# 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 > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A06-3012 ## Record - **Collection:** Federal Register - **Document type:** Notice - **Published:** March 31, 2006 - **Citation:** 71 FR 16353 ## Text SECURITIES AND EXCHANGE COMMISSION [Release No. 34-53539; File No. SR-NYSE-2004-05] Self-Regulatory Organizations; New York Stock Exchange LLC; Order Approving Proposed Rule Change and Amendment Nos. 1, 2, 3, and 5 Thereto and Notice of Filing and Order Granting Accelerated Approval to Amendment Nos. 6, 7, and 8 to the Proposed Rule Change to Establish the Hybrid Market March 22, 2006. I. Introduction II. Description of the Proposal A. Proposed Automated Market 1. Automated Access to Display Book System 2. Liquidity Available for Automatic Execution (a) Specialist Interest Filed and Reserve (b) Floor Broker Agency Interest File and Reserve 3. Autoquote 4. Automatic Executions (a) Priority, Parity, and Precedence (b) Automated Routing Away (c) Tick-Restricted Orders, Stop Orders, and Other Orders Eligible for Automatic Execution 5. Availability of Direct+ (a) Liquidity Replenishment Points (1) Sweep LRPs (2) MLRPs B. Role of the Specialists in the Hybrid Market 1. Specialist Algorithms (a) Quoting Messages (b) Trading Messages (1) Specialists' Ability to Systematically Price Improve Incoming Orders (2) Specialists' Ability to Hit Bids or Take Offers 2. Limitations on Members' Trading Because of Customers' Orders—NYSE Rule 92 3. Policy for Communicating with the Specialist Algorithm 4. Specialist Algorithm Record Requirements C. Proposal to Make Direct+ Permanent D. Auction Limit Orders and Auction Market Orders E. Other Changes 1. Intermarket Sweep Order 2. Record of Orders/Order Tracking 3. NYSE Rule 91 F. Hybrid Market Implementation Plan 1. Phase 1—Floor Broker Agency Interest Files, Specialist Interest Files, and Systematic Integration of Priority, Parity, and Yielding Requirements 2. Phase 2—API and Specialist Algorithms 3. Phase 3—Automatic Routing of Orders, Elimination of Direct+ Restrictions, “Slow” Market Indicators, and Gap Quoting 4. Phase 4—Floor Broker Reserve Features, Sweeps, LRPs, and New Order Types 5. Phase 5—New Reporting Templates and Elimination of Suspensions of Autoquote and Automatic Executions G. Limited Hybrid Market Pilot III. Summary of Comments and NYSE's Response A. Liquidity Available for Automatic Executions 1. Specialist Interest File and Specialist Reserve (a) Specialists' Parity 2. Floor Broker Agency Interest Files and Reserve B. Automatic Executions 1. Sweeping the Display Book System 2. Automated Routing to Other Markets C. Availability of Direct+ and Liquidity Replenishment Points D. Role of the Specialist in the Hybrid Market 1. Specialist Algorithm 2. Specialists' Ability to Systematically Price Improve Incoming Orders E. Auction Limit and Auction Market Orders IV. Discussion A. Increased Access to Display Book System 1. Liquidity Replenishment Points B. Autoquote C. Liquidity Available for Automatic Execution D. Automatic Executions E. Role of Specialist in the Hybrid Market 1. Price Improvement 2. Ability to Hit Bids or Take Offers 3. NYSE Rule 92 4. Communicating with the Specialist Algorithm F. Changes to the Auction Market and New Order Types G. Intermarket Sweep Order H. Implementation Plan I. Interpretive Issues V. Accelerated Approval of Amendment Nos. 6, 7, and 8 VI. Solicitation of Comments on Amendment Nos. 6, 7, and 8 VII. Conclusion I. Introduction On February 9, 2004, the New York Stock Exchange LLC (“NYSE” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “Commission”), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder, 2 a proposed rule change to create a “Hybrid Market” by, among other things, increasing the availability of automatic executions in its existing automatic execution facility, NYSE Direct+® (“Direct+”), and providing a means for participation in the expanded automated market by its floor members. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. On August 2, 2004, NYSE filed Amendment No. 1 to the proposed rule change. 3 The Commission published the proposed rule change, as amended by Amendment No. 1, for comment in the Federal Register on August 16, 2004. 4 On August 26, 2004, the Commission extended the public comment period with respect to the First Notice to September 22, 2004. 5 In response to the First Notice, the Commission received 17 comment letters from 15 commenters. 6 3 See Letter from Darla C. Stuckey, Corporate Secretary, NYSE, to Nancy J. Sanow, Assistant Director, Division of Market Regulation (“Division”), Commission, dated July 30, 2004, and accompanying Form 19b-4, which replaced the original filing in its entirety (“Amendment No. 1”). 4 See Securities Exchange Act Release No. 50173 (August 10, 2004), 69 FR 50407 (“First Notice”). 5 See Securities Exchange Act Release No. 50277, 69 FR 53759 (September 2, 2004). 6 See Letters from Eric D. Roiter, Senior Vice President and General Counsel, Fidelity Management & Research Company, dated August 10, 2004 (“Fidelity Letter I”); James L. Rothenberg, Esq., dated August 20, 2004 (“Rothenberg Letter”); Donald E. Weeden, dated August 31, 2004 (“Weeden Letter”); Thomas Peterffy, Chairman, and David M. Battan, Vice President, Interactive Brokers Group, dated September 7, 2004 (“IBG Letter I”); Jose L. Marques, PhD, Managing Member, Telic Management LLC, dated September 21, 2004 (“Telic Letter”); Junius W. Peake, Monfort Distinguished Professor of Finance, Kenneth W. Monfort College of Business, University of Northern Colorado, dated September 22, 2004 (“Peake Letter I”); Ari Burstein, Associate Counsel, Investment Company Institute, dated September 22, 2004 (“ICI Letter I”); Kim Bang, President and Chief Executive Officer, Bloomberg Tradebook LLC, dated September 22, 2004 (“Bloomberg Letter I”); Ellen L.S. Koplow, Executive Vice President and General Counsel, Ameritrade, Inc., dated September 22, 2004 (“Ameritrade Letter”); Lisa M. Utasi, President, and Kimberly Unger, Executive Director, The Security Traders Association of New York, Inc., dated September 22, 2004 (“STANY Letter”); George W. Mann Jr., EVP & General Counsel, Boston Stock Exchange, dated September 22, 2004 (“BSE Letter”); Bruce Lisman, Bear, Stearns & Co. Inc., dated September 28, 2004 (“Bear Stearns Letter”); Donald D. Kittell, Executive Vice President, Securities Industry Association, dated October 1, 2004 (“SIA Letter I”); Edward J. Nicoll, Chief Executive Officer, Instinet Group, dated October 25, 2004 (“Instinet Letter”); Eric D. Roiter, Senior Vice President and General Counsel, Fidelity Management & Research Company, dated October 26, 2004 (“Fidelity Letter II”); Philip Angelides, Treasurer, State of California, dated November 23, 2004 (“Angelides Letter”); and Eric D. Roiter, Senior Vice President and General Counsel, Fidelity Management & Research Company, dated December 8, 2004 (“Fidelity Letter III”). On November 8, 2004 and November 9, 2004, the Exchange filed Amendment Nos. 2 and 3, respectively. 7 The Commission published the proposed rule change, as further amended by Amendment Nos. 2 and 3, for comment in the Federal Register on November 22, 2004. 8 In response to the Second Notice, the Commission received nine comment letters from eight commenters. 9 7 See Form 19b-4 dated November 8, 2004 (“Amendment No. 2”) and Partial Amendment dated November 9, 2004 (“Amendment No. 3”). 8 See Securities Exchange Act Release No. 50667 (November 15, 2004), 69 FR 67980 (“Second Notice”). 9 See Letters from Gregory van Kipnis, Managing Partner, Invictus Partners, LLC, dated December 10, 2004 (“Invictus Letter”); Ari Burstein, Associate Counsel, Investment Company Institute, dated December 13, 2004 (“ICI Letter II”); Ann L. Vlcek, Vice President and Associate General Counsel, Securities Industry Association, dated December 13, 2004 (“SIA Letter II”); Thomas Peterffy, Chairman, and David M. Battan, Vice President, Interactive Brokers Group, dated December 14, 2004 (“IBG Letter II”); William R. Power, Member and Director, Chicago Board Options Exchange, Incorporated, dated December 21, 2004 (“Power Letter”); Marc L. Lipson, Associate Professor, Terry College of Business, The University of Georgia, dated January 4, 2005 (“Lipson Letter”); Edward S. Knight, The Nasdaq Stock Market, dated January 26, 2005 (“Nasdaq Letter”); and George Rutherfurd, Consultant, dated March 10, 2005 (“Rutherfurd Letter I”) and April 8, 2005 (“Rutherfurd Letter II”). On June 17, 2005, the Exchange filed Amendment No. 5 to the proposed rule change. 10 The Commission published the proposed rule change, as further amended by Amendment No. 5, for comment in the Federal Register on June 29, 2005. 11 In response to the Third Notice, the Commission received six comment letters. 12 10 See Form 19b-4 dated June 17, 2005 (“Amendment No. 5”). The Exchange submitted Amendment No. 4 to the proposed rule change on May 25, 2005, and subsequently withdrew Amendment No. 4 on June 17, 2005. 11 See Securities Exchange Act Release No. 51906 (June 22, 2005), 70 FR 37463 (“Third Notice”). 12 See Letters from George U. Sauter, Managing Director, The Vanguard Group, Inc., dated July 20, 2005 (“Vanguard Letter”); Ari Burstein, Associate Counsel, Investment Company Institute, dated July 20, 2005 (“ICI Letter III”); Donald D. Kittell, Executive Vice President, Securities Industry Association, dated July 20, 2005 (“SIA Letter III”); George Rutherfurd, Consultant, dated July 20, 2005 (“Rutherfurd Letter III”); Kim Bang, President and Chief Executive Officer, Bloomberg Tradebook LLC, dated July 28, 2005 (“Bloomberg Letter II”); and Frank A. Torino, dated September 27, 2005 (“Torino Letter”). In total, the Commission received 43 comment letters on the amended proposal (including 32 comment letters with respect to the First, Second, and Third Notices). 13 On September 21, 2005, the Exchange filed a response to the comment letters. 14 13 See supra notes 6, 9, and 10. The Commission received a comment letter on Amendment No. 4, which was withdrawn by the Exchange. See Letter from Junius W. Peake, Monfort Distinguished Professor of Finance, Kenneth W. Monfort College of Business, University of Northern Colorado, dated June 17, 2005 (“Peake Letter II”). In addition, the Commission received three comment letters from the same commenter in response to Amendment Nos. 6 and 7. See Letters from George Rutherfurd, Consultant, dated November 1, 2005 (“Rutherfurd Letter IV”), November 8, 2005 (“Rutherfurd Letter V”), and November 17, 2005 (“Rutherfurd Letter VI”). Finally, the Commission received seven other comment letters from two commenters. See Letters from Warran P. Meyers, President, Independent Broker Action Committee, Inc., dated December 7, 2005 (“IBAC Letter I”), February 2, 2006 (“IBAC Letter II”), and March 17, 2006 (“IBAC Letter III”), and George Rutherfurd, Consultant, dated December 11, 2005 (“Rutherfurd Letter VII”), December 17, 2005 (“Rutherfurd Letter VIII”), February 1, 2006 (“Rutherfurd Letter IX”), and February 13, 2006 (“Rutherfurd Letter X”). 14 See Letter from Mary Yeager, Assistant Secretary, NYSE, to Jonathan G. Katz, Secretary, Commission, dated September 21, 2005 (“Response to Comments”). On September 16, 2005, the Exchange filed Amendment No. 6 to the proposed rule change. 