* * IMPORTANT – TIME
SENSITIVE INFORMATION * *
The Exchange expects the Securities and Exchange Commission to approve its request to conduct a Pilot to put into operation Phase 1 of the Exchange’s Hybrid Market initiative (the “Pilot”) with respect to approximately 200 NYSE securities (“Pilot Securities”). A list of Pilot Securities is attached as Exhibit B.
The Pilot is expected to begin Thursday, December 15, 2005.
To ensure that the Pilot operates as smoothly as possible, it will be rolled out initially to a few Pilot Securities at a time. Securities for which the Pilot has been implemented will be identified by signs on the Trading Floor. A list will also be available on http://www.nyse.com.
The Pilot will allow members and member organizations to gain essential practical experience with new systems and processes in a controlled and well-modulated way. In addition, the Pilot will contribute to the Exchange’s ability to comply with the implementation date for Regulation NMS.1
The Pilot will last 90 calendar days or until the SEC approves the NYSE’s Hybrid Market filings, whichever comes first.
During the Pilot, the following aspects of the Hybrid Market initiative will be implemented with respect to Pilot Securities:
· NYSE Direct+ will continue to operate under existing rules and be subject to the same availability, restrictions and conditions.
· NYSE Floor Broker Agency Interest FilesSM (“floor broker agency interest” or “agency interest”), also referred to as “e-Quotes,” including the reserve feature, will be activated; however, during this phase Floor Brokers will not have the ability to exclude their interest from the aggregate information available to the specialist. In addition, the brokers’ reserve amounts will be visible to the specialist.
· Specialists will be able to manually layer their interest at and outside the best bid and offer through the use of NYSE Specialist Interest FilesSM (“specialist interest files”), also referred to as “s-Quotes.”
· Systemic programming of priority, parity, and yielding requirements, other than the yielding requirements for additional specialist interest will be operational.
· Certain functions that were previously performed manually by the specialist regarding the execution and reporting of elected stop and CAP-DI orders and the conversion and execution of CAP-DI orders have been systematized.
The Hybrid Market rules that will apply to Pilot Securities during the Pilot are described in detail below and their text is attached as Exhibit A.
1. Background
The Hybrid Market integrates in one marketplace the best of both auction market and electronic trading. By combining the benefits of specialist and Floor Broker expertise with the speed, certainty, and anonymity of electronic execution, the Hybrid Market trading platform offers maximum choice to customers in how to execute orders, but preserves time-tested trading procedures that have proven immensely successful in providing stable, liquid, and less volatile markets.
Customers who want execution speed and certainty, with anonymity, can opt to have their orders automatically executed via NYSE Direct+®, the Exchange’s electronic trading facility. Customers who want the opportunity for price improvement or the benefit of Floor Broker expertise in the handling of their orders can choose to have their orders executed through the traditional auction process. Notably however, these customers do not give up the benefits of electronic trading, since even those choosing to have their orders handled in the auction market initially will still be able to participate in automatic executions, thereby expanding their execution opportunities.
Additional information about the Hybrid Market, its features and its benefits is available at http://www.nyse.com. The remainder of this Information Memo focuses on features that are being implemented during the Pilot. As additional phases are implemented, the Exchange will issue additional Information Memos.
2. Hybrid Market Pilot (Phase I)
It is important to note that not all of the changes included in the Exchange’s Hybrid Market filings will be implemented during the Pilot. Proposed Hybrid Market rules that will be implemented in the Pilot are designated with a (P) for Pilot. Proposed Hybrid Market rule provisions that will not be implemented in the Pilot are noted in the accompanying rule text as “intentionally omitted.”
In addition, all other Exchange Rules remain in force and applicable to trading in Pilot Securities during the Pilot.
A. Operation of NYSE Direct+®
During the Pilot, NYSE Direct+® will continue to operate under existing rules, and all restrictions contained in Exchange Rules 1000 through 1005 will remain in force. Additional information about the operation of NYSE Direct+® may be found in Information Memos 03-21 (May 15, 2003) and 01-4 (February 27, 2001).
