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

Federal RegisterMar 31, 2006

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SECURITIES AND EXCHANGE COMMISSION

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

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

March 22, 2006.

Introduction

II.

Description of the Proposal

Proposed Automated Market

Automated Access to Display Book System

Liquidity Available for Automatic Execution

(a)

Specialist Interest Filed and Reserve

(b)

Floor Broker Agency Interest File and Reserve

Autoquote

Automatic Executions

(a)

Priority, Parity, and Precedence

(b)

Automated Routing Away

(c)

Tick-Restricted Orders, Stop Orders, and Other Orders Eligible for Automatic Execution

Availability of Direct+

(a)

Liquidity Replenishment Points

(1)

Sweep LRPs

(2)

MLRPs

Role of the Specialists in the Hybrid Market

Specialist Algorithms

(a)

Quoting Messages

(b)

Trading Messages

(1)

Specialists' Ability to Systematically Price Improve Incoming Orders

(2)

Specialists' Ability to Hit Bids or Take Offers

Limitations on Members' Trading Because of Customers' Orders—NYSE Rule 92

Policy for Communicating with the Specialist Algorithm

Specialist Algorithm Record Requirements

Proposal to Make Direct+ Permanent

Auction Limit Orders and Auction Market Orders

Other Changes

Intermarket Sweep Order

Record of Orders/Order Tracking

NYSE Rule 91

Hybrid Market Implementation Plan

Phase 1—Floor Broker Agency Interest Files, Specialist Interest Files, and Systematic Integration of Priority, Parity, and Yielding Requirements

Phase 2—API and Specialist Algorithms

Phase 3—Automatic Routing of Orders, Elimination of Direct+ Restrictions, “Slow” Market Indicators, and Gap Quoting

Phase 4—Floor Broker Reserve Features, Sweeps, LRPs, and New Order Types

Phase 5—New Reporting Templates and Elimination of Suspensions of Autoquote and Automatic Executions

Limited Hybrid Market Pilot

III.

Summary of Comments and NYSE's Response

Liquidity Available for Automatic Executions

Specialist Interest File and Specialist Reserve

(a)

Specialists' Parity

Floor Broker Agency Interest Files and Reserve

Automatic Executions

Sweeping the Display Book System

Automated Routing to Other Markets

Availability of Direct+ and Liquidity Replenishment Points

Role of the Specialist in the Hybrid Market

Specialist Algorithm

Specialists' Ability to Systematically Price Improve Incoming Orders

Auction Limit and Auction Market Orders

IV.

Discussion

Increased Access to Display Book System

Liquidity Replenishment Points

Autoquote

Liquidity Available for Automatic Execution

Automatic Executions

Role of Specialist in the Hybrid Market

Price Improvement

Ability to Hit Bids or Take Offers

NYSE Rule 92

Communicating with the Specialist Algorithm

Changes to the Auction Market and New Order Types

Intermarket Sweep Order

Implementation Plan

Interpretive Issues

Accelerated Approval of Amendment Nos. 6, 7, and 8

VI.

Solicitation of Comments on Amendment Nos. 6, 7, and 8

VII.

Conclusion

I. Introduction

On February 9, 2004, the New York Stock Exchange LLC (“NYSE” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “Commission”), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)

and Rule 19b-4 thereunder,

a proposed rule change to create a “Hybrid Market” by, among other things, increasing the availability of automatic executions in its existing automatic execution facility, NYSE Direct+® (“Direct+”), and providing a means for participation in the expanded automated market by its floor members.

15 U.S.C. 78s(b)(1).

17 CFR 240.19b-4.

On August 2, 2004, NYSE filed Amendment No. 1 to the proposed rule change.

The Commission published the proposed rule change, as amended by Amendment No. 1, for comment in the

Federal Register

on August 16, 2004.

On August 26, 2004, the Commission extended the public comment period with respect to the First Notice to September 22, 2004.

In response to the First Notice, the Commission received 17 comment letters from 15 commenters.

See

Letter from Darla C. Stuckey, Corporate Secretary, NYSE, to Nancy J. Sanow, Assistant Director, Division of Market Regulation (“Division”), Commission, dated July 30, 2004, and accompanying Form 19b-4, which replaced the original filing in its entirety (“Amendment No. 1”).

See

Securities Exchange Act Release No. 50173 (August 10, 2004), 69 FR 50407 (“First Notice”).

See

Securities Exchange Act Release No. 50277, 69 FR 53759 (September 2, 2004).

See

Letters from Eric D. Roiter, Senior Vice President and General Counsel, Fidelity Management & Research Company, dated August 10, 2004 (“Fidelity Letter I”); James L. Rothenberg, Esq., dated August 20, 2004 (“Rothenberg Letter”); Donald E. Weeden, dated August 31, 2004 (“Weeden Letter”); Thomas Peterffy, Chairman, and David M. Battan, Vice President, Interactive Brokers Group, dated September 7, 2004 (“IBG Letter I”); Jose L. Marques, PhD, Managing Member, Telic Management LLC, dated September 21, 2004 (“Telic Letter”); Junius W. Peake, Monfort Distinguished Professor of Finance, Kenneth W. Monfort College of Business, University of Northern Colorado, dated September 22, 2004 (“Peake Letter I”); Ari Burstein, Associate Counsel, Investment Company Institute, dated September 22, 2004 (“ICI Letter I”); Kim Bang, President and Chief Executive Officer, Bloomberg Tradebook LLC, dated September 22, 2004 (“Bloomberg Letter I”); Ellen L.S. Koplow, Executive Vice President and General Counsel, Ameritrade, Inc., dated September 22, 2004 (“Ameritrade Letter”); Lisa M. Utasi, President, and Kimberly Unger, Executive Director, The Security Traders Association of New York, Inc., dated September 22, 2004 (“STANY Letter”); George W. Mann Jr., EVP & General Counsel, Boston Stock Exchange, dated September 22, 2004 (“BSE Letter”); Bruce Lisman, Bear, Stearns & Co. Inc., dated September 28, 2004 (“Bear Stearns Letter”); Donald D. Kittell, Executive Vice President, Securities Industry Association, dated October 1, 2004 (“SIA Letter I”); Edward J. Nicoll, Chief Executive Officer, Instinet Group, dated October 25, 2004 (“Instinet Letter”); Eric D. Roiter, Senior Vice President and General Counsel, Fidelity Management & Research Company, dated October 26, 2004 (“Fidelity Letter II”); Philip Angelides, Treasurer, State of California, dated November 23, 2004 (“Angelides Letter”); and Eric D. Roiter, Senior Vice President and General Counsel, Fidelity Management & Research Company, dated December 8, 2004 (“Fidelity Letter III”).

On November 8, 2004 and November 9, 2004, the Exchange filed Amendment Nos. 2 and 3, respectively.

The Commission published the proposed rule change, as further amended by Amendment Nos. 2 and 3, for comment in the

Federal Register

on November 22, 2004.

In response to the Second Notice, the Commission received nine comment letters from eight commenters.

See

Form 19b-4 dated November 8, 2004 (“Amendment No. 2”) and Partial Amendment dated November 9, 2004 (“Amendment No. 3”).

See

Securities Exchange Act Release No. 50667 (November 15, 2004), 69 FR 67980 (“Second Notice”).

See

Letters from Gregory van Kipnis, Managing Partner, Invictus Partners, LLC, dated December 10, 2004 (“Invictus Letter”); Ari Burstein, Associate Counsel, Investment Company Institute, dated December 13, 2004 (“ICI Letter II”); Ann L. Vlcek, Vice President and Associate General Counsel, Securities Industry Association, dated December 13, 2004 (“SIA Letter II”); Thomas Peterffy, Chairman, and David M. Battan, Vice President, Interactive Brokers Group, dated December 14, 2004 (“IBG Letter II”); William R. Power, Member and Director, Chicago Board Options Exchange, Incorporated, dated December 21, 2004 (“Power Letter”); Marc L. Lipson, Associate Professor, Terry College of Business, The University of Georgia, dated January 4, 2005 (“Lipson Letter”); Edward S. Knight, The Nasdaq Stock Market, dated January 26, 2005 (“Nasdaq Letter”); and George Rutherfurd, Consultant, dated March 10, 2005 (“Rutherfurd Letter I”) and April 8, 2005 (“Rutherfurd Letter II”).

On June 17, 2005, the Exchange filed Amendment No. 5 to the proposed rule change.

The Commission published the proposed rule change, as further amended by Amendment No. 5, for comment in the

Federal Register

on June 29, 2005.

In response to the Third Notice, the Commission received six comment letters.

See

Form 19b-4 dated June 17, 2005 (“Amendment No. 5”). The Exchange submitted Amendment No. 4 to the proposed rule change on May 25, 2005, and subsequently withdrew Amendment No. 4 on June 17, 2005.

See

Securities Exchange Act Release No. 51906 (June 22, 2005), 70 FR 37463 (“Third Notice”).

See

Letters from George U. Sauter, Managing Director, The Vanguard Group, Inc., dated July 20, 2005 (“Vanguard Letter”); Ari Burstein, Associate Counsel, Investment Company Institute, dated July 20, 2005 (“ICI Letter III”); Donald D. Kittell, Executive Vice President, Securities Industry Association, dated July 20, 2005 (“SIA Letter III”); George Rutherfurd, Consultant, dated July 20, 2005 (“Rutherfurd Letter III”); Kim Bang, President and Chief Executive Officer, Bloomberg Tradebook LLC, dated July 28, 2005 (“Bloomberg Letter II”); and Frank A. Torino, dated September 27, 2005 (“Torino Letter”).

In total, the Commission received 43 comment letters on the amended proposal (including 32 comment letters with respect to the First, Second, and Third Notices).

On September 21,

2005, the Exchange filed a response to the comment letters.

See supra

notes 6, 9, and 10. The Commission received a comment letter on Amendment No. 4, which was withdrawn by the Exchange.

See

Letter from Junius W. Peake, Monfort Distinguished Professor of Finance, Kenneth W. Monfort College of Business, University of Northern Colorado, dated June 17, 2005 (“Peake Letter II”). In addition, the Commission received three comment letters from the same commenter in response to Amendment Nos. 6 and 7.

See

Letters from George Rutherfurd, Consultant, dated November 1, 2005 (“Rutherfurd Letter IV”), November 8, 2005 (“Rutherfurd Letter V”), and November 17, 2005 (“Rutherfurd Letter VI”). Finally, the Commission received seven other comment letters from two commenters.

See

Letters from Warran P. Meyers, President, Independent Broker Action Committee, Inc., dated December 7, 2005 (“IBAC Letter I”), February 2, 2006 (“IBAC Letter II”), and March 17, 2006 (“IBAC Letter III”),

and George Rutherfurd, Consultant, dated December 11, 2005 (“Rutherfurd Letter VII”), December 17, 2005 (“Rutherfurd Letter VIII”), February 1, 2006 (“Rutherfurd Letter IX”), and February 13, 2006 (“Rutherfurd Letter X”).

See

Letter from Mary Yeager, Assistant Secretary, NYSE, to Jonathan G. Katz, Secretary, Commission, dated September 21, 2005 (“Response to Comments”).

On September 16, 2005, the Exchange filed Amendment No. 6 to the proposed rule change.

In Amendment No. 6, the Exchange proposes to amend NYSE Rule 104 to state that specialists may only provide price improvement to incoming orders that are marketable. In addition, NYSE proposes to amend NYSE Rule 70.20 to limit the ability of interest in the floor broker agency interest file to trade on parity with orders in the customer limit order display book (“Book”) during a sweep.

See

Form 19b-4 dated September 16, 2005 (“Amendment No. 6”).

On October 11, 2005, the Exchange filed Amendment No. 7 to the proposed rule change.

In Amendment No. 7, the Exchange made non-substantive stylistic, conforming, and technical changes to certain Exchange rules governing the Hybrid Market. In Amendment No. 7, the Exchange also proposes to amend NYSE Rule 92 to reflect the operation of the specialist systems that employ algorithms to generate quoting and trading messages (“Specialist Algorithms”). Specifically, the Exchange proposes that the specialist would not be deemed to have “knowledge” of a particular incoming order that is viewed by the Specialist Algorithm if the Specialist Algorithm is designed in a manner that prevents a quoting or trading message from being affected by a later incoming order. In addition, NYSE proposes in Amendment No. 7 to amend NYSE Rule 13.30 and the definitions of stop and stop limit orders to reflect the automatic execution of elected stop and stop limit orders in the Display Book system.

See

Form 19b-4 dated October 11, 2005 (“Amendment No. 7”).

The Display Book system (“Display Book system”) is an order management and execution facility. The Display Book system receives and displays orders to the specialists, contains the Book, and provides a mechanism to execute and report transactions and publish the results to the Consolidated Tape. In addition, the Display Book system is connected to a variety of other Exchange systems for the purposes of comparison, surveillance, and reporting information to customers and other market data and national market systems, that is, the Intermarket Trading System, Consolidated Tape Association, Consolidated Quotation System, etc.

On March 14, 2006, the Exchange filed Amendment No. 8

to the proposed rule change. In Amendment No. 8, NYSE proposes to: (1) Amend proposed NYSE Rules 13 and 124 to specify that a round lot portion of a part of round lot (“PRL”) order is an “Auto Ex Order”

and that the odd lot portion of a PRL order would be executed at the same price as the round lot portion of the PRL order and processed in the Odd-Lot Execution System;

(2) amend proposed NYSE Rule 13 to reflect that stop orders and stop limit orders may still be represented manually by a floor broker in the trading “Crowd;”

(3) amend the definition of immediate or cancel (“IOC”) order in proposed NYSE Rule 13 to: (a) Propose an IOC order that is designed to be in compliance with Regulation NMS; (b) specify that NYSE IOC orders would be eligible to be routed away during a sweep; and (c) eliminate the previously proposed changes to the treatment of commitments to trade received through the Intermarket Trading System (“ITS Commitments”);

(4) amend its proposed definition of Intermarket Sweep order in proposed NYSE Rule 13 to specify that this type of order would be permitted to sweep the Display Book system, and the portion that was not executed would be immediately cancelled; (5) amend proposed NYSE Rule 36 to state that a specialist may only use a wired or wireless device that has been registered with the Exchange to communicate with the Specialist Algorithms and provide that specialist firms must create and maintain records of all messages generated by the Specialist Algorithm; (6) amend proposed NYSE Rule 60 to: (a) Set forth the instances during which Autoquote

will update the quote even if automatic executions are not available; (b) set forth the instances during which Autoquote will update the quote when Autoquote and automatic execution are suspended and disseminate a 100 share quote in certain situations; and (c) propose to use an indicator when the NYSE quote is not available for automatic execution due to a gapped quotation or liquidity replenishment point (“LRP”) to signify that the NYSE quote is not firm; (7) amend proposed NYSE Rule 70.20 to: (a) Permit a floor broker to leave the Crowd without canceling its floor broker agency interest file

to recharge its handheld device and (b) specify the procedures for entering interest in the floor broker agency interest file before the open; (8) amend proposed NYSE Rule 72 to specify the priority and parity rules for instances when there are shares remaining after a sweep that triggers an LRP; (9) amend NYSE Rule 76 to reflect that it would not apply to elected stop or stop limit orders other than those manually represented in the Crowd by a floor broker; (10) amend proposed NYSE Rule 104 to: (a) Permit specialists to manually layer dealer interest in the specialist interest file; (b) permit specialists to enter certain quoting messages when automatic executions and Autoquote are suspended; (c) amend the definition of “meaningful amount” for purposes of determining when a specialist could provide price improvement; and (d) require specialists to hire independent auditors to review their algorithms on an annual basis; (11) amend proposed NYSE Rule 123A.30 to: (a) Provide systematic conversion of elected or converted percentage orders that are converted on a destabilizing tick and that permit the specialist to trade on parity (“CAP-DI orders”) on the same side as a specialist when the specialist is bidding (offering) or trading and an automatic execution occurs against a specialist's proprietary interest and (b) clarify the execution of contra-side elected and converted CAP-DI orders; (12) amend proposed NYSE Rule 123F to codify that NYSE may execute an Auction Limit (“AL”) order or market order at a price that matches a better away market; (13) amend proposed NYSE Rule 1000 to: (a) Clarify that automatic executions will resume in the same manner as Autoquote; (b) prohibit short sale orders, except those for Regulation SHO

pilot securities, from sweeping the Display Book system; (c) eliminate the provision that would have suspended the operation of Direct+ when an away market disseminates a better quote; (d) eliminate the proposal that would have permitted automatic executions to continue while the specialist reports a block trade until the quote decremented to 100 shares; (e) specify the process for determining when a security that is priced at $300.00 or more would be eligible for automatic executions; (f) specify that automatic executions would be suspended on one side of the market when a bid (offer) is

outside the momentum LRP;

(g) specify that any shares remaining after an execution in IOC orders, NYSE IOC orders, or Intermarket Sweep orders would be cancelled after sweeping the Display Book system; and (h) clarify that auto ex limit orders, except IOC orders, that are not able to be immediately executed due to a suspension of Direct+ would be placed in the Book; and (14) amend Rule 1001.