15 In Amendment No. 6, the Exchange proposes to amend NYSE Rule 104 to state that specialists may only provide price improvement to incoming orders that are marketable. In addition, NYSE proposes to amend NYSE Rule 70.20 to limit the ability of interest in the floor broker agency interest file to trade on parity with orders in the customer limit order display book (“Book”) during a sweep. 15 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. 16 In Amendment No. 7, the Exchange made non-substantive stylistic, conforming, and technical changes to certain Exchange rules governing the Hybrid Market. In Amendment No. 7, the Exchange also proposes to amend NYSE Rule 92 to reflect the operation of the specialist systems that employ algorithms to generate quoting and trading messages (“Specialist Algorithms”). Specifically, the Exchange proposes that the specialist would not be deemed to have “knowledge” of a particular incoming order that is viewed by the Specialist Algorithm if the Specialist Algorithm is designed in a manner that prevents a quoting or trading message from being affected by a later incoming order. In addition, NYSE proposes in Amendment No. 7 to amend NYSE Rule 13.30 and the definitions of stop and stop limit orders to reflect the automatic execution of elected stop and stop limit orders in the Display Book system. 17 16 See Form 19b-4 dated October 11, 2005 (“Amendment No. 7”). 17 The Display Book system (“Display Book system”) is an order management and execution facility. The Display Book system receives and displays orders to the specialists, contains the Book, and provides a mechanism to execute and report transactions and publish the results to the Consolidated Tape. In addition, the Display Book system is connected to a variety of other Exchange systems for the purposes of comparison, surveillance, and reporting information to customers and other market data and national market systems, that is, the Intermarket Trading System, Consolidated Tape Association, Consolidated Quotation System, etc. On March 14, 2006, the Exchange filed Amendment No. 8 18 to the proposed rule change. In Amendment No. 8, NYSE proposes to: (1) Amend proposed NYSE Rules 13 and 124 to specify that a round lot portion of a part of round lot (“PRL”) order is an “Auto Ex Order” 19 and that the odd lot portion of a PRL order would be executed at the same price as the round lot portion of the PRL order and processed in the Odd-Lot Execution System; 20 (2) amend proposed NYSE Rule 13 to reflect that stop orders and stop limit orders may still be represented manually by a floor broker in the trading “Crowd;” 21 (3) amend the definition of immediate or cancel (“IOC”) order in proposed NYSE Rule 13 to: (a) Propose an IOC order that is designed to be in compliance with Regulation NMS; (b) specify that NYSE IOC orders would be eligible to be routed away during a sweep; and (c) eliminate the previously proposed changes to the treatment of commitments to trade received through the Intermarket Trading System (“ITS Commitments”); 22 (4) amend its proposed definition of Intermarket Sweep order in proposed NYSE Rule 13 to specify that this type of order would be permitted to sweep the Display Book system, and the portion that was not executed would be immediately cancelled; (5) amend proposed NYSE Rule 36 to state that a specialist may only use a wired or wireless device that has been registered with the Exchange to communicate with the Specialist Algorithms and provide that specialist firms must create and maintain records of all messages generated by the Specialist Algorithm; (6) amend proposed NYSE Rule 60 to: (a) Set forth the instances during which Autoquote 23 will update the quote even if automatic executions are not available; (b) set forth the instances during which Autoquote will update the quote when Autoquote and automatic execution are suspended and disseminate a 100 share quote in certain situations; and (c) propose to use an indicator when the NYSE quote is not available for automatic execution due to a gapped quotation or liquidity replenishment point (“LRP”) to signify that the NYSE quote is not firm; (7) amend proposed NYSE Rule 70.20 to: (a) Permit a floor broker to leave the Crowd without canceling its floor broker agency interest file 24 to recharge its handheld device and (b) specify the procedures for entering interest in the floor broker agency interest file before the open; (8) amend proposed NYSE Rule 72 to specify the priority and parity rules for instances when there are shares remaining after a sweep that triggers an LRP; (9) amend NYSE Rule 76 to reflect that it would not apply to elected stop or stop limit orders other than those manually represented in the Crowd by a floor broker; (10) amend proposed NYSE Rule 104 to: (a) Permit specialists to manually layer dealer interest in the specialist interest file; (b) permit specialists to enter certain quoting messages when automatic executions and Autoquote are suspended; (c) amend the definition of “meaningful amount” for purposes of determining when a specialist could provide price improvement; and (d) require specialists to hire independent auditors to review their algorithms on an annual basis; (11) amend proposed NYSE Rule 123A.30 to: (a) Provide systematic conversion of elected or converted percentage orders that are converted on a destabilizing tick and that permit the specialist to trade on parity (“CAP-DI orders”) on the same side as a specialist when the specialist is bidding (offering) or trading and an automatic execution occurs against a specialist's proprietary interest and (b) clarify the execution of contra-side elected and converted CAP-DI orders; (12) amend proposed NYSE Rule 123F to codify that NYSE may execute an Auction Limit (“AL”) order or market order at a price that matches a better away market; (13) amend proposed NYSE Rule 1000 to: (a) Clarify that automatic executions will resume in the same manner as Autoquote; (b) prohibit short sale orders, except those for Regulation SHO 25 pilot securities, from sweeping the Display Book system; (c) eliminate the provision that would have suspended the operation of Direct+ when an away market disseminates a better quote; (d) eliminate the proposal that would have permitted automatic executions to continue while the specialist reports a block trade until the quote decremented to 100 shares; (e) specify the process for determining when a security that is priced at $300.00 or more would be eligible for automatic executions; (f) specify that automatic executions would be suspended on one side of the market when a bid (offer) is outside the momentum LRP; 26 (g) specify that any shares remaining after an execution in IOC orders, NYSE IOC orders, or Intermarket Sweep orders would be cancelled after sweeping the Display Book system; and (h) clarify that auto ex limit orders, except IOC orders, that are not able to be immediately executed due to a suspension of Direct+ would be placed in the Book; and (14) amend Rule 1001. 18 See Form 19b-4 dated March 14, 2006 (“Amendment No. 8”). 19 See note 29 infra and accompanying text for a description of “Auto Ex Order.” 20 See note 34 infra . 21 See note 46 infra and accompanying text for a description of “Crowd.” 22 Similarly, NYSE also proposes to eliminate previously proposed changes to the treatment of ITS Commitments in NYSE Rule 15A.60. 23 See note 58 infra and accompanying text for a description of Autoquote. 24 See note 43 infra and accompanying text for a description of the floor broker agency interest file. 25 See Securities Exchange Act Release No. 50103 (July 28, 2004), 69 FR 48008 (August 6, 2004). 26 See note infra and accompanying text for a description of momentum LRPs. On December 14, 2005, the Commission approved on an accelerated basis a proposed rule change by the Exchange to implement and test certain proposed functions of the Hybrid Market, known as Phase 1 of the Hybrid Market, on a pilot basis (“Pilot”). 27 27 See Securities Exchange Act Release No. 52954, 70 FR 75519 (December 20, 2005). See also Third Notice, supra note 11, for a description of Phase 1 of the Hybrid Market implementation plan. The Commission notes that it received one comment letter opposing the implementation of the Pilot. See Letter from George Rutherfurd, Consultant, dated December 13, 2005. On February 21, 2006, the Exchange filed a proposed rule change pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(5) thereunder to amend the manner in which CAP-DI orders convert in certain situations (“Pilot Amendment”). See Securities Exchange Act Release No. 53359 (February 24, 2006), 71 FR 10736 (March 2, 2006). On March 13, 2006, the Exchange filed a proposed rule change pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder to extend the Pilot until March 24, 2006 (“Pilot Extension”). See Securities Exchange Act Release No. 53487 (March 15, 2006), 71 FR 14278 (March 21, 2006). This order approves the proposed rule change, as amended by Amendment Nos. 1, 2, 3, 5, 6, 7, and 8. The Commission is also providing notice and soliciting comments on Amendment Nos. 6, 7, and 8 to the proposed rule change. II. Description of the Proposal Currently, NYSE is primarily a floor-based auction market. NYSE members operate on the NYSE floor, representing their customers' orders for execution in a largely manual environment. NYSE provides limited automated access to its market through its automatic execution facility, Direct+. According to NYSE, automatic executions represent approximately 11% of its market share volume, with the bulk of executions occurring manually in its floor-based auction. 28 With this proposed rule change, NYSE has proposed to alter the way its market operates by allowing more orders to be executed automatically in Direct+. In essence, NYSE has proposed to move from a floor-based auction market with limited automated order interaction to a more automated market with limited floor-based auction market availability. 28 See NYSE Market Statistics (visited on March 9, 2006), http://www.nyse.com/Frameset.html?displayPage=/marketinfo/1022221393893.html (noting that Direct+ volume, for the year ended December 31, 2005, is 11.4% of NYSE volume). To create its Hybrid Market, NYSE has proposed changes to its current Direct+ rules to make the system available to more order types and to limit the instances when automatic executions are not available. In addition, NYSE has proposed to permit its floor members to participate in its expanded automated market in an electronic fashion. Specifically, NYSE has proposed to permit specialists and floor brokers to electronically provide liquidity that would be available for automatic executions. In addition, NYSE has proposed changes to its auction market to accommodate those investors that wish to continue to have their orders exposed for price improvement. To this end, NYSE has proposed to create a new order type—the Auction Limit order, and to amend the way market orders are handled in the auction. A. Proposed Automated Market 1. Automated Access To Display Book System Currently, Direct+ is only available, with respect to stocks, to designated marketable limit orders, without tick restrictions, of 1,099 shares or less (“Auto Ex Orders”). 29 In addition, multiple Auto Ex Orders are not allowed to be entered for the account of the same person within a 30-second time period from the entry of an initial Auto Ex Order. 