B. NYSE Floor Broker Agency Interest FileSM (“e-Quotes”)
The Exchange is activating the Floor Brokers’ ability to enter e-Quotes in Pilot Securities. This feature permits Floor Brokers to electronically represent their agency orders at multiple price points at and outside the Exchange best bid and best offer (“BBO”). Through e-Quoting, Floor Brokers can offer customers the benefit of broker knowledge and experience as well as the efficiency of automatic executions.
Note: In the event that a proprietary vendor system has not been activated or vendor systems or Exchange systems that have been activated otherwise become unavailable, a Floor Broker who is unable to enter his or her own e-Quotes during the Pilot has the following options:
(i) Request a specialist to enter the e-Quote for him or her;
(ii) Send an order through SuperDot®;
(iii) Send a CAP-DI order to the specialist;
(iv) Send an order for Direct+ execution;
(v) Trade in the Crowd (i.e., hit bids and take offers); or
(vi) Give the order to another Floor Broker with e-Quoting capabilities.
Members and member organizations are reminded of their obligations regarding the entry of e-Quotes as discussed in Member Education Bulletin 2005-24.
Rule 70.20(a)(i)(P) - Permits Floor Brokers to place e-Quotes at multiple price points, on both sides of the market, in all Pilot Securities trading within the area constituting the “Crowd,” provided that the broker has orders in such securities, and has complied with the requirements of Exchange Rule 123(e).2
Floor Brokers who do not want the specialist to be able to trade on parity with their orders may not include them in their agency interest file. See Section 6, below.
Rule 70.20(i)(P) – Clarifies that when a Floor Broker’s e-Quote participates in an execution, the entering Floor Broker will be deemed to be the executing broker in connection with that transaction.
Rule 70.20(f)(P) – Provides that e-Quotes must be cancelled when a Floor Broker leaves the Crowd, except that a Floor Broker may leave the Crowd without canceling his or her e-Quotes to recharge his or her handheld device.
If the Floor Broker leaves the Crowd without canceling his or her e-Quotes and one or more executions occur with such e-Quotes, the Floor Broker will be held to such executions and may be subject to disciplinary action for failing to cancel e-Quotes when required.
Rule 70.20(l)(P) – Reminds Floor Brokers that e-Quoting capability does not modify or relieve Floor Brokers from their agency obligations, including best execution, or required compliance with all SEC and Exchange rules, policies and procedures.
Accordingly, Floor Brokers should not combine orders with conflicting instructions, such as sell short and sell long, in the same e-Quote. Similarly, an e-Quote that includes multiple orders cannot be converted to a single CAP-DI order sent to the specialist, as that would reduce the number of shares that would be allocated to such orders upon an execution of the CAP-DI order following an election or conversion.
2. Agency Interest Files at the Open and Close
Rule 70.20(j)(P) – Prior to the Opening, Floor Brokers may enter e-Quotes from anywhere on the Floor for participation in the opening trade. However, Floor Brokers must be in the Crowd at the Open in order for their agency interest to participate and the Broker must cancel any e-Quotes in Pilot Securities that are not part of such Crowd before the Open.
E-Quotes entered into files before the Open may participate in the opening trade on parity with the Display Book®, as the Crowd does today, in accordance with the policies and procedures governing the Open.
3. Order Entry Requirements
Rule 123(e)(P) – This rule has been amended to provide that brokers may not enter an e-Quote with respect to any order until such order has been entered into FESC in accordance with Exchange Rule 123(e).
Rule 132B(a)(D)(P) – Similarly, this rule has been amended to require members and member organizations identify which orders or portions of orders are being made part of the agency interest file.
With respect to e-Quotes entered by a specialist on behalf of a Floor Broker, the Broker should note “e-Q” on the relevant order ticket to identify that it was included in an e-Quote. In addition, the Floor Broker and his or her Member Organization are reminded that they need to maintain in their books and records appropriate documentation identifying which orders were made part of their agency interest file.
Rule 70.30(P) – A Crowd consists of five contiguous panels at a single post where securities are traded. Floor Brokers with agency interest files must be in the Crowd, representing those orders and are permitted to have agency interest files in only one Crowd at a time.
