interest Filed and Reserve
    (b) Floor Broker Agency Interest File and Reserve
    3. Autoquote
    4. Automatic Executions
    (a) Priority, Parity, and Precedence
    (b) Automated Routing Away
    (c) Tick-Restricted Orders, Stop Orders, and Other Orders
Eligible for Automatic Execution
    5. Availability of Direct+
    (a) Liquidity Replenishment Points
    (1) Sweep LRPs
    (2) MLRPs
    B. Role of the Specialists in the Hybrid Market
    1. Specialist Algorithms
    (a) Quoting Messages
    (b) Trading Messages
    (1) Specialists' Ability to Systematically Price Improve
Incoming Orders
    (2) Specialists' Ability to Hit Bids or Take Offers
    2. Limitations on Members' Trading Because of Customers'
Orders--NYSE Rule 92
    3. Policy for Communicating with the Specialist Algorithm
    4. Specialist Algorithm Record Requirements
    C. Proposal to Make Direct+ Permanent
    D. Auction Limit Orders and Auction Market Orders
    E. Other Changes
    1. Intermarket Sweep Order
    2. Record of Orders/Order Tracking
    3. NYSE Rule 91
    F. Hybrid Market Implementation Plan
    1. Phase 1--Floor Broker Agency Interest Files, Specialist
Interest Files, and Systematic Integration of Priority, Parity, and
Yielding Requirements

    2. Phase 2--API and Specialist Algorithms
    3. Phase 3--Automatic Routing of Orders, Elimination of Direct+
Restrictions, ``Slow'' Market Indicators, and Gap Quoting
    4. Phase 4--Floor Broker Reserve Features, Sweeps, LRPs, and New
Order Types
    5. Phase 5--New Reporting Templates and Elimination of
Suspensions of Autoquote and Automatic Executions
    G. Limited Hybrid Market Pilot
III. Summary of Comments and NYSE's Response
    A. Liquidity Available for Automatic Executions
    1. Specialist Interest File and Specialist Reserve
    (a) Specialists' Parity
    2. Floor Broker Agency Interest Files and Reserve
    B. Automatic Executions
    1. Sweeping the Display Book System
    2. Automated Routing to Other Markets
    C. Availability of Direct+ and Liquidity Replenishment Points
    D. Role of the Specialist in the Hybrid Market
    1. Specialist Algorithm
    2. Specialists' Ability to Systematically Price Improve Incoming
Orders
    E. Auction Limit and Auction Market Orders
IV. Discussion
    A. Increased Access to Display Book System
    1. Liquidity Replenishment Points
    B. Autoquote
    C. Liquidity Available for Automatic Execution
    D. Automatic Executions
    E. Role of Specialist in the Hybrid Market
    1. Price Improvement
    2. Ability to Hit Bids or Take Offers
    3. NYSE Rule 92
    4. Communicating with the Specialist Algorithm
    F. Changes to the Auction Market and New Order Types
    G. Intermarket Sweep Order
    H. Implementation Plan
    I. Interpretive Issues
V. Accelerated Approval of Amendment Nos. 6, 7, and 8
VI. Solicitation of Comments on Amendment Nos. 6, 7, and 8
VII. Conclusion

I. Introduction

    On February 9, 2004, the New York Stock Exchange LLC (``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'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to create a ``Hybrid Market'' by,
among other things, increasing the availability of automatic executions
in its existing automatic execution facility, NYSE Direct+[supreg]
(``Direct+''), and providing a means for participation in the expanded
automated market by its floor members.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    On August 2, 2004, NYSE filed Amendment No. 1 to the proposed rule
change.\3\ The Commission published the proposed rule change, as
amended by Amendment No. 1, for comment in the Federal Register on
August 16, 2004.\4\ On August 26, 2004, the Commission extended the
public comment period with respect to the First Notice to September 22,
2004.\5\ In response to the First Notice, the Commission received 17
comment letters from 15 commenters.\6\
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    \3\ See Letter from Darla C. Stuckey, Corporate Secretary, NYSE,
to Nancy J. Sanow, Assistant Director, Division of Market Regulation
(``Division''), Commission, dated July 30, 2004, and accompanying
Form 19b-4, which replaced the original filing in its entirety
(``Amendment No. 1'').
    \4\ See Securities Exchange Act Release No. 50173 (August 10,
2004), 69 FR 50407 (``First Notice'').
    \5\ See Securities Exchange Act Release No. 50277, 69 FR 53759
(September 2, 2004).
    \6\ See Letters from Eric D. Roiter, Senior Vice President and
General Counsel, Fidelity Management & Research Company, dated
August 10, 2004 (``Fidelity Letter I''); James L. Rothenberg, Esq.,
dated August 20, 2004 (``Rothenberg Letter''); Donald E. Weeden,
dated August 31, 2004 (``Weeden Letter''); Thomas Peterffy,
Chairman, and David M. Battan, Vice President, Interactive Brokers
Group, dated September 7, 2004 (``IBG Letter I''); Jose L. Marques,
PhD, Managing Member, Telic Management LLC, dated September 21, 2004
(``Telic Letter''); Junius W. Peake, Monfort Distinguished Professor
of Finance, Kenneth W. Monfort College of Business, University of
Northern Colorado, dated September 22, 2004 (``Peake Letter I'');
Ari Burstein, Associate Counsel, Investment Company Institute, dated
September 22, 2004 (``ICI Letter I''); Kim Bang, President and Chief
Executive Officer, Bloomberg Tradebook LLC, dated September 22, 2004
(``Bloomberg Letter I''); Ellen L.S. Koplow, Executive Vice
President and General Counsel, Ameritrade, Inc., dated September 22,
2004 (``Ameritrade Letter''); Lisa M. Utasi, President, and Kimberly
Unger, Executive Director, The Security Traders Association of New
York, Inc., dated September 22, 2004 (``STANY Letter''); George W.
Mann Jr., EVP & General Counsel, Boston Stock Exchange, dated
September 22, 2004 (``BSE Letter''); Bruce Lisman, Bear, Stearns &
Co. Inc., dated September 28, 2004 (``Bear Stearns Letter''); Donald
D. Kittell, Executive Vice President, Securities Industry
Association, dated October 1, 2004 (``SIA Letter I''); Edward J.
Nicoll, Chief Executive Officer, Instinet Group, dated October 25,
2004 (``Instinet Letter''); Eric D. Roiter, Senior Vice President
and General Counsel, Fidelity Management & Research Company, dated
October 26, 2004 (``Fidelity Letter II''); Philip Angelides,
Treasurer, State of California, dated November 23, 2004 (``Angelides
Letter''); and Eric D. Roiter, Senior Vice President and General
Counsel, Fidelity Management & Research Company, dated December 8,
2004 (``Fidelity Letter III'').
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    On November 8, 2004 and November 9, 2004, the Exchange filed
Amendment Nos. 2 and 3, respectively.\7\ The Commission published the
proposed rule change, as further amended by Amendment Nos. 2 and 3, for
comment in the Federal Register on November 22, 2004.\8\ In response to
the Second Notice, the Commission received nine comment letters from
eight commenters.\9\
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    \7\ See Form 19b-4 dated November 8, 2004 (``Amendment No. 2'')
and Partial Amendment dated November 9, 2004 (``Amendment No. 3'').
    \8\ See Securities Exchange Act Release No. 50667 (November 15,
2004), 69 FR 67980 (``Second Notice'').
    \9\ See Letters from Gregory van Kipnis, Managing Partner,
Invictus Partners, LLC, dated December 10, 2004 (``Invictus
Letter''); Ari Burstein, Associate Counsel, Investment Company
Institute, dated December 13, 2004 (``ICI Letter II''); Ann L.
Vlcek, Vice President and Associate General Counsel, Securities
Industry Association, dated December 13, 2004 (``SIA Letter II'');
Thomas Peterffy, Chairman, and David M. Battan, Vice President,
Interactive Brokers Group, dated December 14, 2004 (``IBG Letter
II''); William R. Power, Member and Director, Chicago Board Options
Exchange, Incorporated, dated December 21, 2004 (``Power Letter'');
Marc L. Lipson, Associate Professor, Terry College of Business, The
University of Georgia, dated January 4, 2005 (``Lipson Letter'');
Edward S. Knight, The Nasdaq Stock Market, dated January 26, 2005
(``Nasdaq Letter''); and George Rutherfurd, Consultant, dated March
10, 2005 (``Rutherfurd Letter I'') and April 8, 2005 (``Rutherfurd
Letter II'').
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    On June 17, 2005, the Exchange filed Amendment No. 5 to the
proposed rule change.\10\ The Commission published the proposed rule
change, as further amended by Amendment No. 5, for comment in the
Federal Register on June 29, 2005.\11\ In response to the Third Notice,
the Commission received six comment letters.\12\
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    \10\ See Form 19b-4 dated June 17, 2005 (``Amendment No. 5'').
The Exchange submitted Amendment No. 4 to the proposed rule change
on May 25, 2005, and subsequently withdrew Amendment No. 4 on June
17, 2005.
    \11\ See Securities Exchange Act Release No. 51906 (June 22,
2005), 70 FR 37463 (``Third Notice'').
    \12\ See Letters from George U. Sauter, Managing Director, The
Vanguard Group, Inc., dated July 20, 2005 (``Vanguard Letter''); Ari
Burstein, Associate Counsel, Investment Company Institute, dated
July 20, 2005 (``ICI Letter III''); Donald D. Kittell, Executive
Vice President, Securities Industry Association, dated July 20, 2005
(``SIA Letter III''); George Rutherfurd, Consultant, dated July 20,
2005 (``Rutherfurd Letter III''); Kim Bang, President and Chief
Executive Officer, Bloomberg Tradebook LLC, dated July 28, 2005
(``Bloomberg Letter II''); and Frank A. Torino, dated September 27,
2005 (``Torino Letter'').
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    In total, the Commission received 43 comment letters on the amended
proposal (including 32 comment letters with respect to the First,
Second, and Third Notices).\13\ On September 21,