See

Form 19b-4 dated March 14, 2006 (“Amendment No. 8”).

See

note 29

infra

and accompanying text for a description of “Auto Ex Order.”

See

note 34

infra

See

note 46

infra

and accompanying text for a description of “Crowd.”

Similarly, NYSE also proposes to eliminate previously proposed changes to the treatment of ITS Commitments in NYSE Rule 15A.60.

See

note 58

infra

and accompanying text for a description of Autoquote.

See

note 43

infra

and accompanying text for a description of the floor broker agency interest file.

See

Securities Exchange Act Release No. 50103 (July 28, 2004), 69 FR 48008 (August 6, 2004).

See

note

infra

and accompanying text for a description of momentum LRPs.

On December 14, 2005, the Commission approved on an accelerated basis a proposed rule change by the Exchange to implement and test certain proposed functions of the Hybrid Market, known as Phase 1 of the Hybrid Market, on a pilot basis (“Pilot”).

See

Securities Exchange Act Release No. 52954, 70 FR 75519 (December 20, 2005).

See also

Third Notice,

supra

note 11, for a description of Phase 1 of the Hybrid Market implementation plan. The Commission notes that it received one comment letter opposing the implementation of the Pilot.

See

Letter from George Rutherfurd, Consultant, dated December 13, 2005. On February 21, 2006, the Exchange filed a proposed rule change pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(5) thereunder to amend the manner in which CAP-DI orders convert in certain situations (“Pilot Amendment”).

See

Securities Exchange Act Release No. 53359 (February 24, 2006), 71 FR 10736 (March 2, 2006). On March 13, 2006, the Exchange filed a proposed rule change pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder to extend the Pilot until March 24, 2006 (“Pilot Extension”).

See

Securities Exchange Act Release No. 53487 (March 15, 2006), 71 FR 14278 (March 21, 2006).

This order approves the proposed rule change, as amended by Amendment Nos. 1, 2, 3, 5, 6, 7, and 8. The Commission is also providing notice and soliciting comments on Amendment Nos. 6, 7, and 8 to the proposed rule change.

II. Description of the Proposal

Currently, NYSE is primarily a floor-based auction market. NYSE members operate on the NYSE floor, representing their customers' orders for execution in a largely manual environment. NYSE provides limited automated access to its market through its automatic execution facility, Direct+. According to NYSE, automatic executions represent approximately 11% of its market share volume, with the bulk of executions occurring manually in its floor-based auction.

With this proposed rule change, NYSE has proposed to alter the way its market operates by allowing more orders to be executed automatically in Direct+. In essence, NYSE has proposed to move from a floor-based auction market with limited automated order interaction to a more automated market with limited floor-based auction market availability.

See

NYSE Market Statistics (visited on March 9, 2006),

http://www.nyse.com/Frameset.html?displayPage=/marketinfo/1022221393893.html

(noting that Direct+ volume, for the year ended December 31, 2005, is 11.4% of NYSE volume).

To create its Hybrid Market, NYSE has proposed changes to its current Direct+ rules to make the system available to more order types and to limit the instances when automatic executions are not available. In addition, NYSE has proposed to permit its floor members to participate in its expanded automated market in an electronic fashion. Specifically, NYSE has proposed to permit specialists and floor brokers to electronically provide liquidity that would be available for automatic executions.

In addition, NYSE has proposed changes to its auction market to accommodate those investors that wish to continue to have their orders exposed for price improvement. To this end, NYSE has proposed to create a new order type—the Auction Limit order, and to amend the way market orders are handled in the auction.

A. Proposed Automated Market

1. Automated Access To Display Book System

Currently, Direct+ is only available, with respect to stocks, to designated marketable limit orders, without tick restrictions, of 1,099 shares or less (“Auto Ex Orders”).

In addition, multiple Auto Ex Orders are not allowed to be entered for the account of the same person within a 30-second time period from the entry of an initial Auto Ex Order.

Auto Ex Orders trade only against interest reflected in the Exchange's published quotation—that is, the NYSE best bid or offer (“BBO”). Eligible limit orders are not required to be entered as Auto Ex Orders. Rather, the member organization entering the order (or its customer if enabled by the member organization) must make a specific designation to choose to enter an order into Direct+.

See

NYSE Rules 13 and 1000. Orders in Investment Company Units (as defined in paragraph 703.16 of the Listed Company Manual), Trust Issued Receipts (as defined in NYSE Rule 1200), streetTRACKS Gold Shares (as defined in NYSE Rule 1300), or any product subject to the same rules as Investment Company Units (collectively “ETFs”), however, may be entered in a size greater than 1,099 shares.

See

Securities Exchange Act Release No. 52160 (July 28, 2005), 70 FR 44963 (August 4, 2005) (amending NYSE Rules 13 and 1005 to eliminate the 10,000 share restriction and the 30-second order entry restriction for Auto Ex Orders in ETFs).

See

NYSE Rule 1005.

NYSE proposes to broaden access to Direct+ for stocks and ETFs.

Specifically, NYSE has proposed to amend its Rule 13 to define an Auto Ex Order to include: (1) All marketable limit orders;

(2) designated market orders; (3) designated IOC orders;

(4) elected stop and stop limit orders that have been systematically delivered to the Display Book system; (5) buy minus, sell plus, and short sale orders systematically delivered to the Display Book system; (6) CAP-DI Orders; (7) the round lot portion of a PRL order;

(8) orders that were initially eligible for automatic execution that have been cancelled and replaced with a subsequent Auto Ex Order;

and (9) Intermarket Sweep orders.

In addition,

NYSE proposes to eliminate the size restrictions for Auto Ex Orders and eliminate the 30-second order entry restriction.

See

proposed NYSE Rule 1002.

Marketable limit orders,

i.e.

, limit orders to buy (sell) priced at or above (below) the best offer (bid) at the time the order is routed to the Display Book system, would no longer need to be designated as requesting an automatic execution in Direct+. All marketable limit orders would be automatically executed with or without designation.

See

proposed NYSE Rule 13. Non-marketable limit orders would be routed to the Display Book system, even if designated auto ex, and would be displayed as limit orders on the Book.

See

proposed NYSE Rule 1000(d)(v);

see also

Amendment No. 8. These booked orders would be available to participate in sweep transactions. When such orders become marketable, they would be included in the quote and could participate in automatic executions.

NYSE proposes two types of IOC orders.

See

proposed NYSE Rule 13;

see also

Amendment No. 8. One would be for the purposes of Regulation NMS which would not be routed to away markets during a sweep. Instead, if an away market is disseminating a better protected bid or offer, the IOC order would be cancelled. The other type of IOC order, the NYSE IOC order, would allow NYSE to route portions to away markets to satisfy better protected bids or offers and would cancel once it was no longer able to receive an execution on NYSE. The Exchange also proposes to amend the definition of an IOC order to permit the entry of IOC orders before the opening of the Exchange for participation in the opening trade. If not executed as part of the opening trade, the order would be treated as cancelled.

See

proposed NYSE Rule 13;

see also

Amendment No. 8. Odd-lot orders and odd-lot portions of PRLs would not be eligible for automatic execution in Direct+. The Exchange noted that, under NYSE Rule 124, odd-lot orders are received, processed, and executed by an Exchange system designated for such purpose with the specialist as the contra-party at the price of certain round-lot transactions (“Odd-Lot Execution System”). Accordingly, the Odd-Lot Execution System provides a type of automatic execution that is governed by NYSE Rule 124, not the rules governing Direct+. The Exchange also clarified in the Third Notice that when automatic executions are suspended, odd-lot executions also would be suspended to prevent odd-lots from trading at prices unrelated to round-lot orders in the same security and to provide consistency in the availability of automatic executions.

Currently, the Display Book system changes an order that cancels and replaces an Auto Ex Order to a non-Auto Ex Order. Under the Hybrid Market, the Display Book system would no longer make this change, so that a cancel/replace order of an Auto Ex Order would now be eligible for automatic execution.

A few order types would be ineligible for automatic execution, including CAP, “opening only” (OPG), “limit on close” (LOC), “market on close” (MOC), and “basis” (BAS) orders.

2. Liquidity Available for Automatic Execution

Currently, the Display Book system contains the Book, which is operated and represented by the specialist. The Book contains limit orders routed to NYSE though SuperDOT

or left with the specialist by floor brokers for representation. The Display Book system also may reflect specialist quotes at the NYSE BBO. Auto Ex Orders interact with the interest displayed on the Display Book system at the NYSE BBO.

SuperDOT is an electronic order-routing system used by NYSE member firms to send market and limit orders to NYSE. SuperDOT is also referred to as DOT.

To further automate its market, NYSE has proposed to permit its floor members—that is, specialists and floor brokers—to place liquidity in the Display Book system at various prices, in newly-created separate files that would be available for execution against incoming Auto Ex Orders. This would allow floor members and the investors they represent on the floor to more fully participate in automatic executions.

(a) Specialist Interest File and Reserve

Specialists would have the ability to manually and systematically place in a separate file (“specialist interest file”) within the Display Book system their dealer interest at prices at or outside the Exchange BBO.

NYSE intends the specialist interest file to assist the specialist, in an automated environment, to fulfill its obligations to provide capital, bridge temporary gaps in supply and demand, and dampen volatility. In addition, the specialist interest file would allow specialists to provide increased liquidity at prices at or outside the Exchange BBO, which could potentially improve the prices at which Auto Ex Orders are executed.

See

proposed NYSE Rules 104(b)(i) and 104(c)(viii);

see also

Amendment No. 8 and Pilot.

See

Response to Comments, supra note 14.

The Exchange also proposes to provide specialists with the ability to maintain undisplayed reserve interest on behalf of their dealer accounts at the Exchange BBO, provided that they display at least 2,000 shares of dealer interest at that price on the same side of the market as the reserve.

After an execution against a specialist's displayed bid (offer), if the specialist has reserve interest remaining at that best bid (offer), the amount of displayed interest would be automatically replenished by the specialist's reserve interest, if any, so that at least 2,000 shares of specialist interest is displayed (or whatever specialist interest remains at the best bid (offer), if less than 2,000 shares).

See

proposed NYSE Rule 104(d)(i).

See

proposed NYSE Rule 104(d)(ii).

Specialist interest at the Exchange BBO would be disseminated; specialist reserve and specialist interest away from the Exchange BBO ordinarily would not be disseminated. Each specialist, however, has the option to disseminate its interest away from the Exchange BBO via OpenBook

or another Exchange data distribution channel.

OpenBook is a compilation of limit order data for all NYSE traded securities that the Exchange provides to market data vendors, broker-dealers, private network providers, and other entities through a data feed.

See

Securities Exchange Act Release No. 44138 (December 7, 2001), 66 FR 64895 (December 14, 2001).

(b) Floor Broker Agency Interest File and Reserve

Floor brokers, similarly, would be permitted to represent electronically the orders they hold by including these orders in a separate file (“floor broker agency interest file”) within the Display Book system.

Floor brokers would be permitted to place liquidity electronically at or outside the Exchange BBO. In addition, floor broker agency interest files would be allowed to participate in the opening trade.

Floor brokers would not be permitted to enter in the floor broker agency interest files any interest that restricts the specialist's ability to trade on parity with the floor broker agency interest file.

See

proposed NYSE Rule 70.20(a)(i).

See

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

See

proposed NYSE Rule 70.20(a)(i).

A floor broker would be required to be in close physical proximity to the post for the security—that is, in the Crowd

—while it has orders in its floor broker agency interest file.

NYSE would require that a floor broker's agency interest file be cancelled when the floor broker leaves the Crowd.

If the floor broker nevertheless leaves the Crowd without canceling its agency interest files, and one or more executions occur with its agency interest, the floor broker would be held to such executions.

See

proposed NYSE Rule 70.30. The Exchange proposes to define a Crowd as being any five contiguous panels at any one post where securities are traded. A floor broker would be considered to be in the Crowd if it is physically present at one of the five contiguous panels. However, the requirement that a floor broker be in the Crowd to have agency interest files would not apply to orders governed by section 11(a)(1)(G) of the Act (“G” orders), 15 U.S.C. 78k(a)(1)(G).

See

proposed NYSE Rule 70.20(a)(ii).

A floor broker could enter interest in its agency interest file prior to the open regardless of its location on the floor, but would have to be in the Crowd at the open to participate in the opening trade. Any agency interest entered prior to the open would have to be cancelled before the open, if the floor broker is not in the Crowd.

See

proposed NYSE Rule 70.20(j)(ii);

see also

Amendment No. 8.

See

proposed NYSE Rule 70.20(f). However, a floor broker could leave the Crowd to recharge its handheld device without canceling its interest.

See id

See also

Amendment No. 8.

See

proposed NYSE Rule 70.20(f).

Because the floor broker agency interest file is part of the Display Book system and because of the specialist's obligation to maintain a fair and orderly market, the Exchange proposes to allow the specialist ordinarily to see the aggregate number of shares of all floor broker agency interest files at each price.

A floor broker, however, would have the option to exclude all of its floor broker agency interest file from the information available to the specialist.

A floor broker's ability to exclude volume from the aggregate agency interest information available to the specialist would not be available during the open.

Floor broker agency interest excluded from the aggregated agency interest information available to the specialist would be able to participate in automatic executions, but would not participate in a manual execution unless the floor broker represents the interest manually.

Furthermore, floor broker agency interest that has been excluded from the aggregate information available to the specialist would not participate in the closing trade.

