Federal Register: July 21, 2006 (Volume 71, Number 140)
DOCID: FR Doc E6-11581
SECURITIES AND EXCHANGE COMMISSION
Securities and Exchange Commission
DOCUMENT ID: [Release No. 34-54150; File No. SR-NYSE-2006-36]
NOTICE: NOTICES
ACTION: Self-regulatory organizations; proposed rule changes:
SUBJECT CATEGORY:
Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change and Amendment Nos. 1 and 2 Thereto Relating to Exchange Rule 70 To Provide Floor Brokers With the Ability To Enter Discretionary Instructions and/or Pegging Instructions With Respect to Floor Broker Agency Interest Files (e-Quotes)
DOCUMENT SUMMARY:
July 14, 2006.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b4 thereunder,\2\ notice is hereby given that
on May 16, 2006, the New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. On June
14, 2006, NYSE filed Amendment No. 1 to the proposed rule change.\3\ On
July 11, 2006, NYSE filed Amendment No. 2 to the proposed rule
change.\4\ The Commission is publishing this notice to solicit comments
on the proposed rule change, as amended, from interested persons. \1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b4.
\3\ In Amendment No. 1, NYSE proposed additional changes and clarifications to the proposal.
\4\ Amendment No. 2 supersedes and replaces the original proposed rule change and Amendment No. 1 in its entirety.
I. SelfRegulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange proposes to amend Exchange Rule 70 to reflect that
Floor brokers will have the ability to enter discretionary instructions
(``dQuotes'') with respect to their Floor broker agency interest files
(``eQuotes'') and that their eQuotes and dQuotes will be able to peg
to the Exchange best bid and offer. The Exchange also proposes to amend
NYSE Rules 70.20, 123(e), 104, and 1000. Below is the text of the
proposed rule change, as amended. Proposed new language is italicized; proposed deletions are in brackets.
* * * * *
Bids and Offers
Rule 70
.20 (a)(i) With respect to orders he or she is representing on the
Floor, a Floor broker may place within the Display Book[supreg] system
broker agency interest files at multiple price points on both sides of
the market at or outside the Exchange best bid and offer with respect
to each security trading in the [location(s) comprising the] Crowd such
Floor broker is a part of, [with respect to orders he or she is
representing on the Floor,] except that the agency interest files shall
not include any customer interest that restricts the specialist's
ability to be on parity pursuant to Exchange Rules 104.10(6)(i)(C) and
108(a). Broker agency interest files shall also be referred to as ``e Quotes\SM\''.
* * * * *
(b) All Floor broker agency interest placed within files in the
Display Book[supreg] system at the same price and on the same side
shall be on parity with each other, except agency interest that
establishes the Exchange best bid or offer shall be entitled to
priority in accordance with Exchange Rule 72. No Floor broker agency
interest placed within files in the Display Book[supreg] system shall be entitled to precedence based on size.
* * * * *
(j)(i) Floor broker agency interest placed within files may
participate in the opening and closing trades in accordance with
Exchange policies and procedures governing the open and close. * * * * *
(k) The ability of a Floor broker to have reserve interest will not
be available during the open and during the close. During the close, a
Floor broker's reserve interest, if any, will be added to the size of
his or her displayed agency (``eQuoted'') interest. The ability of a
Floor broker to exclude volume from aggregated agency interest
information available to the specialist will not be available during
the open. Floor broker agency interest excluded from the aggregate
agency interest information available to the specialist will not participate in the close.
.25 Discretionary Instructions for Bids and Offers Represented via Floor Broker Agency Interest Files (eQuotes\SM\)
(a)(i) A Floor broker may enter discretionary instructions as to
size and/or price with respect to his or her eQuotes (``discretionary
eQuotes'' or ``dQuotes''). The discretionary instructions relate to
the price at which the dQuote may trade and the number of shares to which the discretionary price instructions apply.
(ii) Discretionary instructions are active only when the eQuote is at or
[[Page 41497]]
joins the existing Exchange best bid or best offer or would establish a new Exchange best bid or offer.
(iii) Discretionary instructions are active only with respect to
automatic executions. Discretionary instructions are not active with respect to the opening and closing transactions.
(iv) Discretionary instructions will be applied only if all d
Quoting prerequisites are met. Otherwise, the dQuote will be handled
as a regular eQuote, notwithstanding the fact that the Floor broker
has designated the eQuote as a dQuote. For example, to be considered
a discretionary eQuote, an eQuote must have a discretionary price range.
(v) The requirements for eQuotes apply to dQuotes, including the requirement that the Floor broker be in the Crowd.
(vi) A Floor broker may have multiple dQuotes, with different
discretionary price and size limitations, on the same side of the
market. Such multiple dQuotes do not compete with each other for
executions. Trading volume is allocated by Floor broker, not number of dQuotes participating in an execution.
(vii) Discretionary instructions apply to both displayed and
reserve interest, including reserve interest that is excluded from the
aggregate reserve size visible to the specialist on the Floor.
(viii) Neither the specialist on the Floor nor the specialist
system employing algorithms will have access to the discretionary
instructions entered by Floor brokers with respect to their eQuotes. (b) Price Discretion
(i) A Floor broker may set a discretionary price range within the
Exchange best bid and offer that specifies the prices at which they are
willing to trade. This discretion will be used, as necessary, to
initiate or participate in a trade with an incoming order capable of trading at a price within the discretionary price range.
(ii) The minimum price range for a discretionary eQuote is the minimum price variation set forth in Exchange Rule 62.
(iii) Floor brokers may specify that price discretion applies to
all or only a portion of their dQuote. Price discretion is necessary
for dQuotes. Therefore, if price discretion is provided for only a
portion of the dQuote, the residual will be treated as an eQuote.
(iv) When price discretion is used, dQuotes trade first from reserve volume, if any, and then from displayed volume.
(c) Discretionary Size
(i) A Floor broker may designate the amount of his or her eQuote
volume to which discretionary price instructions shall apply.
(ii) A Floor broker may designate a minimum and/or maximum size of contraside volume with which it is willing to trade using
discretionary price instructions.
(iii) Only displayed interest will be used by Exchange systems to
determine whether the size of contraside volume is within the d
Quote's discretionary size range. Contraside reserve and other
interest at the possible execution price will not be considered by Exchange systems when making this determination.
(iv) Interest displayed by other market centers at the price at
which a dQuote may trade will not be considered by Exchange systems
when determining if the dQuote's minimum and/or maximum size range is
met, unless the Floor broker designates that such away volume should be included in this determination.
(v) An increase or reduction in the size associated with a
particular price that brings the contraside volume within a dQuote's
minimum or maximum discretionary size parameter, will trigger an execution of that dQuote.
(vi) Once the total amount of a Floor broker's discretionary volume
has been executed, the dQuote's discretionary price instructions will
become inactive and the remainder of that dQuote will be treated as an eQuote.