30 Auto Ex Orders trade only against interest reflected in the Exchange's published quotation—that is, the NYSE best bid or offer (“BBO”). Eligible limit orders are not required to be entered as Auto Ex Orders. Rather, the member organization entering the order (or its customer if enabled by the member organization) must make a specific designation to choose to enter an order into Direct+. 29 See NYSE Rules 13 and 1000. Orders in Investment Company Units (as defined in paragraph 703.16 of the Listed Company Manual), Trust Issued Receipts (as defined in NYSE Rule 1200), streetTRACKS Gold Shares (as defined in NYSE Rule 1300), or any product subject to the same rules as Investment Company Units (collectively “ETFs”), however, may be entered in a size greater than 1,099 shares. See Securities Exchange Act Release No. 52160 (July 28, 2005), 70 FR 44963 (August 4, 2005) (amending NYSE Rules 13 and 1005 to eliminate the 10,000 share restriction and the 30-second order entry restriction for Auto Ex Orders in ETFs). 30 See NYSE Rule 1005. NYSE proposes to broaden access to Direct+ for stocks and ETFs. 31 Specifically, NYSE has proposed to amend its Rule 13 to define an Auto Ex Order to include: (1) All marketable limit orders; 32 (2) designated market orders; (3) designated IOC orders; 33 (4) elected stop and stop limit orders that have been systematically delivered to the Display Book system; (5) buy minus, sell plus, and short sale orders systematically delivered to the Display Book system; (6) CAP-DI Orders; (7) the round lot portion of a PRL order; 34 (8) orders that were initially eligible for automatic execution that have been cancelled and replaced with a subsequent Auto Ex Order; 35 and (9) Intermarket Sweep orders. 36 In addition, NYSE proposes to eliminate the size restrictions for Auto Ex Orders and eliminate the 30-second order entry restriction. 31 See proposed NYSE Rule 1002. 32 Marketable limit orders, i.e. , limit orders to buy (sell) priced at or above (below) the best offer (bid) at the time the order is routed to the Display Book system, would no longer need to be designated as requesting an automatic execution in Direct+. All marketable limit orders would be automatically executed with or without designation. See proposed NYSE Rule 13. Non-marketable limit orders would be routed to the Display Book system, even if designated auto ex, and would be displayed as limit orders on the Book. See proposed NYSE Rule 1000(d)(v); see also Amendment No. 8. These booked orders would be available to participate in sweep transactions. When such orders become marketable, they would be included in the quote and could participate in automatic executions. 33 NYSE proposes two types of IOC orders. See proposed NYSE Rule 13; see also Amendment No. 8. One would be for the purposes of Regulation NMS which would not be routed to away markets during a sweep. Instead, if an away market is disseminating a better protected bid or offer, the IOC order would be cancelled. The other type of IOC order, the NYSE IOC order, would allow NYSE to route portions to away markets to satisfy better protected bids or offers and would cancel once it was no longer able to receive an execution on NYSE. The Exchange also proposes to amend the definition of an IOC order to permit the entry of IOC orders before the opening of the Exchange for participation in the opening trade. If not executed as part of the opening trade, the order would be treated as cancelled. 34 See proposed NYSE Rule 13; see also Amendment No. 8. Odd-lot orders and odd-lot portions of PRLs would not be eligible for automatic execution in Direct+. The Exchange noted that, under NYSE Rule 124, odd-lot orders are received, processed, and executed by an Exchange system designated for such purpose with the specialist as the contra-party at the price of certain round-lot transactions (“Odd-Lot Execution System”). Accordingly, the Odd-Lot Execution System provides a type of automatic execution that is governed by NYSE Rule 124, not the rules governing Direct+. The Exchange also clarified in the Third Notice that when automatic executions are suspended, odd-lot executions also would be suspended to prevent odd-lots from trading at prices unrelated to round-lot orders in the same security and to provide consistency in the availability of automatic executions. 35 Currently, the Display Book system changes an order that cancels and replaces an Auto Ex Order to a non-Auto Ex Order. Under the Hybrid Market, the Display Book system would no longer make this change, so that a cancel/replace order of an Auto Ex Order would now be eligible for automatic execution. 36 A few order types would be ineligible for automatic execution, including CAP, “opening only” (OPG), “limit on close” (LOC), “market on close” (MOC), and “basis” (BAS) orders. 2. Liquidity Available for Automatic Execution Currently, the Display Book system contains the Book, which is operated and represented by the specialist. The Book contains limit orders routed to NYSE though SuperDOT 37 or left with the specialist by floor brokers for representation. The Display Book system also may reflect specialist quotes at the NYSE BBO. Auto Ex Orders interact with the interest displayed on the Display Book system at the NYSE BBO. 37 SuperDOT is an electronic order-routing system used by NYSE member firms to send market and limit orders to NYSE. SuperDOT is also referred to as DOT. To further automate its market, NYSE has proposed to permit its floor members—that is, specialists and floor brokers—to place liquidity in the Display Book system at various prices, in newly-created separate files that would be available for execution against incoming Auto Ex Orders. This would allow floor members and the investors they represent on the floor to more fully participate in automatic executions. (a) Specialist Interest File and Reserve Specialists would have the ability to manually and systematically place in a separate file (“specialist interest file”) within the Display Book system their dealer interest at prices at or outside the Exchange BBO. 38 NYSE intends the specialist interest file to assist the specialist, in an automated environment, to fulfill its obligations to provide capital, bridge temporary gaps in supply and demand, and dampen volatility. In addition, the specialist interest file would allow specialists to provide increased liquidity at prices at or outside the Exchange BBO, which could potentially improve the prices at which Auto Ex Orders are executed. 39 38 See proposed NYSE Rules 104(b)(i) and 104(c)(viii); see also Amendment No. 8 and Pilot. 39 See Response to Comments, supra note 14. The Exchange also proposes to provide specialists with the ability to maintain undisplayed reserve interest on behalf of their dealer accounts at the Exchange BBO, provided that they display at least 2,000 shares of dealer interest at that price on the same side of the market as the reserve. 40 After an execution against a specialist's displayed bid (offer), if the specialist has reserve interest remaining at that best bid (offer), the amount of displayed interest would be automatically replenished by the specialist's reserve interest, if any, so that at least 2,000 shares of specialist interest is displayed (or whatever specialist interest remains at the best bid (offer), if less than 2,000 shares). 41 40 See proposed NYSE Rule 104(d)(i). 41 See proposed NYSE Rule 104(d)(ii). Specialist interest at the Exchange BBO would be disseminated; specialist reserve and specialist interest away from the Exchange BBO ordinarily would not be disseminated. Each specialist, however, has the option to disseminate its interest away from the Exchange BBO via OpenBook 42 or another Exchange data distribution channel. 42 OpenBook is a compilation of limit order data for all NYSE traded securities that the Exchange provides to market data vendors, broker-dealers, private network providers, and other entities through a data feed. See Securities Exchange Act Release No. 44138 (December 7, 2001), 66 FR 64895 (December 14, 2001). (b) Floor Broker Agency Interest File and Reserve Floor brokers, similarly, would be permitted to represent electronically the orders they hold by including these orders in a separate file (“floor broker agency interest file”) within the Display Book system. 43 Floor brokers would be permitted to place liquidity electronically at or outside the Exchange BBO. In addition, floor broker agency interest files would be allowed to participate in the opening trade. 44 Floor brokers would not be permitted to enter in the floor broker agency interest files any interest that restricts the specialist's ability to trade on parity with the floor broker agency interest file. 45 43 See proposed NYSE Rule 70.20(a)(i). 44 See proposed NYSE Rule 70.20(j)(i). Floor broker agency interest entered before the open could participate in the opening trade on parity with the Book in accordance with Exchange policies that govern the open. 45 See proposed NYSE Rule 70.20(a)(i). A floor broker would be required to be in close physical proximity to the post for the security—that is, in the Crowd 46 —while it has orders in its floor broker agency interest file. 47 NYSE would require that a floor broker's agency interest file be cancelled when the floor broker leaves the Crowd. 48 If the floor broker nevertheless leaves the Crowd without canceling its agency interest files, and one or more executions occur with its agency interest, the floor broker would be held to such executions. 49 46 See proposed NYSE Rule 70.30. The Exchange proposes to define a Crowd as being any five contiguous panels at any one post where securities are traded. A floor broker would be considered to be in the Crowd if it is physically present at one of the five contiguous panels. However, the requirement that a floor broker be in the Crowd to have agency interest files would not apply to orders governed by section 11(a)(1)(G) of the Act (“G” orders), 15 U.S.C. 78k(a)(1)(G). See proposed NYSE Rule 70.20(a)(ii). 47 A floor broker could enter interest in its agency interest file prior to the open regardless of its location on the floor, but would have to be in the Crowd at the open to participate in the opening trade. Any agency interest entered prior to the open would have to be cancelled before the open, if the floor broker is not in the Crowd. See proposed NYSE Rule 70.20(j)(ii); see also Amendment No. 8. 48 See proposed NYSE Rule 70.20(f). However, a floor broker could leave the Crowd to recharge its handheld device without canceling its interest. See id . See also Amendment No. 8. 49 See proposed NYSE Rule 70.20(f). Because the floor broker agency interest file is part of the Display Book system and because of the specialist's obligation to maintain a fair and orderly market, the Exchange proposes to allow the specialist ordinarily to see the aggregate number of shares of all floor broker agency interest files at each price. 50 A floor broker, however, would have the option to exclude all of its floor broker agency interest file from the information available to the specialist. 51 A floor broker's ability to exclude volume from the aggregate agency interest information available to the specialist would not be available during the open. 52 Floor broker agency interest excluded from the aggregated agency interest information available to the specialist would be able to participate in automatic executions, but would not participate in a manual execution unless the floor broker represents the interest manually. 