See

proposed NYSE Rule 70.20(g). Specialists would not be able to see individual orders represented in the floor broker agency interest file.

See id.

See

proposed NYSE Rule 70.20(k).

See

proposed NYSE Rule 70.20(h).

See

proposed NYSE Rule 70.20(k).

The Exchange proposes to permit floor brokers to maintain undisplayed reserve interest at the Exchange BBO provided that a minimum of 1,000 shares of the floor broker's agency interest is displayed at that price.

If an execution at the Exchange BBO occurs that does not exhaust the broker's interest at that price, the displayed interest would be automatically replenished from the floor broker's reserve interest, if any, so that at least 1,000 shares (or whatever amount remains, if less than 1,000 shares) is displayed.

There would be no reserve capability for floor broker agency

interest entered into the files during the open and close.

See

proposed NYSE Rule 70.20(c)(ii).

See

proposed NYSE Rule 70.20(c)(iii).

See

proposed NYSE Rule 70.20(k).

The floor broker agency interest file at the Exchange BBO, except reserve, would be disseminated. Floor broker agency interest away from the BBO would not be displayed in OpenBook or other Exchange data distribution channel.

3. Autoquote

Autoquote is part of the Display Book system that immediately displays customer limit orders received on the Exchange.

Autoquote immediately updates the NYSE BBO when a customer limit order is received by NYSE that improves the NYSE quote.

In addition, Autoquote updates the NYSE BBO when an execution occurs to reflect a new NYSE BBO from interest held in the Display Book system. The Exchange proposes to amend its Rule 60 to modify the circumstances under which Autoquote would be suspended.

This system was developed to facilitate specialists' compliance with the Commission's Limit Order Display Rule.

See

17 CFR 242.604.

NYSE Rule 60(e).

Specifically, Autoquote would be suspended in three circumstances: (1) When the specialist manually reports a block size transaction that involves orders in the Display Book system; (2) when the specialist gaps the quote;

or (3) when a LRP is reached.

When Autoquote is suspended due to a manual report of a block trade that involves orders in the Display Book system,

Autoquote would resume when the manual reporting is concluded.

When Autoquote is suspended following a gap quote, Autoquote would resume upon the report of a manual transaction or the publication of a non-gapped quotation.

See

note 139

infra

, for a description of gapped quotations.

See

proposed NYSE Rule 60(e)(i).

See

Section II(A)(5)(a)

infra

, and proposed NYSE Rule 1000(a)(iv) for a description of LRPs.

See

proposed NYSE Rule 1000(a)(v).

See

Section II(A)(5)

infra.

See

proposed NYSE Rule 60(e)(ii)(B).

See

proposed NYSE Rule 60(e)(ii)(A).

When Autoquote is suspended by an LRP that is reached by an Auto Ex Order that sweeps to the LRP price,

and if the Auto Ex Order is filled or if its unfilled balance is not capable of trading at a price beyond the sweep LRP price, then Autoquote would resume in no more than five seconds after the LRP is reached.

If the Auto Ex Order is capable of trading at a price beyond the LRP price, and would not create a locked or crossed market if quoted, then Autoquote would resume upon the report of a manual transaction or the publication of a new quote by the specialist, but in any event in no more than ten seconds.

Finally, if the Auto Ex Order is capable of trading at a price beyond the LRP price but would create a locked or crossed market if quoted, then Autoquote would resume upon a manual transaction or the publication of a new quote by the specialist.

See

Section II(A)(5)(a)(1)

infra.

See

proposed NYSE Rule 60(e)(ii)(C).

See id.

In Amendment No. 8, the Exchange represented that it would implement an alert for specialists to facilitate their compliance with the Commission's Limit Order Display Rule, 17 CFR 242.604.

When Autoquote is suspended by a momentum LRP (“MLRP”),

Autoquote would resume in no more than ten seconds unless the Auto Ex Order would create a locked or crossed market.

If a locked or crossed market exists, Autoquote would resume once a manual transaction is reported.

See

Section II(A)(5)(a)(2)

infra.

See

proposed NYSE Rule 60(e)(iii).

See id.

See also

note 68

supra.

Autoquote would update the quote in the following situations even though automatic executions are not available. First, when the Exchange best bid (offer) is outside a MLRP, and such MLRP has not yet been reached, the Exchange would permit Autoquote to continue to operate, while automatic executions are not available.

Second, NYSE would keep Autoquote active when an order or a cancellation of an order arrives that would not result in a locked or crossed market in a security priced at $300 or more that has been determined to be ineligible for automatic execution (“high-priced security”)

or a manual execution takes place in such security.

Third, if there is a cancellation of the Exchange best bid (offer) in a high-priced security when the market in such security is internally locked or crossed, and autoquoting of the next best bid (offer) would create a locked or crossed market on the Exchange, NYSE would automatically generate a quote of 100 shares at the bid (offer) price that existed at the time of the cancellation.

See

proposed NYSE rule 60(e)(iv)(a);

see also

Amendment No. 8.

See

note 142

infra

and accompanying text on the definition of high-priced security.

See

proposed NYSE rule 60(e)(iv)(b)(i);

see also

Amendment No. 8.

See

proposed NYSE rule 60(e)(iv)(b)(ii);

see also

Amendment No. 8.

Finally, in the following situations, the Exchange would update its quote even though Autoquote is suspended due to an LRP or a gapped quotation, and automatic executions are not available: (1) If part of the existing Exchange best bid (offer) cancels, the Exchange would use Autoquote to update its quote to reflect the remaining volume;

(2) if the entire existing Exchange best bid (offer) cancels, the Exchange would automatically generate a quote of 100 shares at the bid (offer) price that existed at the time of the cancellation;

or (3) if there is a cancellation of the Exchange best bid (offer) when the market is internally locked or crossed, and autoquoting of the next best bid (offer) would create a locked or crossed market on the Exchange, NYSE would automatically generate a quote of 100 shares at the bid (offer) price that existed at the time of the cancellation.

See

proposed NYSE rule 60(e)(iv)(c)(i);

see also

Amendment No. 8.

See

proposed NYSE rule 60(e)(iv)(c)(ii);

see also

Amendment No. 8.

See

proposed NYSE rule 60(e)(iv)(c)(iii);

see also

Amendment No. 8.

4. Automatic Executions

Currently, an Auto Ex Order equal to or greater than the size of the Exchange's BBO trades with the entire published bid or offer,

and a new bid or offer is then published. If any shares of an Auto Ex Order remain available for execution after it trades with the published quote, the remaining shares are routed to the floor and represented in the auction market.

Auto Ex Orders that cannot be immediately executed are placed in the Book and represented as limit orders in the auction market.

When the national best bid or offer (“NBBO”) is disseminated by another market and an Auto Ex Order is delivered to the specialist, it must either match the better price displayed by the other market or send an ITS Commitment to the other market.

See

NYSE Rule 1000(a).

See

NYSE Rule 1001(b).

See

NYSE Rule 1000.

See

NYSE Rule 15A.

As proposed, Auto Ex Orders would execute against interest at the Exchange BBO including displayed interest and reserve.

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

reached, or a LRP is reached, whichever occurs first.

See

proposed NYSE Rule 1000(d).

See

proposed NYSE Rule 1000(d)(ii)(A)-(D).

During a sweep, the residual would trade with the orders in the Display Book system, floor broker agency interest, and any specialist interest capable of execution, at a single price (the “clean-up price”), such that any price improvement is given to the orders and interest in the Display Book system rather than the Auto Ex Order.

Accordingly, orders in the Book, floor broker agency interest, and any specialist interest capable of trading with the residual would receive the clean-up price.

Any specialist interest that remains at the clean-up price after the residual has traded would be automatically cancelled by the Exchange.

See

proposed NYSE Rule 1000(d)(iii)(A).

See

proposed NYSE Rule 1000(d)(iii)(B).

See

proposed NYSE Rule 1000(d)(iii)(C)(ii).

Any residual remaining after the sweep would become a bid (offer) at the order's limit price, if any, or the LRP price, whichever is lower (higher).

If the residual can execute at the price at which it is bidding (offering), it would have priority for one trade over other interest at that price.

If the residual executes at a different price—within the parameters of its limit, if any—it would trade on parity.

If an Auto Ex Order is designated IOC, any unfilled balance remaining after the sweep would be automatically cancelled.

See

proposed NYSE Rule 1000(d)(iv).

See

proposed NYSE Rule 72(j);

see also

Amendment No. 8.

See id.

See

proposed NYSE Rule 1000(d)(iv).

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

The Exchange requests that the Commission extend this interpretation to its Hybrid Market proposal.

See

note 203

infra.

Automatic executions of Auto Ex Orders may elect stop orders, stop limit orders, and percentage orders electable at the price of such executions.

Currently, any stop orders so elected are executed pursuant to Exchange auction market procedures and are not guaranteed an execution at the same price as subsequent automatic executions of Auto Ex Orders.

The Exchange previously sought and the Commission approved an interpretation

that, for the purposes of NYSE Rule 123A, the specialist is not required to fill any stop orders elected by an execution of an Auto Ex Order at the price of the electing sale in any instance where the specialist was required by NYSE Rule 1001(a)(iv) to take the contra-side of a Direct+ execution. NYSE proposes to retain this interpretation.

See

NYSE Rule 1004.

See id.

See

note 203

infra.

(a) Priority, Parity, and Precedence

NYSE executions are governed by its rules of priority, parity, and precedence.

These rules dictate which order or quote is able to execute against an incoming order and the allotment of shares, if more than one order or quote is at the BBO. Generally, the first bid (offer) at the BBO has priority to execute against the next incoming order.

Once a trade occurs with the bid (offer) that has priority, other bids (offers) at that price (including any remaining interest from the bid (offer) that had priority) generally trade on parity, meaning they split evenly the remainder of the incoming order, up to the size of their own order.

See

NYSE Rules 72, 104, and 108.

See

NYSE Rule 72 I(a). A bid (offer) that establishes the Exchange BBO is entitled to priority at that price for one trade, except a specialist bid or offer entitled to priority must yield to limit orders on the Book at the same price.

See

NYSE Rule 72 III. When bids (offers) are on parity, Exchange rules dictate that in certain circumstances, a particular participant is guaranteed a portion of an order based on the size of its bid (offer),

i.e.

, precedence based on size.

See

NYSE Rule 72 I(c).

A specialist must always yield priority to the orders it represents on the Book,

and today is limited somewhat in its ability to trade with orders represented by floor brokers. Specifically, when the specialist is decreasing or liquidating its dealer position, the specialist is entitled to trade on parity with orders represented by floor brokers, unless the floor broker (or its customer) requests that the specialist refrain from trading along with the order the floor broker represents.

100

When a specialist is establishing or increasing its dealer position, NYSE Rule 108 states that the specialist is not “entitled” to parity with orders represented on the floor. According to NYSE, it has interpreted this rule to permit specialist trading on parity when establishing or increasing a position if the specialist is granted permission from the floor broker (or its customer) to do so.

101

See

NYSE Rule 92.

100

See

NYSE Rule 104.10(6)(i)(C).

101

See

NYSE Information Memo 05-81 (October 26, 2005) (interpreting NYSE Rule 108(a) as permitting a specialist to be on parity with orders in the Crowd when the specialist is establishing or increasing its position, provided that the brokers representing orders in the Crowd permit the specialist to trade along with them by not objecting to such participation).

See

Securities Exchange Act Release No. 53208 (February 2, 2006), 71 FR 6804 (February 9, 2006).

In its Hybrid Market, the Exchange proposes to amend its rules that govern priority, parity, and precedence with respect to interest placed in the Display Book system. Generally, an incoming Auto Ex Order would trade first with the displayed bid (offer) that established the BBO.

102

If the Auto Ex Order is of greater size than the bid (offer) that has priority, the remaining balance of the Auto Ex Order would trade with other displayed interest at the BBO.

103

The additional displayed interest would trade on parity.

104

Thereafter, if the Auto Ex Order has size remaining to be executed, it would then execute against undisplayed specialist or floor broker reserve at the BBO, which would trade on parity.

105

102

See

proposed NYSE Rule 1000(d)(i). If the specialist establishes the BBO, however, it would have to yield to all interest in the Book.

103

See

proposed NYSE Rule 1000(d)(ii). As noted above, floor brokers would not be permitted to enter interest into its floor broker agency interest files that restricts the specialist's ability to trade on parity. In addition, specialists would not be permitted to trade on parity until orders in the Book at the same price are executed in full.

104

See

proposed NYSE Rule 1001(a)(i).

105

See

proposed NYSE Rules 1000(d)(ii)(A), 70.20(c)(iv), and 104(d)(iii).

The Exchange proposes that all floor broker agency interest files at the same price be on parity with each other, except a floor broker agency interest file that establishes the BBO would be entitled to priority in accordance with NYSE Rule 72.

106

Finally, with respect to transactions against the published bid or offer, no published bid or offer may claim precedence based on size with respect to executions against Auto Ex Orders.

107

106

See

proposed NYSE Rule 70.20(b).

107

See

proposed NYSE Rule 1001(b). This reflects the current NYSE Rule 1001(c), which is proposed

in this filing to be renumbered as NYSE Rule 1001(b).

In Amendment No. 6, the Exchange proposes to amend NYSE Rule 70.20(d)(i) to provide that, during a sweep, the amount of floor broker agency interest that would have been displayed had the clean-up price become the Exchange BBO would trade on parity with displayed interest (

i.e.

, orders on the Book) at that price.

108

The amount of any floor broker agency interest that would have been placed in the broker's reserve, however, would yield to displayed interest.

109

108

As noted earlier, floor broker agency interest would not be disseminated unless at the Exchange's BBO.

109

See

proposed NYSE Rule 70.20(d)(ii). Floor brokers would have to indicate when entering interest in the floor broker agency interest file the amount that would be displayed and the amount that would be placed in reserve if the price becomes the BBO.

The Exchange proposes that interest reflected in the specialist interest file would be entitled to trade on parity with interest in the floor broker agency interest file, regardless of whether the specialist is increasing or decreasing its position, but, in all cases, specialist interest would have to yield to orders in the Book. Specifically, during a sweep, if no orders remain on the Book capable of trading at the clean-up price, specialist interest could trade and would be on parity with floor broker interest at that price.

110

During a sweep, neither the specialist interest file nor the floor broker agency interest file could claim precedence based on size.

111

110

See

proposed NYSE Rule 1000(d)(iii)(C)(i).

111

See

proposed NYSE Rule 72 I(c)-(e).

The Exchange also proposes to modify NYSE Rule 72 III to add that a cancellation of an entire bid or offer entitled to priority under the rule would clear the floor, after which all bids and offers would be deemed to be re-entered and on parity.

112

The Exchange believes this amendment is warranted because a cancellation of a bid or offer that was entitled to priority has the same effect as a trade.

112

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

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

Interest at Exchange BBO

An incoming Auto Ex Order would first trade with displayed interest at the Exchange BBO. Within this category, the order of execution would be:

• First, interest that clearly establishes the BBO would be entitled to priority at that price for one trade, except that specialist interest that clearly established the BBO would yield to all later-arriving limit orders at the BBO on the Book. If there are no limit orders on the Book at the BBO, specialist interest that clearly established the BBO would be entitled to priority over the floor broker agency interest file for one trade.