(d) Executions of Discretionary eQuotes
(i) The goal of discretionary eQuoting is to secure the largest
execution for the dQuote, using the least amount of price discretion.
In so doing, dQuotes may often improve the execution price of incoming
orders. Conversely, if no discretion is necessary to accomplish a trade, none will be used.
(A) Future executions that may occur, such as those resulting from
the execution of elected contraside CAPDI orders, will not be
considered in determining when, and to what extent, price discretion is necessary to accomplish a trade.
(ii) Discretionary eQuotes will automatically execute against a
contraside order that enters the Display Book [supreg] system if the
order's price is within the discretionary price range and the order's
size meets any minimum or maximum size requirements that have been set for the dQuote.
(iii) Discretionary eQuotes from different Floor brokers on the
same side of the market with the same price instructions trade on parity after interest entitled to priority is executed.
(iv) Sameside dQuotes from different Floor brokers compete for an
execution, with the most aggressive price range (e.g. three cents vs.
two cents) establishing the execution price. If an incoming order
remains unfilled at that price, executions within the less aggressive price range may then occur.
(v) Discretionary eQuotes compete with sameside specialist
algorithmic trading messages targeting incoming orders. If the price of
dQuotes and specialist trading messages are the same, the dQuotes and the specialist messages will trade on parity.
(vi) Discretionary eQuotes from Floor brokers on opposite sides of
the market will be able to trade with each other. The dQuote that
arrived at the Display Book[supreg] system last will use the most
discretion necessary to effect a trade, except as provided below.
(A) When a protected bid or offer, as defined in Section
242.600(b)(57) of Regulation NMS (``Reg. NMS''), is published by
another market center at a price that is better than the price at which
contraside dQuotes would trade in accordance with (vi) above, the following applies:
(1) the amount of discretion necessary to permit a trade on the
Exchange consistent with the Order Protection Rule (Section 242.611 of Reg. NMS) (``OPR'') will be used; or
(2) such portion of the appropriate dQuote as is necessary will be
automatically routed in accordance with OPR in order to permit a trade to occur on the Exchange.
(vii) As with all executions on the Exchange, executions involving dQuotes will comply with OPR.
(viii) Discretionary eQuotes may provide price improvement to and
trade with an incoming contraside specialist algorithmic trading
message to ``hit bid/take offer,'' just as they can with any other marketable incoming interest.
(ix) Discretionary eQuotes may initiate sweeps in accordance with
and to the extent provided by Exchange Rules 10001004, but only to the
extent of their price and volume discretion. Discretionary eQuotes may
participate in sweeps initiated by other orders but, in such cases, their discretionary instructions are not active.
(A) dQuotes will not trade at a price that would trigger a
liquidity replenishment point (``LRP'') as defined in Exchange Rule
1000. Accordingly, a sweep involving a dQuote will always stop at least one cent before an LRP price.
[[Page 41498]]
.26 Pegging for dQuotes and eQuotes
(i) An eQuote, other than a ticksensitive eQuote, may be set to
provide that it will be available for execution at the Exchange best
bid (for an eQuote that represents a buy order) or at the Exchange
best offer (for an eQuote that represents a sell order) as the
Exchange best bid or offer changes, so long as the Exchange best bid or offer is at or within the eQuote's limit price.
(ii) A dQuote may also employ pegging.
(iii) Pegging is only active when autoquoting is active.
(iv) Pegging eQuotes and dQuotes trade on parity with other
interest at the Exchange best bid or offer after interest entitled to priority is executed.
(v) Pegging is reactive. An eQuote or dQuote will not establish
the Exchange best bid or best offer as a result of pegging.
(vi) Price priority cannot be established by pegging, although
existence of pegging instructions does not preclude an eQuote or d Quote from having priority.
(vii) Pegging eQuotes and dQuotes peg only to other nonpegging
interest within the pegging range selected by the Floor broker.
(viii) An eQuote or dQuote will not sustain the Exchange best bid
or best offer as a result of pegging if there is no other nonpegged
interest at that price and such price is not the eQuote's or dQuote's limit price.
(A) If the lowest quotable price established by the Floor broker
for a pegging eQuote or dQuote to buy is the Exchange best bid and
all other interest at that price cancels or is executed, the pegging e
Quote or dQuote will remain displayed at that best bid price.
(B) If the highest quotable price established by the Floor broker
for a pegging eQuote or dQuote to sell is the Exchange best offer and
all other interest at that price cancels or is executed, the pegging e
Quote or dQuote will remain displayed at that best offer price.
(ix) A Floor broker may establish a price range for an eQuote or
dQuote, beyond which the pegging function will not be available (``quote,'' ``ceiling'' and ``floor'' prices).
(A) The ``quote price'' is the lowest price to which a buy eQuote
or dQuote may peg or the highest price to which a sell eQuote or d Quote may peg.
(B) The ``ceiling price'' is the highest price to which a buyside eQuote or dQuote may peg.
(C) The ``floor price'' is the lowest price to which a sellside e Quote or dQuote may peg.
(D) A quote, ceiling and floor price may be at a price other than
the limit price of the order that is being eQuoted or dQuoted, but may not be inconsistent with the order's limit.
(x) As long as the Exchange best bid is at or within the pegging
price range selected by the Floor broker with respect to a buyside e
Quote or dQuote, or the Exchange best offer is within the price range
selected by the Floor broker with respect to a sellside eQuote or d
Quote, the pegging eQuote or dQuote will join such best bid or best offer as it is auto quoted.
(xi) If the Floor broker does not designate a pegging range, but
has instructed that his or her eQuote or dQuote shall peg, the e
Quote or dQuote will peg to the Exchange best bid (offer) as long as
such bid (offer) is within the limit of the order that is being e Quoted or dQuoted.
(xii) As an eQuote or dQuote pegs, its discretionary price range,
if any, moves along with it, subject to any floor or ceiling price set by the Floor broker.
(A) If the Exchange best bid is higher than the ceiling price of a
pegging buyside eQuote or dQuote, the eQuote or dQuote will remain
at its quote price or the highest price at which there is other
interest within its pegging price range, whichever is higher
(consistent with the limit price of the order underlying the eQuote or dQuote).
(B) If the Exchange best offer is lower than the floor price of a
pegging sellside eQuote or dQuote, the eQuote or dQuote will
remain at its quote price or the lowest price at which there is other
interest within its pegging price range, whichever is lower (consistent
with the limit price of the order underlying the eQuote or dQuote).
(C) If the Exchange best bid or best offer returns to a price
within the pegging price range selected by the Floor broker, the e
Quote or dQuote will once again peg to the Exchange best bid or best offer.
(xiii) A Floor broker may establish a minimum and/or maximum size
of sameside volume to which his or her eQuote or dQuote will peg.