53 Furthermore, floor broker agency interest that has been excluded from the aggregate information available to the specialist would not participate in the closing trade. 54 50 See proposed NYSE Rule 70.20(g). Specialists would not be able to see individual orders represented in the floor broker agency interest file. 51 See id. 52 See proposed NYSE Rule 70.20(k). 53 See proposed NYSE Rule 70.20(h). 54 See proposed NYSE Rule 70.20(k). The Exchange proposes to permit floor brokers to maintain undisplayed reserve interest at the Exchange BBO provided that a minimum of 1,000 shares of the floor broker's agency interest is displayed at that price. 55 If an execution at the Exchange BBO occurs that does not exhaust the broker's interest at that price, the displayed interest would be automatically replenished from the floor broker's reserve interest, if any, so that at least 1,000 shares (or whatever amount remains, if less than 1,000 shares) is displayed. 56 There would be no reserve capability for floor broker agency interest entered into the files during the open and close. 57 55 See proposed NYSE Rule 70.20(c)(ii). 56 See proposed NYSE Rule 70.20(c)(iii). 57 See proposed NYSE Rule 70.20(k). The floor broker agency interest file at the Exchange BBO, except reserve, would be disseminated. Floor broker agency interest away from the BBO would not be displayed in OpenBook or other Exchange data distribution channel. 3. Autoquote Autoquote is part of the Display Book system that immediately displays customer limit orders received on the Exchange. 58 Autoquote immediately updates the NYSE BBO when a customer limit order is received by NYSE that improves the NYSE quote. 59 In addition, Autoquote updates the NYSE BBO when an execution occurs to reflect a new NYSE BBO from interest held in the Display Book system. The Exchange proposes to amend its Rule 60 to modify the circumstances under which Autoquote would be suspended. 58 This system was developed to facilitate specialists' compliance with the Commission's Limit Order Display Rule. See 17 CFR 242.604. 59 NYSE Rule 60(e). Specifically, Autoquote would be suspended in three circumstances: (1) When the specialist manually reports a block size transaction that involves orders in the Display Book system; (2) when the specialist gaps the quote; 60 or (3) when a LRP is reached. 61 When Autoquote is suspended due to a manual report of a block trade that involves orders in the Display Book system, 62 Autoquote would resume when the manual reporting is concluded. 63 When Autoquote is suspended following a gap quote, Autoquote would resume upon the report of a manual transaction or the publication of a non-gapped quotation. 64 60 See note 139 infra , for a description of gapped quotations. 61 See proposed NYSE Rule 60(e)(i). See Section II(A)(5)(a) infra , and proposed NYSE Rule 1000(a)(iv) for a description of LRPs. 62 See proposed NYSE Rule 1000(a)(v). See Section II(A)(5) infra. 63 See proposed NYSE Rule 60(e)(ii)(B). 64 See proposed NYSE Rule 60(e)(ii)(A). When Autoquote is suspended by an LRP that is reached by an Auto Ex Order that sweeps to the LRP price, 65 and if the Auto Ex Order is filled or if its unfilled balance is not capable of trading at a price beyond the sweep LRP price, then Autoquote would resume in no more than five seconds after the LRP is reached. 66 If the Auto Ex Order is capable of trading at a price beyond the LRP price, and would not create a locked or crossed market if quoted, then Autoquote would resume upon the report of a manual transaction or the publication of a new quote by the specialist, but in any event in no more than ten seconds. 67 Finally, if the Auto Ex Order is capable of trading at a price beyond the LRP price but would create a locked or crossed market if quoted, then Autoquote would resume upon a manual transaction or the publication of a new quote by the specialist. 68 65 See Section II(A)(5)(a)(1) infra. 66 See proposed NYSE Rule 60(e)(ii)(C). 67 See id. 68 See id. In Amendment No. 8, the Exchange represented that it would implement an alert for specialists to facilitate their compliance with the Commission's Limit Order Display Rule, 17 CFR 242.604. When Autoquote is suspended by a momentum LRP (“MLRP”), 69 Autoquote would resume in no more than ten seconds unless the Auto Ex Order would create a locked or crossed market. 70 If a locked or crossed market exists, Autoquote would resume once a manual transaction is reported. 71 69 See Section II(A)(5)(a)(2) infra. 70 See proposed NYSE Rule 60(e)(iii). 71 See id. See also note 68 supra. Autoquote would update the quote in the following situations even though automatic executions are not available. First, when the Exchange best bid (offer) is outside a MLRP, and such MLRP has not yet been reached, the Exchange would permit Autoquote to continue to operate, while automatic executions are not available. 72 Second, NYSE would keep Autoquote active when an order or a cancellation of an order arrives that would not result in a locked or crossed market in a security priced at $300 or more that has been determined to be ineligible for automatic execution (“high-priced security”) 73 or a manual execution takes place in such security. 74 Third, if there is a cancellation of the Exchange best bid (offer) in a high-priced security when the market in such security is internally locked or crossed, and autoquoting of the next best bid (offer) would create a locked or crossed market on the Exchange, NYSE would automatically generate a quote of 100 shares at the bid (offer) price that existed at the time of the cancellation. 75 72 See proposed NYSE rule 60(e)(iv)(a); see also Amendment No. 8. 73 See note 142 infra and accompanying text on the definition of high-priced security. 74 See proposed NYSE rule 60(e)(iv)(b)(i); see also Amendment No. 8. 75 See proposed NYSE rule 60(e)(iv)(b)(ii); see also Amendment No. 8. Finally, in the following situations, the Exchange would update its quote even though Autoquote is suspended due to an LRP or a gapped quotation, and automatic executions are not available: (1) If part of the existing Exchange best bid (offer) cancels, the Exchange would use Autoquote to update its quote to reflect the remaining volume; 76 (2) if the entire existing Exchange best bid (offer) cancels, the Exchange would automatically generate a quote of 100 shares at the bid (offer) price that existed at the time of the cancellation; 77 or (3) if there is a cancellation of the Exchange best bid (offer) when the market is internally locked or crossed, and autoquoting of the next best bid (offer) would create a locked or crossed market on the Exchange, NYSE would automatically generate a quote of 100 shares at the bid (offer) price that existed at the time of the cancellation. 78 76 See proposed NYSE rule 60(e)(iv)(c)(i); see also Amendment No. 8. 77 See proposed NYSE rule 60(e)(iv)(c)(ii); see also Amendment No. 8. 78 See proposed NYSE rule 60(e)(iv)(c)(iii); see also Amendment No. 8. 4. Automatic Executions Currently, an Auto Ex Order equal to or greater than the size of the Exchange's BBO trades with the entire published bid or offer, 79 and a new bid or offer is then published. If any shares of an Auto Ex Order remain available for execution after it trades with the published quote, the remaining shares are routed to the floor and represented in the auction market. 80 Auto Ex Orders that cannot be immediately executed are placed in the Book and represented as limit orders in the auction market. 81 When the national best bid or offer (“NBBO”) is disseminated by another market and an Auto Ex Order is delivered to the specialist, it must either match the better price displayed by the other market or send an ITS Commitment to the other market. 82 79 See NYSE Rule 1000(a). 80 See NYSE Rule 1001(b). 81 See NYSE Rule 1000. 82 See NYSE Rule 15A. As proposed, Auto Ex Orders would execute against interest at the Exchange BBO including displayed interest and reserve. 83 Once an Auto Ex Order trades with interest at the BBO, NYSE proposes to permit Auto Ex Orders, except ITS Commitments, to automatically “sweep” the Display Book system by trading with liquidity that is outside the BBO. Specifically, after exhausting the volume at the BBO, the shares of the Auto Ex Order that remain (the “residual”) would trade with existing orders in the Book, floor broker agency interest files, and the specialist interest file, until the Auto Ex Order is executed, its limit price, if any, is reached, or a LRP is reached, whichever occurs first. 84 83 See proposed NYSE Rule 1000(d). 84 See proposed NYSE Rule 1000(d)(ii)(A)-(D). During a sweep, the residual would trade with the orders in the Display Book system, floor broker agency interest, and any specialist interest capable of execution, at a single price (the “clean-up price”), such that any price improvement is given to the orders and interest in the Display Book system rather than the Auto Ex Order. 85 Accordingly, orders in the Book, floor broker agency interest, and any specialist interest capable of trading with the residual would receive the clean-up price. 86 Any specialist interest that remains at the clean-up price after the residual has traded would be automatically cancelled by the Exchange. 87 85 See proposed NYSE Rule 1000(d)(iii)(A). 86 See proposed NYSE Rule 1000(d)(iii)(B). 87 See proposed NYSE Rule 1000(d)(iii)(C)(ii). Any residual remaining after the sweep would become a bid (offer) at the order's limit price, if any, or the LRP price, whichever is lower (higher). 88 If the residual can execute at the price at which it is bidding (offering), it would have priority for one trade over other interest at that price. 89 If the residual executes at a different price—within the parameters of its limit, if any—it would trade on parity. 90 If an Auto Ex Order is designated IOC, any unfilled balance remaining after the sweep would be automatically cancelled. 91 88 See proposed NYSE Rule 1000(d)(iv). 89 See proposed NYSE Rule 72(j); see also Amendment No. 8. 90 See id. 91 See proposed NYSE Rule 1000(d)(iv). Current NYSE Rule 1001(a)(iv) provides that the specialist shall be the contra party for any automatic execution of an Auto Ex Order where the interest reflected in the published bid or offer is no longer available. This obligation exists regardless of the tick associated with the automatic execution. NYSE Rule 104, however, restricts the specialist's ability to purchase stock on direct plus ticks or sell stock on direct minus ticks. As part of its initial proposal establishing Direct+, the Exchange sought and received Commission approval of an interpretation of NYSE Rule 104 that provides that any instance in which the specialist is effecting such a direct tick transaction only because it has been required to assume the contra-side of an automatic execution shall be deemed to be a “neutral” transaction for purposes of NYSE Rule 104, and shall not be deemed a violation of the Exchange rule. 92 The Exchange requests that the Commission extend this interpretation to its Hybrid Market proposal. 92 See note 203 infra. Automatic executions of Auto Ex Orders may elect stop orders, stop limit orders, and percentage orders electable at the price of such executions. 