Federal Register: November 26, 2008 (Volume 73, Number 229)
DOCID: fr26no08-113 FR Doc E8-28042
SECURITIES AND EXCHANGE COMMISSION
Securities and Exchange Commission
DOCUMENT ID: [Release No. 34-58979; File No. SR-NYSE-2008-116]
NOTICE: NOTICES
DOCID: fr26no08-113
ACTION: Self-Regulatory Organizations; Proposed Rule Changes:
SUBJECT CATEGORY:
Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change Amending Rule 411(b) Concerning Certain Odd-Lot Order Handling Requirements, Rescinding NYSE Information Memorandum 94-14 and Issuing a New Information Memo That Provides Comprehensive and Updated Interpretive Guidance on, and Application of, Current NYSE Odd-Lot Trading Practices and Rules
DOCUMENT SUMMARY:
November 19, 2008.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b4 thereunder,\3\ notice is hereby given
that, on November 6, 2008, New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
\1\ 15 U.S.C.78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b4.
I. SelfRegulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange proposes to (i) amend Rule 411(b) concerning certain
oddlot order handling requirements, (ii) rescind NYSE Information
Memorandum (``Information Memo'') 9414 to the extent it created a
distinction in the regulatory treatment of oddlot limit and oddlot
market orders, and (iii) issue a new Information Memo that provides
comprehensive and updated interpretive guidance on, and application of,
current NYSE oddlot trading practices and Rules. This rule filing is
available on the Exchange's Web site at http://www.nyse.com, at the
Exchange's principal office, and at the Public Reference Room of the Commission.
II. SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the selfregulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those 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 parts of such statements.
A. SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
1. Purpose
This proposal is to (i) amend NYSE Rule 411(b) concerning certain oddlot order handling requirements, (ii) rescind NYSE Information Memo 9414 to the extent it created a distinction in the regulatory treatment of oddlot limit and oddlot market orders, and (iii) issue a new Information Memo that provides comprehensive and updated interpretive guidance on, and application of, current NYSE oddlot trading practices and Rules.
Current Operation of the OddLot Order System
The oddlot order system is used for all orders for less than a
unit of trading (a unit of trading is generally referred to as a
``roundlot''), currently set at 100 shares for most NYSElisted
securities.\4\ These orders, which are too small to be handled
efficiently in the regular auction market on the Exchange,
traditionally, have been used by retail investors to buy and sell small amounts of stock. More recently, market
[[Page 72095]]
professionals using certain trading strategies and programs have also accessed the oddlot system.
\4\ The vast majority of securities trade in roundlots of 100
shares; however, there are some securities that trade in roundlots of 10 or even 1 share.
NYSE Rule 124 prescribes certain rules governing the execution of oddlot orders. Among other things, because oddlot orders are executed outside the regular auction market, Rule 124(a) prescribes that the Designated Market Maker (``DMM'') is the contra party for all oddlot orders, thereby providing execution and price guarantees. Pursuant to NYSE Rule 124(c), oddlot market orders and marketable limit orders are subject to automatic execution at the price of the next roundlot transaction in the subject security on the Exchange.
NYSE Rule 411(b) prescribes certain orderhandling requirements for oddlot orders. In particular, Rule 411(b)(1) provides that member organizations may not combine (or ``bunch'') multiple oddlot orders from different customers without prior approval. The Rule also requires member organizations to aggregate oddlot orders, where possible, into as many round lot orders as possible rather than process them separately. Although not expressly stated, Rule 411(b) also implicitly prohibits a customer or member organization from unbundling a roundlot order in order to avoid the roundlot market and take advantage of the oddlot market.
Background
The oddlot system was initially created to replace oddlot dealers on the Exchange. Before the creation of the oddlot system, oddlot dealers made markets in oddlots and either pairedoff oddlot orders against each other or traded with them as dealers. When the Exchange eliminated separate oddlot dealers and adopted Rule 124, DMMs (at the time, specialists) were made the counterparty for each oddlot order execution in their respective stocks.