Rule 70.20(a)(ii)(P) – A Floor Broker does not need to be in the Crowd in order to e-Quote “G” orders.3
5. Orders of Members to be in Writing
Rule 117(P) – This rule has been amended to include electronically recorded orders. It reiterates that Floor Brokers are held to executions with their e-Quotes if not cancelled when they leave the Crowd and that such failure to cancel is a violation of Exchange rules.
6. Priority, Parity, and Yielding
Rule 70.20(b)(P) – An e-Quote that establishes the Exchange BBO will be entitled to priority at that price for one trade, as Rule 72 generally provides today.
Rules 72(c)-(g)(P) - E-Quotes at the same price and on the same side of the market not entitled to priority will be on parity with each other. No e-Quote will be able to invoke precedence based on size. See also, Rule 70.20(b)(P).
Rule 72III.10(P) - Precedence based on size will remain in effect for manual trades.
Rules 108(a)(P) and 104.10(6)(i)(c)(P) – With respect to executions involving s-Quotes, specialists are entitled to trade on parity with e-Quotes and orders represented in the Crowd.
In connection with non-s-Quote specialist proprietary trading, the procedures recently disseminated in Information Memo 05-81 regarding Floor Broker ability to object to specialist parity trades continues to apply.
Floor Brokers who do not want s-Quotes to trade on parity with their orders should send their order through SuperDot®, enter a Direct+ order, or trade in the Crowd (i.e., hit bids or take offers).
Rules 72(f)(P) and 72III(P) – A sale or the complete cancellation of a bid or offer entitled to priority clears the Floor in Pilot Securities.
7. Reserve Interest
Rule 70.20(c)(ii)(P) – Reserve interest is a portion of an e-Quote at the Exchange BBO that the Floor Broker has chosen not to display. Floor Brokers will be permitted to have reserve interest provided they display a minimum of 1,000 shares at the Exchange BBO.
During the Pilot, reserve interest will be visible to the specialist.
Rule 70.20(k)(P) - There is no reserve capability for broker agency interest entered in the files before the Open. Similarly, there is no reserve capability for e-Quotes at the close.
Rule 70.20(c)(iv)(P) – Reserve interest yields to displayed interest at the Exchange BBO, but will participate in automatic executions provided there is sufficient contra-side liquidity. An auto ex order will trade against the displayed interest in the quote and any reserve interest at the bid or offer price subject to the size limits of Direct+. All reserve interest trades on parity.
8. Replenishment of Displayed Agency Interest
Rule 70.20(c)(iii)(P) – When the volume associated with a Floor Broker’s e-Quote at the Exchange BBO falls below 1,000 shares because of an execution or cancellation and the Floor Broker has reserve interest the volume associated with the displayed portion of such broker’s e-Quote will be replenished from the reserve so that at least 1,000 shares of his or her agency interest at the Exchange BBO is displayed.
Example: If after an execution the displayed portion of a broker’s e-Quote was 500 shares and this broker had 500 shares of reserve interest, his or her displayed e-Quote would become 1,000 shares automatically, with nothing remaining in the reserve.
If fewer than 1,000 shares in total remains in a Floor Broker’s e-Quote, all of the Broker’s agency interest at the Exchange BBO will be displayed.
9. Partialing Orders
Rule 122(P) – A Floor Broker may not e-Quote on behalf of an order at a price at which any portion of the same order that is represented by another member may be represented or executed.
Rule 70.20(e)(P) – A Floor Broker may trade on behalf of his or her orders in the Crowd at the same price and on the same side as his or her e-Quote only to the extent that the volume traded in the Crowd is additional volume not included in the e-Quote.
Example: Floor Broker A has an order to buy 2,000 shares of XYZ stock and has placed an e-Quote to buy 1,000 shares. In the Crowd, Floor Broker B has an order to sell 2,000 shares of XYZ. Floor Broker A may trade with Floor Broker B, but must cancel his e-Quote before trading, if this trade is for 2,000 shares. Alternatively, Floor Broker B can “hit” Broker A’s e-Quote and they can trade in the Crowd for 1,000 shares.