Other pegging eQuote or dQuote volume will not be considered in
determining whether the volume parameters set by the Floor broker have been met.
* * * * *
Dealings by Specialists
Rule 104
* * * * *
(c)
* * * * *
(ix) Specialist algorithmicallygenerated messages will compete
with or trade along with sameside discretionary eQuotes SM in the manner described in Exchange Rule 70.25.
* * * * *
Record of Orders
Rule 123
* * * * *
(e) System Entry Required
* * * * *
8. Any limit price, [and/or] stop price, discretionary price range, discretionary volume range, discretionary quote price, pegging ceiling price, pegging floor price and/or whether discretionary instructions are active in connection with interest displayed by other market centers;
* * * * *
The Floor member must identify which orders or portions thereof are
being made part of the Floor broker agency interest file and, with
respect to such orders or portions thereof, what discretionary and/or
pegging instructions, if any, have been assigned pursuant to such procedures as required by the Exchange.
* * * * *
NYSE Direct+[supreg]
Automatic Executions
Rule 1000
* * * * *
(d)
* * * * *
(D) After trading with the Exchange published best bid (offer), the
unfilled balance of any incoming commitment to trade received through
ITS shall be automatically cancelled, as described in Rule 13 (definition of immediate or cancel order).
(iii)(A) During a sweep, the residual shall trade with the orders
on the Display Book[supreg] and any broker agency interest files and/or
specialist interest file capable of execution in accordance with
Exchange rules, at a single price, such price being the best price at
which such orders and files can trade with the residual to the extent
possible, (``cleanup price''). A discretionary eQuote shall
participate in a sweep in accordance with and to the extent allowed by Exchange Rule 70.25(d)(ix).
* * * * *
II. SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change, and discussed any comments it received on the
[[Page 41499]]
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements.
A. SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
1. Purpose
Exchange Rule 70.20 was initially approved by the Commission on
December 14, 2005,\5\ as part of a pilot permitting the implementation
of Phase 1 of the NYSE HYBRID MARKETSM (``Hybrid Market'')
and was permanently approved by the Commission on March 22, 2006.\6\
\5\ See Securities Exchange Act Release No. 52954 (December 14, 2005), 70 FR 75519 (December 20, 2005).
\6\ See Securities Exchange Act Release No. 53539 (March 22, 2006), 71 FR 16353 (March 31, 2006).
In order to fully participate in the Hybrid Market, Floor brokers
have been given the ability to electronically represent their
customers' orders by placing their trading interest at or outside the
Exchange best bid and offer in Floor broker agency interest files
within the Display Book[reg] system \7\ (``NYSE e QuotesSM'' or ``eQuotes'').\8\
\7\ The Display Book [reg] system (``Display Book''
or ``book'') is an order management and execution facility that
receives and displays orders to the specialist and provides a
mechanism to execute and report transactions and publish the results
to the Consolidated Tape. In addition, the Display Book 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 (i.e., the Intermarket
Trading System, Consolidated Tape Association, Consolidated Quotation System, etc.).
\8\ See Exchange Rule 70.20.
The following proposed changes are being made to clarify certain of Rule 70.20's provisions in response to questions that have arisen since the rule has been in effect:
1. Rule 70.20(a)(i): Duplicative language has been deleted.
2. Rule 70.20(b): The phrase ``and on the same side'' has been added to clarify which orders trade on parity pursuant to this provision.
3. Rule 70.20(j)(i): Reference to ``the close'' has been added to clarify that Floor broker agency interest files participate on the open and close in accordance with the policies and procedures of the Exchange.
4. Rule 70.20(k): A sentence has been added to clarify how a Floor broker's reserve interest will be handled on the close.
To further replicate in the Hybrid Market the manner in which Floor brokers utilize their judgment in quoting and trading on behalf of customers' orders today, the Exchange is proposing to provide Floor brokers with the ability to enter discretionary trading and/or pegging (discretionary quoting) instructions for their eQuotes (``NYSE d QuotesSM'' or ``dQuotes'').
Discretionary instructions for eQuotes and pegging will give Floor brokers additional tools to compete with other interest, including the specialists' algorithmic trading and quoting ability. These proposed discretionary features and pegging will facilitate the ability of Floor brokers to participate in trades that they would not be able to reach in the Hybrid Market.
Discretionary Trading Instructions
In the mostlymanual preHybrid Market, Floor brokers had an
opportunity to make trading decisions with respect to arriving orders.
In a more electronic trading environment, the Floor broker may not have
that opportunity. While eQuotes enable Floor brokers' customer
interest to participate in automatic executions at the Exchange best
bid and offer (``BBO'') and in sweeps, they do not initiate trades with
incoming orders at prices better than the BBO. In other words,
currently, eQuotes do not provide Floor brokers with the means to
express a price range within which they are willing to actively trade.
Thus, the proposed changes will provide Floor brokers with the ability
not only to quote in an attempt to draw interest, but, at the same
time, initiate trades with contraside interest able to trade at prices
at or within the BBO. By using dQuotes, a Floor broker may set a
discretionary price range and a discretionary size range. Discretionary
size can apply to the amount of an eQuote to which discretionary
instructions apply and/or to the amount of contraside volume with which the dQuote is willing to trade, as described below.
Discretionary instructions are only active when the eQuote is at the
BBO. Neither the specialist on the Floor nor the specialist system
employing algorithms will have access to the discretionary instructions entered by the Floor broker.
Price Discretion
Discretionary instructions for eQuotes will allow Floor brokers to set a price range for their dQuotes within which they are willing to initiate or participate in a trade. This discretion will be used, as necessary, to initiate or participate in a trade with an incoming order capable of trading at a price within the discretionary range. Discretionary price instructions may apply to all or part of a dQuote.
For example, the BBO is .05 bid, offered at .10. A Floor broker enters a dQuote at .10, with price discretion of .04. A limit order to buy at .06 enters the market. The dQuote will use its four cents of price discretion and initiate a trade at .06.
When a dQuote is competing with sameside quoted or trading interest (i.e., displayed interest at the BBO, other dQuotes, or a sameside specialist algorithmic trading message, such as to provide price improvement), if the dQuote can get a larger allocation by providing an additional penny (or more) of price improvement and the discretionary instructions permit the dQuote to trade at that price, it will do so.
Volume Discretion
Floor brokers may designate that discretionary instructions apply only to a portion of their eQuote. For example, a Floor broker may specify that only 20,000 shares of a 50,000share eQuote may use price discretion. The remaining 30,000shares would be handled as a regular eQuote, i.e., one without discretionary instructions.
Floor brokers who use eQuoting price discretion may also set a minimum and/or maximum size limit with respect to the size of contra side interest with which it is willing to trade using price discretion. This allows for more specific order management by preventing the d Quote from trading with opposite side interest that the Floor broker has judged to be too little or too great in the context of the order or orders he or she is managing.