93 Currently, any stop orders so elected are executed pursuant to Exchange auction market procedures and are not guaranteed an execution at the same price as subsequent automatic executions of Auto Ex Orders. 94 The Exchange previously sought and the Commission approved an interpretation 95 that, for the purposes of NYSE Rule 123A, the specialist is not required to fill any stop orders elected by an execution of an Auto Ex Order at the price of the electing sale in any instance where the specialist was required by NYSE Rule 1001(a)(iv) to take the contra-side of a Direct+ execution. NYSE proposes to retain this interpretation. 93 See NYSE Rule 1004. 94 See id. 95 See note 203 infra. (a) Priority, Parity, and Precedence NYSE executions are governed by its rules of priority, parity, and precedence. 96 These rules dictate which order or quote is able to execute against an incoming order and the allotment of shares, if more than one order or quote is at the BBO. Generally, the first bid (offer) at the BBO has priority to execute against the next incoming order. 97 Once a trade occurs with the bid (offer) that has priority, other bids (offers) at that price (including any remaining interest from the bid (offer) that had priority) generally trade on parity, meaning they split evenly the remainder of the incoming order, up to the size of their own order. 98 96 See NYSE Rules 72, 104, and 108. 97 See NYSE Rule 72 I(a). A bid (offer) that establishes the Exchange BBO is entitled to priority at that price for one trade, except a specialist bid or offer entitled to priority must yield to limit orders on the Book at the same price. 98 See NYSE Rule 72 III. When bids (offers) are on parity, Exchange rules dictate that in certain circumstances, a particular participant is guaranteed a portion of an order based on the size of its bid (offer), i.e. , precedence based on size. See NYSE Rule 72 I(c). A specialist must always yield priority to the orders it represents on the Book, 99 and today is limited somewhat in its ability to trade with orders represented by floor brokers. Specifically, when the specialist is decreasing or liquidating its dealer position, the specialist is entitled to trade on parity with orders represented by floor brokers, unless the floor broker (or its customer) requests that the specialist refrain from trading along with the order the floor broker represents. 100 When a specialist is establishing or increasing its dealer position, NYSE Rule 108 states that the specialist is not “entitled” to parity with orders represented on the floor. According to NYSE, it has interpreted this rule to permit specialist trading on parity when establishing or increasing a position if the specialist is granted permission from the floor broker (or its customer) to do so. 101 99 See NYSE Rule 92. 100 See NYSE Rule 104.10(6)(i)(C). 101 See NYSE Information Memo 05-81 (October 26, 2005) (interpreting NYSE Rule 108(a) as permitting a specialist to be on parity with orders in the Crowd when the specialist is establishing or increasing its position, provided that the brokers representing orders in the Crowd permit the specialist to trade along with them by not objecting to such participation). See Securities Exchange Act Release No. 53208 (February 2, 2006), 71 FR 6804 (February 9, 2006). In its Hybrid Market, the Exchange proposes to amend its rules that govern priority, parity, and precedence with respect to interest placed in the Display Book system. Generally, an incoming Auto Ex Order would trade first with the displayed bid (offer) that established the BBO. 102 If the Auto Ex Order is of greater size than the bid (offer) that has priority, the remaining balance of the Auto Ex Order would trade with other displayed interest at the BBO. 103 The additional displayed interest would trade on parity. 104 Thereafter, if the Auto Ex Order has size remaining to be executed, it would then execute against undisplayed specialist or floor broker reserve at the BBO, which would trade on parity. 105 102 See proposed NYSE Rule 1000(d)(i). If the specialist establishes the BBO, however, it would have to yield to all interest in the Book. 103 See proposed NYSE Rule 1000(d)(ii). As noted above, floor brokers would not be permitted to enter interest into its floor broker agency interest files that restricts the specialist's ability to trade on parity. In addition, specialists would not be permitted to trade on parity until orders in the Book at the same price are executed in full. 104 See proposed NYSE Rule 1001(a)(i). 105 See proposed NYSE Rules 1000(d)(ii)(A), 70.20(c)(iv), and 104(d)(iii). The Exchange proposes that all floor broker agency interest files at the same price be on parity with each other, except a floor broker agency interest file that establishes the BBO would be entitled to priority in accordance with NYSE Rule 72. 106 Finally, with respect to transactions against the published bid or offer, no published bid or offer may claim precedence based on size with respect to executions against Auto Ex Orders. 107 106 See proposed NYSE Rule 70.20(b). 107 See proposed NYSE Rule 1001(b). This reflects the current NYSE Rule 1001(c), which is proposed in this filing to be renumbered as NYSE Rule 1001(b). In Amendment No. 6, the Exchange proposes to amend NYSE Rule 70.20(d)(i) to provide that, during a sweep, the amount of floor broker agency interest that would have been displayed had the clean-up price become the Exchange BBO would trade on parity with displayed interest ( i.e. , orders on the Book) at that price. 108 The amount of any floor broker agency interest that would have been placed in the broker's reserve, however, would yield to displayed interest. 109 108 As noted earlier, floor broker agency interest would not be disseminated unless at the Exchange's BBO. 109 See proposed NYSE Rule 70.20(d)(ii). Floor brokers would have to indicate when entering interest in the floor broker agency interest file the amount that would be displayed and the amount that would be placed in reserve if the price becomes the BBO. The Exchange proposes that interest reflected in the specialist interest file would be entitled to trade on parity with interest in the floor broker agency interest file, regardless of whether the specialist is increasing or decreasing its position, but, in all cases, specialist interest would have to yield to orders in the Book. Specifically, during a sweep, if no orders remain on the Book capable of trading at the clean-up price, specialist interest could trade and would be on parity with floor broker interest at that price. 110 During a sweep, neither the specialist interest file nor the floor broker agency interest file could claim precedence based on size. 111 110 See proposed NYSE Rule 1000(d)(iii)(C)(i). 111 See proposed NYSE Rule 72 I(c)-(e). The Exchange also proposes to modify NYSE Rule 72 III to add that a cancellation of an entire bid or offer entitled to priority under the rule would clear the floor, after which all bids and offers would be deemed to be re-entered and on parity. 112 The Exchange believes this amendment is warranted because a cancellation of a bid or offer that was entitled to priority has the same effect as a trade. 112 Currently, a transaction “clears the floor,” after which all bids and offers are deemed resubmitted simultaneously and are on parity, except that specialists must yield to limit orders on the Book. Cancellation of part of an order retains priority for the uncancelled portion of such order. However, canceling an order and replacing it with a larger order would result in a loss of priority for the original order. To summarize, the following describes the sequence of execution against an incoming Auto Ex Order in the Hybrid Market: Interest at Exchange BBO An incoming Auto Ex Order would first trade with displayed interest at the Exchange BBO. Within this category, the order of execution would be: • First, interest that clearly establishes the BBO would be entitled to priority at that price for one trade, except that specialist interest that clearly established the BBO would yield to all later-arriving limit orders at the BBO on the Book. If there are no limit orders on the Book at the BBO, specialist interest that clearly established the BBO would be entitled to priority over the floor broker agency interest file for one trade. • Second, all other displayed interest at the BBO would trade on parity, except that specialist interest displayed at the BBO could not trade until all limit orders on the Book at the BBO are filled. If there are no limit orders on the Book at the BBO, specialist interest displayed at that price would trade on parity with the floor broker agency interest files displayed at the BBO. A specialist's ability to trade on parity with the floor broker agency interest files would not be restricted by the specialist's proprietary position ( i.e. , the specialist would trade on parity whether establishing/increasing or liquidating/decreasing its position). 113 113 However, NYSE Rule 104 would continue to restrict a specialist's ability to trade on parity. • Third, reserve interest ( i.e. , non-displayed interest) of the specialist or floor broker at the BBO would trade on parity. Additional specialist interest ( i.e. , other non-displayed interest generated by the Specialist Algorithm) at the BBO would trade only if no other interest exists at the BBO. 114 114 See infra Section II(B)(1) for a description of this “additional specialist interest.” Interest Outside Exchange BBO That Participates in a Sweep • Orders on the Book outside the Exchange BBO would trade at the clean-up price on parity with the amount of floor broker agency interest that would have been displayed had the clean-up price become the Exchange BBO. The amount of any floor broker agency interest that would have been placed in the broker's reserve would yield to displayed interest. • Specialist interest would participate in the sweep provided there are no limit orders on the Book remaining at the clean-up price. Specialist interest participating in the sweep would trade on parity with any remaining floor broker agency interest at the clean-up price. (b) Automated Routing Away In the case of all orders submitted to the Exchange electronically, except for certain IOC orders, ITS Commitments, and Intermarket Sweep orders, where a better bid or offer is published by another ITS participating market center in which an automatic execution is available, or a published bid or offer is otherwise protected from a trade-through by Commission rule or the Intermarket Trading System plan, and the specialist has not systematically matched the price associated with that better bid or offer, the Exchange would automatically route to such other market center a commitment to trade that satisfies that published bid or offer, unless the member entering the order indicates that it has contemporaneously satisfied the better published bid or offer. 115 If the commitment to trade is not filled or not filled in its entirety, the balance would be returned to the Exchange and handled consistent with the order's instructions, which includes automatic execution, if available. 116 The order entry time associated with this returned portion of the order would be the time of its return, not the time the order was first entered on the Exchange. 