Because the system forces DMMs to provide liquidity, the Exchange
has always sought to limit the use of the oddlot order system to only
the types of trading it replaced (socalled ``traditional'' or
``standard'' oddlot trading practices) in order to ensure the system's
continued economic viability. In particular, the Exchange has long
prohibited the specific use of the oddlot order system as a
professional trading platform, because it reduces the DMMs' willingness
to provide cost effective and efficient liquidity for the oddlot
system as a whole. Accordingly, the Exchange has on many occasions
issued guidance that any use of the oddlot system in a manner that is
inconsistent with traditional or standard oddlot investment activity is strictly prohibited.
Distinction in Regulatory Treatment of OddLot Limit and OddLot Market Orders
Information Memo 9414 provides that certain trading practices that
rely specifically on oddlot limit orders are flatly prohibited.\5\
Under the terms of Information Memo 9414, however, oddlot market orders were not subject to the same restrictions.
\5\ See Information Memo 9414 (April 18, 1994). See also
Securities Exchange Act Release No. 3433678 (February 24, 1994), 59 FR 10192 (March 3, 1994) (SRNYSE9213).
This distinction in the regulatory treatment between oddlot limit
and oddlot market orders noted in Information Memo 9414 evolved from
changes made to the oddlot order system in and around 1991.\6\ Before
then, DMMs were permitted to charge a differential on (i) all oddlot
limit orders executed through the automated system, and (ii) any odd
lot order that required manual handling; all other oddlot orders,
including market orders, were executed without a differential.\7\
\6\ In May 1992, because it made changes to existing NYSE Rule
124, the Exchange submitted to the Commission the interpretive
guidance that would later become Information Memo 9414, which was
approved in February 1994 after several amendments. See Securities
Exchange Act Release No. 3433678 (February 24, 1994), 59 FR 10192
(March 3, 1994) (SRNYSE9213) (formally adopting Information Memo
9414). Information Memo 9414 was subsequently distributed to all members and member organizations on April 18, 1994.
\7\ See Securities Exchange Act Release No. 3428837 (January 14 [sic], 1991), 56 FR 4660 (February 5, 1991) (SRNYSE9103).
In February 1991, at the conclusion of a six month pilot program,
the Exchange amended NYSE Rule 124 to eliminate price differentials on
oddlot orders executed on the Exchange and extended the ``no
commission policy'' to cover floor brokerage charges on all
systematized oddlot orders. The Exchange stated that, by providing
more economic pricing, the amendments would enhance the efficiency of
oddlot order executions compatible with the traditional oddlot
investing practices of smaller investors. Although there were concerns
about possible adverse impacts to the oddlot market, the data
collected during the implementation of the pilot program reflected that
the mix of oddlot limit and market orders had remained at or near
historical levels and there was no evidence of regulatory issues or trading abuses.\8\
\8\ See Securities Exchange Act Release No. 3428837 (January 14
[sic], 1991), 56 FR 4660 (February 5, 1991) (SRNYSE9103). See
also Securities Exchange Act Release No. 3433678 (February 24, 1994), 59 FR 10192 (March 3, 1994) (SRNYSE9213).
In July 1991, after implementation of the amendments and further observation of the oddlot market, the Exchange released Information Memo 9129. In that Information Memo, the Exchange identified and precluded certain trading practices that had developed that were inconsistent with traditional or standard oddlot trading practices and that undermined the economic benefits derived by the market from the elimination of differential pricing for oddlot orders. These practices included the unbundling of roundlot orders for the purpose of entering oddlot limit orders in comparable amounts, the failure to aggregate into roundlots oddlot orders from the same account or accounts with a common monetary interest, and the entry of oddlot limit orders on both sides of the market for a security in order to capture the ``spread''. The Exchange also emphasized more generally that any oddlot order entry practices intended to circumvent the roundlot auction market were prohibited.\9\
\9\ See Information Memo 9129 (July 25, 1991).
To address these issues in part, in 1992 the Exchange amended NYSE Rule 411(b) to expand the requirement for aggregating oddlot orders to include market participants who entered multiple orders on behalf of various accounts over which they had investment discretion.\10\ \10\ See Securities Exchange Act Release No. 3431048 (August 18, 1992), 57 FR 38706 (August 26, 1992) (SRNYSE9203).