For example, the BBO is .05 bid, offered at .10. A Floor broker e Quotes stock at .10, with price discretion of .04 and minimum/maximum volume discretion of 1,000/10,000 shares. A limit order to buy 500 shares at .06 enters the market. No trade will occur, even though a trade at .06 is within the dQuote's price discretion range, because the incoming order size is below the dQuote's minimum discretionary volume size. A new best bid of .06 will be autoquoted. An order to buy 1,500 shares at .06 enters the market. The dQuote will initiate a transaction, selling 2,000 shares at .06, as the size available to trade at .06 is now within the dQuote's discretionary volume parameters. Similarly, a sufficient reduction in the size of a bid or offer that was previously larger than the maximum discretionary volume will trigger an execution of a discretionary dQuote.
[[Page 41500]]
Only published contraside volume is considered when determining whether such volume is within the dQuote's discretionary volume range. Reserve and other interest at the possible execution price is not considered, as it is not displayed. Interest displayed by other market centers at the price at which a dQuote may trade is not considered when determining if the minimum volume range is met, unless the Floor broker electronically designates that such away volume should be included in this determination.
Pegging
In the Hybrid Market, a Floor broker needs to be represented in the BBO in order to participate in automatic executions. The eQuotes provide Floor brokers with the mechanism to be part of the quote. However, in a more automated environment, the BBO may change rapidly and the eQuoting process, as it currently exists, may not be sufficient to enable Floor brokers to stay with a quickly changing quote. The proposed pegging function will allow Floor brokers to keep their interest in the quote, even as the quote moves. Floor brokers will be able to designate a range to which their eQuotes and dQuotes will peg and, as long as the BBO is within that range, the eQuote and dQuote will be included. Buy side eQuotes and dQuotes will peg to the best bid, and sell side eQuotes and dQuotes will peg to the best offer.
In addition, pegging eQuotes and dQuotes may set a minimum and/or maximum size of sameside volume to which his or her eQuote or dQuote will peg. Pegging eQuotes and dQuotes may set a ``quote price'' specifying the lowest price to which a buyside eQuote or dQuote may peg and the highest price to which a sellside eQuote or dQuote may peg. A ``ceiling price'' may be set to establish the highest price to which a buyside eQuote or dQuote may peg, and a ``floor price'' may be set to establish the lowest price to which a sellside eQuote or d Quote may peg. The quote, ceiling and floor prices must be at or within the limit price of the order being eQuoted or dQuoted.
A pegging dQuote's price discretion range will move along with the dQuote as it pegs.
Pegging is a separate type of discretionary instruction and may occur with eQuotes and/or with dQuotes using discretionary price instructions.
Example
A Floor broker is representing an order to buy 4,000 shares of XYZ
with a limit of .97, notheld.\9\ He decides to electronically
represent this order as a dQuote, with a quote price of .92 and with
price discretion of .02, in the hope of obtaining a better execution
price for his customer. This means that the Floor broker is willing to
participate in an execution at the following prices: .92, .93 and .94.
Further, he has decided to display 1,000 shares, with 3,000 in reserve.
In addition, the Floor broker has decided to have this order peg, with
minimum and maximum volume sizes of 500 and 8,000 shares respectively.
The Floor broker has set the ceiling price at .97. This means that as
long as the Exchange best bid is a minimum of 500 shares and no more
than 8,000 shares, the dQuote would peg to any Exchange best bid at or between .92 and .97
\9\ A ``not held'' order is a market or limit order that gives
the Floor broker both time and price discretion to attempt to get the best possible price for the customer.
The Exchange best bid becomes 2,000 shares bid for .94. As this is within the minimum and maximum pegging size range, the order will peg to the .94 bid, increasing the displayed size at that price to 3,000 shares (2,000 shares that established that price and the dQuote's displayed 1,000 shares). The Exchange best bid then becomes 300 shares bid for .95. The dQuote will not peg to that best bid, as its size is below the minimum pegging size designated by the Floor broker. If an additional 400 shares is added to the best bid as a result of other interest at that price, the dQuote will peg to it, increasing the displayed size to 1,700 shares. Similarly, if the displayed volume at .95 increased from 300 shares to 10,000 shares (instead of 700 shares), the dQuote would not peg to that price, as 10,000 shares is more than the maximum pegging size selected by the Floor broker (which was 8,000 shares, as noted above). Again, if the displayed volume at .95 decreases to 6,000 shares, for example, as a result of a trade at that price, the dQuote will peg to the .95 bid, as the displayed volume size is now lower than the maximum selected by the Floor broker. 7,000 shares will be bid at .95, with the dQuote's 3,000 shares in reserve.
As the dQuote pegs, it continues to be able to use its price
discretion of .02 to effect a trade. Accordingly, if 7,000 shares is
bid at .95, comprised of 6,000 shares of other interest and 1,000
shares of the dQuote (with 3,000 shares of the dQuote in reserve at
.95) and the Exchange best offer is .97 for 1,700 shares, the dQuote
will initiate an execution, trading 1,700 shares at .97. The dQuote's
reserve size will be decremented by the amount of the trade, leaving
1,300 shares to buy in reserve, with 1,000 shares displayed. The best
bid continues to be .95, so the dQuote remains pegged at that price.
The displayed volume at .95 continues to be 7,000 shares, including the displayed portion of the dQuote (1,000 shares).
General Principles Covering Discretionary eQuotes and Pegging
The following describes in more detail the general principles
governing dQuotes (i.e., an eQuote with discretionary trading and/or pegging instructions):
[[Page 41501]]
Exchange BBO or would establish a new Exchange BBO.
\10\ See 17 CFR 242.611.
Rule 104
Rule 104(c)(ix) has been amended to reflect that a specialist's algorithmicallygenerated messages will compete with or trade along with same side dQuote as described in NYSE Rule 70.25.
Rule 123
Exchange Rule 123(e)(8) which requires the entry of certain order information into the Exchange's Front End Systemic Capture (FESC'') system before such order can be represented, has been amended to add certain required terms regarding eQuotes and dQuotes.
Rule 1000
Rule 1000(d)(iii) which governs sweeps has been amended to reflect that dQuotes will participate in sweeps in the manner described in NYSE Rule 70.25(d)(ix).
Implementation Plans
At present, the Exchange plans to implement proposed Rules 70.25 and 70.26 as part of Phase 3 of the Hybrid Market. The Exchange will consult with the Commission with respect to any change to this implementation plan.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b)(5) of the Act \11\ because it is designed to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to protect investors and the public interest.
\11\ 15 U.S.C. 78f(b)(5).
[[Page 41502]]
B. SelfRegulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
C. SelfRegulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change. The Exchange has received one comment letter
on the proposed rule change and will respond to it after the comment period has concluded.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the selfregulatory organization consents, the Commission will: (A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of the following methods:
Electronic Comments
Paper Comments
All submissions should refer to File Number SRNYSE200636. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SRNYSE200636 and should be submitted on or before August 11, 2006.