• Second, all other displayed interest at the BBO would trade on parity, except that specialist interest displayed at the BBO could not trade until all limit orders on the Book at the BBO are filled. If there are no limit orders on the Book at the BBO, specialist interest displayed at that price would trade on parity with the floor broker agency interest files displayed at the BBO. A specialist's ability to trade on parity with the floor broker agency interest files would not be restricted by the specialist's proprietary position (

i.e.

, the specialist would trade on parity whether establishing/increasing or liquidating/decreasing its position).

113

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

• Third, reserve interest (

i.e.

, non-displayed interest) of the specialist or floor broker at the BBO would trade on parity. Additional specialist interest (

i.e.

, other non-displayed interest generated by the Specialist Algorithm) at the BBO would trade only if no other interest exists at the BBO.

114

See infra

Section II(B)(1) for a description of this “additional specialist interest.”

Interest Outside Exchange BBO That Participates in a Sweep

• Orders on the Book outside the Exchange BBO would trade at the clean-up price on parity with the amount of floor broker agency interest that would have been displayed had the clean-up price become the Exchange BBO. The amount of any floor broker agency interest that would have been placed in the broker's reserve would yield to displayed interest.

• Specialist interest would participate in the sweep provided there are no limit orders on the Book remaining at the clean-up price. Specialist interest participating in the sweep would trade on parity with any remaining floor broker agency interest at the clean-up price.

(b) Automated Routing Away

In the case of all orders submitted to the Exchange electronically, except for certain IOC orders, ITS Commitments, and Intermarket Sweep orders, where a better bid or offer is published by another ITS participating market center in which an automatic execution is available, or a published bid or offer is otherwise protected from a trade-through by Commission rule or the Intermarket Trading System plan, and the specialist has not systematically matched the price associated with that better bid or offer, the Exchange would automatically route to such other market center a commitment to trade that satisfies that published bid or offer, unless the member entering the order indicates that it has contemporaneously satisfied the better published bid or offer.

115

If the commitment to trade is not filled or not filled in its entirety, the balance would be returned to the Exchange and handled consistent with the order's instructions, which includes automatic execution, if available.

116

The order entry time associated with this returned portion of the order would be the time of its return, not the time the order was first entered on the Exchange.

117

With respect to the operation of sweeps, automated bids (offers) published by away markets that are better than the clean-up price would be satisfied in their entirety unless the order is an IOC order

118

or an Intermarket Sweep order.

119

115

See

proposed NYSE Rule 15A.50

116

See id.

117

See id.

118

In such case, the IOC order would be cancelled by NYSE to prevent trading through the away market.

119

See

proposed NYSE Rule 1000(d)(III)(D) and Rule 600(b)(30) of Regulation NMS, 17 CFR 242.600(b)(30).

Tick-restricted orders in the Display Book system would be filled electronically and participate in automatic executions and sweeps as their ticks and limits, if any, allow.

120

Specifically, buy sweeps would cause short sales and sell plus orders to be executed above the offer, while sell sweeps would cause buy minus orders to be executed below the bid. Sell short orders, other than those involving Regulation SHO pilot securities, would not sweep the Display Book system after automatically executing against the bid,

as the sweep transaction would occur on a minus tick.

121

120

Specifically, the Exchange proposes in NYSE Rule 13 that sell “plus” limit orders, buy “minus” limit orders, sell “plus” market orders, and by “minus” market orders designated for automatic execution that are systematically delivered to the Display Book system be eligible to be automatically executed in accordance with NYSE Rules 1000-1004.

121

See

proposed NYSE Rule 1000(d)(iii)(E);

see also

Amendment No. 8.

Under the proposal, stop orders (including stop limit orders) on the Display Book system would be electronically elected and may participate in automatic executions.

122

Elected stop orders on the same side of the market as the Auto Ex Order could trade at the electing bid (offer) price after the Auto Ex Order is filled to the extent that there is volume available.

123

In addition, an execution at the clean-up price could also elect stop orders. Elected stop orders on the same side of the market as a sweeping Auto Ex Order could trade at the clean-up price after the Auto Ex Order is filled to the extent that there is volume available.

124

122

See

proposed NYSE Rule 13.

123

Elected stop orders on the contra side of the market of the Auto Ex Order could trade with the Auto Ex Order at the electing bid (offer) price after interest in the Display Book system at such price has been filled to the extent that there is volume available from the Auto Ex Order.

124

Elected stop orders on the contra side of the market of the Auto Ex Order could trade with the Auto Ex Order at the clean-up price after interest in the Display Book system at such price has been filled to the extent that there is volume available from the Auto Ex Order.

Furthermore, under proposed amendments to NYSE Rule 123A, the elected or converted portion of a CAP-DI order could be automatically executed and participate in a sweep. An elected or converted CAP-DI order on the same side of the market as an automatically executed electing order could participate in a transaction at the bid (offer) price if there is volume associated with the bid (offer) remaining after the electing order is filled in its entirety.

125

An elected or converted CAP-DI order on the same side of the market as an automatically executed electing order that sweeps the Display Book system could also participate in a transaction at the clean-up price if there is volume remaining on the Display Book system or from contra-side elected CAP-DI orders at that price.

126

Furthermore, an elected or converted CAP-DI order on the contra-side of the market of an automatically executed electing order could execute against the Auto Ex Order at the electing price if there is volume remaining after the Auto Ex Order executes against interest in the Display Book system at the bid (offer) price.

127

An elected or converted CAP-DI order on the contra-side of the market of an automatically executed electing order that sweeps the Display Book system could execute against the Auto Ex Order at the clean-up price if there is volume remaining from the Auto Ex Order, from contra-side elected CAP-DI orders, or other interest at that price.

128

Finally, when a specialist is bidding (offering) or trading and an automatic execution occurs against such specialist proprietary interest, marketable CAP-DI orders on the same side as the specialist's interest would be automatically converted to participate in such execution.

129

If the execution elects a contra-side stop or stop limit order and the specialist is required to execute the elected stop or stop limit order, then CAP-DI orders on the same side of the market as the specialist would be automatically converted to participate in the execution of the stop or stop limit orders.

130

125

See

proposed NYSE Rule 123A.30(a)(i).

126

See id.

127

See

proposed NYSE Rule 123A.30(a)(ii);

see also

Amendment No. 8.

128

See

proposed NYSE Rule 123A.30(a)(ii);

see also

Amendment No. 8.

129

See

proposed NYSE Rule 123A.30(a)(iii);

see also

Pilot Amendment.

130

See id.

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

131

See

NYSE Rule 123A.30.

5. Availability of Direct+

Current Exchange rules provide that automatic executions are available from the time the Exchange disseminates a published bid or offer until 3:59 p.m. for stocks and Trust Issued Receipts, or 4:14 p.m. for Investment Company Units, or within one minute of any other closing time of the Exchange's floor market.

132

Auto Ex Orders entered prior to the dissemination of a bid or offer or after 3:59 p.m./4:14 p.m. or within one minute of any other closing time, are handled in the auction market. The Exchange proposes to extend the availability of automatic executions through the close of regular trading for a particular product (

e.g.

, 4 p.m./4:15 p.m.).

133

132

See

NYSE Rule 1002.

133

See

proposed NYSE Rule 1002.

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

134

or (6) when trading in the subject security has been halted.

135

134

On January 17, 2006, the Exchange filed a proposed rule change seeking to amend the procedure for suspending automatic execution in connection with a block size transaction.

See

Form 19b-4 dated January 17, 2006 (SR-NYSE-2006-01). The Exchange proposes to require specialists to publish a 100 × 100 share market quote that reflects the last reported transaction in connection with a block size transaction.

135

See

NYSE Rule 100(a)(i)-(vi).

NYSE proposes to limit the instances when Direct+ is unavailable.

136

Specifically, pursuant to proposed NYSE Rule 1000(a),

137

automatic executions in Direct+ would not occur when: (1) The NYSE published quotation is in non-firm quote mode; (2) trading in a security has been halted;

138

(3) the quote is gapped in accordance with Exchange procedures;

139

(4) trading on the Exchange reaches a LRP; (5) a block size transaction, as defined in NYSE Rule 127.10,

140

that involves

orders in the Display Book system is being manually reported;

141

or (6) an Auto Ex Order is entered for a security whose closing price (or the closing bid price if there were no transactions on the previous trading day) on the Exchange is $300 or more.

142

Direct+ would be unavailable on both sides of the market in these situations.

143

NYSE proposes to disseminate an indicator to alert investors when automatic executions are not available against its quote. In addition, when automatic executions are not available due to a LRP or gapped quotation, NYSE would disseminate an indicator to signify that the NYSE quotation is not firm.

144

In any instance where the automatic execution feature is not available, Auto Ex Orders would be directed to the Exchange's auction market for representation.

145

136

In Amendment No. 8, NYSE proposes to remove its previously proposed rule that would have made Direct+ unavailable when a better price was published by an away market. As noted above, NYSE proposes to automatically route orders, except Intermarket Sweep orders and certain IOC orders, to ITS participant markets that make automatic execution immediately available and are protected from trade throughs, unless the specialist matches the better price.

137

See

proposed NYSE Rule 1000(a)(i)-(vi).

138

No executions, either automatic or manual, would be possible on the Exchange when trading has been halted.

139

A specialist could cause a non-auto-executable quote by gapping the quotation due to an order imbalance in accordance with the policies and procedures of the Exchange. Gap quotes are used to signal an imbalance so as to attract contra-side liquidity in an attempt to mitigate volatility. The size of an imbalance suitable for gapped quoting is at least 10,000 shares or a quantity of stock having a value of $200,000 or more, although depending on the trading characteristics of the security, the appropriate conditions for gapped quoting could be higher.

See

NYSE Information Memo 04-27 (June 9, 2004).

When the quotation is gapped, automatic executions and Autoquote would be suspended, and the NYSE quote would be identified as non-firm. Incoming orders and cancellations would update the Book electronically. Once a trade occurs or a non-gapped quote is published, Autoquote and automatic execution would resume.

140

NYSE Rule 127.10 defines a “block” size as at least 10,000 shares or a quantity of stock having a

market value of $200,000 or more, whichever is less.

See

Amendment No. 8.

141

The Exchange originally proposed to permit automatic executions to continue while a block size transaction was manually reported until the bid (offer) decremented to 100 shares. In Amendment No. 8, NYSE proposes to suspend both Autoquote and automatic executions as soon as the report template is opened by the specialist to report a block size transaction that involves orders on the Display Book system.

See

proposed NYSE Rule 60(e)(ii)(B) and NYSE Rule 1000(a)(v).

142

See

proposed NYSE Rule 1000(a)(vi);

see also

Amendment No. 8. In addition, in Amendment No. 8, NYSE proposes to suspend automatic executions for such securities on both sides of the market.

143

Automatic executions would be suspended on only one side of the market when an execution at the NYSE quote would trigger the MLRP.

See

proposed NYSE Rule 1000(c).

See also

proposed NYSE Rule 60(e)(iv)(a).

144

See

proposed NYSE Rule 60(c)(2)(b);

see also

Amendment No. 8.

145

See

NYSE Rule 1000(d)(v).

(a) Liquidity Replenishment Points

The Exchange proposes LRPs as pre-determined price points that would halt automatic executions for varying periods of time depending on the price and remaining size, if any, of an Auto Ex Order. LRPs may be triggered by a sweep or electronic trading that results in rapid price movement over a short period. A LRP converts the electronic market to an auction market on a temporary basis, with the intent of moderating volatility in the security by affording an opportunity for new orders, the Crowd, and the specialist to add liquidity. The Exchange proposes two LRPs—a price-based or sweep LRP and a momentum LRP.

(1) Sweep LRPs

The sweep LRP price would be set at the nearest five-cent increment outside the Exchange BBO, rounded away to the next nearest nickel.

146

When a sweep LRP is reached, the sweeping order would trade at that price to the extent of the volume available at that price. If there is a residual remaining after a sweep that has triggered an LRP, it would be bid (offered) at the LRP price, unless the order is NYSE IOC, IOC or Intermarket Sweep, in which case it would be cancelled.

147

146

See

proposed NYSE Rule 1000(a)(iv)(A).

147

See

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

Automatic executions and Autoquote would then be suspended, but incoming orders and cancellations would continue to be reflected automatically in the Display Book system, although new incoming orders would not be displayed.

148

However, if a displayed bid (offer) cancels, a new bid (offer) would be autoquoted.

149

148

See

Second Notice,

supra

note . According to the Exchange, the Display Book system has the ability to accept incoming orders and cancellations when automatic executions and Autoquote are suspended; however, only the specialist would be able to view this information. These incoming orders and cancellations are held in the Display Book system in the sequence that they are received, until Autoquote and automatic executions are available.

149

See

proposed NYSE Rule 60(e)(iv)(c);

see also

Amendment No. 8.

Under the proposal, automatic executions and Autoquote would resume in no more than five seconds when the sweeping order is filled in its entirety (

i.e.

, no residual exists), when the residual is cancelled (

i.e.

, the sweeping order is IOC), or when the residual is not capable of trading at a price above (in the case of a buy order) or below (in the case of a sell order) the sweep LRP (that is, when the residual has a limit price equal to the LRP).

150

Automatic executions and Autoquote would resume in no more than 10 seconds when the residual is able to trade at a price above (below) the sweep LRP, but that price would not create a locked or crossed market.

151

Automatic executions and Autoquote would resume earlier if the specialist has manually traded or quoted the market before 10 seconds have elapsed. NYSE expects the specialist to quote or trade before 10 seconds have elapsed, unless an imbalance exists, a trade is being put together in the Crowd, or market conditions otherwise prevent such actions from occurring.

150

See

proposed NYSE Rules 60(e)(ii)(C) and 1000(b);

see also

Amendment No. 8.

151

See id.

Finally, where a residual is able to trade at a price above (below) the sweep LRP, and that price would create a locked or crossed market, or when a locked or crossed market results from the entry of orders or cancellations during the 5- and 10-second periods described above, automatic executions and Autoquote would resume with a manual trade or the publication of a new quote by the specialist.

152

In this circumstance, there is no maximum time period after which automatic executions and Autoquote would automatically resume.

153

If the locking or crossing residual order cancels, automatic executions and Autoquote would resume within the relevant 5- or 10-second timeframe described above, unless a manual trade or quote occurs before then.

154

If the displayed bid (offer) on the contra-side of the locking or crossing residual order cancels, a new bid (offer) would be autoquoted.

152

See

proposed NYSE Rules 60(e)(ii)(C) and 1000(b).

153

Specialists would still be required to immediately display customer limit orders.

See

Rule 604 of Regulation NMS, 17 CFR 242.604.

See also

proposed NYSE Rule 60(e)(ii)(C) and 60(e)(iii).

154

See

Second Notice,

supra note 8.

(2) MLRPs

The momentum LRP would be triggered by a specified price movement over a specified period during a trading session. The Exchange is proposing a LRP based on price movement over a period of time because it is concerned that excessive volatility could arise in situations other than electronic sweeps. MLRPs are designed to limit the amount of price change that can occur within a 30-second time period to the greater of 25 cents or 1% of the security price (rounded to the nearest cent).