2005, the Exchange filed a response to the comment letters.\14\
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    \13\ See supra notes 6, 9, and 10. The Commission received a
comment letter on Amendment No. 4, which was withdrawn by the
Exchange. See Letter from Junius W. Peake, Monfort Distinguished
Professor of Finance, Kenneth W. Monfort College of Business,
University of Northern Colorado, dated June 17, 2005 (``Peake Letter
II''). In addition, the Commission received three comment letters
from the same commenter in response to Amendment Nos. 6 and 7. See
Letters from George Rutherfurd, Consultant, dated November 1, 2005
(``Rutherfurd Letter IV''), November 8, 2005 (``Rutherfurd Letter
V''), and November 17, 2005 (``Rutherfurd Letter VI''). Finally, the
Commission received seven other comment letters from two commenters.
See Letters from Warran P. Meyers, President, Independent Broker
Action Committee, Inc., dated December 7, 2005 (``IBAC Letter I''),
February 2, 2006 (``IBAC Letter II''), and March 17, 2006 (``IBAC
Letter III''), and George Rutherfurd, Consultant, dated December 11,
2005 (``Rutherfurd Letter VII''), December 17, 2005 (``Rutherfurd
Letter VIII''), February 1, 2006 (``Rutherfurd Letter IX''), and
February 13, 2006 (``Rutherfurd Letter X'').
    \14\ See Letter from Mary Yeager, Assistant Secretary, NYSE, to
Jonathan G. Katz, Secretary, Commission, dated September 21, 2005
(``Response to Comments'').
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    On September 16, 2005, the Exchange filed Amendment No. 6 to the
proposed rule change.\15\ In Amendment No. 6, the Exchange proposes to
amend NYSE Rule 104 to state that specialists may only provide price
improvement to incoming orders that are marketable. In addition, NYSE
proposes to amend NYSE Rule 70.20 to limit the ability of interest in
the floor broker agency interest file to trade on parity with orders in
the customer limit order display book (``Book'') during a sweep.
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    \15\ See Form 19b-4 dated September 16, 2005 (``Amendment No.
6'').
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    On October 11, 2005, the Exchange filed Amendment No. 7 to the
proposed rule change.\16\ In Amendment No. 7, the Exchange made non-
substantive stylistic, conforming, and technical changes to certain
Exchange rules governing the Hybrid Market. In Amendment No. 7, the
Exchange also proposes to amend NYSE Rule 92 to reflect the operation
of the specialist systems that employ algorithms to generate quoting
and trading messages (``Specialist Algorithms''). Specifically, the
Exchange proposes that the specialist would not be deemed to have
``knowledge'' of a particular incoming order that is viewed by the
Specialist Algorithm if the Specialist Algorithm is designed in a
manner that prevents a quoting or trading message from being affected
by a later incoming order. In addition, NYSE proposes in Amendment No.
7 to amend NYSE Rule 13.30 and the definitions of stop and stop limit
orders to reflect the automatic execution of elected stop and stop
limit orders in the Display Book system.\17\
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    \16\ See Form 19b-4 dated October 11, 2005 (``Amendment No.
7'').
    \17\ The Display Book system (``Display Book system'') is an
order management and execution facility. The Display Book system
receives and displays orders to the specialists, contains the Book,
and provides a mechanism to execute and report transactions and
publish the results to the Consolidated Tape. In addition, the
Display Book system is connected to a variety of other Exchange
systems for the purposes of comparison, surveillance, and reporting
information to customers and other market data and national market
systems, that is, the Intermarket Trading System, Consolidated Tape
Association, Consolidated Quotation System, etc.
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    On March 14, 2006, the Exchange filed Amendment No. 8 \18\ to the
proposed rule change. In Amendment No. 8, NYSE proposes to: (1) Amend
proposed NYSE Rules 13 and 124 to specify that a round lot portion of a
part of round lot (``PRL'') order is an ``Auto Ex Order'' \19\ and that
the odd lot portion of a PRL order would be executed at the same price
as the round lot portion of the PRL order and processed in the Odd-Lot
Execution System; \20\ (2) amend proposed NYSE Rule 13 to reflect that
stop orders and stop limit orders may still be represented manually by
a floor broker in the trading ``Crowd;'' \21\ (3) amend the definition
of immediate or cancel (``IOC'') order in proposed NYSE Rule 13 to: (a)
Propose an IOC order that is designed to be in compliance with
Regulation NMS; (b) specify that NYSE IOC orders would be eligible to
be routed away during a sweep; and (c) eliminate the previously
proposed changes to the treatment of commitments to trade received
through the Intermarket Trading System (``ITS Commitments''); \22\ (4)
amend its proposed definition of Intermarket Sweep order in proposed
NYSE Rule 13 to specify that this type of order would be permitted to
sweep the Display Book system, and the portion that was not executed
would be immediately cancelled; (5) amend proposed NYSE Rule 36 to
state that a specialist may only use a wired or wireless device that
has been registered with the Exchange to communicate with the
Specialist Algorithms and provide that specialist firms must create and
maintain records of all messages generated by the Specialist Algorithm;
(6) amend proposed NYSE Rule 60 to: (a) Set forth the instances during
which Autoquote \23\ will update the quote even if automatic executions
are not available; (b) set forth the instances during which Autoquote
will update the quote when Autoquote and automatic execution are
suspended and disseminate a 100 share quote in certain situations; and
(c) propose to use an indicator when the NYSE quote is not available
for automatic execution due to a gapped quotation or liquidity
replenishment point (``LRP'') to signify that the NYSE quote is not
firm; (7) amend proposed NYSE Rule 70.20 to: (a) Permit a floor broker
to leave the Crowd without canceling its floor broker agency interest
file \24\ to recharge its handheld device and (b) specify the
procedures for entering interest in the floor broker agency interest
file before the open; (8) amend proposed NYSE Rule 72 to specify the
priority and parity rules for instances when there are shares remaining
after a sweep that triggers an LRP; (9) amend NYSE Rule 76 to reflect
that it would not apply to elected stop or stop limit orders other than
those manually represented in the Crowd by a floor broker; (10) amend
proposed NYSE Rule 104 to: (a) Permit specialists to manually layer
dealer interest in the specialist interest file; (b) permit specialists
to enter certain quoting messages when automatic executions and
Autoquote are suspended; (c) amend the definition of ``meaningful
amount'' for purposes of determining when a specialist could provide
price improvement; and (d) require specialists to hire independent
auditors to review their algorithms on an annual basis; (11) amend
proposed NYSE Rule 123A.30 to: (a) Provide systematic conversion of
elected or converted percentage orders that are converted on a
destabilizing tick and that permit the specialist to trade on parity
(``CAP-DI orders'') on the same side as a specialist when the
specialist is bidding (offering) or trading and an automatic execution
occurs against a specialist's proprietary interest and (b) clarify the
execution of contra-side elected and converted CAP-DI orders; (12)
amend proposed NYSE Rule 123F to codify that NYSE may execute an
Auction Limit (``AL'') order or market order at a price that matches a
better away market; (13) amend proposed NYSE Rule 1000 to: (a) Clarify
that automatic executions will resume in the same manner as Autoquote;
(b) prohibit short sale orders, except those for Regulation SHO \25\
pilot securities, from sweeping the Display Book system; (c) eliminate
the provision that would have suspended the operation of Direct+ when
an away market disseminates a better quote; (d) eliminate the proposal
that would have permitted automatic executions to continue while the
specialist reports a block trade until the quote decremented to 100
shares; (e) specify the process for determining when a security that is
priced at $300.00 or more would be eligible for automatic executions;
(f) specify that automatic executions would be suspended on one side of
the market when a bid (offer) is

outside the momentum LRP; \26\ (g) specify that any shares remaining
after an execution in IOC orders, NYSE IOC orders, or Intermarket Sweep
orders would be cancelled after sweeping the Display Book system; and
(h) clarify that auto ex limit orders, except IOC orders, that are not
able to be immediately executed due to a suspension of Direct+ would be
placed in the Book; and (14) amend Rule 1001.
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    \18\ See Form 19b-4 dated March 14, 2006 (``Amendment No. 8'').
    \19\ See note 29 infra and accompanying text for a description
of ``Auto Ex Order.''
    \20\ See note 34 infra.
    \21\ See note 46 infra and accompanying text for a description
of ``Crowd.''
    \22\ Similarly, NYSE also proposes to eliminate previously
proposed changes to the treatment of ITS Commitments in NYSE Rule
15A.60.
    \23\ See note 58 infra and accompanying text for a description
of Autoquote.
    \24\ See note 43 infra and accompanying text for a description
of the floor broker agency interest file.
    \25\ See Securities Exchange Act Release No. 50103 (July 28,
2004), 69 FR 48008 (August 6, 2004).
    \26\ See note infra and accompanying text for a description of
momentum LRPs.
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    On December 14, 2005, the Commission approved on an accelerated
basis a proposed rule change by the Exchange to implement and test
certain proposed functions of the Hybrid Market, known as Phase 1 of
the Hybrid Market, on a pilot basis (``Pilot'').\27\
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    \27\ See Securities Exchange Act Release No. 52954, 70 FR 75519
(December 20, 2005). See also Third Notice, supra note 11, for a
description of Phase 1 of the Hybrid Market implementation plan. The
Commission notes that it received one comment letter opposing the
implementation of the Pilot. See Letter from George Rutherfurd,
Consultant, dated December 13, 2005. On February 21, 2006, the
Exchange filed a proposed rule change pursuant to Section
19(b)(3)(A) of the Act and Rule 19b-4(f)(5) thereunder to amend the
manner in which CAP-DI orders convert in certain situations (``Pilot
Amendment''). See Securities Exchange Act Release No. 53359
(February 24, 2006), 71 FR 10736 (March 2, 2006). On March 13, 2006,
the Exchange filed a proposed rule change pursuant to Section
19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder to extend the
Pilot until March 24, 2006 (``Pilot Extension''). See Securities
Exchange Act Release No. 53487 (March 15, 2006), 71 FR 14278 (March
21, 2006).
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    This order approves the proposed rule change, as amended by
Amendment Nos. 1, 2, 3, 5, 6, 7, and 8. The Commission is also
providing notice and soliciting comments on Amendment Nos. 6, 7, and 8
to the proposed rule change.

II. Description of the Proposal

    Currently, NYSE is primarily a floor-based auction market. NYSE
members operate on the NYSE floor, representing their customers' orders
for execution in a largely manual environment. NYSE provides limited
automated access to its market through its automatic execution
facility, Direct+. According to NYSE, automatic executions represent
approximately 11% of its market share volume, with the bulk of
executions occurring manually in its floor-based auction.\28\ With this
proposed rule change, NYSE has proposed to alter the way its market
operates by allowing more orders to be executed automatically in
Direct+. In essence, NYSE has proposed to move from a floor-based
auction market with limited automated order interaction to a more
automated market with limited floor-based auction market availability.
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    \28\ See NYSE Market Statistics (visited on March 9, 2006),
http://www.nyse.com/Frameset.html?displayPage=/ marketinfo/

1022221393893.html (noting that Direct+ volume, for the year ended
December 31, 2005, is 11.4% of NYSE volume).
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    To create its Hybrid Market, NYSE has proposed changes to its
current Direct+ rules to make the system available to more order types
and to limit the instances when automatic executions are not available.
In addition, NYSE has proposed to permit its floor members to
participate in its expanded automated market in an electronic fashion.
Specifically, NYSE has proposed to permit specialists and floor brokers
to electronically provide liquidity that would be available for
automatic executions.
    In addition, NYSE has proposed changes to its auction market to
accommodate those investors that wish to continue to have their orders
exposed for price improvement. To this end, NYSE has proposed to create
a new order type--the Auction Limit order, and to amend the way market
orders are handled in the auction.

A. Proposed Automated Market

1. Automated Access To Display Book System
    Currently, Direct+ is only available, with respect to stocks, to
designated marketable limit orders, without tick restrictions, of 1,099
shares or less (``Auto Ex Orders'').\29\ In addition, multiple Auto Ex
Orders are not allowed to be entered for the account of the same person
within a 30-second time period from the entry of an initial Auto Ex
Order.\30\ Auto Ex Orders trade only against interest reflected in the
Exchange's published quotation--that is, the NYSE best bid or offer
(``BBO''). Eligible limit orders are not required to be entered as Auto
Ex Orders. Rather, the member organization entering the order (or its
customer if enabled by the member organization) must make a specific
designation to choose to enter an order into Direct+.
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    \29\ See NYSE Rules 13 and 1000. Orders in Investment Company
Units (as defined in paragraph 703.16 of the Listed Company Manual),
Trust Issued Receipts (as defined in NYSE Rule 1200), streetTRACKS
Gold Shares (as defined in NYSE Rule 1300), or any product subject
to the same rules as Investment Company Units (collectively
``ETFs''), however, may be entered in a size greater than 1,099
shares. See Securities Exchange Act Release No. 52160 (July 28,
2005), 70 FR 44963 (August 4, 2005) (amending NYSE Rules 13 and 1005
to eliminate the 10,000 share restriction and the 30-second order
entry restriction for Auto Ex Orders in ETFs).
    \30\ See NYSE Rule 1005.
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    NYSE proposes to broaden access to Direct+ for stocks and ETFs.\31\
Specifically, NYSE has proposed to amend its Rule 13 to define an Auto
Ex Order to include: (1) All marketable limit orders; \32\ (2)
designated market orders; (3) designated IOC orders; \33\ (4) elected
stop and stop limit orders that have been systematically delivered to
the Display Book system; (5) buy minus, sell plus, and short sale
orders systematically delivered to the Display Book system; (6) CAP-DI
Orders; (7) the round lot portion of a PRL order; \34\ (8) orders that
were initially eligible for automatic execution that have been
cancelled and replaced with a subsequent Auto Ex Order; \35\ and (9)
Intermarket Sweep orders.\36\ In addition,

NYSE proposes to eliminate the size restrictions for Auto Ex Orders and
eliminate the 30-second order entry restriction.
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    \31\ See proposed NYSE Rule 1002.
    \32\ Marketable limit orders, i.e., limit orders to buy (sell)
priced at or above (below) the best offer (bid) at the time the
order is routed to the Display Book system, would no longer need to
be designated as requesting an automatic execution in Direct+. All
marketable limit orders would be automatically executed with or
without designation. See proposed NYSE Rule 13. Non-marketable limit
orders would be routed to the Display Book system, even if
designated auto ex, and would be displayed as limit orders on the
Book. See proposed NYSE Rule 1000(d)(v); see also Amendment No. 8.
These booked orders would be available to participate in sweep
transactions. When such orders become marketable, they would be
included in the quote and could participate in automatic executions.
    \33\ NYSE proposes two types of IOC orders. See proposed NYSE
Rule 13; see also Amendment No. 8. One would be for the purposes of
Regulation NMS which would not be routed to away markets during a
sweep. Instead, if an away market is disseminating a better
protected bid or offer, the IOC order would be cancelled. The other
type of IOC order, the NYSE IOC order, would allow NYSE to route
portions to away markets to satisfy better protected bids or offers
and would cancel once it was no longer able to receive an execution
on NYSE. The Exchange also proposes to amend the definition of an
IOC order to permit the entry of IOC orders before the opening of
the Exchange for participation in the opening trade. If not executed
as part of the opening trade, the order would be treated as
cancelled.
    \34\ See proposed NYSE Rule 13; see also Amendment No. 8. Odd-
lot orders and odd-lot portions of PRLs would not be eligible for
automatic execution in Direct+. The Exchange noted that, under NYSE
Rule 124, odd-lot orders are received, processed, and executed by an
Exchange system designated for such purpose with the specialist as
the contra-party at the price of certain round-lot transactions
(``Odd-Lot Execution System''). Accordingly, the Odd-Lot Execution
System provides a type of automatic execution that is governed by
NYSE Rule 124, not the rules governing Direct+. The Exchange also
clarified in the Third Notice that when automatic executions are
suspended, odd-lot executions also would be suspended to prevent
odd-lots from trading at prices unrelated to round-lot orders in the
same security and to provide consistency in the availability of
automatic executions.
    \35\ Currently, the Display Book system changes an order that
cancels and replaces an Auto Ex Order to a non-Auto Ex Order. Under
the Hybrid Market, the Display Book system would no longer make this
change, so that a cancel/replace order of an Auto Ex Order would now
be eligible for automatic execution.
    \36\ A few order types would be ineligible for automatic
execution, including CAP, ``opening only'' (OPG), ``limit on close''
(LOC), ``market on close'' (MOC), and ``basis'' (BAS) orders.
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2. Liquidity Available for Automatic Execution
    Currently, the Display Book system contains the Book, which is
operated and represented by the specialist. The Book contains limit
orders routed to NYSE though SuperDOT \37\ or left with the specialist
by floor brokers for representation. The Display Book system also may
reflect specialist quotes at the NYSE BBO. Auto Ex Orders interact with
the interest displayed on the Display Book system at the NYSE BBO.
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    \37\ SuperDOT is an electronic order-routing system used by NYSE
member firms to send market and limit orders to NYSE. SuperDOT is
also referred to as DOT.
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    To further automate its market, NYSE has proposed to permit its
floor members--that is, specialists and floor brokers--to place
liquidity in the Display Book system at various prices, in newly-
created separate files that would be available for execution against
incoming Auto Ex Orders. This would allow floor members and the
investors they represent on the floor to more fully participate in
automatic executions.
(a) Specialist Interest File and Reserve
    Specialists would have the ability to manually and systematically
place in a separate file (``specialist interest file'') within the
Display Book system their dealer interest at prices at or outside the
Exchange BBO.\38\ NYSE intends the specialist interest file to assist
the specialist, in an automated environment, to fulfill its obligations
to provide capital, bridge temporary gaps in supply and demand, and
dampen volatility. In addition, the specialist interest file would
allow specialists to provide increased liquidity at prices at or
outside the Exchange BBO, which could potentially improve the prices at
which Auto Ex Orders are executed.\39\
---------------------------------------------------------------------------