\12\ 17 CFR 200.303(a)(12).
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\12\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E611581 Filed 72006; 8:45 am]
BILLING CODE 801001P
SUMMARY:
New York Stock Exchange LLC,
DOCUMENT BODY 2:
July 14, 2006.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b4 thereunder,\2\ notice is hereby given that
on May 16, 2006, the New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. On June
14, 2006, NYSE filed Amendment No. 1 to the proposed rule change.\3\ On
July 11, 2006, NYSE filed Amendment No. 2 to the proposed rule
change.\4\ The Commission is publishing this notice to solicit comments
on the proposed rule change, as amended, from interested persons. \1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b4.
\3\ In Amendment No. 1, NYSE proposed additional changes and clarifications to the proposal.
\4\ Amendment No. 2 supersedes and replaces the original proposed rule change and Amendment No. 1 in its entirety.
I. SelfRegulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange proposes to amend Exchange Rule 70 to reflect that
Floor brokers will have the ability to enter discretionary instructions
(``dQuotes'') with respect to their Floor broker agency interest files
(``eQuotes'') and that their eQuotes and dQuotes will be able to peg
to the Exchange best bid and offer. The Exchange also proposes to amend
NYSE Rules 70.20, 123(e), 104, and 1000. Below is the text of the
proposed rule change, as amended. Proposed new language is italicized; proposed deletions are in brackets.
* * * * *
Bids and Offers
Rule 70
.20 (a)(i) With respect to orders he or she is representing on the
Floor, a Floor broker may place within the Display Book[supreg] system
broker agency interest files at multiple price points on both sides of
the market at or outside the Exchange best bid and offer with respect
to each security trading in the [location(s) comprising the] Crowd such
Floor broker is a part of, [with respect to orders he or she is
representing on the Floor,] except that the agency interest files shall
not include any customer interest that restricts the specialist's
ability to be on parity pursuant to Exchange Rules 104.10(6)(i)(C) and
108(a). Broker agency interest files shall also be referred to as ``e Quotes\SM\''.
* * * * *
(b) All Floor broker agency interest placed within files in the
Display Book[supreg] system at the same price and on the same side
shall be on parity with each other, except agency interest that
establishes the Exchange best bid or offer shall be entitled to
priority in accordance with Exchange Rule 72. No Floor broker agency
interest placed within files in the Display Book[supreg] system shall be entitled to precedence based on size.
* * * * *
(j)(i) Floor broker agency interest placed within files may
participate in the opening and closing trades in accordance with
Exchange policies and procedures governing the open and close. * * * * *
(k) The ability of a Floor broker to have reserve interest will not
be available during the open and during the close. During the close, a
Floor broker's reserve interest, if any, will be added to the size of
his or her displayed agency (``eQuoted'') interest. The ability of a
Floor broker to exclude volume from aggregated agency interest
information available to the specialist will not be available during
the open. Floor broker agency interest excluded from the aggregate
agency interest information available to the specialist will not participate in the close.
.25 Discretionary Instructions for Bids and Offers Represented via Floor Broker Agency Interest Files (eQuotes\SM\)
(a)(i) A Floor broker may enter discretionary instructions as to
size and/or price with respect to his or her eQuotes (``discretionary
eQuotes'' or ``dQuotes''). The discretionary instructions relate to
the price at which the dQuote may trade and the number of shares to which the discretionary price instructions apply.
(ii) Discretionary instructions are active only when the eQuote is at or
[[Page 41497]]
joins the existing Exchange best bid or best offer or would establish a new Exchange best bid or offer.
(iii) Discretionary instructions are active only with respect to
automatic executions. Discretionary instructions are not active with respect to the opening and closing transactions.
(iv) Discretionary instructions will be applied only if all d
Quoting prerequisites are met. Otherwise, the dQuote will be handled
as a regular eQuote, notwithstanding the fact that the Floor broker
has designated the eQuote as a dQuote. For example, to be considered
a discretionary eQuote, an eQuote must have a discretionary price range.
(v) The requirements for eQuotes apply to dQuotes, including the requirement that the Floor broker be in the Crowd.
(vi) A Floor broker may have multiple dQuotes, with different
discretionary price and size limitations, on the same side of the
market. Such multiple dQuotes do not compete with each other for
executions. Trading volume is allocated by Floor broker, not number of dQuotes participating in an execution.
(vii) Discretionary instructions apply to both displayed and
reserve interest, including reserve interest that is excluded from the
aggregate reserve size visible to the specialist on the Floor.
(viii) Neither the specialist on the Floor nor the specialist
system employing algorithms will have access to the discretionary
instructions entered by Floor brokers with respect to their eQuotes. (b) Price Discretion
(i) A Floor broker may set a discretionary price range within the
Exchange best bid and offer that specifies the prices at which they are
willing to trade. This discretion will be used, as necessary, to
initiate or participate in a trade with an incoming order capable of trading at a price within the discretionary price range.
(ii) The minimum price range for a discretionary eQuote is the minimum price variation set forth in Exchange Rule 62.
(iii) Floor brokers may specify that price discretion applies to
all or only a portion of their dQuote. Price discretion is necessary
for dQuotes. Therefore, if price discretion is provided for only a
portion of the dQuote, the residual will be treated as an eQuote.
(iv) When price discretion is used, dQuotes trade first from reserve volume, if any, and then from displayed volume.
(c) Discretionary Size
(i) A Floor broker may designate the amount of his or her eQuote
volume to which discretionary price instructions shall apply.
(ii) A Floor broker may designate a minimum and/or maximum size of contraside volume with which it is willing to trade using
discretionary price instructions.
(iii) Only displayed interest will be used by Exchange systems to
determine whether the size of contraside volume is within the d
Quote's discretionary size range. Contraside reserve and other
interest at the possible execution price will not be considered by Exchange systems when making this determination.
(iv) Interest displayed by other market centers at the price at
which a dQuote may trade will not be considered by Exchange systems
when determining if the dQuote's minimum and/or maximum size range is
met, unless the Floor broker designates that such away volume should be included in this determination.
(v) An increase or reduction in the size associated with a
particular price that brings the contraside volume within a dQuote's
minimum or maximum discretionary size parameter, will trigger an execution of that dQuote.
(vi) Once the total amount of a Floor broker's discretionary volume
has been executed, the dQuote's discretionary price instructions will
become inactive and the remainder of that dQuote will be treated as an eQuote.
(d) Executions of Discretionary eQuotes
(i) The goal of discretionary eQuoting is to secure the largest
execution for the dQuote, using the least amount of price discretion.
In so doing, dQuotes may often improve the execution price of incoming
orders. Conversely, if no discretion is necessary to accomplish a trade, none will be used.