In Information Memo 9414, the Exchange identified and precluded
additional types of trading using oddlot limit orders in particular,
including index arbitrage, program trading and day trading, as
inconsistent with traditional or standard oddlot trading practices and
that undermined the integrity of the oddlot order system and its
purpose. At that time, the Exchange noted that such trading practices using oddlot market orders were not precluded.\11\
\11\ See Information Memo 9414 (April 18, 1994). See also
Securities Exchange Act Release No. 3433678 (February 24, 1994), 59 FR 10192 (March 3, 1994) (SRNYSE9213).
More recently, in Information Memo 0760, the Exchange provided
additional interpretive guidance concerning the oddlot system,
including an overview of various types of prohibited trading practices.\12\
\12\ See Information Memo 0760 (June 29, 2007). This
Information Memo was not filed with the SEC.
Proposed Rule Changes
The rules and interpretive guidance (in the form of Information Memos and Enforcement Decisions) for the
[[Page 72096]]
Exchange's oddlot order system have evolved over the years in response
to changes in the way market participants use the system. This has
resulted in a set of rules and policies that, while comprehensive, is
not readily accessible in one source. Moreover, some of the rules (i.e.
Rule 411(b)) have not been updated to reflect the Exchange's most
current interpretive guidance and application of oddlot trading
practices. As a result, and as described more fully below, the Exchange
proposes the following changes in order to update Rule 411(b) and to
provide a single source of interpretive guidance in accordance with the current oddlot order system and trading practices.
2. Proposed Amendments to Rule 411(b)
The Exchange proposes to amend Rule 411(b) to update and clarify certain oddlot trading practices described in the Rule.
First, the Exchange proposes to amend the first subparagraph of the Rule to clarify that a person, member or member organization shall not enter or accept multiple oddlot orders in the same security where those orders can be aggregated into roundlots. Under the current Rule, members or member organizations must monitor and aggregate oddlot orders received from their customers where appropriate. As amended, the Rule would also explicitly provide that members or member organizations must not submit unaggregated orders.
In addition, the Exchange proposes to limit the requirement to aggregate oddlot orders to regular trading hours from 9:30 a.m. to 4 p.m. The Exchange's member firms have differing systems and procedures that make it difficult to standardize their capability to aggregate oddlot orders prior to the commencement of trading at 9:30 a.m. As a result, the Exchange believes that it is more equitable to limit the aggregation requirement to regular trading hours.
The Exchange also proposes to add a new subparagraph to the Rule to
explicitly provide that no person, member or member organization shall
unbundle market or limit roundlot orders for the purpose of entering
multiple oddlot orders that aggregate to an amount comparable to the amount of the original roundlot order(s).\13\
\13\ Email from Jason Harman, Consultant, NYSE Regulation, to
Nathan Saunders, Special Counsel, and Steve Varholik, Attorney,
Division of Trading and Markets, Commission, on November 18, 2008
(clarifying discussion relating to proposed NYSE Rule 411(b)(3)).
Finally, the Exchange proposes to make technical amendments to Rule
411(b) to reorder and renumber the subparagraphs in this section in accordance with these proposed amendments.
3.Proposed Rescission of Information Memo 9414 and Issuance of New Information Memo
The Exchange is seeking approval from the SEC to rescind Information Memo 9414 and to eliminate the regulatory distinction between oddlot limit and oddlot market orders.
The distinction in the regulatory treatment of oddlot limit and oddlot market orders as described in Information Memo 9414 is no longer necessary or practical in today's market. In the past, as observed by the Exchange, oddlot limit orders could be and were used by market participants to access the oddlot order system in ways that were inconsistent with traditional or standard oddlot trading and that undermined the integrity of the oddlot order system. Since the filing and approval of Information Memo 9414, however, the market has undergone significant changes, including the adoption of Regulation NMS and technological developments impacting order routing and execution. Today, volume is much greater and the speed of the market has increased such that most limit orders are effectively market orders when entered. In addition, there are numerous programs and algorithmic trading platforms that permit market participants to use trading strategies involving both limit and market orders. At the same time, the Exchange has better tools with which to conduct market surveillance and regulation.
In conjunction with these changes to the marketplace, NYSE Regulation has noted the increasing use of oddlot market orders in trading practices that, were they implemented using oddlot limit orders (even marketable limit orders), would be violations of the Exchange's current oddlot rules and interpretive guidance. These trading practices are designed to circumvent the auction market and provide liquidity and pricing that is not otherwise available, or to create an unfair advantage over other market participants, and, as a result, threaten to undermine the economic viability of the oddlot trading system and reduce the DMMs' willingness to provide cost effective and efficient liquidity.