The MLRP range at any time may be calculated as follows. First, the low MLRP range is calculated by taking the high transaction price of the security within the prior 30 seconds and subtracting the greater of (a) 25 cents or (b) 1% of the security's price (rounded to the nearest cent).

155

Next, the high MLRP range is calculated by taking the low transaction price of the security within the prior 30 seconds and adding the greater of (a) 25 cents or (b) 1% of the security's price (rounded to the nearest cent).

156

For example, assume that during the prior 30 seconds, the high transaction price is $20.15, the low transaction price is $19.92, and the last sale price was $20.15. The low MLRP range would be $19.90, calculated by subtracting $0.25 ($0.25 is greater than 1% of the security's price) from the high transaction price of $20.15. The high MLRP range would be $20.17, calculated by adding $0.25 to the low transaction price of $19.92. The MLRP

range could change based on an event (

e.g.

, a new trade) or the passage of time.

155

See

proposed NYSE rule 1000(a)(iv)(B)(ii).

156

See id.

If there was no transaction on the Exchange within 30 seconds, the MLRP range would be based off the last transaction on the Exchange.

157

For example, if the last sale price was $20.15 and no transactions have occurred within the prior 30 seconds, the low MLRP range would be $19.90 and the high MLRP range would be $20.40. Automatic executions could occur at prices at or within the MLRP range. Automatic executions that would occur at prices outside the MLRP range would cause the suspension of automatic executions and Autoquote. An Auto Ex Order that reaches the MLRP price would trade at that price to the extent possible, and thereafter automatic executions and Autoquote would be suspended.

158

The Display Book system would be automatically updated by incoming orders and cancellations, although new incoming orders would not be displayed.

159

157

See

proposed NYSE rule 1000(a)(iv)(B)(iii).

158

See

proposed NYSE Rule 1000(a)(iv)(B).

159

See

Second Notice,

supra

note 8.

see also

Amendment No. 8.

161

See id.

In addition, if the NYSE published bid or offer is at a price beyond the MLRP range, automatic executions on that side of the market would be suspended because an automatic execution could not occur at that price.

162

This is the only instance when automatic executions would be suspended on one side of the market. Autoquote would continue, and orders and cancellations would update the Display Book system.

163

Automatic executions would resume when a bid or offer within the MLRP range is autoquoted or the MLRP range changes as a result of the moving 30-second timeframe.

164

162

see

proposed NYSE Rule 1000(c);

see also

Amendment No. 8.

163

See supra

note 148.

164

See id.

B. Role of the Specialist in the Hybrid Market

1. Specialist Algorithms

The Exchange proposes to allow specialists to participate automatically in the Hybrid Market and replicate the performance of certain specialist privileges and obligations in an electronic way. For instance, specialists would be permitted to establish electronic connections to the Display Book system that would provide them with access to certain information before other market participants, and be permitted to make a range of specified quoting and trading decisions based on that information.

Specifically, the Exchange proposes to provide specialists with the ability to implement systems that use proprietary algorithms, based on predetermined parameters, to electronically participate in the Hybrid Market (“Specialist Algorithm”).

165

The Specialist Algorithm would communicate with the Display Book system via an Exchange-owned external application program interface (“API”).

166

The Specialist Algorithm is intended to replicate electronically some of the activities specialists are permitted to engage in on the floor in the auction market, and to facilitate specialists' ability to fulfill their obligations to maintain a fair and orderly market.

165

See

proposed NYSE Rule 104(b).

166

In Amendment No. 8, the Exchange clarified that specialists would develop Specialist Algorithms to communicate with the Display Book system via the API.

The Specialist Algorithm would receive information via the API, including information about orders entering NYSE systems, before that information is available to other market participants.

167

NYSE systems would enforce the proper sequencing of incoming orders and algorithmically-generated messages.

168

The Specialist Algorithm and the specialists on the floor would not have the ability to affect the arrival of orders at the Display Book system, or the sequence in which orders and algorithmically-generated messages are processed by the Display Book system.

169

The Specialist Algorithm, however, would be able to generate certain specified quoting and trading messages based on the information it receives through the API. Once an algorithmic message has been generated, it cannot be stopped, changed, or cancelled on its way to the Display Book system.

167

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

See

proposed NYSE rule 104(c)(ii).

168

See

proposed NYSE Rule 104(b)(ii)(A).

169

See

proposed NYSE Rule 104(b)(ii)(B).

The Display Book system would not accept algorithmically-generated messages from the Specialist Algorithm when automatic executions are unavailable except in certain specified situations.

170

Specifically, when automatic executions are suspended, but Autoquote is active, the Display Book system would accept algorithmically-generated messages from the Specialist Algorithm to generate a bid or offer that improves the Exchange BBO or supplements the size of the existing BBO.

171

170

See

proposed NYSE Rule 104(c)(vi).

171

See

proposed NYSE Rule 104(c)(vi)(i);

See also

Amendment No. 8.

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

172

See

proposed NYSE Rule 104(c)(vi)(ii) and 104(c)(viii);

See also

Amendment No. 8.

Furthermore, the Display Book system would not process algorithmically-generated messages from the Specialist Algorithm during the time a block size transaction involving orders in the Display Book system is being manually reported

173

or when the messages would trigger the automatic execution of an AL order or an AM order, or would result in such order's execution with an existing contra-side specialist bid or offer.

174

However, the Display Book system would process algorithmically-generated messages from the Specialist Algorithm to provide price improvement to AL and AM orders in accordance with the price improvement parameters described below.

175

Algorithmically generated messages would not be permitted to create a

locked or crossed market

176

and would have to comply with all SEC and NYSE rules, policies, and procedures governing specialist proprietary trading.

177

173

See

proposed NYSE Rule 104(c)(v).

174

See

proposed NYSE Rule 104(c)(vii) and

infra

Section II(D).

175

See

proposed NYSE Rule 104(c)(vii).

176

See

proposed NYSE Rule 104(c)(iv).

177

See

proposed NYSE Rule 104(c)(iii). NYSE has represented that prior to the rollout of the third phase of the Hybrid Market, it will develop guidance to clarify how it expects specialists to comply with the NYSE Rule 104 in the Hybrid Market. Telephone call between Catherine R. Kinney, President and Co-Chief Operating Officer, NYSE Group, Inc. and Richard G. Ketchum, Chief Regulatory Officer, NYSE Regulation, Inc., and Kelly M. Riley, Assistant Director, Division, SEC, on March 22, 2006.

See also

Amendment No. 8.

(a) Quoting Messages

The Exchange proposes to allow the Specialist Algorithm to generate quoting messages to: (1) Supplement the size of the existing Exchange BBO; (2) place within the Display Book system specialist reserve interest at the Exchange BBO; (3) layer within the Display Book system specialist interest at varying prices outside the Exchange BBO;

178

(4) establish the Exchange BBO; and (5) withdraw previously established specialist interest at the Exchange BBO.

179

178

In Amendment No. 8, NYSE proposes to permit specialists to manually place interest in the specialist interest files at and outside the BBO. Such interest would remain in the Display Book system until it is traded with or cancelled.

See

proposed NYSE Rule 104(c)(viii);

see also

Pilot.

179

See

proposed NYSE Rule 104(b)(i)(A)-(E).

A quoting message would not be able to interact with the order that preceded it. In addition, the Specialist Algorithm could move its quote away from the inside market only after the order it is reacting to has been processed.

(b) Trading Messages

The Exchange proposes to allow the Specialist Algorithm to generate trading messages to: (1) Provide “additional specialist volume” to partially or completely fill an order at the Exchange BBO;

180

(2) match better bids and offers published by other market centers where automatic executions are immediately available; (3) provide price improvement to an order, subject to the conditions outlined below; and (4) trade with the Exchange published quotation “ that is, “hit bids” or “take offers.”

181

180

Specialists could supply additional trading volume at the BBO beyond the amount in the specialist's reserve, if any. The Exchange proposes to amend NYSE Rule 104 to provide that this additional volume, which is not part of the reserve and which is not displayed, could complete an order, thereby providing a single-priced execution, or partially fill the remainder of the order.

See

proposed NYSE Rule 104(b)(i)(F). Additional specialist volume would yield to displayed and reserve interest.

181

See

proposed NYSE Rule 104(b)(i)(F)-(I).

The generation of algorithmic messages to trade in response to a particular order does not guarantee that the specialist would be able to interact with that order or that the specialist has priority in trading with that order.

182

For example, specialist interest may not trade with the order identified by the algorithmic message because the specialist's message did not arrive in the Display Book system in time or the specialist has to yield to the Book. Such interest would be automatically cancelled.

183

182

See

proposed NYSE Rule 104(c)(i)(C).

183

See

proposed NYSE Rule 104(c)(i)(D).

(1) Specialists' Ability To Systematically Price Improve Incoming Orders

The Specialist Algorithm would enable specialists, on behalf of their dealer accounts, to electronically provide price improvement to all or part of a marketable incoming order, including an AL order or AM order,

184

provided the following conditions are met: (i) The specialist is represented in a “meaningful amount” in the bid with respect to price improvement provided to an incoming sell order, or in the offer with respect to price improvement provided to an incoming buy order; and (ii) the price improvement provided by the specialist is (a) at least three cents where the quotation spread is more than five cents, (b) at least two cents where the quotation spread is three, four, or five cents, or (c) one cent where the quotation spread is two cents.

185

NYSE proposes to define the term “meaningful amount” as at least 1,000 shares for the 100 most active securities on the Exchange based on average daily volume and at least 500 shares for all other securities on the Exchange.

186

Specialist systematic price improvement would only be available for incoming orders that are marketable (

i.e.

, that can trade with the published bid or offer).

187

In addition, the Exchange proposes to amend NYSE Rule 123A.30 to provide for systematic conversion of marketable CAP-DI orders previously entered with the specialist to allow these orders to participate on parity with the specialist when the specialist is price improving an incoming order.

188

184

Specialist Algorithms could price improve AL orders and AM orders, consistent with the requirements noted above, by generating a message to trade with the AL or AM order before it is processed by the Display Book system, or executing the AL or AM order at its quoted price once the order has been processed by the Display Book system. Algorithmic messages that would trigger the automatic execution of AL or AM orders or that would result in such orders trading with the specialist's existing contra-side bid or offer would be prohibited.

See

proposed NYSE Rule 104(c)(vii).

185

See

proposed NYSE Rule 104(e)(i)(A)-(D).

186

See proposed NYSE Rule 104(e)(ii);

see also

Amendment No. 8. NYSE would disseminate a list of the 100 most active securities on a quarterly basis, or more frequently as the Exchange may determine from time to time.

See

proposed NYSE Rule 104(e)(ii).

187

See

proposed NYSE Rule 104(e)(i). With respect to incoming orders that are not marketable (

i.e.

, those orders that would establish a new best bid or best offer), the specialist could not trade with such order until the new bid or offer is publicly disseminated.

188

See

proposed NYSE Rule 123A.30(a)(iii).

(2) Specialists' Ability To Hit Bids or Take Offers

Specialists' messages to trade with the Exchange published quote must include information that indicates the quote has been publicly disseminated.

189

In addition, to ensure that a specialist's algorithmic message to trade with the Exchange published quotation does not possess any speed advantage in reaching the Display Book system, Exchange systems would process such messages in a manner that gives specialists and other market participants a similar opportunity to trade with the Exchange's published quotation, by delaying the processing of this type of trading message from the Specialist Algorithm.

190

189

See

proposed NYSE Rule 104(c)(i)(A).

190

See

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

See

Third Notice,

supra

note 11.

2. Limitations on Members' Trading Because of Customers' Orders—NYSE Rule 92

NYSE Rule 92(a) generally prohibits members from causing the entry of an order to buy (sell) any Exchange-listed security for any account in which such member is directly or indirectly interested, if the person responsible for entering such order has knowledge of any particular unexecuted customer's order to buy (sell) such security which could be executed at the same price. The Exchange has proposed to amend NYSE Rule 92 to reflect the operation of the Specialist Algorithm.

Specifically, NYSE proposes that the specialist would not be deemed to have knowledge about a particular incoming order that is viewed by the Specialist Algorithm until such incoming order is “processed” by the Specialist Algorithm.

191

According to the Exchange, there may be times when the Specialist Algorithm could “possess” more than one order at the same time.

In addition, there could be times when a permissible algorithmic message has been generated, but before such message has been processed by the Display Book system, the Specialist Algorithm has “read” or “is reading” a new incoming order. This new order could be priced at the same price as the algorithmically-generated order or otherwise be able to trade with the order to which the algorithmic message reacted, but, as a result of proper time sequencing within the Display Book system, the algorithmic message would be processed before the new incoming order. NYSE has proposed to amend Rule 92 to provide that, if the Specialist Algorithm is designed and operated in a manner that prevents a quoting or trading message generated in response to an order from being affected by the receipt of a subsequent order, then for purposes of Rule 92, the specialist would not be deemed to have knowledge of the subsequent order.

192

191

See

proposed NYSE Rule 92.15.

See also

Amendment No. 7.

192

See id

3. Policy for Communicating With the Specialist Algorithm

NYSE proposes to permit specialists on the floor to control the Specialist Algorithms.

193

For example, specialists could activate or deactivate the firm's algorithms or adjust the firm's pre-set parameters that guide an algorithm's decision-making.

194

Specialists would not, however, have the ability to prevent the processing by the Display Book system of an algorithmically-generated message. NYSE proposes to allow specialists to interact with the Specialist Algorithm via a wired or wireless device that has been registered with the Exchange, such as a computer terminal or laptop. Each specialist firm would be required to certify, in the time, frequency, and manner prescribed by the Exchange, that such wired or wireless devices operate in accordance with all SEC and Exchange rules, policies, and procedures.

195

In addition, specialists would be required to create and maintain records of all messages generated by the firm's wired or wireless devices.

196

193

See

proposed NYSE Rule 36.30.

194

See id. See also

proposed NYSE Rule 104(g).

195

See

proposed NYSE Rule 36.30;

see also

Amendment No. 8.

196

See id

4. Specialist Algorithm Record Requirements

Every algorithmically-generated message generated by the Specialist Algorithm would have to include a code identifying the reason for the algorithmic action (

e.g.

, “match ITS,” “price improvement,” “hit bid,” etc.), the unique identifiers of the order to which the algorithmically-generated message is reacting (if any), the order immediately preceding the generation of the algorithmically-generated message, and any other information the Exchange may require.

197

The Exchange would automatically cancel algorithmically-generated messages that are unable to interact with the order or quotation identified by the message, where the reason code and the proposed algorithmic action are inconsistent, where message activity would create a locked or crossed market, where the identifiers described above are not included, and in other similar situations.

198

Furthermore, the Exchange would require that each specialist firm maintain an electronic log of all algorithmically-generated messages, including the date and time of each algorithmically-generated message and such other information as the Exchange shall designate.

199

Such log would have to be maintained in accordance with SEC and Exchange rules regarding books and records, and be capable of being provided to the Exchange upon request, in such time and in such format as the Exchange shall designate.

200

In addition, each specialist firm would be required to notify the Exchange in writing, within such time as the Exchange shall designate, whenever its Specialist Algorithm or an individual algorithm is not operating and the time, cause, and duration of such non-operation.

201

Finally, each specialist would be required to have an independent third party auditor review, on an annual basis, all Specialist Algorithms to ensure that they operate in accordance with all SEC and Exchange rules, policies, and procedures.