    \38\ See proposed NYSE Rules 104(b)(i) and 104(c)(viii); see
also Amendment No. 8 and Pilot.
    \39\ See Response to Comments, supra note 14.
---------------------------------------------------------------------------

    The Exchange also proposes to provide specialists with the ability
to maintain undisplayed reserve interest on behalf of their dealer
accounts at the Exchange BBO, provided that they display at least 2,000
shares of dealer interest at that price on the same side of the market
as the reserve.\40\ After an execution against a specialist's displayed
bid (offer), if the specialist has reserve interest remaining at that
best bid (offer), the amount of displayed interest would be
automatically replenished by the specialist's reserve interest, if any,
so that at least 2,000 shares of specialist interest is displayed (or
whatever specialist interest remains at the best bid (offer), if less
than 2,000 shares).\41\
---------------------------------------------------------------------------

    \40\ See proposed NYSE Rule 104(d)(i).
    \41\ See proposed NYSE Rule 104(d)(ii).
---------------------------------------------------------------------------

    Specialist interest at the Exchange BBO would be disseminated;
specialist reserve and specialist interest away from the Exchange BBO
ordinarily would not be disseminated. Each specialist, however, has the
option to disseminate its interest away from the Exchange BBO via
OpenBook \42\ or another Exchange data distribution channel.
---------------------------------------------------------------------------

    \42\ OpenBook is a compilation of limit order data for all NYSE
traded securities that the Exchange provides to market data vendors,
broker-dealers, private network providers, and other entities
through a data feed. See Securities Exchange Act Release No. 44138
(December 7, 2001), 66 FR 64895 (December 14, 2001).
---------------------------------------------------------------------------

(b) Floor Broker Agency Interest File and Reserve
    Floor brokers, similarly, would be permitted to represent
electronically the orders they hold by including these orders in a
separate file (``floor broker agency interest file'') within the
Display Book system.\43\ Floor brokers would be permitted to place
liquidity electronically at or outside the Exchange BBO. In addition,
floor broker agency interest files would be allowed to participate in
the opening trade.\44\ Floor brokers would not be permitted to enter in
the floor broker agency interest files any interest that restricts the
specialist's ability to trade on parity with the floor broker agency
interest file.\45\
---------------------------------------------------------------------------

    \43\ See proposed NYSE Rule 70.20(a)(i).
    \44\ See proposed NYSE Rule 70.20(j)(i). Floor broker agency
interest entered before the open could participate in the opening
trade on parity with the Book in accordance with Exchange policies
that govern the open.
    \45\ See proposed NYSE Rule 70.20(a)(i).
---------------------------------------------------------------------------

    A floor broker would be required to be in close physical proximity
to the post for the security--that is, in the Crowd \46\ --while it has
orders in its floor broker agency interest file.\47\ NYSE would require
that a floor broker's agency interest file be cancelled when the floor
broker leaves the Crowd.\48\ If the floor broker nevertheless leaves
the Crowd without canceling its agency interest files, and one or more
executions occur with its agency interest, the floor broker would be
held to such executions.\49\
---------------------------------------------------------------------------

    \46\ See proposed NYSE Rule 70.30. The Exchange proposes to
define a Crowd as being any five contiguous panels at any one post
where securities are traded. A floor broker would be considered to
be in the Crowd if it is physically present at one of the five
contiguous panels. However, the requirement that a floor broker be
in the Crowd to have agency interest files would not apply to orders
governed by section 11(a)(1)(G) of the Act (``G'' orders), 15 U.S.C.
78k(a)(1)(G). See proposed NYSE Rule 70.20(a)(ii).
    \47\ A floor broker could enter interest in its agency interest
file prior to the open regardless of its location on the floor, but
would have to be in the Crowd at the open to participate in the
opening trade. Any agency interest entered prior to the open would
have to be cancelled before the open, if the floor broker is not in
the Crowd. See proposed NYSE Rule 70.20(j)(ii); see also Amendment
No. 8.
    \48\ See proposed NYSE Rule 70.20(f). However, a floor broker
could leave the Crowd to recharge its handheld device without
canceling its interest. See id. See also Amendment No. 8.
    \49\ See proposed NYSE Rule 70.20(f).
---------------------------------------------------------------------------

    Because the floor broker agency interest file is part of the
Display Book system and because of the specialist's obligation to
maintain a fair and orderly market, the Exchange proposes to allow the
specialist ordinarily to see the aggregate number of shares of all
floor broker agency interest files at each price.\50\ A floor broker,
however, would have the option to exclude all of its floor broker
agency interest file from the information available to the
specialist.\51\ A floor broker's ability to exclude volume from the
aggregate agency interest information available to the specialist would
not be available during the open.\52\ Floor broker agency interest
excluded from the aggregated agency interest information available to
the specialist would be able to participate in automatic executions,
but would not participate in a manual execution unless the floor broker
represents the interest manually.\53\ Furthermore, floor broker agency
interest that has been excluded from the aggregate information
available to the specialist would not participate in the closing
trade.\54\
---------------------------------------------------------------------------

    \50\ See proposed NYSE Rule 70.20(g). Specialists would not be
able to see individual orders represented in the floor broker agency
interest file.
    \51\ See id.
    \52\ See proposed NYSE Rule 70.20(k).
    \53\ See proposed NYSE Rule 70.20(h).
    \54\ See proposed NYSE Rule 70.20(k).
---------------------------------------------------------------------------

    The Exchange proposes to permit floor brokers to maintain
undisplayed reserve interest at the Exchange BBO provided that a
minimum of 1,000 shares of the floor broker's agency interest is
displayed at that price.\55\ If an execution at the Exchange BBO occurs
that does not exhaust the broker's interest at that price, the
displayed interest would be automatically replenished from the floor
broker's reserve interest, if any, so that at least 1,000 shares (or
whatever amount remains, if less than 1,000 shares) is displayed.\56\
There would be no reserve capability for floor broker agency

interest entered into the files during the open and close.\57\
---------------------------------------------------------------------------

    \55\ See proposed NYSE Rule 70.20(c)(ii).
    \56\ See proposed NYSE Rule 70.20(c)(iii).
    \57\ See proposed NYSE Rule 70.20(k).
---------------------------------------------------------------------------

    The floor broker agency interest file at the Exchange BBO, except
reserve, would be disseminated. Floor broker agency interest away from
the BBO would not be displayed in OpenBook or other Exchange data
distribution channel.
3. Autoquote
    Autoquote is part of the Display Book system that immediately
displays customer limit orders received on the Exchange.\58\ Autoquote
immediately updates the NYSE BBO when a customer limit order is
received by NYSE that improves the NYSE quote.\59\ In addition,
Autoquote updates the NYSE BBO when an execution occurs to reflect a
new NYSE BBO from interest held in the Display Book system. The
Exchange proposes to amend its Rule 60 to modify the circumstances
under which Autoquote would be suspended.
---------------------------------------------------------------------------

    \58\ This system was developed to facilitate specialists'
compliance with the Commission's Limit Order Display Rule. See 17
CFR 242.604.
    \59\ NYSE Rule 60(e).
---------------------------------------------------------------------------

    Specifically, Autoquote would be suspended in three circumstances:
(1) When the specialist manually reports a block size transaction that
involves orders in the Display Book system; (2) when the specialist
gaps the quote; \60\ or (3) when a LRP is reached.\61\ When Autoquote
is suspended due to a manual report of a block trade that involves
orders in the Display Book system,\62\ Autoquote would resume when the
manual reporting is concluded.\63\ When Autoquote is suspended
following a gap quote, Autoquote would resume upon the report of a
manual transaction or the publication of a non-gapped quotation.\64\
---------------------------------------------------------------------------

    \60\ See note 139 infra, for a description of gapped quotations.
    \61\ See proposed NYSE Rule 60(e)(i). See Section II(A)(5)(a)
infra, and proposed NYSE Rule 1000(a)(iv) for a description of LRPs.
    \62\ See proposed NYSE Rule 1000(a)(v). See Section II(A)(5)
infra.
    \63\ See proposed NYSE Rule 60(e)(ii)(B).
    \64\ See proposed NYSE Rule 60(e)(ii)(A).
---------------------------------------------------------------------------

    When Autoquote is suspended by an LRP that is reached by an Auto Ex
Order that sweeps to the LRP price,\65\ and if the Auto Ex Order is
filled or if its unfilled balance is not capable of trading at a price
beyond the sweep LRP price, then Autoquote would resume in no more than
five seconds after the LRP is reached.\66\ If the Auto Ex Order is
capable of trading at a price beyond the LRP price, and would not
create a locked or crossed market if quoted, then Autoquote would
resume upon the report of a manual transaction or the publication of a
new quote by the specialist, but in any event in no more than ten
seconds.\67\ Finally, if the Auto Ex Order is capable of trading at a
price beyond the LRP price but would create a locked or crossed market
if quoted, then Autoquote would resume upon a manual transaction or the
publication of a new quote by the specialist.\68\
---------------------------------------------------------------------------

    \65\ See Section II(A)(5)(a)(1) infra.
    \66\ See proposed NYSE Rule 60(e)(ii)(C).
    \67\ See id.
    \68\ See id. In Amendment No. 8, the Exchange represented that
it would implement an alert for specialists to facilitate their
compliance with the Commission's Limit Order Display Rule, 17 CFR
242.604.
---------------------------------------------------------------------------

    When Autoquote is suspended by a momentum LRP (``MLRP''),\69\
Autoquote would resume in no more than ten seconds unless the Auto Ex
Order would create a locked or crossed market.\70\ If a locked or
crossed market exists, Autoquote would resume once a manual transaction
is reported.\71\
---------------------------------------------------------------------------

    \69\ See Section II(A)(5)(a)(2) infra.
    \70\ See proposed NYSE Rule 60(e)(iii).
    \71\ See id. See also note 68 supra.
---------------------------------------------------------------------------

    Autoquote would update the quote in the following situations even
though automatic executions are not available. First, when the Exchange
best bid (offer) is outside a MLRP, and such MLRP has not yet been
reached, the Exchange would permit Autoquote to continue to operate,
while automatic executions are not available.\72\ Second, NYSE would
keep Autoquote active when an order or a cancellation of an order
arrives that would not result in a locked or crossed market in a
security priced at $300 or more that has been determined to be
ineligible for automatic execution (``high-priced security'') \73\ or a
manual execution takes place in such security.\74\ Third, if there is a
cancellation of the Exchange best bid (offer) in a high-priced security
when the market in such security is internally locked or crossed, and
autoquoting of the next best bid (offer) would create a locked or
crossed market on the Exchange, NYSE would automatically generate a
quote of 100 shares at the bid (offer) price that existed at the time
of the cancellation.\75\
---------------------------------------------------------------------------

    \72\ See proposed NYSE rule 60(e)(iv)(a); see also Amendment No.
8.
    \73\ See note 142 infra and accompanying text on the definition
of high-priced security.
    \74\ See proposed NYSE rule 60(e)(iv)(b)(i); see also Amendment
No. 8.
    \75\ See proposed NYSE rule 60(e)(iv)(b)(ii); see also Amendment
No. 8.
---------------------------------------------------------------------------