(A) Future executions that may occur, such as those resulting from
the execution of elected contraside CAPDI orders, will not be
considered in determining when, and to what extent, price discretion is necessary to accomplish a trade.
(ii) Discretionary eQuotes will automatically execute against a
contraside order that enters the Display Book [supreg] system if the
order's price is within the discretionary price range and the order's
size meets any minimum or maximum size requirements that have been set for the dQuote.
(iii) Discretionary eQuotes from different Floor brokers on the
same side of the market with the same price instructions trade on parity after interest entitled to priority is executed.
(iv) Sameside dQuotes from different Floor brokers compete for an
execution, with the most aggressive price range (e.g. three cents vs.
two cents) establishing the execution price. If an incoming order
remains unfilled at that price, executions within the less aggressive price range may then occur.
(v) Discretionary eQuotes compete with sameside specialist
algorithmic trading messages targeting incoming orders. If the price of
dQuotes and specialist trading messages are the same, the dQuotes and the specialist messages will trade on parity.
(vi) Discretionary eQuotes from Floor brokers on opposite sides of
the market will be able to trade with each other. The dQuote that
arrived at the Display Book[supreg] system last will use the most
discretion necessary to effect a trade, except as provided below.
(A) When a protected bid or offer, as defined in Section
242.600(b)(57) of Regulation NMS (``Reg. NMS''), is published by
another market center at a price that is better than the price at which
contraside dQuotes would trade in accordance with (vi) above, the following applies:
(1) the amount of discretion necessary to permit a trade on the
Exchange consistent with the Order Protection Rule (Section 242.611 of Reg. NMS) (``OPR'') will be used; or
(2) such portion of the appropriate dQuote as is necessary will be
automatically routed in accordance with OPR in order to permit a trade to occur on the Exchange.
(vii) As with all executions on the Exchange, executions involving dQuotes will comply with OPR.
(viii) Discretionary eQuotes may provide price improvement to and
trade with an incoming contraside specialist algorithmic trading
message to ``hit bid/take offer,'' just as they can with any other marketable incoming interest.
(ix) Discretionary eQuotes may initiate sweeps in accordance with
and to the extent provided by Exchange Rules 10001004, but only to the
extent of their price and volume discretion. Discretionary eQuotes may
participate in sweeps initiated by other orders but, in such cases, their discretionary instructions are not active.
(A) dQuotes will not trade at a price that would trigger a
liquidity replenishment point (``LRP'') as defined in Exchange Rule
1000. Accordingly, a sweep involving a dQuote will always stop at least one cent before an LRP price.
[[Page 41498]]
.26 Pegging for dQuotes and eQuotes
(i) An eQuote, other than a ticksensitive eQuote, may be set to
provide that it will be available for execution at the Exchange best
bid (for an eQuote that represents a buy order) or at the Exchange
best offer (for an eQuote that represents a sell order) as the
Exchange best bid or offer changes, so long as the Exchange best bid or offer is at or within the eQuote's limit price.
(ii) A dQuote may also employ pegging.
(iii) Pegging is only active when autoquoting is active.
(iv) Pegging eQuotes and dQuotes trade on parity with other
interest at the Exchange best bid or offer after interest entitled to priority is executed.
(v) Pegging is reactive. An eQuote or dQuote will not establish
the Exchange best bid or best offer as a result of pegging.
(vi) Price priority cannot be established by pegging, although
existence of pegging instructions does not preclude an eQuote or d Quote from having priority.
(vii) Pegging eQuotes and dQuotes peg only to other nonpegging
interest within the pegging range selected by the Floor broker.
(viii) An eQuote or dQuote will not sustain the Exchange best bid
or best offer as a result of pegging if there is no other nonpegged
interest at that price and such price is not the eQuote's or dQuote's limit price.
(A) If the lowest quotable price established by the Floor broker
for a pegging eQuote or dQuote to buy is the Exchange best bid and
all other interest at that price cancels or is executed, the pegging e
Quote or dQuote will remain displayed at that best bid price.
(B) If the highest quotable price established by the Floor broker
for a pegging eQuote or dQuote to sell is the Exchange best offer and
all other interest at that price cancels or is executed, the pegging e
Quote or dQuote will remain displayed at that best offer price.
(ix) A Floor broker may establish a price range for an eQuote or
dQuote, beyond which the pegging function will not be available (``quote,'' ``ceiling'' and ``floor'' prices).
(A) The ``quote price'' is the lowest price to which a buy eQuote
or dQuote may peg or the highest price to which a sell eQuote or d Quote may peg.
(B) The ``ceiling price'' is the highest price to which a buyside eQuote or dQuote may peg.
(C) The ``floor price'' is the lowest price to which a sellside e Quote or dQuote may peg.
(D) A quote, ceiling and floor price may be at a price other than
the limit price of the order that is being eQuoted or dQuoted, but may not be inconsistent with the order's limit.
(x) As long as the Exchange best bid is at or within the pegging
price range selected by the Floor broker with respect to a buyside e
Quote or dQuote, or the Exchange best offer is within the price range
selected by the Floor broker with respect to a sellside eQuote or d
Quote, the pegging eQuote or dQuote will join such best bid or best offer as it is auto quoted.
(xi) If the Floor broker does not designate a pegging range, but
has instructed that his or her eQuote or dQuote shall peg, the e
Quote or dQuote will peg to the Exchange best bid (offer) as long as
such bid (offer) is within the limit of the order that is being e Quoted or dQuoted.
(xii) As an eQuote or dQuote pegs, its discretionary price range,
if any, moves along with it, subject to any floor or ceiling price set by the Floor broker.
(A) If the Exchange best bid is higher than the ceiling price of a
pegging buyside eQuote or dQuote, the eQuote or dQuote will remain
at its quote price or the highest price at which there is other
interest within its pegging price range, whichever is higher
(consistent with the limit price of the order underlying the eQuote or dQuote).
(B) If the Exchange best offer is lower than the floor price of a
pegging sellside eQuote or dQuote, the eQuote or dQuote will
remain at its quote price or the lowest price at which there is other
interest within its pegging price range, whichever is lower (consistent
with the limit price of the order underlying the eQuote or dQuote).
(C) If the Exchange best bid or best offer returns to a price
within the pegging price range selected by the Floor broker, the e
Quote or dQuote will once again peg to the Exchange best bid or best offer.
(xiii) A Floor broker may establish a minimum and/or maximum size
of sameside volume to which his or her eQuote or dQuote will peg.
Other pegging eQuote or dQuote volume will not be considered in
determining whether the volume parameters set by the Floor broker have been met.
* * * * *
Dealings by Specialists
Rule 104
* * * * *
(c)
* * * * *
(ix) Specialist algorithmicallygenerated messages will compete
with or trade along with sameside discretionary eQuotes SM in the manner described in Exchange Rule 70.25.