202

197

See

proposed NYSE Rule 104(c)(i).

198

See

proposed NYSE Rule 104(c)(i)(D).

199

See

proposed NYSE Rule 104(f)(i). NYSE Rule 132A requires members and member firms to synchronize the business clocks they use to record dates and times of any event the Exchange requires to an Exchange-designated time source.

200

See id

201

See

proposed NYSE Rule 104(f)(ii)

202

The Exchange would have the right to request originals and copies of any report, notes, analysis, documents, and similar types of materials prepared by the independent auditor.

See

proposed NYSE Rule 104(h);

see also

Amendment No. 8.

C. Proposal To Make Direct+ Permanent

Direct+ was originally approved as a one-year pilot program ending on December 21, 2001.

203

The pilot was subsequently extended for five additional one-year periods, and is currently scheduled to end on December 23, 2006.

204

The Exchange proposes to make Direct+ permanent.

205

203

See

Securities Exchange Act Release No. 43767 (December 22, 2000), 66 FR 834 (January 4, 2001).

204

See

Securities Exchange Act Release Nos. 45331 (January 24, 2002), 67 FR 5024 (February 1, 2002); 46906 (November 25, 2002), 67 FR 72260 (December 4, 2002); 48772 (November 12, 2003), 68 FR 65756 (November 21, 2003); 50828 (December 9, 2004), 69 FR 75579 (December 17, 2004); and 53014 (December 22, 2005), 70 FR 77228 (December 29, 2005).

205

This would also have the effect of superseding four filings that have been approved by the Commission during the Direct+ pilot, which were made part of the pilot.

See

Securities Exchange Act Release Nos. 47024 (December 18, 2002), 67 FR 79217 (December 27, 2002); 47353 (February 12, 2003), 68 FR 8318 (February 20, 2003); 47463 (March 7, 2003), 68 FR 12122 (March 13, 2003); and 47614 (April 2, 2003), 68 FR 17140 (April 8, 2003).

D. Auction Limit Orders and Auction Market Orders

While NYSE has proposed to significantly increase the availability of Direct+, it would still retain its auction market on the floor. Investors would be able to submit orders to floor brokers for representation on the floor (or in the electronic market if the floor broker sends this interest to the floor broker agency interest file). Investors also would be able to submit certain order types electronically through DOT that would be represented by the specialist to seek price improvement opportunities.

Specifically, NYSE has proposed one new order type—AL orders, and has proposed to amend its rules governing the execution of market orders that are not designated as auto ex eligible,

i.e.

, AM orders.

206

Specialists would represent these orders in the auction market, where the Crowd or Auto Ex Orders could offer an opportunity for execution at a price better than the Exchange BBO, while retaining as a backup the possibility of automatic execution in case the floor is unable to offer price improvement promptly.

206

See

proposed NYSE Rule 13.

Under the proposal, AL and AM orders would be automatically executed when they arrive at the Display Book system if the Exchange quotation is at the minimum variation of one cent.

207

Where a better bid (offer) is published by another ITS participating market center in which an automatic execution is immediately available and such better bid (offer) creates a minimum variation market compared with the Exchange best offer (bid), an AL or AM order (or the requisite portion thereof) would be automatically routed to such other market center for execution, unless the

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

208

207

See

proposed NYSE Rule 123F(a)(i)(A) and (b)(ii)(A).

208

See

proposed NYSE Rule 123F(a)(i)(B) and (b)(ii)(B).

If not automatically executed or routed away upon entry, AM orders to buy and AL orders to buy with a limit price that is at or above the Exchange best offer when they reach the Display Book system would be autoquoted the minimum variation better than the Exchange best bid, thereby becoming the Exchange best bid.

209

Similarly, AM orders to sell and AL orders to sell with a limit price that is at or below the Exchange best bid when they reach the Display Book system would be autoquoted the minimum variation better than the Exchange best offer, thereby becoming the Exchange best offer.

210

The size associated with the bid or offer would be the size of the AL or AM order.

211

The size of subsequent AL and AM orders on the same side of the market would be aggregated in the bid (offer) and executed based on time priority, consistent with AL orders' limit prices.

212

209

See

proposed NYSE Rule 123F(a)(ii) and (b)(iii).

210

See id.

211

See id.

212

See id.

An AL or AM order could miss the market while attempting to obtain price improvement,

213

but according to the Exchange, electronic representation should limit that possibility. Once on the Book, an AL or AM order could participate in any execution, including automatic executions and sweeps. Furthermore, if an AL or AM order has not been executed within 15 seconds after reaching the Display Book system, it would automatically execute (

i.e.

, buy orders would execute against the displayed offer, and sell orders would execute against the displayed bid),

214

provided Autoquote and automatic executions are available.

215

In addition, three events would cause automatic execution of an AL or AM order before 15 seconds has elapsed. The three events are: (i) The arrival of a subsequent order at a better price on the same side of the market as an AL or AM order; (ii) the execution of an order on the same side of the market as an AL or AM order that exhausts some or all of the displayed contra-side volume available in the Exchange quotation; and (iii) the cancellation of some or all of the displayed contra-side volume, or the improvement of the displayed contra-side price that creates a minimum variation market or allows execution of the AL or AM order with price improvement.

216

In these situations, the order causing the AL or AM order to automatically execute would trade first.

217

If a trade that causes an automatic execution of an AL or AM order also elects stop orders and CAP-DI orders, the AL and AM orders would execute first because they are executable at the time of entry (but seek an opportunity for price improvement), and CAP-DI and stop orders would execute after the AL and AM orders because they are contingent orders that are not executable until elected.

213

See

proposed NYSE Rule 123F(a)(iv) and (b)(v).

214

See

proposed NYSE Rule 123F(a)(iii)(D) and (b)(iv)(D).

215

If another market displays a price better than the AL or AM orders, the Exchange would execute the AL or AM order at a price (consistent with the AL order's limit) that matches the immediately accessible better away quote.

See

proposed NYSE Rule 123F(a)(i)(C) and (b)(ii)(C);

see also

Amendment No. 8.

216

See

proposed NYSE Rule 123F(a)(iii)(A)-(C) and (b)(iv)(A)-(C).

217

As noted above, a Specialist Algorithm trading message cannot cause the automatic execution of an AL or AM order.

See

proposed NYSE Rule 104(c)(vii).

An AL order to buy with a limit price that is not at or above the Exchange best offer when it reaches the Book or an AL order to sell with a limit price that is not at or below the Exchange best bid when it reaches the Book, would be displayed on the Book at its limit price.

218

An AL order that is unable to automatically execute because of its limit price would be handled as a regular limit order.

219

218

See

proposed NYSE Rule 123F(a)(v).

219

See id.

E. Other Changes

1. Intermarket Sweep Order

To implement the requirements of Regulation NMS,

220

the Exchange proposes to amend NYSE Rule 13 to adopt another new order type—the Intermarket Sweep order. An Intermarket Sweep order would be a limit order designated for automatic execution in a particular security that meets the following requirements: (1) It is identified as an Intermarket Sweep order in the manner prescribed by the Exchange; and (2) simultaneously with the routing of the Intermarket Sweep order to the Exchange, one or more additional limit orders, as necessary, are routed to execute against the full displayed size of any protected bids (offers).

221

These additional routed orders would have to be marked as intermarket sweep orders. Intermarket Sweep orders would be automatically executed upon receipt against the displayed bid (offer) and would then sweep the Display Book system. Any portion not executed would be immediately and automatically cancelled. Intermarket Sweep orders would be identified as such on the Consolidated Tape.

220

17 CFR 242.600(b)(30).

221

See

proposed NYSE Rule 13.

2. Record of Orders/Order Tracking

The Exchange proposes in NYSE Rule 123(e) that no order may be represented for execution on the floor or placed in a floor broker agency interest file within the Display Book system unless certain details of the order and the floor broker agency interest file have been first recorded in an electronic system on the floor. Furthermore, the floor member would have to identify which orders or portions thereof are being made part of the floor broker agency interest file. Since NYSE Rule 123(e)(7) provides that the type of order be designated and recorded, the Exchange proposes that AL orders and auto ex market orders be added to this rule.

NYSE Rule 132B prescribes requirements and procedures with respect to orders in any security listed on the Exchange received or originated by a member. It requires a member to immediately record data elements as detailed in the rule. If an order is transmitted to another member or is transmitted to another department of the same member, or is modified or cancelled, information detailed in the rule must be recorded. Additionally, the recipient of the order must record the order details as provided in the rule.

The Exchange proposes similar changes to NYSE Rule 132B(b)(9) with regard to the designation of an order as in proposed NYSE Rule 123(e)(7). Furthermore, NYSE Rule 132B(a)(1)(D) is proposed to be amended to require that members and member organizations identify which orders or portions thereof are being made part of the floor broker agency interest file pursuant to such procedures as required by the Exchange. This would conform NYSE Rule 132B with changes made to NYSE Rule 123(e).

3. NYSE Rule 91

NYSE Rule 91 includes transaction confirmation requirements in instances in which the specialist participates in a transaction as both principal and agent. The Exchange sought and received Commission approval

222

of its interpretation that NYSE Rule 91 does not apply where the specialist is the contra-party to an automatic execution, as the specialist does not accept an Auto Ex Order for execution or act as agent in the execution of such order. NYSE

proposes to extend this interpretation to its Hybrid Market.

222

See supra

note 203.

F. Hybrid Market Implementation Plan

The Exchange proposes to implement the Hybrid Market in five phases over a period of months.

223

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

223

See

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

In Amendment No. 8, the Exchange committed to provide notice to its members and others using its facilities, through information memoranda and its Web site, of the specific rules that would be effective during each phase.

1. Phase 1—Floor Broker Agency Interest Files, Specialist Interest Files, and Systematic Integration of Priority, Parity, and Yielding Requirements

During the first phase of implementation, the Exchange contemplates activating the floor broker agency interest file to permit floor brokers to enter their interest at or outside the BBO. This would enable floor brokers to gain experience using this tool. Floor brokers would be able to populate the reserve file; however, the reserve file would be visible to the specialist in this phase. The feature permitting floor brokers to exclude their interest from the aggregate information available to the specialist would not be available in this phase; the Exchange contemplates making the exclusion feature operational in Phase 4. In addition, commencing in Phase 4, floor broker reserve interest would not be visible to the specialist if chosen as an option by the floor broker.

Specialists would be able to manually layer their interest at and outside the BBO during the first phase. However, they would not be able to disseminate this information via OpenBook or another Exchange data distribution channel until Phase 4. The API would not be activated during Phase 1; accordingly, specialists would not be able to use Specialist Algorithms to layer their interest or to otherwise trade or quote, nor would the specialists' reserve capability be operational.

During Phase 1, the systematic programming of priority, parity, and yielding requirements, other than the yielding requirements for additional specialist interest, would be completed, enabling “G” order interest to be included in the floor broker agency files and to be handled by the Display Book system. Other system changes would be made to enhance systematic reporting of transactions and associated audit trail, such as eliminating specialist responsibility for allocation of volume in automatic executions.

224

Finally, the Exchange would implement the automation of CAP-DI orders and stop or stop limit orders.

224

See

NYSE Rule 1001(a)(3).

During Phase 1, Direct+ would continue to operate as it does under the current rules and would be subject to the same restrictions and availability as set forth in NYSE Rules 1000—1005. Accordingly, the Exchange anticipates that most trading would continue to be effected in the auction market, subject to the same rules and conditions as trading on the Exchange today. The Exchange began testing the Phase 1 functions for 168 securities in the Pilot.

225

Upon approval of the Hybrid Market, the Exchange would implement Phase 1 for all its securities.

226

225

See

Pilot.

See

Section II(G),

supra,

for a discussion of the Pilot.

226

See

Amendment No. 8.

2. Phase 2—API and Specialist Algorithms

Phase 2 would see the introduction of the API and Specialist Algorithm. During this phase, the specialist's systematic trading and quoting abilities would become operational. For example, the specialist would be able to provide algorithmic price improvement pursuant to the formula described in the proposal, regardless of the size of the incoming order. Algorithmic trading with the bid and offer, algorithmic ability to make new bids and offers and to withdraw previously made bids and offers, to add size to an existing bid and offer, to match better bids and offers away, and to layer specialist interest at prices outside the BBO, would also be available. Specialist reserve file capability and the yielding requirements for additional specialist interest would become operational during this phase.

As in Phase 1, Direct+ would continue to operate according to the same restrictions and availability as set forth in NYSE Rules 1000-1005 today, and the Exchange anticipates that most trading would continue to be effected in the auction market.

3. Phase 3—Automatic Routing of Orders, Elimination of Direct+ Restrictions, “Slow” Market Indicators, and Gap Quoting

During Phase 3, the following changes would be implemented:

• Automatic routing of orders to automated markets posting better bids and offers in accordance with Regulation NMS;

• Availability of NYSE IOC orders for automatic executions;

• Use of indicators to identify quotations that are not immediately available for automatic executions;

• Implementation of gap quoting procedures;

• Elimination of size restrictions for automatic executions;

• Elimination of 30-second restriction on the entry of Auto Ex Orders from the same person;

• Availability of automatic executions through the close;

• Elimination of Direct+ availability only to straight limit orders;

• Elimination of Direct+ suspensions due to price (

i.e.,

a trade at a price that would be more than five cents from the last trade in the stock on the Exchange);

• Elimination of Direct+ suspensions due to size (

i.e.

, a 100-share published bid or offer);

• Conversion of marketable limit orders automatically to Auto Ex Orders; and

• Automatic executions of designated market orders.

Not all of these features would be made available at the same time during this phase, but instead would be made available in all securities over a period of time.

4. Phase 4—Floor Broker Reserve Features, Sweeps, LRPs, and New Order Types

Phase 4 would implement the following:

• Use of indicators to identify an execution involving an Intermarket Sweep order;

• Floor brokers' ability to exclude interest, including reserve, from the aggregate information available to the specialist;

• Sweep functionality for automatic executions;

• Activation of LRPs (both sweep and momentum), and the publication via OpenBook or another Exchange data distribution channel of the most restrictive LRP;

• Availability of new order types—AL and AM orders and Intermarket Sweep orders;

• Specialists' ability to disseminate their layered interest via OpenBook or another Exchange data distribution channel;

• Specialists' ability to manually enter reserve interest; and

• Availability of IOC orders for automatic executions.

5. Phase 5—New Reporting Templates and Elimination of Suspensions of Autoquote and Automatic Executions

In Phase 5, NYSE proposes to implement the new Display Book system templates and programming that would eliminate the suspension of Autoquote and automatic executions.

G. Limited Hybrid Market Pilot

As noted earlier, the Commission approved the testing of certain functions the Hybrid Market on December 14, 2005, on a limited basis and for a pilot period expiring on March 24, 2006.

227

The Pilot implemented testing, with respect to a limited group of securities, the specialist interest files, the floor broker agency interest files, and the priority, parity, and yielding rules as proposed in the Hybrid Market.

228

227

See

Pilot Extension,

supra

note 27.

228

See also

Pilot Amendment,

supra

note 27.

Specifically, the Pilot allows specialists to manually layer their proprietary trading interest outside the NYSE BBO into the Display Book system.