Given this trend, the Exchange believes that it is no longer proper, or consistent with the protection of investors, to maintain a regulatory distinction between oddlot limit and oddlot market orders in determining whether oddlot activity is violative and that, moreover, continuation of this distinction impedes the appropriate regulation of abusive trading practices involving both oddlot limit and oddlot market orders.
In addition, in the interest of providing market participants with a single, comprehensive source of guidance, the Exchange proposes to issue a new Information Memo that would update and restate the Exchange's most current interpretive guidance and application of odd lot trading practices and Rules. The proposed new Information Memo would retain the relevant portions of Information Memo 9414 and prior Information Memos, as well as the more recent guidance issued in Information Memo 0760.
4. Statutory Basis
The statutory basis for the proposed rule change is Section 6(b)(5)
of the Act,\14\ which requires the rules of an exchange to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to remove impediments to and perfect the
mechanism of a free and open market and a national market system and,
in general, to protect investors and the public interest. The proposed
rule change also supports the principles of Section 11A(a)(1) \15\ of
the Act, in that it seeks to ensure economically efficient execution of
securities transactions and fair competition among brokers and dealers and among exchange markets.
\14\ 15 U.S.C. 78f(b)(5).
\15\ 15 U.S.C. 78k1(a)(1).
In particular, as noted above, the proposed rule filing would bring
the Exchange's oddlot Rules and interpretive guidance into line with
the way the oddlot system is currently used by market participants.
The proposed filing also would eliminate a historical distinction in
the regulatory treatment of oddlot trading that is no longer relevant
in today's market. The Exchange has observed patterns of abuse by
market participants who have crafted schemes involving oddlot market
orders that, were they implemented using oddlot limit orders, would be
violations of the Exchange's current oddlot rules and interpretive
guidance. The Exchange believes that, in order to effectively regulate
the use of the oddlot system and protect investors, it is necessary to
close this loophole. In addition, the proposed filing would provide
market participants with a comprehensive source of the Exchange's most current interpretive guidance and
[[Page 72097]]
application of oddlot trading practices and Rules.
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
No written comments were solicited or received with respect to the proposed rule change.
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 the 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
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\16\
\16\ 17 CFR 200.303(a)(12).
Florence E. Harmon,
Acting Secretary.
[FR Doc. E828042 Filed 112508; 8:45 am]
BILLING CODE 801101P
SUMMARY:
New York Stock Exchange LLC,
DOCUMENT BODY 2:
November 19, 2008.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b4 thereunder,\3\ notice is hereby given
that, on November 6, 2008, New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
\1\ 15 U.S.C.78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b4.
I. SelfRegulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange proposes to (i) amend Rule 411(b) concerning certain
oddlot order handling requirements, (ii) rescind NYSE Information
Memorandum (``Information Memo'') 9414 to the extent it created a
distinction in the regulatory treatment of oddlot limit and oddlot
market orders, and (iii) issue a new Information Memo that provides
comprehensive and updated interpretive guidance on, and application of,
current NYSE oddlot trading practices and Rules. This rule filing is
available on the Exchange's Web site at http://www.nyse.com, at the
Exchange's principal office, and at the Public Reference Room of the Commission.
II. SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the selfregulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those 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 parts of such statements.
A. SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
1. Purpose
This proposal is to (i) amend NYSE Rule 411(b) concerning certain oddlot order handling requirements, (ii) rescind NYSE Information Memo 9414 to the extent it created a distinction in the regulatory treatment of oddlot limit and oddlot market orders, and (iii) issue a new Information Memo that provides comprehensive and updated interpretive guidance on, and application of, current NYSE oddlot trading practices and Rules.
Current Operation of the OddLot Order System
The oddlot order system is used for all orders for less than a
unit of trading (a unit of trading is generally referred to as a
``roundlot''), currently set at 100 shares for most NYSElisted
securities.\4\ These orders, which are too small to be handled
efficiently in the regular auction market on the Exchange,
traditionally, have been used by retail investors to buy and sell small amounts of stock. More recently, market
[[Page 72095]]
professionals using certain trading strategies and programs have also accessed the oddlot system.