    Finally, in the following situations, the Exchange would update its
quote even though Autoquote is suspended due to an LRP or a gapped
quotation, and automatic executions are not available: (1) If part of
the existing Exchange best bid (offer) cancels, the Exchange would use
Autoquote to update its quote to reflect the remaining volume;\76\ (2)
if the entire existing Exchange best bid (offer) cancels, the Exchange
would automatically generate a quote of 100 shares at the bid (offer)
price that existed at the time of the cancellation;\77\ or (3) if there
is a cancellation of the Exchange best bid (offer) when the market is
internally locked or crossed, and autoquoting of the next best bid
(offer) would create a locked or crossed market on the Exchange, NYSE
would automatically generate a quote of 100 shares at the bid (offer)
price that existed at the time of the cancellation.\78\
---------------------------------------------------------------------------

    \76\ See proposed NYSE rule 60(e)(iv)(c)(i); see also Amendment
No. 8.
    \77\ See proposed NYSE rule 60(e)(iv)(c)(ii); see also Amendment
No. 8.
    \78\ See proposed NYSE rule 60(e)(iv)(c)(iii); see also
Amendment No. 8.
---------------------------------------------------------------------------

4. Automatic Executions
    Currently, an Auto Ex Order equal to or greater than the size of
the Exchange's BBO trades with the entire published bid or offer,\79\
and a new bid or offer is then published. If any shares of an Auto Ex
Order remain available for execution after it trades with the published
quote, the remaining shares are routed to the floor and represented in
the auction market.\80\ Auto Ex Orders that cannot be immediately
executed are placed in the Book and represented as limit orders in the
auction market.\81\ When the national best bid or offer (``NBBO'') is
disseminated by another market and an Auto Ex Order is delivered to the
specialist, it must either match the better price displayed by the
other market or send an ITS Commitment to the other market.\82\
---------------------------------------------------------------------------

    \79\ See NYSE Rule 1000(a).
    \80\ See NYSE Rule 1001(b).
    \81\ See NYSE Rule 1000.
    \82\ See NYSE Rule 15A.
---------------------------------------------------------------------------

    As proposed, Auto Ex Orders would execute against interest at the
Exchange BBO including displayed interest and reserve.\83\ Once an Auto
Ex Order trades with interest at the BBO, NYSE proposes to permit Auto
Ex Orders, except ITS Commitments, to automatically ``sweep'' the
Display Book system by trading with liquidity that is outside the BBO.
Specifically, after exhausting the volume at the BBO, the shares of the
Auto Ex Order that remain (the ``residual'') would trade with existing
orders in the Book, floor broker agency interest files, and the
specialist interest file, until the Auto Ex Order is executed, its
limit price, if any, is

reached, or a LRP is reached, whichever occurs first.\84\
---------------------------------------------------------------------------

    \83\ See proposed NYSE Rule 1000(d).
    \84\ See proposed NYSE Rule 1000(d)(ii)(A)-(D).
---------------------------------------------------------------------------

    During a sweep, the residual would trade with the orders in the
Display Book system, floor broker agency interest, and any specialist
interest capable of execution, at a single price (the ``clean-up
price''), such that any price improvement is given to the orders and
interest in the Display Book system rather than the Auto Ex Order.\85\
Accordingly, orders in the Book, floor broker agency interest, and any
specialist interest capable of trading with the residual would receive
the clean-up price.\86\ Any specialist interest that remains at the
clean-up price after the residual has traded would be automatically
cancelled by the Exchange.\87\
---------------------------------------------------------------------------

    \85\ See proposed NYSE Rule 1000(d)(iii)(A).
    \86\ See proposed NYSE Rule 1000(d)(iii)(B).
    \87\ See proposed NYSE Rule 1000(d)(iii)(C)(ii).
---------------------------------------------------------------------------

    Any residual remaining after the sweep would become a bid (offer)
at the order's limit price, if any, or the LRP price, whichever is
lower (higher).\88\ If the residual can execute at the price at which
it is bidding (offering), it would have priority for one trade over
other interest at that price.\89\ If the residual executes at a
different price--within the parameters of its limit, if any--it would
trade on parity.\90\ If an Auto Ex Order is designated IOC, any
unfilled balance remaining after the sweep would be automatically
cancelled.\91\
---------------------------------------------------------------------------

    \88\ See proposed NYSE Rule 1000(d)(iv).
    \89\ See proposed NYSE Rule 72(j); see also Amendment No. 8.
    \90\ See id.
    \91\ See proposed NYSE Rule 1000(d)(iv).
---------------------------------------------------------------------------

    Current NYSE Rule 1001(a)(iv) provides that the specialist shall be
the contra party for any automatic execution of an Auto Ex Order where
the interest reflected in the published bid or offer is no longer
available. This obligation exists regardless of the tick associated
with the automatic execution. NYSE Rule 104, however, restricts the
specialist's ability to purchase stock on direct plus ticks or sell
stock on direct minus ticks. As part of its initial proposal
establishing Direct+, the Exchange sought and received Commission
approval of an interpretation of NYSE Rule 104 that provides that any
instance in which the specialist is effecting such a direct tick
transaction only because it has been required to assume the contra-side
of an automatic execution shall be deemed to be a ``neutral''
transaction for purposes of NYSE Rule 104, and shall not be deemed a
violation of the Exchange rule.\92\ The Exchange requests that the
Commission extend this interpretation to its Hybrid Market proposal.
---------------------------------------------------------------------------

    \92\ See note 203 infra.
---------------------------------------------------------------------------

    Automatic executions of Auto Ex Orders may elect stop orders, stop
limit orders, and percentage orders electable at the price of such
executions.\93\ Currently, any stop orders so elected are executed
pursuant to Exchange auction market procedures and are not guaranteed
an execution at the same price as subsequent automatic executions of
Auto Ex Orders.\94\ The Exchange previously sought and the Commission
approved an interpretation \95\ that, for the purposes of NYSE Rule
123A, the specialist is not required to fill any stop orders elected by
an execution of an Auto Ex Order at the price of the electing sale in
any instance where the specialist was required by NYSE Rule 1001(a)(iv)
to take the contra-side of a Direct+ execution. NYSE proposes to retain
this interpretation.
---------------------------------------------------------------------------

    \93\ See NYSE Rule 1004.
    \94\ See id.
    \95\ See note 203 infra.
---------------------------------------------------------------------------

(a) Priority, Parity, and Precedence
    NYSE executions are governed by its rules of priority, parity, and
precedence.\96\ These rules dictate which order or quote is able to
execute against an incoming order and the allotment of shares, if more
than one order or quote is at the BBO. Generally, the first bid (offer)
at the BBO has priority to execute against the next incoming order.\97\
Once a trade occurs with the bid (offer) that has priority, other bids
(offers) at that price (including any remaining interest from the bid
(offer) that had priority) generally trade on parity, meaning they
split evenly the remainder of the incoming order, up to the size of
their own order.\98\
---------------------------------------------------------------------------

    \96\ See NYSE Rules 72, 104, and 108.
    \97\ See NYSE Rule 72 I(a). A bid (offer) that establishes the
Exchange BBO is entitled to priority at that price for one trade,
except a specialist bid or offer entitled to priority must yield to
limit orders on the Book at the same price.
    \98\ See NYSE Rule 72 III. When bids (offers) are on parity,
Exchange rules dictate that in certain circumstances, a particular
participant is guaranteed a portion of an order based on the size of
its bid (offer), i.e., precedence based on size. See NYSE Rule 72
I(c).
---------------------------------------------------------------------------

    A specialist must always yield priority to the orders it represents
on the Book,\99\ and today is limited somewhat in its ability to trade
with orders represented by floor brokers. Specifically, when the
specialist is decreasing or liquidating its dealer position, the
specialist is entitled to trade on parity with orders represented by
floor brokers, unless the floor broker (or its customer) requests that
the specialist refrain from trading along with the order the floor
broker represents.\100\ When a specialist is establishing or increasing
its dealer position, NYSE Rule 108 states that the specialist is not
``entitled'' to parity with orders represented on the floor. According
to NYSE, it has interpreted this rule to permit specialist trading on
parity when establishing or increasing a position if the specialist is
granted permission from the floor broker (or its customer) to do
so.\101\
---------------------------------------------------------------------------

    \99\ See NYSE Rule 92.
    \100\ See NYSE Rule 104.10(6)(i)(C).
    \101\ See NYSE Information Memo 05-81 (October 26, 2005)
(interpreting NYSE Rule 108(a) as permitting a specialist to be on
parity with orders in the Crowd when the specialist is establishing
or increasing its position, provided that the brokers representing
orders in the Crowd permit the specialist to trade along with them
by not objecting to such participation). See Securities Exchange Act
Release No. 53208 (February 2, 2006), 71 FR 6804 (February 9, 2006).
---------------------------------------------------------------------------

    In its Hybrid Market, the Exchange proposes to amend its rules that
govern priority, parity, and precedence with respect to interest placed
in the Display Book system. Generally, an incoming Auto Ex Order would
trade first with the displayed bid (offer) that established the
BBO.\102\ If the Auto Ex Order is of greater size than the bid (offer)
that has priority, the remaining balance of the Auto Ex Order would
trade with other displayed interest at the BBO.\103\ The additional
displayed interest would trade on parity.\104\ Thereafter, if the Auto
Ex Order has size remaining to be executed, it would then execute
against undisplayed specialist or floor broker reserve at the BBO,
which would trade on parity.\105\
---------------------------------------------------------------------------

    \102\ See proposed NYSE Rule 1000(d)(i). If the specialist
establishes the BBO, however, it would have to yield to all interest
in the Book.
    \103\ See proposed NYSE Rule 1000(d)(ii). As noted above, floor
brokers would not be permitted to enter interest into its floor
broker agency interest files that restricts the specialist's ability
to trade on parity. In addition, specialists would not be permitted
to trade on parity until orders in the Book at the same price are
executed in full.
    \104\ See proposed NYSE Rule 1001(a)(i).
    \105\ See proposed NYSE Rules 1000(d)(ii)(A), 70.20(c)(iv), and
104(d)(iii).
---------------------------------------------------------------------------

    The Exchange proposes that all floor broker agency interest files
at the same price be on parity with each other, except a floor broker
agency interest file that establishes the BBO would be entitled to
priority in accordance with NYSE Rule 72.\106\ Finally, with respect to
transactions against the published bid or offer, no published bid or
offer may claim precedence based on size with respect to executions
against Auto Ex Orders.\107\
---------------------------------------------------------------------------

    \106\ See proposed NYSE Rule 70.20(b).
    \107\ See proposed NYSE Rule 1001(b). This reflects the current
NYSE Rule 1001(c), which is proposed in this filing to be renumbered
as NYSE Rule 1001(b).

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

    In Amendment No. 6, the Exchange proposes to amend NYSE Rule
70.20(d)(i) to provide that, during a sweep, the amount of floor broker
agency interest that would have been displayed had the clean-up price
become the Exchange BBO would trade on parity with displayed interest
(i.e., orders on the Book) at that price.\108\ The amount of any floor
broker agency interest that would have been placed in the broker's
reserve, however, would yield to displayed interest.\109\
---------------------------------------------------------------------------

    \108\ As noted earlier, floor broker agency interest would not
be disseminated unless at the Exchange's BBO.
    \109\ See proposed NYSE Rule 70.20(d)(ii). Floor brokers would
have to indicate when entering interest in the floor broker agency
interest file the amount that would be displayed and the amount that
would be placed in reserve if the price becomes the BBO.
---------------------------------------------------------------------------

    The Exchange proposes that interest reflected in the specialist
interest file would be entitled to trade on parity with interest in the
floor broker agency interest file, regardless of whether the specialist
is increasing or decreasing its position, but, in all cases, specialist
interest would have to yield to orders in the Book. Specifically,
during a sweep, if no orders remain on the Book capable of trading at
the clean-up price, specialist interest could trade and would be on
parity with floor broker interest at that price.\110\ During a sweep,
neither the specialist interest file nor the floor broker agency
interest file could claim precedence based on size.\111\
---------------------------------------------------------------------------

    \110\ See proposed NYSE Rule 1000(d)(iii)(C)(i).
    \111\ See proposed NYSE Rule 72 I(c)-(e).
---------------------------------------------------------------------------

    The Exchange also proposes to modify NYSE Rule 72 III to add that a
cancellation of an entire bid or offer entitled to priority under the
rule would clear the floor, after which all bids and offers would be
deemed to be re-entered and on parity.\112\ The Exchange believes this
amendment is warranted because a cancellation of a bid or offer that
was entitled to priority has the same effect as a trade.
---------------------------------------------------------------------------

    \112\ Currently, a transaction ``clears the floor,'' after which
all bids and offers are deemed resubmitted simultaneously and are on
parity, except that specialists must yield to limit orders on the
Book. Cancellation of part of an order retains priority for the
uncancelled portion of such order. However, canceling an order and
replacing it with a larger order would result in a loss of priority
for the original order.
---------------------------------------------------------------------------

    To summarize, the following describes the sequence of execution
against an incoming Auto Ex Order in the Hybrid Market:

Interest at Exchange BBO

    An incoming Auto Ex Order would first trade with displayed interest
at the Exchange BBO. Within this category, the order of execution would
be:
     First, interest that clearly establishes the BBO would be
entitled to priority at that price for one trade, except that
specialist interest that clearly established the BBO would yield to all
later-arriving limit orders at the BBO on the Book. If there are no
limit orders on the Book at the BBO, specialist interest that clearly
established the BBO would be entitled to priority over the floor broker
agency interest file for one trade.
     Second, all other displayed interest at the BBO would
trade on parity, except that specialist interest displayed at the BBO
could not trade until all limit orders on the Book at the BBO are
filled. If there are no limit orders on the Book at the BBO, specialist
interest displayed at that price would trade on parity with the floor
broker agency interest files displayed at the BBO. A specialist's
ability to trade on parity with the floor broker agency interest files
would not be restricted by the specialist's proprietary position (i.e.,
the specialist would trade on parity whether establishing/increasing or
liquidating/decreasing its position).\113\
---------------------------------------------------------------------------

    \113\ However, NYSE Rule 104 would continue to restrict a
specialist's ability to trade on parity.
---------------------------------------------------------------------------

     Third, reserve interest (i.e., non-displayed interest) of
the specialist or floor broker at the BBO would trade on parity.
Additional specialist interest (i.e., other non-displayed interest
generated by the Specialist Algorithm) at the BBO would trade only if
no other interest exists at the BBO.\114\
---------------------------------------------------------------------------

    \114\ See infra Section II(B)(1) for a description of this
``additional specialist interest.''
---------------------------------------------------------------------------

Interest Outside Exchange BBO That Participates in a Sweep

     Orders on the Book outside the Exchange BBO would trade at
the clean-up price on parity with the amount of floor broker agency
interest that would have been displayed had the clean-up price become
the Exchange BBO. The amount of any floor broker agency interest that
would have been placed in the broker's reserve would yield to displayed
interest.
     Specialist interest would participate in the sweep
provided there are no limit orders on the Book remaining at the clean-
up price. Specialist interest participating in the sweep would trade on
parity with any remaining floor broker agency interest at the clean-up
price.
(b) Automated Routing Away
    In the case of all orders submitted to the Exchange electronically,
except for certain IOC orders, ITS Commitments, and Intermarket Sweep
orders, where a better bid or offer is published by another ITS
participating market center in which an automatic execution is
available, or a published bid or offer is otherwise protected from a
trade-through by Commission rule or the Intermarket Trading System
plan, and the specialist has not systematically matched the price
associated with that better bid or offer, the Exchange would
automatically route to such other market center a commitment to trade
that satisfies that published bid or offer, unless the member entering
the order indicates that it has contemporaneously satisfied the better
published bid or offer.\115\ If the commitment to trade is not filled
or not filled in its entirety, the balance would be returned to the
Exchange and handled consistent with the order's instructions, which
includes automatic execution, if available.\116\ The order entry time
associated with this returned portion of the order would be the time of
its return, not the time the order was first entered on the
Exchange.\117\ With respect to the operation of sweeps, automated bids
(offers) published by away markets that are better than the clean-up
price would be satisfied in their entirety unless the order is an IOC
order \118\ or an Intermarket Sweep order.\119\
---------------------------------------------------------------------------

    \115\ See proposed NYSE Rule 15A.50
    \116\ See id.
    \117\ See id.
    \118\ In such case, the IOC order would be cancelled by NYSE to
prevent trading through the away market.
    \119\ See proposed NYSE Rule 1000(d)(III)(D) and Rule 600(b)(30)
of Regulation NMS, 17 CFR 242.600(b)(30).
---------------------------------------------------------------------------

(c) Tick-Restricted Orders, Stop Orders, and Other Orders Eligible for
Automatic Execution
    Tick-restricted orders in the Display Book system would be filled
electronically and participate in automatic executions and sweeps as
their ticks and limits, if any, allow.\120\ Specifically, buy sweeps
would cause short sales and sell plus orders to be executed above the
offer, while sell sweeps would cause buy minus orders to be executed
below the bid. Sell short orders, other than those involving Regulation
SHO pilot securities, would not sweep the Display Book system after
automatically executing against the bid,

as the sweep transaction would occur on a minus tick.\121\
---------------------------------------------------------------------------

    \120\ Specifically, the Exchange proposes in NYSE Rule 13 that
sell ``plus'' limit orders, buy ``minus'' limit orders, sell
``plus'' market orders, and by ``minus'' market orders designated
for automatic execution that are systematically delivered to the
Display Book system be eligible to be automatically executed in
accordance with NYSE Rules 1000-1004.
    \121\ See proposed NYSE Rule 1000(d)(iii)(E); see also Amendment
No. 8.
---------------------------------------------------------------------------

    Under the proposal, stop orders (including stop limit orders) on
the Display Book system would be electronically elected and may
participate in automatic executions.\122\ Elected stop orders on the
same side of the market as the Auto Ex Order could trade at the
electing bid (offer) price after the Auto Ex Order is filled to the
extent that there is volume available.\123\ In addition, an execution
at the clean-up price could also elect stop orders. Elected stop orders
on the same side of the market as a sweeping Auto Ex Order could trade
at the clean-up price after the Auto Ex Order is filled to the extent
that there is volume available.\124\
---------------------------------------------------------------------------

    \122\ See proposed NYSE Rule 13.
    \123\ Elected stop orders on the contra side of the market of
the Auto Ex Order could trade with the Auto Ex Order at the electing
bid (offer) price after interest in the Display Book system at such
price has been filled to the extent that there is volume available
from the Auto Ex Order.
    \124\ Elected stop orders on the contra side of the market of
the Auto Ex Order could trade with the Auto Ex Order at the clean-up
price after interest in the Display Book system at such price has
been filled to the extent that there is volume available from the
Auto Ex Order.
---------------------------------------------------------------------------

    Furthermore, under proposed amendments to NYSE Rule 123A, the
elected or converted portion of a CAP-DI order could be automatically
executed and participate in a sweep. An elected or converted CAP-DI
order on the same side of the market as an automatically executed
electing order could participate in a transaction at the bid (offer)
price if there is volume associated with the bid (offer) remaining
after the electing order is filled in its entirety.\125\ An elected or
converted CAP-DI order on the same side of the market as an
automatically executed electing order that sweeps the Display Book
system could also participate in a transaction at the clean-up price if
there is volume remaining on the Display Book system or from contra-
side elected CAP-DI orders at that price.\126\ Furthermore, an elected
or converted CAP-DI order on the contra-side of the market of an
automatically executed electing order could execute against the Auto Ex
Order at the electing price if there is volume remaining after the Auto
Ex Order executes against interest in the Display Book system at the
bid (offer) price.\127\ An elected or converted CAP-DI order on the
contra-side of the market of an automatically executed electing order
that sweeps the Display Book system could execute against the Auto Ex
Order at the clean-up price if there is volume remaining from the Auto
Ex Order, from contra-side elected CAP-DI orders, or other interest at
that price.\128\ Finally, when a specialist is bidding (offering) or
trading and an automatic execution occurs against such specialist
proprietary interest, marketable CAP-DI orders on the same side as the
specialist's interest would be automatically converted to participate
in such execution.\129\ If the execution elects a contra-side stop or
stop limit order and the specialist is required to execute the elected
stop or stop limit order, then CAP-DI orders on the same side of the
market as the specialist would be automatically converted to
participate in the execution of the stop or stop limit orders.\130\
---------------------------------------------------------------------------

    \125\ See proposed NYSE Rule 123A.30(a)(i).
    \126\ See id.
    \127\ See proposed NYSE Rule 123A.30(a)(ii); see also Amendment
No. 8.
    \128\ See proposed NYSE Rule 123A.30(a)(ii); see also Amendment
No. 8.
    \129\ See proposed NYSE Rule 123A.30(a)(iii); see also Pilot
Amendment.
    \130\ See id.
---------------------------------------------------------------------------

    Stop orders and CAP-DI orders could be elected at the same time by
automatic executions and sweeps. If there is insufficient volume to
fill the elected orders, stop orders could be executed first as they
become market or marketable limit orders upon their election, whereas
the elected portion of CAP-DI orders would revert to CAP-DI status if
it is unable to trade. Elected CAP-DI orders are on parity with each
other, which could affect the sequence in which elected stop and CAP-DI
orders would trade.\131\
---------------------------------------------------------------------------

    \131\ See NYSE Rule 123A.30.
---------------------------------------------------------------------------

5. Availability of Direct+
    Current Exchange rules provide that automatic executions are
available from the time the Exchange disseminates a published bid or
offer until 3:59 p.m. for stocks and Trust Issued Receipts, or 4:14
p.m. for Investment Company Units, or within one minute of any other
closing time of the Exchange's floor market.\132\ Auto Ex Orders
entered prior to the dissemination of a bid or offer or after 3:59
p.m./4:14 p.m. or within one minute of any other closing time, are
handled in the auction market. The Exchange proposes to extend the
availability of automatic executions through the close of regular
trading for a particular product (e.g., 4 p.m./4:15 p.m.).\133\
---------------------------------------------------------------------------

    \132\ See NYSE Rule 1002.
    \133\ See proposed NYSE Rule 1002.
---------------------------------------------------------------------------

    Currently, Direct+ is not available during the trading day at the
following times: (1) When the NYSE published quotation is in the non-
firm quote mode; (2) when the execution price would be more than five
cents away from the last reported transaction price in the subject
security on the Exchange; (3) when a better price exists in another ITS
participating market center; (4) when NYSE's published bid or offer is
100 shares (on the side the order would be executed against); (5) when
a block size transaction outside NYSE's published bid or offer pursuant
to NYSE Rule 127 is in the process of being completed, in which case
the specialist should publish a bid and/or offer that is more than five
cents away from the last reported transaction price in the subject
security on the Exchange; \134\ or (6) when trading in the subject
security has been halted.\135\
---------------------------------------------------------------------------

    \134\ On January 17, 2006, the Exchange filed a proposed rule
change seeking to amend the procedure for suspending automatic
execution in connection with a block size transaction. See Form 19b-
4 dated January 17, 2006 (SR-NYSE-2006-01). The Exchange proposes to
require specialists to publish a 100 x 100 share market quote that
reflects the last reported transaction in connection with a block
size transaction.
    \135\ See NYSE Rule 100(a)(i)-(vi).
---------------------------------------------------------------------------

    NYSE proposes to limit the instances when Direct+ is
unavailable.\136\ Specifically, pursuant to proposed NYSE Rule
1000(a),\137\ automatic executions in Direct+ would not occur when: (1)
The NYSE published quotation is in non-firm quote mode; (2) trading in
a security has been halted; \138\ (3) the quote is gapped in accordance
with Exchange procedures; \139\ (4) trading on the Exchange reaches a
LRP; (5) a block size transaction, as defined in NYSE Rule 127.10,\140\
that involves

orders in the Display Book system is being manually reported; \141\ or
(6) an Auto Ex Order is entered for a security whose closing price (or
the closing bid price if there were no transactions on the previous
trading day) on the Exchange is $300 or more.\142\ Direct+ would be
unavailable on both sides of the market in these situations.\143\ NYSE
proposes to disseminate an indicator to alert investors when automatic
executions are not available against its quote. In addition, when
automatic executions are not available due to a LRP or gapped
quotation, NYSE would disseminate an indicator to signify that the NYSE
quotation is not firm.\144\ In any instance where the automatic
execution feature is not available, Auto Ex Orders would be directed to
the Exchange's auction market for representation.\145\
---------------------------------------------------------------------------

    \136\ In Amendment No. 8, NYSE proposes to remove its previously
proposed rule that would have made Direct+ unavailable when a better
price was published by an away market. As noted above, NYSE proposes
to automatically route orders, except Intermarket Sweep orders and
certain IOC orders, to ITS participant markets that make automatic
execution immediately available and are protected from trade
throughs, unless the specialist matches the better price.
    \137\ See proposed NYSE Rule 1000(a)(i)-(vi).
    \138\ No executions, either automatic or manual, would be
possible on the Exchange when trading has been halted.
    \139\ A specialist could cause a non-auto-executable quote by
gapping the quotation due to an order imbalance in accordance with
the policies and procedures of the Exchange. Gap quotes are used to
signal an imbalance so as to attract contra-side liquidity in an
attempt to mitigate volatility. The size of an imbalance suitable
for gapped quoting is at least 10,000 shares or a quantity of stock
having a value of $200,000 or more, although depending on the
trading characteristics of the security, the appropriate conditions
for gapped quoting could be higher. See NYSE Information Memo 04-27
(June 9, 2004).
    When the quotation is gapped, automatic executions and Autoquote
would be suspended, and the NYSE quote would be identified as non-
firm. Incoming orders and cancellations would update the Book
electronically. Once a trade occurs or a non-gapped quote is
published, Autoquote and automatic execution would resume.
    \140\ NYSE Rule 127.10 defines a ``block'' size as at least
10,000 shares or a quantity of stock having a market value of
$200,000 or more, whichever is less. See Amendment No. 8.
    \141\ The Exchange originally proposed to permit automatic
executions to continue while a block size transaction was manually
reported until the bid (offer) decremented to 100 shares. In
Amendment No. 8, NYSE proposes to suspend both Autoquote and
automatic executions as soon as the report template is opened by the
specialist to report a block size transaction that involves orders
on the Display Book system. See proposed NYSE Rule 60(e)(ii)(B) and
NYSE Rule 1000(a)(v).
    \142\ See proposed NYSE Rule 1000(a)(vi); see also Amendment No.
8. In addition, in Amendment No. 8, NYSE proposes to suspend
automatic executions for such securities on both sides of the
market.
    \143\ Automatic executions would be suspended on only one side
of the market when an execution at the NYSE quote would trigger the
MLRP. See proposed NYSE Rule 1000(c). See also proposed NYSE Rule
60(e)(iv)(a).
    \144\ See proposed NYSE Rule 60(c)(2)(b); see also Amendment No.
8.
    \145\ See NYSE Rule 1000(d)(v).
---------------------------------------------------------------------------