229

Specialists' proprietary interest remains in the Display Book system until cancelled or executed. The Pilot also allows floor brokers to electronically represent their customers' orders in the floor broker agency interest files.

230

Floor brokers could enter interest in the floor broker agency interest files directly either at the BBO or outside the BBO and could enter reserve size at the BBO so long as 1,000 shares are displayed. In addition, the Pilot automates the priority, parity, and yielding rules. The Pilot permits specialists to trade on parity with orders represented by floor brokers when specialists are increasing or decreasing their position and eliminates floor brokers' ability to object to specialist parity. Finally, the Pilot implemented the automation of CAP-DI orders and stop orders.

231

229

Prior to the Pilot, specialists could only manually place their proprietary trading interest at the NYSE BBO.

230

Prior to the Pilot, floor brokers could only enter their customers' orders in the Display Book system through the specialist.

231

In Amendment No. 8, the Exchange represented that it has not encountered any systematic difficulties in connection with the Pilot.

III. Summary of Comments and NYSE's Response

The Commission received a total of 43 comment letters on the Hybrid Market proposal.

232

In addition to the amendments filed by the Exchange that addressed many questions raised in the comment letters, NYSE also filed the Response to Comments to address other specific concerns raised in the comment letters.

233

232

See supra

notes 6, 9, 12, and 13.

233

See

Response to Comments,

supra

note 14.

A few commenters supported the NYSE's proposal to create a Hybrid Market.

234

Several commenters generally supported further automation of the NYSE market,

235

and some of these commenters claimed that the Exchange had not gone far enough to create the automated mar ket that Exchange users desire.

236

A few commenters expressed dissatisfaction with the proposal.

237

Some of these commenters believed that the Exchange failed to create a genuine hybrid market that would blend floor-based and screen-based trading, that the proposed market did not provide for any true inter-market competition, and that it gave preferential treatment to specialists and/or floor brokers.

238

234

See

IBG Letter II, Invictus Letter, and Power Letter.

235

See,

e.g.,

Ameritrade Letter, IBG Letters I and II, ICI Letters I, II, and III, SIA Letters I, II and III, STANY Letter, Telic Letter, and Vanguard Letter. However, one commenter suggested that while the proposal could turn out well for liquid stocks, the Exchange should consider separate and distinct rules for illiquid securities.

See

Bear Stearns Letter.

236

See,

e.g.,

ICI Letters I and III and Telic Letter.

237

See,

e.g.,

Bloomberg Letters I and II, IBAC Letters I, II, and III, Peake Letter I, Rutherfurd Letters I, II, III, IV, V, VI, VII, VIII, IX, and X, Telic Letter, Torino Letter, and Weeden Letter.

See also

Fidelity Letter III (urging the Commission to consider a study indicating that NYSE's Hybrid Market would be a substantially more costly trading environment than that of fully electronic markets). However,

see also

Lipson Letter (stating that the data does not justify Fidelity Letter III's conclusion).

238

See,

e.g.,

Bloomberg Letter I, IBAC Letters I and II, Rutherfurd Letters I, III, and V, Telic Letter, Weeden Letter. In particular, one of these commenters argued that specialists and floor brokers in the proposed Hybrid Market should not be able to charge floor brokerage commission on any orders that are executed automatically in the Display Book system and not by the specialist or floor broker personally.

See

Rutherfurd Letter I. Another commenter was concerned that NYSE's ultimate plans would be to move past any true “hybrid” and phase out the auction market entirely, which the commenter believed would disadvantage the investing public that relies on the face-to-face interaction on the floor to achieve the best prices.

See

IBAC Letters I and II.

Initially, most commenters had questions about the rules that the Exchange had proposed. Specifically, in response to the First Notice, a majority of commenters requested that NYSE provide more details and specific trading examples showing how the Hybrid Market proposal would work.

239

Several commenters raised specific issues. For example, several commenters on the First Notice questioned how the LRPs would work,

240

how specialists would participate in the Hybrid Market,

241

how the floor broker agency interest file would interact with orders on the Book,

242

and how AL and AM orders would be handled.

243

In addition, several commenters requested more detail on automatic execution.

244

Specifically, commenters requested detail on how the priority and parity rules would operate with the specialist interest file and floor broker agency interest file,

245

and the instances when automatic executions would not be available.

246

239

See,

e.g.,

Ameritrade Letter, Angelides Letter, Bear Stearns Letter, Bloomberg Letter I, BSE Letter, Fidelity Letters I and II, IBG Letter I, ICI Letter I, Instinet Letter, Peake Letter, SIA Letter I, STANY Letter, and Telic Letter. After the Second and Third Notices, a few commenters continued to believe that the proposal did not fairly and accurately describe exactly what the NYSE intended, and still had explicit questions relating to the Hybrid Market.

See also

Bloomberg Letter II, IBAC Letters I and II, and Rutherfurd Letters I, II, III, and V.

240

See

IBG Letter I and ICI Letter I. The Commission notes that NYSE did not specifically define the parameters of its MLRP in the First Notice.

241

See

IBG Letter I and ICI Letter I.

242

See

IBG Letter I and ICI Letter I.

243

See

IBG Letter I.

244

See

BSE Letter, Fidelity Letter I, and STANY Letter.

245

See

Fidelity Letter I, SIA Letter I, and STANY Letter.

246

See

BSE Letter, Instinet Letter, and STANY Letter.

Several commenters also questioned how the Hybrid Market would interact with other markets. For example, one commenter questioned whether ITS would be capable of handling NYSE's increased interaction with “away markets” and whether the Exchange had a contingency plan to ensure that adequate linkages will be in place to accommodate the enhancement to

Direct+.

247

Other commenters questioned how the Hybrid Market would operate in compliance with the ITS trade-through rule or the then-proposed Regulation NMS.

248

247

See,

e.g.,

STANY Letter.

See also

Ameritrade Letter (voicing concern that Direct+ and ITS would fall short of today's technological standards and create a slow, automated trading environment for listed securities).

248

See,

e.g.,

Ameritrade Letter, Bloomberg Letters I and II, BSE Letter, Fidelity Letters I and II, and SIA Letter I.

See

note and accompanying text for a complete discussion of the comments on this issue.

The Exchange responded to the initial comments in its Amendment Nos. 2 and 3, which the Commission published as the Second Notice.

249

In addition to providing more detail on its proposal, NYSE submitted detailed trading examples to demonstrate how its proposed Hybrid Market would operate.

250

Soon after the Second Notice was published, the Commission reproposed its Regulation NMS.

251

Commenters generally asked the Commission to refrain from acting on NYSE's proposal until it had made a decision on Regulation NMS to allow commenters to consider the operation of the Hybrid Market in conjunction with Regulation NMS.

252

Several commenters, however, raised specific concerns about NYSE's proposal as described in the Second Notice. For example, commenters questioned whether it would be appropriate to allow undisplayed floor broker interest to trade on parity with displayed orders on the Book,

253

whether it would be appropriate to allow specialists to have access to non-public information about incoming orders,

254

and whether the sweep functionality would result in less favorable executions of customer orders.

255

249

See

note 8,

supra.

250

The Commission published these trading examples as Exhibit A to the Second Notice.

251

See

Securities Exchange Act Release No. 50870 (December 16, 2004), 69 FR 77424 (December 27, 2004).

252

See,

e.g.,

ICI Letter III, Nasdaq Letter, and SIA Letters II and III.

See also

Ameritrade Letter. A few commenters also urged the Commission to examine the Hybrid Market proposal alongside Regulation NMS.

See,

e.g.,

Angelides Letter, Fidelity Letter II, Nasdaq Letter, and SIA Letters I, II and III.

253

See

Rutherfurd Letter II and Invictus Letter.

254

See

Rutherfurd Letter II, Invictus Letter, and ICI Letter II.

255

See

Rutherfurd Letter II.

See also

Bloomberg Letters I and II.

After the Third Notice, certain commenters continued to question several aspects of the proposal that they believed raised investor fairness and logistical issues.

256

Some of these commenters encouraged the Exchange to modify its proposal to give priority to investor orders and to encourage the display of limit orders.

257

256

See,

e.g.,

IBAC Letters I and II (arguing that the Commission should reject the Hybrid Market proposal because it lacks the statutorily required information on possible impacts on competition and because the proposal would indeed impair competition and unfairly discriminate against floor brokers and investors), ICI Letter III, Rutherfurd Letters IV, V, VI, VII, VIII, IX, and X, and Vanguard Letter.

257

See,

e.g.,

ICI Letter III and Vanguard Letter.

A number of commenters emphasized the significance of NYSE's proposal.

258

In fact, one commenter stated that NYSE's proposal was “among the most significant SRO rule changes that the Commission has had to evaluate for quite some time.”

259

Although the same commenter favored a quick approval and implementation of the proposal,

260

other commenters cautioned the Commission to proceed slowly in considering the NYSE's rule change, to give the industry and investors an opportunity to gain a full understanding of the proposal's effect.

261

Some commenters believed that Direct+ should be subject to a pilot program or have a phase-in period so that there would be an opportunity to review the impact of the proposed changes before they become a permanent fixture of the equities markets.

262

258

See

Fidelity Letter I, IBG Letter I, and Weeden Letter.

259

See

IBG Letter I.

260

See

IBG Letter II.

261

See,

e.g.,

Angelides Letter, Bear Stearns Letter, SIA Letter I, and Weeden Letter. A few commenters believed that the Commission should hold a public hearing on the proposal.

See,

e.g.,

Angelides Letter, Fidelity Letter I, IBAC Letter II, and STANY Letter.

262

See, e.g.,

Bear Stearns Letter, Invictus Letter, SIA Letter III, and STANY Letter.

In its response, the Exchange stated that the proposed enhancements to Direct+ were responsive to customer requests for greater electronic access to the liquidity on the Exchange. The Exchange believed that this, along with the new opportunities for price improvement via AL and AM orders, would make for a better market, would encourage the display of liquidity, and would allow customers to access this liquidity in the manner that best suits their needs. In response to commenters' concerns over the implementation of the Hybrid Market, the Exchange proposed, in the Third Notice, to launch the Hybrid Market proposal in phases. The Exchange believes this phased implementation should help ensure the proper functioning of market participants' Hybrid Market-related systems, promote the integration of Hybrid Market facilities into the marketplace, and allow market participants adequate time to become familiar with the features of the Hybrid Market.

263

In addition, as noted above, the Exchange implemented a limited pilot to begin testing some of its Hybrid Market systems and to give its floor members an opportunity to utilize its functionality in live trading.

See

discussion of the Pilot in Section II(G),

supra.

A. Liquidity Available for Automatic Executions

Several commenters argued that off-floor participants should be able to place liquidity on the Display Book system without the use of a floor member.

264

Two commenters argued that the NYSE's proposal failed to provide any material inducement to non-NYSE liquidity providers to participate in the Hybrid Market.

265

One of these commenters stated that the proposal would “perpetuate asymmetric information between specialists, floor brokers and customers that only serves to discourage competing liquidity providers * * *” from providing better prices and more liquidity.

266

264

See

Rutherfurd Letters I and V, ICI Letter III, and Vanguard Letter.

But see

ICI Letter II (noting that it did not object to the Exchange providing floor brokers with the ability to represent their customers as they do today).

265

See

Telic Letter and Weeden Letter.

266

See

Telic Letter.

1. Specialist Interest File and Specialist Reserve

As discussed earlier, specialists would have the ability to manually and systematically place in the Display Book their dealer interest at prices at or outside the Exchange BBO.

267

In addition, a specialist would be able to maintain undisplayed reserve interest on behalf of its dealer account at the Exchange BBO, provided that the specialist displayed at least 2,000 shares at that price on the same side of the market.

268

Specialist interest at the Exchange BBO would be disseminated; specialist reserve would not be disseminated. In addition, specialist interest away from the Exchange BBO could be disseminated, at the option of the specialist, via the NYSE's OpenBook data feed.

267

See

proposed NYSE Rule 104(b)(i) and 104(c)(viii).

268

See

proposed NYSE Rule 104(d)(i).

Many comments questioned the appropriateness of creating an undisplayed interest file for those market participants that have a time and place advantage relative to the rest of the marketplace.

269

One commenter advised that the Exchange either continually monitor the specialist's dealer position in real time to preclude unlawful trading activity or require the specialist interest file to yield to all orders in all instances.

270

269

See,

e.g.,

Bloomberg Letters I and II, Rutherfurd Letters I, III and V, and SIA Letter I.

270

See

Rutherfurd Letter I.

The Exchange responded that it believes that the specialist interest file would allow specialists to provide value by committing capital and layering the Display Book system outside the BBO. According to NYSE, such interest would benefit the marketplace by increasing liquidity at prices outside the BBO, bridging temporary gaps in supply and demand, dampening volatility, and potentially improving clean-up prices. Additionally, the Exchange noted that specialists would have the option to display all of their specialist interest file away from the BBO in the aggregate price/volume information disseminated via NYSE OpenBook.

(a) Specialists' Parity

The Exchange also has proposed to amend its Rule 108 to provide that the specialist interest file would be entitled to trade on parity with interest in the floor broker agency interest files regardless of whether the specialist is increasing or decreasing its position. Specialist interest would, however, continue to yield to orders on the Book. Three commenters opposed these proposed changes to NYSE Rule 108.

271

Two believed that placing specialist proprietary trading on parity with investors' orders would misalign the interests of participants on the Exchange and likely contribute to the ineffectiveness of the Hybrid Market.

272

The other commenter considered this change to be a contravention of the specialists' negative obligation to trade only when reasonably necessary to maintain a fair and orderly market.

273

According to this commenter, specialist parity acquisitions would amount to unnecessary dealer intervention because there would be no market “necessity” for the specialist to effect proprietary trades in these situations, where public orders could otherwise fully satisfy contra-side interest.

274

271

See

IBAC Letters I and II, ICI Letter III, and Rutherfurd Letters III, IV, V, VI, VII, VIII, IX, and X. Two of these commenters also challenged NYSE's interpretation of NYSE Rule 108 that provides that specialists can trade on parity with orders in the Crowd when establishing or increasing their position, provided that the floor broker or its customer does not object.

See,

e.g.,

IBAC Letter I and Rutherfurd Letters III, IV, V, VI, VII, VIII, IX, and X.

272

See

IBAC Letters I (also contending that it would increase volatility in the market) and II and ICI Letter III.

273

See

Rutherfurd Letters III, IV, V, VI, VII, VIII, IX, and X. According to the commenter, since Section 11A of the Act promotes the objective of public order interaction without dealer intervention, specialist parity acquisitions would constitute an example of unnecessary dealer intervention and could not be reconciled with Section 11A.

See

Rutherfurd Letter III.

See also

IBAC Letter I.

274

See

Rutherfurd Letters III, IV, V, VI, VII, VIII, IX, and X.

In response, the Exchange noted that, under current practice, floor brokers in the Crowd may permit the specialist to be on parity with their orders. The Exchange stated its belief that parity provides an incentive for specialists to participate in the price discovery process at the point of sale, and has the beneficial effects of dampening volatility and lowering execution costs for investors. In response to the concern that a specialist trading on parity when establishing or increasing its position could be inconsistent with the negative obligation, the Exchange clarified that the general negative obligation incorporated into NYSE Rule 104.10 would continue to apply to all specialist trading on the NYSE.