\4\ The vast majority of securities trade in roundlots of 100
shares; however, there are some securities that trade in roundlots of 10 or even 1 share.
NYSE Rule 124 prescribes certain rules governing the execution of oddlot orders. Among other things, because oddlot orders are executed outside the regular auction market, Rule 124(a) prescribes that the Designated Market Maker (``DMM'') is the contra party for all oddlot orders, thereby providing execution and price guarantees. Pursuant to NYSE Rule 124(c), oddlot market orders and marketable limit orders are subject to automatic execution at the price of the next roundlot transaction in the subject security on the Exchange.
NYSE Rule 411(b) prescribes certain orderhandling requirements for oddlot orders. In particular, Rule 411(b)(1) provides that member organizations may not combine (or ``bunch'') multiple oddlot orders from different customers without prior approval. The Rule also requires member organizations to aggregate oddlot orders, where possible, into as many round lot orders as possible rather than process them separately. Although not expressly stated, Rule 411(b) also implicitly prohibits a customer or member organization from unbundling a roundlot order in order to avoid the roundlot market and take advantage of the oddlot market.
Background
The oddlot system was initially created to replace oddlot dealers on the Exchange. Before the creation of the oddlot system, oddlot dealers made markets in oddlots and either pairedoff oddlot orders against each other or traded with them as dealers. When the Exchange eliminated separate oddlot dealers and adopted Rule 124, DMMs (at the time, specialists) were made the counterparty for each oddlot order execution in their respective stocks.
Because the system forces DMMs to provide liquidity, the Exchange
has always sought to limit the use of the oddlot order system to only
the types of trading it replaced (socalled ``traditional'' or
``standard'' oddlot trading practices) in order to ensure the system's
continued economic viability. In particular, the Exchange has long
prohibited the specific use of the oddlot order system as a
professional trading platform, because it reduces the DMMs' willingness
to provide cost effective and efficient liquidity for the oddlot
system as a whole. Accordingly, the Exchange has on many occasions
issued guidance that any use of the oddlot system in a manner that is
inconsistent with traditional or standard oddlot investment activity is strictly prohibited.
Distinction in Regulatory Treatment of OddLot Limit and OddLot Market Orders
Information Memo 9414 provides that certain trading practices that
rely specifically on oddlot limit orders are flatly prohibited.\5\
Under the terms of Information Memo 9414, however, oddlot market orders were not subject to the same restrictions.
\5\ See Information Memo 9414 (April 18, 1994). See also
Securities Exchange Act Release No. 3433678 (February 24, 1994), 59 FR 10192 (March 3, 1994) (SRNYSE9213).
This distinction in the regulatory treatment between oddlot limit
and oddlot market orders noted in Information Memo 9414 evolved from
changes made to the oddlot order system in and around 1991.\6\ Before
then, DMMs were permitted to charge a differential on (i) all oddlot
limit orders executed through the automated system, and (ii) any odd
lot order that required manual handling; all other oddlot orders,
including market orders, were executed without a differential.\7\
\6\ In May 1992, because it made changes to existing NYSE Rule
124, the Exchange submitted to the Commission the interpretive
guidance that would later become Information Memo 9414, which was
approved in February 1994 after several amendments. See Securities
Exchange Act Release No. 3433678 (February 24, 1994), 59 FR 10192
(March 3, 1994) (SRNYSE9213) (formally adopting Information Memo
9414). Information Memo 9414 was subsequently distributed to all members and member organizations on April 18, 1994.
\7\ See Securities Exchange Act Release No. 3428837 (January 14 [sic], 1991), 56 FR 4660 (February 5, 1991) (SRNYSE9103).
In February 1991, at the conclusion of a six month pilot program,
the Exchange amended NYSE Rule 124 to eliminate price differentials on
oddlot orders executed on the Exchange and extended the ``no
commission policy'' to cover floor brokerage charges on all
systematized oddlot orders. The Exchange stated that, by providing
more economic pricing, the amendments would enhance the efficiency of
oddlot order executions compatible with the traditional oddlot
investing practices of smaller investors. Although there were concerns
about possible adverse impacts to the oddlot market, the data
collected during the implementation of the pilot program reflected that
the mix of oddlot limit and market orders had remained at or near
historical levels and there was no evidence of regulatory issues or trading abuses.\8\
\8\ See Securities Exchange Act Release No. 3428837 (January 14
[sic], 1991), 56 FR 4660 (February 5, 1991) (SRNYSE9103). See
also Securities Exchange Act Release No. 3433678 (February 24, 1994), 59 FR 10192 (March 3, 1994) (SRNYSE9213).