(a) Liquidity Replenishment Points
    The Exchange proposes LRPs as pre-determined price points that
would halt automatic executions for varying periods of time depending
on the price and remaining size, if any, of an Auto Ex Order. LRPs may
be triggered by a sweep or electronic trading that results in rapid
price movement over a short period. A LRP converts the electronic
market to an auction market on a temporary basis, with the intent of
moderating volatility in the security by affording an opportunity for
new orders, the Crowd, and the specialist to add liquidity. The
Exchange proposes two LRPs--a price-based or sweep LRP and a momentum
LRP.
(1) Sweep LRPs
    The sweep LRP price would be set at the nearest five-cent increment
outside the Exchange BBO, rounded away to the next nearest nickel.\146\
When a sweep LRP is reached, the sweeping order would trade at that
price to the extent of the volume available at that price. If there is
a residual remaining after a sweep that has triggered an LRP, it would
be bid (offered) at the LRP price, unless the order is NYSE IOC, IOC or
Intermarket Sweep, in which case it would be cancelled.\147\
---------------------------------------------------------------------------

    \146\ See proposed NYSE Rule 1000(a)(iv)(A).
    \147\ See proposed NYSE Rule 1000(d)(iv). If an Auto Ex Order
sweeps to its limit price and has residual remaining at the price,
the residual would be bid (offered) at its limit price.
---------------------------------------------------------------------------

    Automatic executions and Autoquote would then be suspended, but
incoming orders and cancellations would continue to be reflected
automatically in the Display Book system, although new incoming orders
would not be displayed.\148\ However, if a displayed bid (offer)
cancels, a new bid (offer) would be autoquoted.\149\
---------------------------------------------------------------------------

    \148\ See Second Notice, supra note . According to the Exchange,
the Display Book system has the ability to accept incoming orders
and cancellations when automatic executions and Autoquote are
suspended; however, only the specialist would be able to view this
information. These incoming orders and cancellations are held in the
Display Book system in the sequence that they are received, until
Autoquote and automatic executions are available.
    \149\ See proposed NYSE Rule 60(e)(iv)(c); see also Amendment
No. 8.
---------------------------------------------------------------------------

    Under the proposal, automatic executions and Autoquote would resume
in no more than five seconds when the sweeping order is filled in its
entirety (i.e., no residual exists), when the residual is cancelled
(i.e., the sweeping order is IOC), or when the residual is not capable
of trading at a price above (in the case of a buy order) or below (in
the case of a sell order) the sweep LRP (that is, when the residual has
a limit price equal to the LRP).\150\ Automatic executions and
Autoquote would resume in no more than 10 seconds when the residual is
able to trade at a price above (below) the sweep LRP, but that price
would not create a locked or crossed market.\151\ Automatic executions
and Autoquote would resume earlier if the specialist has manually
traded or quoted the market before 10 seconds have elapsed. NYSE
expects the specialist to quote or trade before 10 seconds have
elapsed, unless an imbalance exists, a trade is being put together in
the Crowd, or market conditions otherwise prevent such actions from
occurring.
---------------------------------------------------------------------------

    \150\ See proposed NYSE Rules 60(e)(ii)(C) and 1000(b); see also
Amendment No. 8.
    \151\ See id.
---------------------------------------------------------------------------

    Finally, where a residual is able to trade at a price above (below)
the sweep LRP, and that price would create a locked or crossed market,
or when a locked or crossed market results from the entry of orders or
cancellations during the 5- and 10-second periods described above,
automatic executions and Autoquote would resume with a manual trade or
the publication of a new quote by the specialist.\152\ In this
circumstance, there is no maximum time period after which automatic
executions and Autoquote would automatically resume.\153\ If the
locking or crossing residual order cancels, automatic executions and
Autoquote would resume within the relevant 5- or 10-second timeframe
described above, unless a manual trade or quote occurs before
then.\154\ If the displayed bid (offer) on the contra-side of the
locking or crossing residual order cancels, a new bid (offer) would be
autoquoted.
---------------------------------------------------------------------------

    \152\ See proposed NYSE Rules 60(e)(ii)(C) and 1000(b).
    \153\ Specialists would still be required to immediately display
customer limit orders. See Rule 604 of Regulation NMS, 17 CFR
242.604. See also proposed NYSE Rule 60(e)(ii)(C) and 60(e)(iii).
    \154\ See Second Notice, supra note 8.
---------------------------------------------------------------------------

(2) MLRPs
    The momentum LRP would be triggered by a specified price movement
over a specified period during a trading session. The Exchange is
proposing a LRP based on price movement over a period of time because
it is concerned that excessive volatility could arise in situations
other than electronic sweeps. MLRPs are designed to limit the amount of
price change that can occur within a 30-second time period to the
greater of 25 cents or 1% of the security price (rounded to the nearest
cent).
    The MLRP range at any time may be calculated as follows. First, the
low MLRP range is calculated by taking the high transaction price of
the security within the prior 30 seconds and subtracting the greater of
(a) 25 cents or (b) 1% of the security's price (rounded to the nearest
cent).\155\ Next, the high MLRP range is calculated by taking the low
transaction price of the security within the prior 30 seconds and
adding the greater of (a) 25 cents or (b) 1% of the security's price
(rounded to the nearest cent).\156\ For example, assume that during the
prior 30 seconds, the high transaction price is $20.15, the low
transaction price is $19.92, and the last sale price was $20.15. The
low MLRP range would be $19.90, calculated by subtracting $0.25 ($0.25
is greater than 1% of the security's price) from the high transaction
price of $20.15. The high MLRP range would be $20.17, calculated by
adding $0.25 to the low transaction price of $19.92. The MLRP

range could change based on an event (e.g., a new trade) or the passage
of time.
---------------------------------------------------------------------------

    \155\ See proposed NYSE rule 1000(a)(iv)(B)(ii).
    \156\ See id.
---------------------------------------------------------------------------

    If there was no transaction on the Exchange within 30 seconds, the
MLRP range would be based off the last transaction on the
Exchange.\157\ For example, if the last sale price was $20.15 and no
transactions have occurred within the prior 30 seconds, the low MLRP
range would be $19.90 and the high MLRP range would be $20.40.
Automatic executions could occur at prices at or within the MLRP range.
Automatic executions that would occur at prices outside the MLRP range
would cause the suspension of automatic executions and Autoquote. An
Auto Ex Order that reaches the MLRP price would trade at that price to
the extent possible, and thereafter automatic executions and Autoquote
would be suspended.\158\ The Display Book system would be automatically
updated by incoming orders and cancellations, although new incoming
orders would not be displayed.\159\
---------------------------------------------------------------------------

    \157\ See proposed NYSE rule 1000(a)(iv)(B)(iii).
    \158\ See proposed NYSE Rule 1000(a)(iv)(B).
    \159\ See Second Notice, supra note 8. See also supra note 148.
---------------------------------------------------------------------------

    Once automatic executions and Autoquote have been suspended due to
a MLRP, they generally would resume in no more than 10 seconds.\160\
The Exchange expects, similar to a sweep LRP, that the specialist will
trade or requote the stock in less than 10 seconds unless conditions in
the stock prevent this. Where incoming orders and cancellations cause a
locked or crossed market, Autoquote and automatic executions would
resume upon a manual transaction.\161\
---------------------------------------------------------------------------

    \160\ See proposed NYSE Rules 60(e)(iii) and 1000(b); see also
Amendment No. 8.
    \161\ See id.
---------------------------------------------------------------------------

    In addition, if the NYSE published bid or offer is at a price
beyond the MLRP range, automatic executions on that side of the market
would be suspended because an automatic execution could not occur at
that price.\162\ This is the only instance when automatic executions
would be suspended on one side of the market. Autoquote would continue,
and orders and cancellations would update the Display Book system.\163\
Automatic executions would resume when a bid or offer within the MLRP
range is autoquoted or the MLRP range changes as a result of the moving
30-second timeframe.\164\
---------------------------------------------------------------------------

    \162\ see proposed NYSE Rule 1000(c); see also Amendment No. 8.
    \163\ See supra note 148.
    \164\ See id.
---------------------------------------------------------------------------

B. Role of the Specialist in the Hybrid Market

1. Specialist Algorithms
    The Exchange proposes to allow specialists to participate
automatically in the Hybrid Market and replicate the performance of
certain specialist privileges and obligations in an electronic way. For
instance, specialists would be permitted to establish electronic
connections to the Display Book system that would provide them with
access to certain information before other market participants, and be
permitted to make a range of specified quoting and trading decisions
based on that information.
    Specifically, the Exchange proposes to provide specialists with the
ability to implement systems that use proprietary algorithms, based on
predetermined parameters, to electronically participate in the Hybrid
Market (``Specialist Algorithm'').\165\ The Specialist Algorithm would
communicate with the Display Book system via an Exchange-owned external
application program interface (``API'').\166\ The Specialist Algorithm
is intended to replicate electronically some of the activities
specialists are permitted to engage in on the floor in the auction
market, and to facilitate specialists' ability to fulfill their
obligations to maintain a fair and orderly market.
---------------------------------------------------------------------------

    \165\ See proposed NYSE Rule 104(b).
    \166\ In Amendment No. 8, the Exchange clarified that
specialists would develop Specialist Algorithms to communicate with
the Display Book system via the API.
---------------------------------------------------------------------------

    The Specialist Algorithm would receive information via the API,
including information about orders entering NYSE systems, before that
information is available to other market participants.\167\ NYSE
systems would enforce the proper sequencing of incoming orders and
algorithmically-generated messages.\168\ The Specialist Algorithm and
the specialists on the floor would not have the ability to affect the
arrival of orders at the Display Book system, or the sequence in which
orders and algorithmically-generated messages are processed by the
Display Book system.\169\ The Specialist Algorithm, however, would be
able to generate certain specified quoting and trading messages based
on the information it receives through the API. Once an algorithmic
message has been generated, it cannot be stopped, changed, or cancelled
on its way to the Display Book system.
---------------------------------------------------------------------------

    \167\ The Specialist Algorithm would have access to the
following information: (1) Specialist dealer position; (2) quotes;
(3) information about orders in the Display Book system such as
limit orders, percentage orders, stop orders, and AL orders and
market orders not designated for automatic execution (``AM orders'')
(``state of the book''); (4) any publicly available information the
specialist firm chooses to supply to the algorithm, such as the
Consolidated Quote stream; and (5) incoming orders as they are
entering NYSE systems. The Specialist Algorithm would not have
access to the following types of information: (1) Information
identifying the firms entering orders, customer information, or an
order's clearing broker; (2) floor broker agency interest files or
aggregate floor broker agency interest available at each price; or
(3) order cancellations, except for cancel and replace orders. See
proposed NYSE rule 104(c)(ii).
    \168\ See proposed NYSE Rule 104(b)(ii)(A).
    \169\ See proposed NYSE Rule 104(b)(ii)(B).
---------------------------------------------------------------------------

    The Display Book system would not accept algorithmically-generated
messages from the Specialist Algorithm when automatic executions are
unavailable except in certain specified situations.\170\ Specifically,
when automatic executions are suspended, but Autoquote is active, the
Display Book system would accept algorithmically-generated messages
from the Specialist Algorithm to generate a bid or offer that improves
the Exchange BBO or supplements the size of the existing BBO.\171\
---------------------------------------------------------------------------

    \170\ See proposed NYSE Rule 104(c)(vi).
    \171\ See proposed NYSE Rule 104(c)(vi)(i); See also Amendment
No. 8.
---------------------------------------------------------------------------

    In addition, when Autoquote and automatic executions are suspended,
the Display Book system would: (1) Process algorithmically-generated
messages to layer specialist interest outside the published Exchange
quotation and (2) permit specialists to manually layer specialist
interest at prices within a previously established locking or crossing
quotation.\172\
---------------------------------------------------------------------------

    \172\ See proposed NYSE Rule 104(c)(vi)(ii) and 104(c)(viii);
See also Amendment No. 8.
---------------------------------------------------------------------------

    Furthermore, the Display Book system would not process
algorithmically-generated messages from the Specialist Algorithm during
the time a block size transaction involving orders in the Display Book
system is being manually reported \173\ or when the messages would
trigger the automatic execution of an AL order or an AM order, or would
result in such order's execution with an existing contra-side
specialist bid or offer.\174\ However, the Display Book system would
process algorithmically-generated messages from the Specialist
Algorithm to provide price improvement to AL and AM orders in
accordance with the price improvement parameters described below.\175\
Algorithmically generated messages would not be permitted to create a

locked or crossed market \176\ and would have to comply with all SEC
and NYSE rules, policies, and procedures governing specialist
proprietary trading.\177\
---------------------------------------------------------------------------