* * * * *
Record of Orders
Rule 123
* * * * *
(e) System Entry Required
* * * * *
8. Any limit price, [and/or] stop price, discretionary price range, discretionary volume range, discretionary quote price, pegging ceiling price, pegging floor price and/or whether discretionary instructions are active in connection with interest displayed by other market centers;
* * * * *
The Floor member must identify which orders or portions thereof are
being made part of the Floor broker agency interest file and, with
respect to such orders or portions thereof, what discretionary and/or
pegging instructions, if any, have been assigned pursuant to such procedures as required by the Exchange.
* * * * *
NYSE Direct+[supreg]
Automatic Executions
Rule 1000
* * * * *
(d)
* * * * *
(D) After trading with the Exchange published best bid (offer), the
unfilled balance of any incoming commitment to trade received through
ITS shall be automatically cancelled, as described in Rule 13 (definition of immediate or cancel order).
(iii)(A) During a sweep, the residual shall trade with the orders
on the Display Book[supreg] and any broker agency interest files and/or
specialist interest file capable of execution in accordance with
Exchange rules, at a single price, such price being the best price at
which such orders and files can trade with the residual to the extent
possible, (``cleanup price''). A discretionary eQuote shall
participate in a sweep in accordance with and to the extent allowed by Exchange Rule 70.25(d)(ix).
* * * * *
II. SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change, and discussed any comments it received on the
[[Page 41499]]
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements.
A. SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
1. Purpose
Exchange Rule 70.20 was initially approved by the Commission on
December 14, 2005,\5\ as part of a pilot permitting the implementation
of Phase 1 of the NYSE HYBRID MARKETSM (``Hybrid Market'')
and was permanently approved by the Commission on March 22, 2006.\6\
\5\ See Securities Exchange Act Release No. 52954 (December 14, 2005), 70 FR 75519 (December 20, 2005).
\6\ See Securities Exchange Act Release No. 53539 (March 22, 2006), 71 FR 16353 (March 31, 2006).
In order to fully participate in the Hybrid Market, Floor brokers
have been given the ability to electronically represent their
customers' orders by placing their trading interest at or outside the
Exchange best bid and offer in Floor broker agency interest files
within the Display Book[reg] system \7\ (``NYSE e QuotesSM'' or ``eQuotes'').\8\
\7\ The Display Book [reg] system (``Display Book''
or ``book'') is an order management and execution facility that
receives and displays orders to the specialist and provides a
mechanism to execute and report transactions and publish the results
to the Consolidated Tape. In addition, the Display Book 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 (i.e., the Intermarket
Trading System, Consolidated Tape Association, Consolidated Quotation System, etc.).
\8\ See Exchange Rule 70.20.
The following proposed changes are being made to clarify certain of Rule 70.20's provisions in response to questions that have arisen since the rule has been in effect:
1. Rule 70.20(a)(i): Duplicative language has been deleted.
2. Rule 70.20(b): The phrase ``and on the same side'' has been added to clarify which orders trade on parity pursuant to this provision.
3. Rule 70.20(j)(i): Reference to ``the close'' has been added to clarify that Floor broker agency interest files participate on the open and close in accordance with the policies and procedures of the Exchange.
4. Rule 70.20(k): A sentence has been added to clarify how a Floor broker's reserve interest will be handled on the close.
To further replicate in the Hybrid Market the manner in which Floor brokers utilize their judgment in quoting and trading on behalf of customers' orders today, the Exchange is proposing to provide Floor brokers with the ability to enter discretionary trading and/or pegging (discretionary quoting) instructions for their eQuotes (``NYSE d QuotesSM'' or ``dQuotes'').
Discretionary instructions for eQuotes and pegging will give Floor brokers additional tools to compete with other interest, including the specialists' algorithmic trading and quoting ability. These proposed discretionary features and pegging will facilitate the ability of Floor brokers to participate in trades that they would not be able to reach in the Hybrid Market.
Discretionary Trading Instructions
In the mostlymanual preHybrid Market, Floor brokers had an
opportunity to make trading decisions with respect to arriving orders.
In a more electronic trading environment, the Floor broker may not have
that opportunity. While eQuotes enable Floor brokers' customer
interest to participate in automatic executions at the Exchange best
bid and offer (``BBO'') and in sweeps, they do not initiate trades with
incoming orders at prices better than the BBO. In other words,
currently, eQuotes do not provide Floor brokers with the means to
express a price range within which they are willing to actively trade.
Thus, the proposed changes will provide Floor brokers with the ability
not only to quote in an attempt to draw interest, but, at the same
time, initiate trades with contraside interest able to trade at prices
at or within the BBO. By using dQuotes, a Floor broker may set a
discretionary price range and a discretionary size range. Discretionary
size can apply to the amount of an eQuote to which discretionary
instructions apply and/or to the amount of contraside volume with which the dQuote is willing to trade, as described below.
Discretionary instructions are only active when the eQuote is at the
BBO. Neither the specialist on the Floor nor the specialist system
employing algorithms will have access to the discretionary instructions entered by the Floor broker.
Price Discretion
Discretionary instructions for eQuotes will allow Floor brokers to set a price range for their dQuotes within which they are willing to initiate or participate in a trade. This discretion will be used, as necessary, to initiate or participate in a trade with an incoming order capable of trading at a price within the discretionary range. Discretionary price instructions may apply to all or part of a dQuote.
For example, the BBO is .05 bid, offered at .10. A Floor broker enters a dQuote at .10, with price discretion of .04. A limit order to buy at .06 enters the market. The dQuote will use its four cents of price discretion and initiate a trade at .06.
When a dQuote is competing with sameside quoted or trading interest (i.e., displayed interest at the BBO, other dQuotes, or a sameside specialist algorithmic trading message, such as to provide price improvement), if the dQuote can get a larger allocation by providing an additional penny (or more) of price improvement and the discretionary instructions permit the dQuote to trade at that price, it will do so.
Volume Discretion
Floor brokers may designate that discretionary instructions apply only to a portion of their eQuote. For example, a Floor broker may specify that only 20,000 shares of a 50,000share eQuote may use price discretion. The remaining 30,000shares would be handled as a regular eQuote, i.e., one without discretionary instructions.
Floor brokers who use eQuoting price discretion may also set a minimum and/or maximum size limit with respect to the size of contra side interest with which it is willing to trade using price discretion. This allows for more specific order management by preventing the d Quote from trading with opposite side interest that the Floor broker has judged to be too little or too great in the context of the order or orders he or she is managing.