In July 1991, after implementation of the amendments and further observation of the oddlot market, the Exchange released Information Memo 9129. In that Information Memo, the Exchange identified and precluded certain trading practices that had developed that were inconsistent with traditional or standard oddlot trading practices and that undermined the economic benefits derived by the market from the elimination of differential pricing for oddlot orders. These practices included the unbundling of roundlot orders for the purpose of entering oddlot limit orders in comparable amounts, the failure to aggregate into roundlots oddlot orders from the same account or accounts with a common monetary interest, and the entry of oddlot limit orders on both sides of the market for a security in order to capture the ``spread''. The Exchange also emphasized more generally that any oddlot order entry practices intended to circumvent the roundlot auction market were prohibited.\9\
\9\ See Information Memo 9129 (July 25, 1991).
To address these issues in part, in 1992 the Exchange amended NYSE Rule 411(b) to expand the requirement for aggregating oddlot orders to include market participants who entered multiple orders on behalf of various accounts over which they had investment discretion.\10\ \10\ See Securities Exchange Act Release No. 3431048 (August 18, 1992), 57 FR 38706 (August 26, 1992) (SRNYSE9203).
In Information Memo 9414, the Exchange identified and precluded
additional types of trading using oddlot limit orders in particular,
including index arbitrage, program trading and day trading, as
inconsistent with traditional or standard oddlot trading practices and
that undermined the integrity of the oddlot order system and its
purpose. At that time, the Exchange noted that such trading practices using oddlot market orders were not precluded.\11\
\11\ See Information Memo 9414 (April 18, 1994). See also
Securities Exchange Act Release No. 3433678 (February 24, 1994), 59 FR 10192 (March 3, 1994) (SRNYSE9213).
More recently, in Information Memo 0760, the Exchange provided
additional interpretive guidance concerning the oddlot system,
including an overview of various types of prohibited trading practices.\12\
\12\ See Information Memo 0760 (June 29, 2007). This
Information Memo was not filed with the SEC.
Proposed Rule Changes
The rules and interpretive guidance (in the form of Information Memos and Enforcement Decisions) for the
[[Page 72096]]
Exchange's oddlot order system have evolved over the years in response
to changes in the way market participants use the system. This has
resulted in a set of rules and policies that, while comprehensive, is
not readily accessible in one source. Moreover, some of the rules (i.e.
Rule 411(b)) have not been updated to reflect the Exchange's most
current interpretive guidance and application of oddlot trading
practices. As a result, and as described more fully below, the Exchange
proposes the following changes in order to update Rule 411(b) and to
provide a single source of interpretive guidance in accordance with the current oddlot order system and trading practices.
2. Proposed Amendments to Rule 411(b)
The Exchange proposes to amend Rule 411(b) to update and clarify certain oddlot trading practices described in the Rule.
First, the Exchange proposes to amend the first subparagraph of the Rule to clarify that a person, member or member organization shall not enter or accept multiple oddlot orders in the same security where those orders can be aggregated into roundlots. Under the current Rule, members or member organizations must monitor and aggregate oddlot orders received from their customers where appropriate. As amended, the Rule would also explicitly provide that members or member organizations must not submit unaggregated orders.
In addition, the Exchange proposes to limit the requirement to aggregate oddlot orders to regular trading hours from 9:30 a.m. to 4 p.m. The Exchange's member firms have differing systems and procedures that make it difficult to standardize their capability to aggregate oddlot orders prior to the commencement of trading at 9:30 a.m. As a result, the Exchange believes that it is more equitable to limit the aggregation requirement to regular trading hours.
The Exchange also proposes to add a new subparagraph to the Rule to
explicitly provide that no person, member or member organization shall
unbundle market or limit roundlot orders for the purpose of entering
multiple oddlot orders that aggregate to an amount comparable to the amount of the original roundlot order(s).\13\
\13\ Email from Jason Harman, Consultant, NYSE Regulation, to
Nathan Saunders, Special Counsel, and Steve Varholik, Attorney,
Division of Trading and Markets, Commission, on November 18, 2008
(clarifying discussion relating to proposed NYSE Rule 411(b)(3)).