    \173\ See proposed NYSE Rule 104(c)(v).
    \174\ See proposed NYSE Rule 104(c)(vii) and infra Section
II(D).
    \175\ See proposed NYSE Rule 104(c)(vii).
    \176\ See proposed NYSE Rule 104(c)(iv).
    \177\ See proposed NYSE Rule 104(c)(iii). NYSE has represented
that prior to the rollout of the third phase of the Hybrid Market,
it will develop guidance to clarify how it expects specialists to
comply with the NYSE Rule 104 in the Hybrid Market. Telephone call
between Catherine R. Kinney, President and Co-Chief Operating
Officer, NYSE Group, Inc. and Richard G. Ketchum, Chief Regulatory
Officer, NYSE Regulation, Inc., and Kelly M. Riley, Assistant
Director, Division, SEC, on March 22, 2006. See also Amendment No.
8.
---------------------------------------------------------------------------

(a) Quoting Messages
    The Exchange proposes to allow the Specialist Algorithm to generate
quoting messages to: (1) Supplement the size of the existing Exchange
BBO; (2) place within the Display Book system specialist reserve
interest at the Exchange BBO; (3) layer within the Display Book system
specialist interest at varying prices outside the Exchange BBO; \178\
(4) establish the Exchange BBO; and (5) withdraw previously established
specialist interest at the Exchange BBO.\179\
---------------------------------------------------------------------------

    \178\ In Amendment No. 8, NYSE proposes to permit specialists to
manually place interest in the specialist interest files at and
outside the BBO. Such interest would remain in the Display Book
system until it is traded with or cancelled. See proposed NYSE Rule
104(c)(viii); see also Pilot.
    \179\ See proposed NYSE Rule 104(b)(i)(A)-(E).
---------------------------------------------------------------------------

    A quoting message would not be able to interact with the order that
preceded it. In addition, the Specialist Algorithm could move its quote
away from the inside market only after the order it is reacting to has
been processed.
(b) Trading Messages
    The Exchange proposes to allow the Specialist Algorithm to generate
trading messages to: (1) Provide ``additional specialist volume'' to
partially or completely fill an order at the Exchange BBO; \180\ (2)
match better bids and offers published by other market centers where
automatic executions are immediately available; (3) provide price
improvement to an order, subject to the conditions outlined below; and
(4) trade with the Exchange published quotation `` that is, ``hit
bids'' or ``take offers.'' \181\
---------------------------------------------------------------------------

    \180\ Specialists could supply additional trading volume at the
BBO beyond the amount in the specialist's reserve, if any. The
Exchange proposes to amend NYSE Rule 104 to provide that this
additional volume, which is not part of the reserve and which is not
displayed, could complete an order, thereby providing a single-
priced execution, or partially fill the remainder of the order. See
proposed NYSE Rule 104(b)(i)(F). Additional specialist volume would
yield to displayed and reserve interest.
    \181\ See proposed NYSE Rule 104(b)(i)(F)-(I).
---------------------------------------------------------------------------

    The generation of algorithmic messages to trade in response to a
particular order does not guarantee that the specialist would be able
to interact with that order or that the specialist has priority in
trading with that order.\182\ For example, specialist interest may not
trade with the order identified by the algorithmic message because the
specialist's message did not arrive in the Display Book system in time
or the specialist has to yield to the Book. Such interest would be
automatically cancelled.\183\
---------------------------------------------------------------------------

    \182\ See proposed NYSE Rule 104(c)(i)(C).
    \183\ See proposed NYSE Rule 104(c)(i)(D).
---------------------------------------------------------------------------

(1) Specialists' Ability To Systematically Price Improve Incoming
Orders
    The Specialist Algorithm would enable specialists, on behalf of
their dealer accounts, to electronically provide price improvement to
all or part of a marketable incoming order, including an AL order or AM
order,\184\ provided the following conditions are met: (i) The
specialist is represented in a ``meaningful amount'' in the bid with
respect to price improvement provided to an incoming sell order, or in
the offer with respect to price improvement provided to an incoming buy
order; and (ii) the price improvement provided by the specialist is (a)
at least three cents where the quotation spread is more than five
cents, (b) at least two cents where the quotation spread is three,
four, or five cents, or (c) one cent where the quotation spread is two
cents.\185\ NYSE proposes to define the term ``meaningful amount'' as
at least 1,000 shares for the 100 most active securities on the
Exchange based on average daily volume and at least 500 shares for all
other securities on the Exchange.\186\ Specialist systematic price
improvement would only be available for incoming orders that are
marketable (i.e., that can trade with the published bid or offer).\187\
In addition, the Exchange proposes to amend NYSE Rule 123A.30 to
provide for systematic conversion of marketable CAP-DI orders
previously entered with the specialist to allow these orders to
participate on parity with the specialist when the specialist is price
improving an incoming order.\188\
---------------------------------------------------------------------------

    \184\ Specialist Algorithms could price improve AL orders and AM
orders, consistent with the requirements noted above, by generating
a message to trade with the AL or AM order before it is processed by
the Display Book system, or executing the AL or AM order at its
quoted price once the order has been processed by the Display Book
system. Algorithmic messages that would trigger the automatic
execution of AL or AM orders or that would result in such orders
trading with the specialist's existing contra-side bid or offer
would be prohibited. See proposed NYSE Rule 104(c)(vii).
    \185\ See proposed NYSE Rule 104(e)(i)(A)-(D).
    \186\ See proposed NYSE Rule 104(e)(ii); see also Amendment No.
8. NYSE would disseminate a list of the 100 most active securities
on a quarterly basis, or more frequently as the Exchange may
determine from time to time. See proposed NYSE Rule 104(e)(ii).
    \187\ See proposed NYSE Rule 104(e)(i). With respect to incoming
orders that are not marketable (i.e., those orders that would
establish a new best bid or best offer), the specialist could not
trade with such order until the new bid or offer is publicly
disseminated.
    \188\ See proposed NYSE Rule 123A.30(a)(iii).
---------------------------------------------------------------------------

(2) Specialists' Ability To Hit Bids or Take Offers
    Specialists' messages to trade with the Exchange published quote
must include information that indicates the quote has been publicly
disseminated.\189\ In addition, to ensure that a specialist's
algorithmic message to trade with the Exchange published quotation does
not possess any speed advantage in reaching the Display Book system,
Exchange systems would process such messages in a manner that gives
specialists and other market participants a similar opportunity to
trade with the Exchange's published quotation, by delaying the
processing of this type of trading message from the Specialist
Algorithm.\190\
---------------------------------------------------------------------------

    \189\ See proposed NYSE Rule 104(c)(i)(A).
    \190\ See proposed NYSE Rule 104(b)(ii). Based upon the average
transit time from the Common Message Switch (CMS) system to the
Display Book system, the Exchange would determine the appropriate
amount of time to delay the processing of algorithmic messages to
trade with the Exchange published quotation. The delay parameter
would be adjusted periodically to account for changes to the average
transit time resulting from capacity and other upgrades to Exchange
systems. See Third Notice, supra note 11.
---------------------------------------------------------------------------

2. Limitations on Members' Trading Because of Customers' Orders--NYSE
Rule 92
    NYSE Rule 92(a) generally prohibits members from causing the entry
of an order to buy (sell) any Exchange-listed security for any account
in which such member is directly or indirectly interested, if the
person responsible for entering such order has knowledge of any
particular unexecuted customer's order to buy (sell) such security
which could be executed at the same price. The Exchange has proposed to
amend NYSE Rule 92 to reflect the operation of the Specialist
Algorithm.
    Specifically, NYSE proposes that the specialist would not be deemed
to have knowledge about a particular incoming order that is viewed by
the Specialist Algorithm until such incoming order is ``processed'' by
the Specialist Algorithm.\191\ According to the Exchange, there may be
times when the Specialist Algorithm could ``possess'' more than one
order at the same time.

In addition, there could be times when a permissible algorithmic
message has been generated, but before such message has been processed
by the Display Book system, the Specialist Algorithm has ``read'' or
``is reading'' a new incoming order. This new order could be priced at
the same price as the algorithmically-generated order or otherwise be
able to trade with the order to which the algorithmic message reacted,
but, as a result of proper time sequencing within the Display Book
system, the algorithmic message would be processed before the new
incoming order. NYSE has proposed to amend Rule 92 to provide that, if
the Specialist Algorithm is designed and operated in a manner that
prevents a quoting or trading message generated in response to an order
from being affected by the receipt of a subsequent order, then for
purposes of Rule 92, the specialist would not be deemed to have
knowledge of the subsequent order.\192\
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    \191\ See proposed NYSE Rule 92.15. See also Amendment No. 7.
    \192\ See id.
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3. Policy for Communicating With the Specialist Algorithm
    NYSE proposes to permit specialists on the floor to control the
Specialist Algorithms.\193\ For example, specialists could activate or
deactivate the firm's algorithms or adjust the firm's pre-set
parameters that guide an algorithm's decision-making.\194\ Specialists
would not, however, have the ability to prevent the processing by the
Display Book system of an algorithmically-generated message. NYSE
proposes to allow specialists to interact with the Specialist Algorithm
via a wired or wireless device that has been registered with the
Exchange, such as a computer terminal or laptop. Each specialist firm
would be required to certify, in the time, frequency, and manner
prescribed by the Exchange, that such wired or wireless devices operate
in accordance with all SEC and Exchange rules, policies, and
procedures.\195\ In addition, specialists would be required to create
and maintain records of all messages generated by the firm's wired or
wireless devices.\196\
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    \193\ See proposed NYSE Rule 36.30.
    \194\ See id. See also proposed NYSE Rule 104(g).
    \195\ See proposed NYSE Rule 36.30; see also Amendment No. 8.
    \196\ See id.
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4. Specialist Algorithm Record Requirements
    Every algorithmically-generated message generated by the Specialist
Algorithm would have to include a code identifying the reason for the
algorithmic action (e.g., ``match ITS,'' ``price improvement,'' ``hit
bid,'' etc.), the unique identifiers of the order to which the
algorithmically-generated message is reacting (if any), the order
immediately preceding the generation of the algorithmically-generated
message, and any other information the Exchange may require.\197\ The
Exchange would automatically cancel algorithmically-generated messages
that are unable to interact with the order or quotation identified by
the message, where the reason code and the proposed algorithmic action
are inconsistent, where message activity would create a locked or
crossed market, where the identifiers described above are not included,
and in other similar situations.\198\
    Furthermore, the Exchange would require that each specialist firm
maintain an electronic log of all algorithmically-generated messages,
including the date and time of each algorithmically-generated message
and such other information as the Exchange shall designate.\199\ Such
log would have to be maintained in accordance with SEC and Exchange
rules regarding books and records, and be capable of being provided to
the Exchange upon request, in such time and in such format as the
Exchange shall designate.\200\ In addition, each specialist firm would
be required to notify the Exchange in writing, within such time as the
Exchange shall designate, whenever its Specialist Algorithm or an
individual algorithm is not operating and the time, cause, and duration
of such non-operation.\201\ Finally, each specialist would be required
to have an independent third party auditor review, on an annual basis,
all Specialist Algorithms to ensure that they operate in accordance
with all SEC and Exchange rules, policies, and procedures.\202\
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    \197\ See proposed NYSE Rule 104(c)(i).
    \198\ See proposed NYSE Rule 104(c)(i)(D).
    \199\ See proposed NYSE Rule 104(f)(i). NYSE Rule 132A requires
members and member firms to synchronize the business clocks they use
to record dates and times of any event the Exchange requires to an
Exchange-designated time source.
    \200\ See id.
    \201\ See proposed NYSE Rule 104(f)(ii)
    \202\ The Exchange would have the right to request originals and
copies of any report, notes, analysis, documents, and similar types
of materials prepared by the independent auditor. See proposed NYSE
Rule 104(h); see also Amendment No. 8.
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C. Proposal To Make Direct+ Permanent

    Direct+ was originally approved as a one-year pilot program ending
on December 21, 2001.\203\ The pilot was subsequently extended for five
additional one-year periods, and is currently scheduled to end on
December 23, 2006.\204\ The Exchange proposes to make Direct+
permanent.\205\
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    \203\ See Securities Exchange Act Release No. 43767 (December
22, 2000), 66 FR 834 (January 4, 2001).
    \204\ See Securities Exchange Act Release Nos. 45331 (January
24, 2002), 67 FR 5024 (February 1, 2002); 46906 (November 25, 2002),
67 FR 72260 (December 4, 2002); 48772 (November 12, 2003), 68 FR
65756 (November 21, 2003); 50828 (December 9, 2004), 69 FR 75579
(December 17, 2004); and 53014 (December 22, 2005), 70 FR 77228
(December 29, 2005).
    \205\ This would also have the effect of superseding four
filings that have been approved by the Commission during the Direct+
pilot, which were made part of the pilot. See Securities Exchange
Act Release Nos. 47024 (December 18, 2002), 67 FR 79217 (December
27, 2002); 47353 (February 12, 2003), 68 FR 8318 (February 20,
2003); 47463 (March 7, 2003), 68 FR 12122 (March 13, 2003); and
47614 (April 2, 2003), 68 FR 17140 (April 8, 2003).
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D. Auction Limit Orders and Auction Market Orders