117 With respect to the operation of sweeps, automated bids (offers) published by away markets that are better than the clean-up price would be satisfied in their entirety unless the order is an IOC order 118 or an Intermarket Sweep order. 119 115 See proposed NYSE Rule 15A.50 116 See id. 117 See id. 118 In such case, the IOC order would be cancelled by NYSE to prevent trading through the away market. 119 See proposed NYSE Rule 1000(d)(III)(D) and Rule 600(b)(30) of Regulation NMS, 17 CFR 242.600(b)(30). (c) Tick-Restricted Orders, Stop Orders, and Other Orders Eligible for Automatic Execution Tick-restricted orders in the Display Book system would be filled electronically and participate in automatic executions and sweeps as their ticks and limits, if any, allow. 120 Specifically, buy sweeps would cause short sales and sell plus orders to be executed above the offer, while sell sweeps would cause buy minus orders to be executed below the bid. Sell short orders, other than those involving Regulation SHO pilot securities, would not sweep the Display Book system after automatically executing against the bid, as the sweep transaction would occur on a minus tick. 121 120 Specifically, the Exchange proposes in NYSE Rule 13 that sell “plus” limit orders, buy “minus” limit orders, sell “plus” market orders, and by “minus” market orders designated for automatic execution that are systematically delivered to the Display Book system be eligible to be automatically executed in accordance with NYSE Rules 1000-1004. 121 See proposed NYSE Rule 1000(d)(iii)(E); see also Amendment No. 8. Under the proposal, stop orders (including stop limit orders) on the Display Book system would be electronically elected and may participate in automatic executions. 122 Elected stop orders on the same side of the market as the Auto Ex Order could trade at the electing bid (offer) price after the Auto Ex Order is filled to the extent that there is volume available. 123 In addition, an execution at the clean-up price could also elect stop orders. Elected stop orders on the same side of the market as a sweeping Auto Ex Order could trade at the clean-up price after the Auto Ex Order is filled to the extent that there is volume available. 124 122 See proposed NYSE Rule 13. 123 Elected stop orders on the contra side of the market of the Auto Ex Order could trade with the Auto Ex Order at the electing bid (offer) price after interest in the Display Book system at such price has been filled to the extent that there is volume available from the Auto Ex Order. 124 Elected stop orders on the contra side of the market of the Auto Ex Order could trade with the Auto Ex Order at the clean-up price after interest in the Display Book system at such price has been filled to the extent that there is volume available from the Auto Ex Order. Furthermore, under proposed amendments to NYSE Rule 123A, the elected or converted portion of a CAP-DI order could be automatically executed and participate in a sweep. An elected or converted CAP-DI order on the same side of the market as an automatically executed electing order could participate in a transaction at the bid (offer) price if there is volume associated with the bid (offer) remaining after the electing order is filled in its entirety. 125 An elected or converted CAP-DI order on the same side of the market as an automatically executed electing order that sweeps the Display Book system could also participate in a transaction at the clean-up price if there is volume remaining on the Display Book system or from contra-side elected CAP-DI orders at that price. 126 Furthermore, an elected or converted CAP-DI order on the contra-side of the market of an automatically executed electing order could execute against the Auto Ex Order at the electing price if there is volume remaining after the Auto Ex Order executes against interest in the Display Book system at the bid (offer) price. 127 An elected or converted CAP-DI order on the contra-side of the market of an automatically executed electing order that sweeps the Display Book system could execute against the Auto Ex Order at the clean-up price if there is volume remaining from the Auto Ex Order, from contra-side elected CAP-DI orders, or other interest at that price. 128 Finally, when a specialist is bidding (offering) or trading and an automatic execution occurs against such specialist proprietary interest, marketable CAP-DI orders on the same side as the specialist's interest would be automatically converted to participate in such execution. 129 If the execution elects a contra-side stop or stop limit order and the specialist is required to execute the elected stop or stop limit order, then CAP-DI orders on the same side of the market as the specialist would be automatically converted to participate in the execution of the stop or stop limit orders. 130 125 See proposed NYSE Rule 123A.30(a)(i). 126 See id. 127 See proposed NYSE Rule 123A.30(a)(ii); see also Amendment No. 8. 128 See proposed NYSE Rule 123A.30(a)(ii); see also Amendment No. 8. 129 See proposed NYSE Rule 123A.30(a)(iii); see also Pilot Amendment. 130 See id. Stop orders and CAP-DI orders could be elected at the same time by automatic executions and sweeps. If there is insufficient volume to fill the elected orders, stop orders could be executed first as they become market or marketable limit orders upon their election, whereas the elected portion of CAP-DI orders would revert to CAP-DI status if it is unable to trade. Elected CAP-DI orders are on parity with each other, which could affect the sequence in which elected stop and CAP-DI orders would trade. 131 131 See NYSE Rule 123A.30. 5. Availability of Direct+ Current Exchange rules provide that automatic executions are available from the time the Exchange disseminates a published bid or offer until 3:59 p.m. for stocks and Trust Issued Receipts, or 4:14 p.m. for Investment Company Units, or within one minute of any other closing time of the Exchange's floor market. 132 Auto Ex Orders entered prior to the dissemination of a bid or offer or after 3:59 p.m./4:14 p.m. or within one minute of any other closing time, are handled in the auction market. The Exchange proposes to extend the availability of automatic executions through the close of regular trading for a particular product ( e.g. , 4 p.m./4:15 p.m.). 133 132 See NYSE Rule 1002. 133 See proposed NYSE Rule 1002. Currently, Direct+ is not available during the trading day at the following times: (1) When the NYSE published quotation is in the non-firm quote mode; (2) when the execution price would be more than five cents away from the last reported transaction price in the subject security on the Exchange; (3) when a better price exists in another ITS participating market center; (4) when NYSE's published bid or offer is 100 shares (on the side the order would be executed against); (5) when a block size transaction outside NYSE's published bid or offer pursuant to NYSE Rule 127 is in the process of being completed, in which case the specialist should publish a bid and/or offer that is more than five cents away from the last reported transaction price in the subject security on the Exchange; 134 or (6) when trading in the subject security has been halted. 135 134 On January 17, 2006, the Exchange filed a proposed rule change seeking to amend the procedure for suspending automatic execution in connection with a block size transaction. See Form 19b-4 dated January 17, 2006 (SR-NYSE-2006-01). The Exchange proposes to require specialists to publish a 100 × 100 share market quote that reflects the last reported transaction in connection with a block size transaction. 135 See NYSE Rule 100(a)(i)-(vi). NYSE proposes to limit the instances when Direct+ is unavailable. 136 Specifically, pursuant to proposed NYSE Rule 1000(a), 137 automatic executions in Direct+ would not occur when: (1) The NYSE published quotation is in non-firm quote mode; (2) trading in a security has been halted; 138 (3) the quote is gapped in accordance with Exchange procedures; 139 (4) trading on the Exchange reaches a LRP; (5) a block size transaction, as defined in NYSE Rule 127.10, 140 that involves orders in the Display Book system is being manually reported; 141 or (6) an Auto Ex Order is entered for a security whose closing price (or the closing bid price if there were no transactions on the previous trading day) on the Exchange is $300 or more. 142 Direct+ would be unavailable on both sides of the market in these situations. 143 NYSE proposes to disseminate an indicator to alert investors when automatic executions are not available against its quote. In addition, when automatic executions are not available due to a LRP or gapped quotation, NYSE would disseminate an indicator to signify that the NYSE quotation is not firm. 144 In any instance where the automatic execution feature is not available, Auto Ex Orders would be directed to the Exchange's auction market for representation. 145 136 In Amendment No. 8, NYSE proposes to remove its previously proposed rule that would have made Direct+ unavailable when a better price was published by an away market. As noted above, NYSE proposes to automatically route orders, except Intermarket Sweep orders and certain IOC orders, to ITS participant markets that make automatic execution immediately available and are protected from trade throughs, unless the specialist matches the better price. 137 See proposed NYSE Rule 1000(a)(i)-(vi). 138 No executions, either automatic or manual, would be possible on the Exchange when trading has been halted. 139 A specialist could cause a non-auto-executable quote by gapping the quotation due to an order imbalance in accordance with the policies and procedures of the Exchange. Gap quotes are used to signal an imbalance so as to attract contra-side liquidity in an attempt to mitigate volatility. The size of an imbalance suitable for gapped quoting is at least 10,000 shares or a quantity of stock having a value of $200,000 or more, although depending on the trading characteristics of the security, the appropriate conditions for gapped quoting could be higher. See NYSE Information Memo 04-27 (June 9, 2004). When the quotation is gapped, automatic executions and Autoquote would be suspended, and the NYSE quote would be identified as non-firm. Incoming orders and cancellations would update the Book electronically. Once a trade occurs or a non-gapped quote is published, Autoquote and automatic execution would resume. 140 NYSE Rule 127.10 defines a “block” size as at least 10,000 shares or a quantity of stock having a market value of $200,000 or more, whichever is less. See Amendment No. 8. 141 The Exchange originally proposed to permit automatic executions to continue while a block size transaction was manually reported until the bid (offer) decremented to 100 shares. In Amendment No. 8, NYSE proposes to suspend both Autoquote and automatic executions as soon as the report template is opened by the specialist to report a block size transaction that involves orders on the Display Book system. See proposed NYSE Rule 60(e)(ii)(B) and NYSE Rule 1000(a)(v). 142 See proposed NYSE Rule 1000(a)(vi); see also Amendment No. 8. In addition, in Amendment No. 8, NYSE proposes to suspend automatic executions for such securities on both sides of the market. 143 Automatic executions would be suspended on only one side of the market when an execution at the NYSE quote would trigger the MLRP. See proposed NYSE Rule 1000(c). See also proposed NYSE Rule 60(e)(iv)(a). 