Finally, the Exchange proposes to make technical amendments to Rule
411(b) to reorder and renumber the subparagraphs in this section in accordance with these proposed amendments.
3.Proposed Rescission of Information Memo 9414 and Issuance of New Information Memo
The Exchange is seeking approval from the SEC to rescind Information Memo 9414 and to eliminate the regulatory distinction between oddlot limit and oddlot market orders.
The distinction in the regulatory treatment of oddlot limit and oddlot market orders as described in Information Memo 9414 is no longer necessary or practical in today's market. In the past, as observed by the Exchange, oddlot limit orders could be and were used by market participants to access the oddlot order system in ways that were inconsistent with traditional or standard oddlot trading and that undermined the integrity of the oddlot order system. Since the filing and approval of Information Memo 9414, however, the market has undergone significant changes, including the adoption of Regulation NMS and technological developments impacting order routing and execution. Today, volume is much greater and the speed of the market has increased such that most limit orders are effectively market orders when entered. In addition, there are numerous programs and algorithmic trading platforms that permit market participants to use trading strategies involving both limit and market orders. At the same time, the Exchange has better tools with which to conduct market surveillance and regulation.
In conjunction with these changes to the marketplace, NYSE Regulation has noted the increasing use of oddlot market orders in trading practices that, were they implemented using oddlot limit orders (even marketable limit orders), would be violations of the Exchange's current oddlot rules and interpretive guidance. These trading practices are designed to circumvent the auction market and provide liquidity and pricing that is not otherwise available, or to create an unfair advantage over other market participants, and, as a result, threaten to undermine the economic viability of the oddlot trading system and reduce the DMMs' willingness to provide cost effective and efficient liquidity.
Given this trend, the Exchange believes that it is no longer proper, or consistent with the protection of investors, to maintain a regulatory distinction between oddlot limit and oddlot market orders in determining whether oddlot activity is violative and that, moreover, continuation of this distinction impedes the appropriate regulation of abusive trading practices involving both oddlot limit and oddlot market orders.
In addition, in the interest of providing market participants with a single, comprehensive source of guidance, the Exchange proposes to issue a new Information Memo that would update and restate the Exchange's most current interpretive guidance and application of odd lot trading practices and Rules. The proposed new Information Memo would retain the relevant portions of Information Memo 9414 and prior Information Memos, as well as the more recent guidance issued in Information Memo 0760.
4. Statutory Basis
The statutory basis for the proposed rule change is Section 6(b)(5)
of the Act,\14\ which requires the rules of an exchange to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to remove impediments to and perfect the
mechanism of a free and open market and a national market system and,
in general, to protect investors and the public interest. The proposed
rule change also supports the principles of Section 11A(a)(1) \15\ of
the Act, in that it seeks to ensure economically efficient execution of
securities transactions and fair competition among brokers and dealers and among exchange markets.
\14\ 15 U.S.C. 78f(b)(5).
\15\ 15 U.S.C. 78k1(a)(1).
In particular, as noted above, the proposed rule filing would bring
the Exchange's oddlot Rules and interpretive guidance into line with
the way the oddlot system is currently used by market participants.
The proposed filing also would eliminate a historical distinction in
the regulatory treatment of oddlot trading that is no longer relevant
in today's market. The Exchange has observed patterns of abuse by
market participants who have crafted schemes involving oddlot market
orders that, were they implemented using oddlot limit orders, would be
violations of the Exchange's current oddlot rules and interpretive
guidance. The Exchange believes that, in order to effectively regulate
the use of the oddlot system and protect investors, it is necessary to
close this loophole. In addition, the proposed filing would provide
market participants with a comprehensive source of the Exchange's most current interpretive guidance and
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application of oddlot trading practices and Rules.
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
No written comments were solicited or received with respect to the proposed rule change.
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 the 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
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\16\
\16\ 17 CFR 200.303(a)(12).
Florence E. Harmon,
Acting Secretary.
[FR Doc. E828042 Filed 112508; 8:45 am]
BILLING CODE 801101P