C. Specialist Interest Files (“s-Quotes”)
Rule 104(c)(P) -- Specialists will be able to manually layer their interest at and outside the Exchange BBO, which will give their bids and offers persistent standing. This means that if the specialist bids/offers at a price that is not the BBO, such interest will remain as an s-Quote and available to be traded with until executed or cancelled.
During the Pilot, specialists will not be able to disseminate s-Quotes via NYSE OPENBOOK or another Exchange data distribution channel.
D. Autoquoting
Rule 60(e)(P) - The Exchange will autoquote the NYSE’s highest bid or lowest offer to reflect limit orders on the Display Book®, e-Quotes, and s-Quotes. See also Rule 70.20(c)(i)(P).
E. CAP-DI and Stop Orders
1. Automatic Execution of Elected CAP-DI Orders
and Stop Orders
Rules 13(P) and 76(P) - Elected stop and CAP-DI orders will be automatically executed to the extent contra-side liquidity is available at the electing price. This execution is not restricted by current Direct+ order size requirements.
Elected CAP-DI volume unable to trade will automatically revert to CAP-DI status and elected stop limit orders unable to trade will become limit orders on the Display Book. Elected stop orders will be executed in the same manner as any market order.
The rules regarding the election and execution of CAP-DI orders and stop orders and passive conversion of CAP-DI orders remain the same. See Rules 123A.30 and 123A.40.
2. Elected or Converted CAP-DI Orders and Direct+
Rules 13(P) and 123A.30(a)(P) – Elected or converted CAP-DI orders will be able to participate in automatic executions in accordance with current Exchange Rules 1000 – 1005.
3. Automation of Parity between Specialist and Elected CAP-DI Orders
Commencing with the Pilot, the system will assign the proper number of shares to the specialist when trading along with elected CAP-DI orders in accordance with Exchange Rule 123A.30.
4. Auto-Conversions of CAP-DI Orders.
Rule 123A.30(a)(iv)(P) – When a specialist systemically trades for its own account, marketable CAP-DI orders on the Display Book® on the same side as the specialist will be automatically converted to participate in such execution, with the system assigning the proper number of shares to the specialist and auto-converted CAP-DI orders.
Exception: Where the execution that included auto-converted CAP-DI orders elects a contra-side stop or stop limit order, CAP-DI orders will not be auto-converted in connection with the specialist’s subsequent trade with such elected stop order.
Specialists will be notified by highlighting in the Display Book® alerting them that there are CAP-DI orders capable of trading, so that the specialist may take appropriate action.
5. Recording Floor Official Approval for CAP-DI Order Conversions
Rule 123A.30 provides that Floor Official approval4 must be obtained and recorded for certain CAP-DI Order conversions effected on destabilizing ticks. Commencing with the Pilot, specialists will be required to record the approving Floor Official’s badge number in the comment field of the template used to convert the CAP-DI order.
Initially, comment functionality will be available only for active CAP-DI conversions within the Smart Report template. Floor Official badge numbers for approvals of passive conversions should be recorded using the Floor Slip Database.
Failure to properly record Floor Official approval in this manner would constitute a violation of NYSE Rule 123A.30.
Questions regarding this Information Memo should be directed as follows:
General Questions -- Rules:
Donald Siemer, Director, Market Surveillance (212-656-6940)
Daniel Labovitz, Director, Market Surveillance (212-656-2081)
Jeff Rosenstrock, Principal Rule Counsel, Market Surveillance (212-656-5499)
Douglas Witter, Senior Special Counsel, Market Surveillance (212-656-4875)
General Questions – Operations and Technology:
Anne E. Allen, Executive Vice President, Floor Operations (212-656-4582)
Lou Pastina, Senior Vice President, Market Development (212-656-6821)
Definition of a Crowd, FESC (123(e)) and OTS (132B):
Rohan Prashad, Director, Market Surveillance (212-656-6772)
Floor Official Approvals for CAP Order Conversions:
Sue Lui-Facendola, Director, Market Surveillance (212-656-4347)
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