144 See proposed NYSE Rule 60(c)(2)(b); see also Amendment No. 8. 145 See NYSE Rule 1000(d)(v). (a) Liquidity Replenishment Points The Exchange proposes LRPs as pre-determined price points that would halt automatic executions for varying periods of time depending on the price and remaining size, if any, of an Auto Ex Order. LRPs may be triggered by a sweep or electronic trading that results in rapid price movement over a short period. A LRP converts the electronic market to an auction market on a temporary basis, with the intent of moderating volatility in the security by affording an opportunity for new orders, the Crowd, and the specialist to add liquidity. The Exchange proposes two LRPs—a price-based or sweep LRP and a momentum LRP. (1) Sweep LRPs The sweep LRP price would be set at the nearest five-cent increment outside the Exchange BBO, rounded away to the next nearest nickel. 146 When a sweep LRP is reached, the sweeping order would trade at that price to the extent of the volume available at that price. If there is a residual remaining after a sweep that has triggered an LRP, it would be bid (offered) at the LRP price, unless the order is NYSE IOC, IOC or Intermarket Sweep, in which case it would be cancelled. 147 146 See proposed NYSE Rule 1000(a)(iv)(A). 147 See proposed NYSE Rule 1000(d)(iv). If an Auto Ex Order sweeps to its limit price and has residual remaining at the price, the residual would be bid (offered) at its limit price. Automatic executions and Autoquote would then be suspended, but incoming orders and cancellations would continue to be reflected automatically in the Display Book system, although new incoming orders would not be displayed. 148 However, if a displayed bid (offer) cancels, a new bid (offer) would be autoquoted. 149 148 See Second Notice, supra note . According to the Exchange, the Display Book system has the ability to accept incoming orders and cancellations when automatic executions and Autoquote are suspended; however, only the specialist would be able to view this information. These incoming orders and cancellations are held in the Display Book system in the sequence that they are received, until Autoquote and automatic executions are available. 149 See proposed NYSE Rule 60(e)(iv)(c); see also Amendment No. 8. Under the proposal, automatic executions and Autoquote would resume in no more than five seconds when the sweeping order is filled in its entirety ( i.e. , no residual exists), when the residual is cancelled ( i.e. , the sweeping order is IOC), or when the residual is not capable of trading at a price above (in the case of a buy order) or below (in the case of a sell order) the sweep LRP (that is, when the residual has a limit price equal to the LRP). 150 Automatic executions and Autoquote would resume in no more than 10 seconds when the residual is able to trade at a price above (below) the sweep LRP, but that price would not create a locked or crossed market. 151 Automatic executions and Autoquote would resume earlier if the specialist has manually traded or quoted the market before 10 seconds have elapsed. NYSE expects the specialist to quote or trade before 10 seconds have elapsed, unless an imbalance exists, a trade is being put together in the Crowd, or market conditions otherwise prevent such actions from occurring. 150 See proposed NYSE Rules 60(e)(ii)(C) and 1000(b); see also Amendment No. 8. 151 See id. Finally, where a residual is able to trade at a price above (below) the sweep LRP, and that price would create a locked or crossed market, or when a locked or crossed market results from the entry of orders or cancellations during the 5- and 10-second periods described above, automatic executions and Autoquote would resume with a manual trade or the publication of a new quote by the specialist. 152 In this circumstance, there is no maximum time period after which automatic executions and Autoquote would automatically resume. 153 If the locking or crossing residual order cancels, automatic executions and Autoquote would resume within the relevant 5- or 10-second timeframe described above, unless a manual trade or quote occurs before then. 154 If the displayed bid (offer) on the contra-side of the locking or crossing residual order cancels, a new bid (offer) would be autoquoted. 152 See proposed NYSE Rules 60(e)(ii)(C) and 1000(b). 153 Specialists would still be required to immediately display customer limit orders. See Rule 604 of Regulation NMS, 17 CFR 242.604. See also proposed NYSE Rule 60(e)(ii)(C) and 60(e)(iii). 154 See Second Notice, supra note 8. (2) MLRPs The momentum LRP would be triggered by a specified price movement over a specified period during a trading session. The Exchange is proposing a LRP based on price movement over a period of time because it is concerned that excessive volatility could arise in situations other than electronic sweeps. MLRPs are designed to limit the amount of price change that can occur within a 30-second time period to the greater of 25 cents or 1% of the security price (rounded to the nearest cent). The MLRP range at any time may be calculated as follows. First, the low MLRP range is calculated by taking the high transaction price of the security within the prior 30 seconds and subtracting the greater of (a) 25 cents or (b) 1% of the security's price (rounded to the nearest cent). 155 Next, the high MLRP range is calculated by taking the low transaction price of the security within the prior 30 seconds and adding the greater of (a) 25 cents or (b) 1% of the security's price (rounded to the nearest cent). 156 For example, assume that during the prior 30 seconds, the high transaction price is $20.15, the low transaction price is $19.92, and the last sale price was $20.15. The low MLRP range would be $19.90, calculated by subtracting $0.25 ($0.25 is greater than 1% of the security's price) from the high transaction price of $20.15. The high MLRP range would be $20.17, calculated by adding $0.25 to the low transaction price of $19.92. The MLRP range could change based on an event ( e.g. , a new trade) or the passage of time. 155 See proposed NYSE rule 1000(a)(iv)(B)(ii). 156 See id. If there was no transaction on the Exchange within 30 seconds, the MLRP range would be based off the last transaction on the Exchange. 157 For example, if the last sale price was $20.15 and no transactions have occurred within the prior 30 seconds, the low MLRP range would be $19.90 and the high MLRP range would be $20.40. Automatic executions could occur at prices at or within the MLRP range. Automatic executions that would occur at prices outside the MLRP range would cause the suspension of automatic executions and Autoquote. An Auto Ex Order that reaches the MLRP price would trade at that price to the extent possible, and thereafter automatic executions and Autoquote would be suspended. 158 The Display Book system would be automatically updated by incoming orders and cancellations, although new incoming orders would not be displayed. 159 157 See proposed NYSE rule 1000(a)(iv)(B)(iii). 158 See proposed NYSE Rule 1000(a)(iv)(B). 159 See Second Notice, supra note 8. See also supra note 148. Once automatic executions and Autoquote have been suspended due to a MLRP, they generally would resume in no more than 10 seconds. 160 The Exchange expects, similar to a sweep LRP, that the specialist will trade or requote the stock in less than 10 seconds unless conditions in the stock prevent this. Where incoming orders and cancellations cause a locked or crossed market, Autoquote and automatic executions would resume upon a manual transaction. 161 160 See proposed NYSE Rules 60(e)(iii) and 1000(b); see also Amendment No. 8. 161 See id. In addition, if the NYSE published bid or offer is at a price beyond the MLRP range, automatic executions on that side of the market would be suspended because an automatic execution could not occur at that price. 162 This is the only instance when automatic executions would be suspended on one side of the market. Autoquote would continue, and orders and cancellations would update the Display Book system. 163 Automatic executions would resume when a bid or offer within the MLRP range is autoquoted or the MLRP range changes as a result of the moving 30-second timeframe. 164 162 see proposed NYSE Rule 1000(c); see also Amendment No. 8. 163 See supra note 148. 164 See id. B. Role of the Specialist in the Hybrid Market 1. Specialist Algorithms The Exchange proposes to allow specialists to participate automatically in the Hybrid Market and replicate the performance of certain specialist privileges and obligations in an electronic way. For instance, specialists would be permitted to establish electronic connections to the Display Book system that would provide them with access to certain information before other market participants, and be permitted to make a range of specified quoting and trading decisions based on that information. Specifically, the Exchange proposes to provide specialists with the ability to implement systems that use proprietary algorithms, based on predetermined parameters, to electronically participate in the Hybrid Market (“Specialist Algorithm”). 165 The Specialist Algorithm would communicate with the Display Book system via an Exchange-owned external application program interface (“API”). 166 The Specialist Algorithm is intended to replicate electronically some of the activities specialists are permitted to engage in on the floor in the auction market, and to facilitate specialists' ability to fulfill their obligations to maintain a fair and orderly market. 165 See proposed NYSE Rule 104(b). 166 In Amendment No. 8, the Exchange clarified that specialists would develop Specialist Algorithms to communicate with the Display Book system via the API. The Specialist Algorithm would receive information via the API, including information about orders entering NYSE systems, before that information is available to other market participants. 167 NYSE systems would enforce the proper sequencing of incoming orders and algorithmically-generated messages. 168 The Specialist Algorithm and the specialists on the floor would not have the ability to affect the arrival of orders at the Display Book system, or the sequence in which orders and algorithmically-generated messages are processed by the Display Book system. 169 The Specialist Algorithm, however, would be able to generate certain specified quoting and trading messages based on the information it receives through the API. Once an algorithmic message has been generated, it cannot be stopped, changed, or cancelled on its way to the Display Book system. 167 The Specialist Algorithm would have access to the following information: (1) Specialist dealer position; (2) quotes; (3) information about orders in the Display Book system such as limit orders, percentage orders, stop orders, and AL orders and market orders not designated for automatic execution (“AM orders”) (“state of the book”); (4) any publicly available information the specialist firm chooses to supply to the algorithm, such as the Consolidated Quote stream; and (5) incoming orders as they are entering NYSE systems. The Specialist Algorithm would not have access to the following types of information: (1) Information identifying the firms entering orders, customer information, or an order's clearing broker; (2) floor broker agency interest files or aggregate floor broker agency interest available at each price; or (3) order cancellations, except for cancel and replace orders. See proposed NYSE rule 104(c)(ii). 