    While NYSE has proposed to significantly increase the availability
of Direct+, it would still retain its auction market on the floor.
Investors would be able to submit orders to floor brokers for
representation on the floor (or in the electronic market if the floor
broker sends this interest to the floor broker agency interest file).
Investors also would be able to submit certain order types
electronically through DOT that would be represented by the specialist
to seek price improvement opportunities.
    Specifically, NYSE has proposed one new order type--AL orders, and
has proposed to amend its rules governing the execution of market
orders that are not designated as auto ex eligible, i.e., AM
orders.\206\ Specialists would represent these orders in the auction
market, where the Crowd or Auto Ex Orders could offer an opportunity
for execution at a price better than the Exchange BBO, while retaining
as a backup the possibility of automatic execution in case the floor is
unable to offer price improvement promptly.
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    \206\ See proposed NYSE Rule 13.
---------------------------------------------------------------------------

    Under the proposal, AL and AM orders would be automatically
executed when they arrive at the Display Book system if the Exchange
quotation is at the minimum variation of one cent.\207\ Where a better
bid (offer) is published by another ITS participating market center in
which an automatic execution is immediately available and such better
bid (offer) creates a minimum variation market compared with the
Exchange best offer (bid), an AL or AM order (or the requisite portion
thereof) would be automatically routed to such other market center for
execution, unless the

specialist matches the price of the better away offer (bid).\208\
---------------------------------------------------------------------------

    \207\ See proposed NYSE Rule 123F(a)(i)(A) and (b)(ii)(A).
    \208\ See proposed NYSE Rule 123F(a)(i)(B) and (b)(ii)(B).
---------------------------------------------------------------------------

    If not automatically executed or routed away upon entry, AM orders
to buy and AL orders to buy with a limit price that is at or above the
Exchange best offer when they reach the Display Book system would be
autoquoted the minimum variation better than the Exchange best bid,
thereby becoming the Exchange best bid.\209\ Similarly, AM orders to
sell and AL orders to sell with a limit price that is at or below the
Exchange best bid when they reach the Display Book system would be
autoquoted the minimum variation better than the Exchange best offer,
thereby becoming the Exchange best offer.\210\ The size associated with
the bid or offer would be the size of the AL or AM order.\211\ The size
of subsequent AL and AM orders on the same side of the market would be
aggregated in the bid (offer) and executed based on time priority,
consistent with AL orders' limit prices.\212\
---------------------------------------------------------------------------

    \209\ See proposed NYSE Rule 123F(a)(ii) and (b)(iii).
    \210\ See id.
    \211\ See id.
    \212\ See id.
---------------------------------------------------------------------------

    An AL or AM order could miss the market while attempting to obtain
price improvement,\213\ but according to the Exchange, electronic
representation should limit that possibility. Once on the Book, an AL
or AM order could participate in any execution, including automatic
executions and sweeps. Furthermore, if an AL or AM order has not been
executed within 15 seconds after reaching the Display Book system, it
would automatically execute (i.e., buy orders would execute against the
displayed offer, and sell orders would execute against the displayed
bid),\214\ provided Autoquote and automatic executions are
available.\215\ In addition, three events would cause automatic
execution of an AL or AM order before 15 seconds has elapsed. The three
events are: (i) The arrival of a subsequent order at a better price on
the same side of the market as an AL or AM order; (ii) the execution of
an order on the same side of the market as an AL or AM order that
exhausts some or all of the displayed contra-side volume available in
the Exchange quotation; and (iii) the cancellation of some or all of
the displayed contra-side volume, or the improvement of the displayed
contra-side price that creates a minimum variation market or allows
execution of the AL or AM order with price improvement.\216\ In these
situations, the order causing the AL or AM order to automatically
execute would trade first.\217\ If a trade that causes an automatic
execution of an AL or AM order also elects stop orders and CAP-DI
orders, the AL and AM orders would execute first because they are
executable at the time of entry (but seek an opportunity for price
improvement), and CAP-DI and stop orders would execute after the AL and
AM orders because they are contingent orders that are not executable
until elected.
---------------------------------------------------------------------------

    \213\ See proposed NYSE Rule 123F(a)(iv) and (b)(v).
    \214\ See proposed NYSE Rule 123F(a)(iii)(D) and (b)(iv)(D).
    \215\ If another market displays a price better than the AL or
AM orders, the Exchange would execute the AL or AM order at a price
(consistent with the AL order's limit) that matches the immediately
accessible better away quote. See proposed NYSE Rule 123F(a)(i)(C)
and (b)(ii)(C); see also Amendment No. 8.
    \216\ See proposed NYSE Rule 123F(a)(iii)(A)-(C) and (b)(iv)(A)-
(C).
    \217\ As noted above, a Specialist Algorithm trading message
cannot cause the automatic execution of an AL or AM order. See
proposed NYSE Rule 104(c)(vii).
---------------------------------------------------------------------------

    An AL order to buy with a limit price that is not at or above the
Exchange best offer when it reaches the Book or an AL order to sell
with a limit price that is not at or below the Exchange best bid when
it reaches the Book, would be displayed on the Book at its limit
price.\218\ An AL order that is unable to automatically execute because
of its limit price would be handled as a regular limit order.\219\
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    \218\ See proposed NYSE Rule 123F(a)(v).
    \219\ See id.
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E. Other Changes

1. Intermarket Sweep Order
    To implement the requirements of Regulation NMS,\220\ the Exchange
proposes to amend NYSE Rule 13 to adopt another new order type--the
Intermarket Sweep order. An Intermarket Sweep order would be a limit
order designated for automatic execution in a particular security that
meets the following requirements: (1) It is identified as an
Intermarket Sweep order in the manner prescribed by the Exchange; and
(2) simultaneously with the routing of the Intermarket Sweep order to
the Exchange, one or more additional limit orders, as necessary, are
routed to execute against the full displayed size of any protected bids
(offers).\221\ These additional routed orders would have to be marked
as intermarket sweep orders. Intermarket Sweep orders would be
automatically executed upon receipt against the displayed bid (offer)
and would then sweep the Display Book system. Any portion not executed
would be immediately and automatically cancelled. Intermarket Sweep
orders would be identified as such on the Consolidated Tape.
---------------------------------------------------------------------------

    \220\ 17 CFR 242.600(b)(30).
    \221\ See proposed NYSE Rule 13.
---------------------------------------------------------------------------

2. Record of Orders/Order Tracking
    The Exchange proposes in NYSE Rule 123(e) that no order may be
represented for execution on the floor or placed in a floor broker
agency interest file within the Display Book system unless certain
details of the order and the floor broker agency interest file have
been first recorded in an electronic system on the floor. Furthermore,
the floor member would have to identify which orders or portions
thereof are being made part of the floor broker agency interest file.
Since NYSE Rule 123(e)(7) provides that the type of order be designated
and recorded, the Exchange proposes that AL orders and auto ex market
orders be added to this rule.
    NYSE Rule 132B prescribes requirements and procedures with respect
to orders in any security listed on the Exchange received or originated
by a member. It requires a member to immediately record data elements
as detailed in the rule. If an order is transmitted to another member
or is transmitted to another department of the same member, or is
modified or cancelled, information detailed in the rule must be
recorded. Additionally, the recipient of the order must record the
order details as provided in the rule.
    The Exchange proposes similar changes to NYSE Rule 132B(b)(9) with
regard to the designation of an order as in proposed NYSE Rule
123(e)(7). Furthermore, NYSE Rule 132B(a)(1)(D) is proposed to be
amended to require that members and member organizations identify which
orders or portions thereof are being made part of the floor broker
agency interest file pursuant to such procedures as required by the
Exchange. This would conform NYSE Rule 132B with changes made to NYSE
Rule 123(e).
3. NYSE Rule 91
    NYSE Rule 91 includes transaction confirmation requirements in
instances in which the specialist participates in a transaction as both
principal and agent. The Exchange sought and received Commission
approval \222\ of its interpretation that NYSE Rule 91 does not apply
where the specialist is the contra-party to an automatic execution, as
the specialist does not accept an Auto Ex Order for execution or act as
agent in the execution of such order. NYSE

proposes to extend this interpretation to its Hybrid Market.
---------------------------------------------------------------------------

    \222\ See supra note 203.
---------------------------------------------------------------------------

F. Hybrid Market Implementation Plan

    The Exchange proposes to implement the Hybrid Market in five phases
over a period of months.\223\ The Exchange believes that this would
help ensure proper functioning of the Exchange, specialists, floor
brokers, vendor-based systems, and Hybrid Market-related
functionalities, and would promote the seamless integration of Hybrid
Market facilities into the marketplace. In addition, the phased
implementation plan would provide time for market participants to
become familiar with the different functions and features, so that they
would be adequately prepared to employ them properly once the Hybrid
Market is fully functional. Within each phase, the various functions
that would become operational during that phase would be made available
over a period of several weeks.
---------------------------------------------------------------------------

    \223\ See Amendment No. 8. In Amendment No. 8, the Exchange
modified the implementation plan by moving: (1) Floor brokers'
ability to exclude their interest in the floor broker agency
interest file from the aggregate information available to the
specialist from Phase 2 to Phase 4; (2) the ability of floor brokers
to hide their reserve interest from the specialist from Phase 2 to
Phase 4; (3) the specialist's ability to disseminate information
regarding its layered interest via OpenBook or another Exchange data
distribution channel from Phase 2 to Phase 4; (4) the availability
of sweeps, LRPs, and AL/AM orders from Phase 3 to Phase 4; (5) the
availability of Intermarket Sweep orders and use of indicators to
identify executions involving an Intermarket Sweep order from Phase
3 to Phase 4; and (6) the implementation of new Display Book system
templates and programming that will eliminate the suspension of
Autoquote and automatic executions from Phase 4 to Phase 5, and by
adding: (1) The specialist's ability to manually enter reserve
interest to Phase 4 and (2) the availability of IOC (consistent with
Regulation NMS) orders for automatic executions to Phase 4.
---------------------------------------------------------------------------

    In Amendment No. 8, the Exchange committed to provide notice to its
members and others using its facilities, through information memoranda
and its Web site, of the specific rules that would be effective during
each phase.
1. Phase 1--Floor Broker Agency Interest Files, Specialist Interest
Files, and Systematic Integration of Priority, Parity, and Yielding
Requirements
    During the first phase of implementation, the Exchange contemplates
activating the floor broker agency interest file to permit floor
brokers to enter their interest at or outside the BBO. This would
enable floor brokers to gain experience using this tool. Floor brokers
would be able to populate the reserve file; however, the reserve file
would be visible to the specialist in this phase. The feature
permitting floor brokers to exclude their interest from the aggregate
information available to the specialist would not be available in this
phase; the Exchange contemplates making the exclusion feature
operational in Phase 4. In addition, commencing in Phase 4, floor
broker reserve interest would not be visible to the specialist if
chosen as an option by the floor broker.
    Specialists would be able to manually layer their interest at and
outside the BBO during the first phase. However, they would not be able
to disseminate this information via OpenBook or another Exchange data
distribution channel until Phase 4. The API would not be activated
during Phase 1; accordingly, specialists would not be able to use
Specialist Algorithms to layer their interest or to otherwise trade or
quote, nor would the specialists' reserve capability be operational.
    During Phase 1, the systematic programming of priority, parity, and
yielding requirements, other than the yielding requirements for
additional specialist interest, would be completed, enabling ``G''
order interest to be included in the floor broker agency files and to
be handled by the Display Book system. Other system changes would be
made to enhance systematic reporting of transactions and associated
audit trail, such as eliminating specialist responsibility for
allocation of volume in automatic executions.\224\ Finally, the
Exchange would implement the automation of CAP-DI orders and stop or
stop limit orders.
---------------------------------------------------------------------------

    \224\ See NYSE Rule 1001(a)(3).
---------------------------------------------------------------------------

    During Phase 1, Direct+ would continue to operate as it does under
the current rules and would be subject to the same restrictions and
availability as set forth in NYSE Rules 1000--1005. Accordingly, the
Exchange anticipates that most trading would continue to be effected in
the auction market, subject to the same rules and conditions as trading
on the Exchange today. The Exchange began testing the Phase 1 functions
for 168 securities in the Pilot.\225\ Upon approval of the Hybrid
Market, the Exchange would implement Phase 1 for all its
securities.\226\
---------------------------------------------------------------------------

    \225\ See Pilot. See Section II(G), supra, for a discussion of
the Pilot.
    \226\ See Amendment No. 8.
---------------------------------------------------------------------------

2. Phase 2--API and Specialist Algorithms
    Phase 2 would see the introduction of the API and Specialist
Algorithm. During this phase, the specialist's systematic trading and
quoting abilities would become operational. For example, the specialist
would be able to provide algorithmic price improvement pursuant to the
formula described in the proposal, regardless of the size of the
incoming order. Algorithmic trading with the bid and offer, algorithmic
ability to make new bids and offers and to withdraw previously made
bids and offers, to add size to an existing bid and offer, to match