For example, the BBO is .05 bid, offered at .10. A Floor broker e Quotes stock at .10, with price discretion of .04 and minimum/maximum volume discretion of 1,000/10,000 shares. A limit order to buy 500 shares at .06 enters the market. No trade will occur, even though a trade at .06 is within the dQuote's price discretion range, because the incoming order size is below the dQuote's minimum discretionary volume size. A new best bid of .06 will be autoquoted. An order to buy 1,500 shares at .06 enters the market. The dQuote will initiate a transaction, selling 2,000 shares at .06, as the size available to trade at .06 is now within the dQuote's discretionary volume parameters. Similarly, a sufficient reduction in the size of a bid or offer that was previously larger than the maximum discretionary volume will trigger an execution of a discretionary dQuote.
[[Page 41500]]
Only published contraside volume is considered when determining whether such volume is within the dQuote's discretionary volume range. Reserve and other interest at the possible execution price is not considered, as it is not displayed. Interest displayed by other market centers at the price at which a dQuote may trade is not considered when determining if the minimum volume range is met, unless the Floor broker electronically designates that such away volume should be included in this determination.
Pegging
In the Hybrid Market, a Floor broker needs to be represented in the BBO in order to participate in automatic executions. The eQuotes provide Floor brokers with the mechanism to be part of the quote. However, in a more automated environment, the BBO may change rapidly and the eQuoting process, as it currently exists, may not be sufficient to enable Floor brokers to stay with a quickly changing quote. The proposed pegging function will allow Floor brokers to keep their interest in the quote, even as the quote moves. Floor brokers will be able to designate a range to which their eQuotes and dQuotes will peg and, as long as the BBO is within that range, the eQuote and dQuote will be included. Buy side eQuotes and dQuotes will peg to the best bid, and sell side eQuotes and dQuotes will peg to the best offer.
In addition, pegging eQuotes and dQuotes may set a minimum and/or maximum size of sameside volume to which his or her eQuote or dQuote will peg. Pegging eQuotes and dQuotes may set a ``quote price'' specifying the lowest price to which a buyside eQuote or dQuote may peg and the highest price to which a sellside eQuote or dQuote may peg. A ``ceiling price'' may be set to establish the highest price to which a buyside eQuote or dQuote may peg, and a ``floor price'' may be set to establish the lowest price to which a sellside eQuote or d Quote may peg. The quote, ceiling and floor prices must be at or within the limit price of the order being eQuoted or dQuoted.
A pegging dQuote's price discretion range will move along with the dQuote as it pegs.
Pegging is a separate type of discretionary instruction and may occur with eQuotes and/or with dQuotes using discretionary price instructions.
Example
A Floor broker is representing an order to buy 4,000 shares of XYZ
with a limit of .97, notheld.\9\ He decides to electronically
represent this order as a dQuote, with a quote price of .92 and with
price discretion of .02, in the hope of obtaining a better execution
price for his customer. This means that the Floor broker is willing to
participate in an execution at the following prices: .92, .93 and .94.
Further, he has decided to display 1,000 shares, with 3,000 in reserve.
In addition, the Floor broker has decided to have this order peg, with
minimum and maximum volume sizes of 500 and 8,000 shares respectively.
The Floor broker has set the ceiling price at .97. This means that as
long as the Exchange best bid is a minimum of 500 shares and no more
than 8,000 shares, the dQuote would peg to any Exchange best bid at or between .92 and .97
\9\ A ``not held'' order is a market or limit order that gives
the Floor broker both time and price discretion to attempt to get the best possible price for the customer.
The Exchange best bid becomes 2,000 shares bid for .94. As this is within the minimum and maximum pegging size range, the order will peg to the .94 bid, increasing the displayed size at that price to 3,000 shares (2,000 shares that established that price and the dQuote's displayed 1,000 shares). The Exchange best bid then becomes 300 shares bid for .95. The dQuote will not peg to that best bid, as its size is below the minimum pegging size designated by the Floor broker. If an additional 400 shares is added to the best bid as a result of other interest at that price, the dQuote will peg to it, increasing the displayed size to 1,700 shares. Similarly, if the displayed volume at .95 increased from 300 shares to 10,000 shares (instead of 700 shares), the dQuote would not peg to that price, as 10,000 shares is more than the maximum pegging size selected by the Floor broker (which was 8,000 shares, as noted above). Again, if the displayed volume at .95 decreases to 6,000 shares, for example, as a result of a trade at that price, the dQuote will peg to the .95 bid, as the displayed volume size is now lower than the maximum selected by the Floor broker. 7,000 shares will be bid at .95, with the dQuote's 3,000 shares in reserve.
As the dQuote pegs, it continues to be able to use its price
discretion of .02 to effect a trade. Accordingly, if 7,000 shares is
bid at .95, comprised of 6,000 shares of other interest and 1,000
shares of the dQuote (with 3,000 shares of the dQuote in reserve at
.95) and the Exchange best offer is .97 for 1,700 shares, the dQuote
will initiate an execution, trading 1,700 shares at .97. The dQuote's
reserve size will be decremented by the amount of the trade, leaving
1,300 shares to buy in reserve, with 1,000 shares displayed. The best
bid continues to be .95, so the dQuote remains pegged at that price.
The displayed volume at .95 continues to be 7,000 shares, including the displayed portion of the dQuote (1,000 shares).
General Principles Covering Discretionary eQuotes and Pegging
The following describes in more detail the general principles
governing dQuotes (i.e., an eQuote with discretionary trading and/or pegging instructions):
[[Page 41501]]
Exchange BBO or would establish a new Exchange BBO.
\10\ See 17 CFR 242.611.
Rule 104
Rule 104(c)(ix) has been amended to reflect that a specialist's algorithmicallygenerated messages will compete with or trade along with same side dQuote as described in NYSE Rule 70.25.
Rule 123
Exchange Rule 123(e)(8) which requires the entry of certain order information into the Exchange's Front End Systemic Capture (FESC'') system before such order can be represented, has been amended to add certain required terms regarding eQuotes and dQuotes.
Rule 1000
Rule 1000(d)(iii) which governs sweeps has been amended to reflect that dQuotes will participate in sweeps in the manner described in NYSE Rule 70.25(d)(ix).
Implementation Plans
At present, the Exchange plans to implement proposed Rules 70.25 and 70.26 as part of Phase 3 of the Hybrid Market. The Exchange will consult with the Commission with respect to any change to this implementation plan.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b)(5) of the Act \11\ because it is designed to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to protect investors and the public interest.
\11\ 15 U.S.C. 78f(b)(5).
[[Page 41502]]
B. SelfRegulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
C. SelfRegulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change. The Exchange has received one comment letter
on the proposed rule change and will respond to it after the comment period has concluded.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the selfregulatory organization consents, the Commission will: (A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of the following methods:
Electronic Comments
Paper Comments
All submissions should refer to File Number SRNYSE200636. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SRNYSE200636 and should be submitted on or before August 11, 2006.
\12\ 17 CFR 200.303(a)(12).
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\12\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E611581 Filed 72006; 8:45 am]
BILLING CODE 801001P