168 See proposed NYSE Rule 104(b)(ii)(A). 169 See proposed NYSE Rule 104(b)(ii)(B). The Display Book system would not accept algorithmically-generated messages from the Specialist Algorithm when automatic executions are unavailable except in certain specified situations. 170 Specifically, when automatic executions are suspended, but Autoquote is active, the Display Book system would accept algorithmically-generated messages from the Specialist Algorithm to generate a bid or offer that improves the Exchange BBO or supplements the size of the existing BBO. 171 170 See proposed NYSE Rule 104(c)(vi). 171 See proposed NYSE Rule 104(c)(vi)(i); See also Amendment No. 8. In addition, when Autoquote and automatic executions are suspended, the Display Book system would: (1) Process algorithmically-generated messages to layer specialist interest outside the published Exchange quotation and (2) permit specialists to manually layer specialist interest at prices within a previously established locking or crossing quotation. 172 172 See proposed NYSE Rule 104(c)(vi)(ii) and 104(c)(viii); See also Amendment No. 8. Furthermore, the Display Book system would not process algorithmically-generated messages from the Specialist Algorithm during the time a block size transaction involving orders in the Display Book system is being manually reported 173 or when the messages would trigger the automatic execution of an AL order or an AM order, or would result in such order's execution with an existing contra-side specialist bid or offer. 174 However, the Display Book system would process algorithmically-generated messages from the Specialist Algorithm to provide price improvement to AL and AM orders in accordance with the price improvement parameters described below. 175 Algorithmically generated messages would not be permitted to create a locked or crossed market 176 and would have to comply with all SEC and NYSE rules, policies, and procedures governing specialist proprietary trading. 177 173 See proposed NYSE Rule 104(c)(v). 174 See proposed NYSE Rule 104(c)(vii) and infra Section II(D). 175 See proposed NYSE Rule 104(c)(vii). 176 See proposed NYSE Rule 104(c)(iv). 177 See proposed NYSE Rule 104(c)(iii). NYSE has represented that prior to the rollout of the third phase of the Hybrid Market, it will develop guidance to clarify how it expects specialists to comply with the NYSE Rule 104 in the Hybrid Market. Telephone call between Catherine R. Kinney, President and Co-Chief Operating Officer, NYSE Group, Inc. and Richard G. Ketchum, Chief Regulatory Officer, NYSE Regulation, Inc., and Kelly M. Riley, Assistant Director, Division, SEC, on March 22, 2006. See also Amendment No. 8. (a) Quoting Messages The Exchange proposes to allow the Specialist Algorithm to generate quoting messages to: (1) Supplement the size of the existing Exchange BBO; (2) place within the Display Book system specialist reserve interest at the Exchange BBO; (3) layer within the Display Book system specialist interest at varying prices outside the Exchange BBO; 178 (4) establish the Exchange BBO; and (5) withdraw previously established specialist interest at the Exchange BBO. 179 178 In Amendment No. 8, NYSE proposes to permit specialists to manually place interest in the specialist interest files at and outside the BBO. Such interest would remain in the Display Book system until it is traded with or cancelled. See proposed NYSE Rule 104(c)(viii); see also Pilot. 179 See proposed NYSE Rule 104(b)(i)(A)-(E). A quoting message would not be able to interact with the order that preceded it. In addition, the Specialist Algorithm could move its quote away from the inside market only after the order it is reacting to has been processed. (b) Trading Messages The Exchange proposes to allow the Specialist Algorithm to generate trading messages to: (1) Provide “additional specialist volume” to partially or completely fill an order at the Exchange BBO; 180 (2) match better bids and offers published by other market centers where automatic executions are immediately available; (3) provide price improvement to an order, subject to the conditions outlined below; and (4) trade with the Exchange published quotation “ that is, “hit bids” or “take offers.” 181 180 Specialists could supply additional trading volume at the BBO beyond the amount in the specialist's reserve, if any. The Exchange proposes to amend NYSE Rule 104 to provide that this additional volume, which is not part of the reserve and which is not displayed, could complete an order, thereby providing a single-priced execution, or partially fill the remainder of the order. See proposed NYSE Rule 104(b)(i)(F). Additional specialist volume would yield to displayed and reserve interest. 181 See proposed NYSE Rule 104(b)(i)(F)-(I). The generation of algorithmic messages to trade in response to a particular order does not guarantee that the specialist would be able to interact with that order or that the specialist has priority in trading with that order. 182 For example, specialist interest may not trade with the order identified by the algorithmic message because the specialist's message did not arrive in the Display Book system in time or the specialist has to yield to the Book. Such interest would be automatically cancelled. 183 182 See proposed NYSE Rule 104(c)(i)(C). 183 See proposed NYSE Rule 104(c)(i)(D). (1) Specialists' Ability To Systematically Price Improve Incoming Orders The Specialist Algorithm would enable specialists, on behalf of their dealer accounts, to electronically provide price improvement to all or part of a marketable incoming order, including an AL order or AM order, 184 provided the following conditions are met: (i) The specialist is represented in a “meaningful amount” in the bid with respect to price improvement provided to an incoming sell order, or in the offer with respect to price improvement provided to an incoming buy order; and (ii) the price improvement provided by the specialist is (a) at least three cents where the quotation spread is more than five cents, (b) at least two cents where the quotation spread is three, four, or five cents, or (c) one cent where the quotation spread is two cents. 185 NYSE proposes to define the term “meaningful amount” as at least 1,000 shares for the 100 most active securities on the Exchange based on average daily volume and at least 500 shares for all other securities on the Exchange. 186 Specialist systematic price improvement would only be available for incoming orders that are marketable ( i.e. , that can trade with the published bid or offer). 187 In addition, the Exchange proposes to amend NYSE Rule 123A.30 to provide for systematic conversion of marketable CAP-DI orders previously entered with the specialist to allow these orders to participate on parity with the specialist when the specialist is price improving an incoming order. 188 184 Specialist Algorithms could price improve AL orders and AM orders, consistent with the requirements noted above, by generating a message to trade with the AL or AM order before it is processed by the Display Book system, or executing the AL or AM order at its quoted price once the order has been processed by the Display Book system. Algorithmic messages that would trigger the automatic execution of AL or AM orders or that would result in such orders trading with the specialist's existing contra-side bid or offer would be prohibited. See proposed NYSE Rule 104(c)(vii). 185 See proposed NYSE Rule 104(e)(i)(A)-(D). 186 See proposed NYSE Rule 104(e)(ii); see also Amendment No. 8. NYSE would disseminate a list of the 100 most active securities on a quarterly basis, or more frequently as the Exchange may determine from time to time. See proposed NYSE Rule 104(e)(ii). 187 See proposed NYSE Rule 104(e)(i). With respect to incoming orders that are not marketable ( i.e. , those orders that would establish a new best bid or best offer), the specialist could not trade with such order until the new bid or offer is publicly disseminated. 188 See proposed NYSE Rule 123A.30(a)(iii). (2) Specialists' Ability To Hit Bids or Take Offers Specialists' messages to trade with the Exchange published quote must include information that indicates the quote has been publicly disseminated. 189 In addition, to ensure that a specialist's algorithmic message to trade with the Exchange published quotation does not possess any speed advantage in reaching the Display Book system, Exchange systems would process such messages in a manner that gives specialists and other market participants a similar opportunity to trade with the Exchange's published quotation, by delaying the processing of this type of trading message from the Specialist Algorithm. 190 189 See proposed NYSE Rule 104(c)(i)(A). 190 See proposed NYSE Rule 104(b)(ii). Based upon the average transit time from the Common Message Switch (CMS) system to the Display Book system, the Exchange would determine the appropriate amount of time to delay the processing of algorithmic messages to trade with the Exchange published quotation. The delay parameter would be adjusted periodically to account for changes to the average transit time resulting from capacity and other upgrades to Exchange systems. See Third Notice, supra note 11. 2. Limitations on Members' Trading Because of Customers' Orders—NYSE Rule 92 NYSE Rule 92(a) generally prohibits members from causing the entry of an order to buy (sell) any Exchange-listed security for any account in which such member is directly or indirectly interested, if the person responsible for entering such order has knowledge of any particular unexecuted customer's order to buy (sell) such security which could be executed at the same price. The Exchange has proposed to amend NYSE Rule 92 to reflect the operation of the Specialist Algorithm. Specifically, NYSE proposes that the specialist would not be deemed to have knowledge about a particular incoming order that is viewed by the Specialist Algorithm until such incoming order is “processed” by the Specialist Algorithm. 191 According to the Exchange, there may be times when the Specialist Algorithm could “possess” more than one order at the same time. In addition, there could be times when a permissible algorithmic message has been generated, but before such message has been processed by the Display Book system, the Specialist Algorithm has “read” or “is reading” a new incoming order. This new order could be priced at the same price as the algorithmically-generated order or otherwise be able to trade with the order to which the algorithmic message reacted, but, as a result of proper time sequencing within the Display Book system, the algorithmic message would be processed before the new incoming order. NYSE has proposed to amend Rule 92 to provide that, if the Specialist Algorithm is designed and operated in a manner that prevents a quoting or trading message generated in response to an order from being affected by the receipt of a subsequent order, then for purposes of Rule 92, the specialist would not be deemed to have knowledge of the subsequent order. 192 191 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 prov [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A06-3012. Public record. Not legal advice.