275

See also

note

infra

and accompanying text.

2. Floor Broker Agency Interest Files and Reserve

NYSE proposes to permit floor brokers to participate in the Hybrid Market by allowing them to systematically provide liquidity at varying prices at or outside the BBO with respect to orders the broker is representing, but only while standing in the Crowd.

276

While a floor broker's agency interest, except reserve, would be displayed as part of the quotation when it is at the BBO, floor broker agency interest outside of the BBO would not be displayed. NYSE proposes to allow floor broker agency interest to trade on parity with the specialist interest file,

277

and in many cases, with orders on the Book.

276

However, as noted earlier, a floor broker would be permitted to leave the Crowd without canceling its agency interest files to recharge its handheld device.

See

proposed NYSE Rule 70.20(f).

277

The specialist interest file would only trade on parity with the floor broker agency interest file when there are no orders on the Book executable at a particular price.

The Commission received one comment letter criticizing the requirement that floor brokers be physically present in the Crowd to place interest in its floor broker agency interest file.

278

Most of the other comments regarding floor broker agency interest file focused on the Exchange's proposal to not require the display of such interest that is outside of the BBO while providing this interest with the ability to trade on parity with displayed interest.

279

Specifically, several commenters questioned the fairness of allowing non-displayed floor broker agency interest to trade on parity with disclosed orders on the Book.

280

Some commenters argued that this practice would be inconsistent with the Exchange's goal of providing incentives to place limit orders on the Exchange, and predicted that investors would be reluctant to place limit orders on the Book knowing that they might not be fully rewarded for displaying those orders.

281

278

See

Invictus Letter. This commenter believed that the proposed requirement that a floor broker agency interest file be cancelled when the floor broker leaves the Crowd and the proposed definition of a Crowd would be at odds with the direction of technology, greater speed, productivity, and liquidity. Because floor brokers are equipped with hand held computers and can act in a virtual capacity at any post where they have customer interest files, this commenter believed that limiting them to a distance of five contiguous panels at the same post would be arbitrary and unnecessarily restrictive and would put customers who use independent floor brokers at a disadvantage. In response to this criticism, the Exchange explained that, like the current floor today where a floor broker has to be in the Crowd to participate in the auction, the floor broker agency interest file was designed to allow the floor broker to continue participation in the auction, but in an automatic execution environment. In addition, the Exchange believes that the range of five contiguous panels in the proposed definition of a Crowd represents the appropriate range of proximity to enable brokers to also participate in the auction market. Furthermore, the Exchange pointed out that, if a floor broker must leave the Crowd and therefore cancel its agency interest file, the broker could ensure that its customers' orders are still represented in that Crowd by sending such orders to the specialist, sending the orders to Direct+ via its handheld devices for automatic execution, or transferring the orders to another member for representation in the Crowd. In Amendment No. 8, NYSE proposes to limit this restriction by allowing a floor broker to leave the Crowd to recharge a handheld device without canceling its agency interest file.

279

See,

e.g.,

Bloomberg Letters I and II, ICI Letters I, II, and III, Rutherfurd Letters I, II, III, and V, SIA Letter I, STANY Letter, and Vanguard Letter.

280

See,

e.g.,

Bloomberg Letters I and II, ICI Letters I, II, and III, Rutherfurd Letters I, II, III, and V, SIA Letter I, STANY Letter, and Vanguard Letter.

While supporting the NYSE's proposal to have the floor broker's undisplayed reserve interest at the BBO yield to displayed interest at that price, one commenter questioned why the Exchange did not extend this concept to its execution priorities at other levels of the book.

See

ICI Letter II.

281

See,

e.g.,

ICI Letters II and III, Rutherfurd Letters II and V, STANY Letter, and Vanguard Letter.

Commenters also expressed the opinion that the proposal appeared to be designed to preserve the time and place advantages that floor members currently enjoy over public investors.

282

For example, one commenter believed that, by authorizing this parity structure, the Exchange would be affording the floor broker agency interest file with three major execution advantages over orders on the Book: (1) Floor broker agency interest entered later in time could deny an execution to public limit orders

entered earlier in time;

283

(2) floor broker agency interest would often be entitled to superior parity splits with the Book, since the proposed parity structure would treat the Book as only one bidder (irrespective of the number of orders on the Book, the aggregate number of shares, and their times of entry);

284

and (3) floor brokers would enjoy an informational and order entry advantage that will allow them to “see” the orders on the Book and make trading decisions by entering floor broker agency interest.

285

282

See,

e.g.,

Bloomberg Letters I and II, ICI Letters I, II, and III, Rutherfurd Letters I, II, and III, and SIA Letter I.

283

See

Rutherfurd Letters III and V. This commenter believed that the proposal would allow floor brokers to enter interest in reaction to their knowledge of public orders on the Book, and thereby supersede the clearly established price/time priority of such public limit orders. The commenter believed this to be fundamentally unfair to public investors and unknown in other major securities markets.

See

Rutherfurd Letter V.

284

This commenter believed that the Exchange's examples do not reveal the fact that the Book would be deemed to be only one “bidder” regardless of how many individual orders are on the Book at the same price, while every broker who enters an agency interest file would be considered a separate “bidder.”

See

Rutherfurd Letter V. This commenter believed that, if the floor broker agency interest file is permitted to compete directly with the price/time priority of the Book, it should be treated as only one bidder.

See

Rutherfurd Letter I.

285

See

Rutherfurd Letters I, III, and V (also claiming that Amendment No. 6 failed to address the floor brokers' informational advantage in placing orders and their advantage in being able to supersede the price/time priority of orders on the Book and in being treated as a separate “bidders,” whereas limit orders on the Book would be treated as one “bidder”). The commenter also argued that the principal beneficiary of the clean up methodology would be undisplayed floor broker agency interest files, which could be entered on the Display Book with knowledge of, and in relation to, the limit orders on the Book to take advantage of possible sweep executions.

Accordingly, commenters insisted that for a floor broker agency interest file to be on parity with other orders at its price, a broker should be required to display orders placed in their agency interest file in the same manner as at the BBO.

286

If the Exchange believes that floor brokers' agency interest should be undisplayed, commenters argued that those orders should not be provided parity with fully-displayed orders on the Book.

287

286

See,

e.g.,

ICI Letters I, II and III, Rutherfurd Letters I and II, SIA Letter I, and Vanguard Letter.

287

See,

e.g.,

ICI Letters I, II and III (recommending that the Exchange provide execution priority on the same level as fully displayed investors' orders only to the portion of those orders represented by the floor brokers that are displayed).

See also

SIA Letter I.

One commenter suggested that the Exchange give qualified customers the option either to give their agency interest to a floor broker or enter it directly in the Display Book system themselves.

288

Similarly, with respect to a floor broker's ability to place undisplayed reserve interest at the BBO, two commenters suggested that the Exchange provide investors with a similar reserve feature where investors would have the direct ability to conceal a portion of their orders at the BBO, and not be required to do so solely through the use of a floor broker.

289

One of these commenters argued that this aspect of the proposal would not support economically efficient executions or the ability of investors to interact directly, and thus would be inconsistent with the principles of section 11A under the Act.

290

288

See

Rutherfurd Letters I and III.

289

See,

e.g.,

ICI Letters I and III and Vanguard Letter.

290

See

Vanguard Letter.

In general support of the floor broker agency interest file, the Exchange stated that this feature would allow customers both to take advantage of floor broker knowledge and trading expertise, as well as the efficiencies of automatic executions. The Exchange believes that floor brokers would be able to use the interest file to effectively represent interest that their customers do not wish to display, and, simultaneously, permit this interest to be accessed by incoming orders and participate in automatic executions and sweeps.

Furthermore, in addressing comments that undisplayed floor broker agency interest should not trade on parity with displayed orders on the Book, the Exchange proposed in Amendment No. 6 to revise the standing of orders on the Book and floor broker agency interest during a sweep. Specifically, the Exchange proposes to revise NYSE Rule 70 to provide that during a sweep, the amount of floor broker agency interest that would have been displayed had there been a new quote at the clean-up price would trade on parity with displayed interest,

e.g.

orders on the Book, at that price. The amount of any floor broker agency interest that would have been placed in the broker's reserve would yield to displayed interest. The Exchange believes that this amendment is consistent with the concept that displayed interest at each price point would execute before non-displayed interest at the same price point and the corollary principle that non-displayed interest at a better price would trade ahead of displayed interest at a worse price, while taking into account the fact that during a sweep there is no opportunity for floor broker agency interest at the clean-up price to be displayed before an execution that occurs at that price.

291

However,

see

Rutherfurd Letter V. This commenter argued that the NYSE's revision in Amendment No. 6 to the standing of floor broker agency interest during a sweep would be ineffective (

i.e.

, no one would be aware of the floor broker agency interest file except for the floor broker since the interest would not actually be displayed prior to a sweep transaction). Accordingly, the commenter believed that the amendment would not attract liquidity or solve the problems of unfairness to the Book, since investors with orders on the Book would still have no information about interest in the floor broker agency interest files.

With respect to suggestions that the floor broker agency interest file would provide floor brokers with some form of advantage over public customers, the Exchange emphasized that floor brokers would only have access to information pertaining to their own agency interest, and no access to other broker's files. Similarly, the Exchange proposed that neither specialists on the floor nor the Specialist Algorithms would have access to any information about specific orders in floor broker agency interest files.

292

Under the proposal, specialists would only be able to view the total aggregated broker agency interest at each price, except for any interest a broker has elected to not disclose to the specialist.

292

Only the specialist on the floor would have access to limited information pertaining to interest in the files. The specialist would not know the number of customer orders behind such volume, who the orders are for, which brokers represent the orders, or the limit prices for such orders.

See

Response to Comments,

supra

note 14.

Furthermore, in response to comments questioning the reserve feature of the floor broker agency interest file and whether it would grant too much advantage to floor brokers,

293

the Exchange argued that the existence of reserve interest would not be unique to the Exchange, and that electronic order books in other markets have a reserve functionality at all price levels, not just the BBO.

294

In the Hybrid Market, the Exchange believes that the reserve functionality would allow floor brokers to use their skills to determine the best way to represent their customers' interests, whether that be through the display of some or all of the customer order. Furthermore, the Exchange believes that the reserve feature would benefit the marketplace as a whole by providing liquidity and dampening price volatility. Since reserve interest would yield to

displayed interest at the Exchange BBO, but would participate in automatic executions at that price provided there is sufficient contra-side liquidity, the Exchange believes that reserve interest would benefit incoming orders by providing more liquidity at the BBO, yet without disadvantaging displayed interest at the BBO. The Exchange believes that it would be unable to attract and aggregate liquidity as effectively if a reserve feature was not offered, as it is in other competing market centers. In response to comments that investors should have a similar feature to directly enter interest in reserve, the Exchange represents that the reserve feature would be available to all investors through floor brokers. Customers seeking to participate in the reserve interest file would be able to do so by sending their orders to floor brokers with appropriate instructions as to how they want their orders handled. The Exchange believes that creating a reserve feature exclusively for on-floor participants would provide an incentive for participating in price discovery at the point of sale, and would allow differentiation from typical electronic communication network (ECN) functionality.

293

See

e.g.

, Bloomberg Letters I and II, ICI Letter III, Rutherfurd Letter I, SIA Letter I, and Vanguard Letter.

294

However,

see

Rutherfurd Letter V. This commenter argues that markets with reserve features are, for the most part, non-primary, non-price discovery markets whose lack of transparency does not materially impact the overall price discovery process. However, the commenter believes that the critical distinction between other markets that have reserve features and the NYSE's proposed Hybrid Market is that there is not a similar concept of “parity” in those markets (

e.g.

, a trader cannot enter a reserve order in those markets that will supersede the price/time priority of a previously entered order).

B. Automatic Executions

1. Sweeping the Display Book System

With respect to sweeps, two commenters noted that incoming investors' orders that sweep the Display Book system would be executed at a clean-up price, which could be inferior to other prices placed in the Display Book system.

295

Specifically, one commenter believed that the proposed sweep methodology would result in executions less favorable to investors than that of the current floor auction, which allows floor brokers with a large order to trade at intervening price levels instead of only a clean-up price.

296

The other commenter questioned whether the Exchange's proposal would be consistent with best execution requirements of brokers.

297

295

See

e.g.

, Bloomberg Letters I and II and Rutherfurd Letters I, III, and V (declaring that the sweep clean up price methodology would be a benefit only to those trade initiators who seek such a price; otherwise, there is significant economic dislocation for them with respect to the traditional pricing of large orders that cannot be filled at published bid or offer prices).

296

See

Rutherfurd Letter I.

297

See

Bloomberg Letters I and II.

Two commenters also suggested that the proposed sweep function should be considered in relation to the pilot program in Regulation SHO,

e.g.

the effect a sell short sweep order would have under the pilot where consecutive bids were hit.

298

In Amendment No. 8, the Exchange proposes in NYSE Rule 1000(d)(iii)(E) to clarify that during a sweep, sell short orders, other than those involving Regulation SHO pilot securities, would have to comply with the conditions outlined in the SEC's Short Sale Rule, Rule 10a-1, and NYSE Rule 440B.

298

See

Rothenberg Letter and SIA Letter I.

2. Automated Routing to Other Markets

Initially, a number of commenters generally believed that the proposal would allow limit orders to be swept on NYSE at prices that are inferior to prices immediately available at other markets.

299

In addition, some commenters initially believed that the proposal did not clearly indicate how a specialist would be able to match the NBBO on an away market, and noted that there did not appear to be a minimum size requirement for specialists to match away markets. Specifically, some commenters thought that the NYSE specialist could program its systems to automatically put up a pre-emptive 100 share bid or offer to match the NBBO at any given time on any other market, and thus would not be obligated to send trades to another market.

300

299

See

e.g.

, Ameritrade Letter, Bloomberg Letters I and II, Fidelity Letters I and II, and SIA Letter I.

300

See

e.g.

, Bloomberg Letters I and II, Fidelity Letter I, SIA Letter I.

In addressing these comments, the Exchange emphasized in its Second Notice and Response to Comments that the proposed Hybrid Market would operate in full conformity with all SEC rules, including Regulation NMS. In response to specific comments that the specialist in the Hybrid Market proposal could trade through better prices on another market center below the NBBO, the Exchange stressed in the Second Notice that the operation of sweeps, including the automatic electronic routing of orders to the market centers displaying better priced bids and offers, would be consistent with the fundamental tenet of the ITS trade-through rule and Regulation NMS—that the best bids and offers published by other market centers are entitled to protection. The Exchange represented that best bids (offers) published by away markets that are better than a clean-up price would be satisfied in their entirety. The Exchange further represented that, as today, best bids and offers in these markets (

i.e.

, “top of the book”) would be entitled to price protection in the Hybrid Market.

301

The Exchange disagreed with comments suggesting that it should also provide price protection at intervening price levels, and argues that while intermarket price-time priority has been extensively debated, it has not been viewed to be in the best interest of the national market system.

301

As discussed earlier, except for IOC and Intermarket Sweep orders, NYSE proposes to automatically route portions of an Auto Ex Order that would satisfy a protected quote of an away market, unless the specialist matches the better published price.

Furthermore, the Exchange pointed out that a specialist already has

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