Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment Nos. 1 and 2 Thereto by the New York Stock Exchange, Inc., Relating to the Creation of a Floor Audit Trail

[Federal Register Volume 64, Number 155 (Thursday, August 12, 1999)]
[Notices]
[Pages 44069-44072]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-20851]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41706; File No. SR-NTSE-98-25]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 Thereto by the New York Stock 
Exchange, Inc., Relating to the Creation of a Floor Audit Trail

August 4, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 4, 1998, the New York Stock Exchange, Inc. (``NYSE'' or 
Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change relating to the creation of a 
Floor audit trail. The Exchange submitted Amendment No. 1 to its 
proposal on December 21, 1998.\3\ On June 8, 1999, the NYSE submitted 
Amendment No. 2.\4\ The proposed rule change, as amended, is described 
in Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the NYSE proposes to amend the 
discussion of the proposal contained in the purpose section of the 
original filing to provide additional information about the proposed 
floor audit trail system. See Letter from James E. Buck, Senior Vice 
President and Secretary, NYSE, to Richard Strasser, Assistant 
Director, Division of Market Regulation (``Division''), Commission, 
dated December 18, 1998 (``Amendment No. 1'').
    \4\ In Amendment No. 2, the NYSE proposes to delete from the 
proposal those portions of the filing relating to proposed 
amendments to NYSE Rule 134 (error accounts) and the adoption of new 
NYSE Rule 407A (member account disclosure). The NYSE also proposes, 
among other things, to revise the proposed rule text to include a 
list of data elements to be recorded in an electronic system before 
an order has been represented or executed on the Exchange's trading 
floor. See Letter from Daniel Parker Odell, Assistant Secretary, 
NYSE, to Richard Strasser, Assistant Director, Division, Commission, 
dated June 7, 1999 (``Amendment No. 2'').
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to adopt new provisions In NYSE Rule 123, to 
provide for the capturing of details of an order systemically on the 
Floor of the Exchange. The proposed provision would require that the 
details of all orders be recorded in an electronic system prior to 
being represented or executed on the Floor. The text of the proposed 
rule change follows. New text is italicized.

Rule 123--Records of Orders

    Paragraphs headed ``Given Out'', ``Receipt of Orders'', 
``Cancelled or Executed'', and ``By Accounts'', to be numbered (a), 
(b), (c) and (d), respectively.

(e) System Entry Required

    No Floor member may represent or execute an order on the Floor 
of the Exchange unless the details of the order have been first 
recorded in an electronic system on the Floor. Any member 
organization proprietary system used to record the details of the 
order must be capable of transmitting these details to a designated 
Exchange data base within such time frame as the Exchange may 
prescribe. The details of each order required to be recorded shall 
include the following data elements, any changes in the terms of the 
order and cancellations, in such form as the Exchange may from time 
to time prescribe:
    1. Symbol;
    2. Clearing member organization;
    3. Order identifier that uniquely identifies the order;
    4. Identification of member or member organization recording 
order details;
    5. Number of shares or quantity of security;
    6. Side of market;
    7. Designation as market, limit, stop, stop limit;
    8. Any limit price and/or stop price;
    9. Time in force;
    10. Designation as held or not held;
    11. Any special conditions;
    12. System-generated time of recording order details, 
modification of terms of order or cancellation of order;
    13. Such other information as the Exchange may from time to time 
require.
* * * * *

[[Page 44070]]

    .20  Orders--For purposes of paragraph (e), an order shall be 
any written, oral or electronic instruction to effect a transaction.
    .21  Orders not subject to paragraph (e) recording 
requirements--Any order executed by a specialist, Competitive Trader 
or Registered Competitive Market Maker for his or her own account 
and any orders which by their terms are incompatible for entry in an 
Exchange system relied on by a Floor member to record the details of 
the order in compliance with this rule shall be exempt from the 
order entry requirements of paragraph (e) above.
    .22  Time standards--Any member organization proprietary system 
used to record the details of an order for purposes of this rule 
must be synchronized to a commonly used time standard and format 
acceptable to the Exchange.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange has proposed a series of initiatives to strengthen the 
regulation of activities of members on the Floor. One of the 
initiatives, proposed here, is the adoption of new provisions in NYSE 
Rule 123 for recording the details of an order, as well as any 
modification or cancellation of such order, in an electronic system 
prior to representing or executing an order on the Floor. The order 
initiatives, which consist of amendments to NYSE Rule 134 governing 
error accounts and the adoption of new Rule 407A regarding Floor member 
account disclosure, have been removed from this filing.\5\ These 
proposed rule changes have been resubmitted in a separate filing.\6\
---------------------------------------------------------------------------

    \5\ See Amendment No. 2, supra note 4.
    \6\ See File No. SR-NYSE-99-25.
---------------------------------------------------------------------------

    The proposed amendment to NYSE Rule 123 defines an order as any 
written, oral or electronic instruction to effect a transaction. 
Paragraph (e) of the proposed rule requires that, prior to being 
represented, an order, including any changes in its terms and any 
cancellations, must be entered into an electronic system that records 
the order details specified in the rule, and records the time the order 
details were entered into the system and the time of any modification 
or cancellation. This will be a system-generated timestamp. If a 
proprietary system is used, this timestamp will be generated by the 
proprietary system rather than at the NYSE. This will require that 
proprietary systems and NYSE systems be synchronized to a commonly used 
time standard and format, as provided in section .22 of the 
Supplementary material accompanying the proposed rule.
    Members may use either a proprietary or an Exchange system to 
comply with the proposed rule. If a proprietary system is used, order 
details must be sent to a designated NYSE data base. The systemic entry 
requirement would not be applicable to transactions initiated on the 
floor and executed by a registered competitive market maker, a 
competitive trader or a specialist \7\ for their own account, as such 
trades may be initiated on the Floor and are already reported to the 
Exchange.
---------------------------------------------------------------------------

    \7\ See paragraph .20 of Supplementary Material accompanying the 
proposed rule.
---------------------------------------------------------------------------

    Other than as noted above, before representing or executing an 
order on the Floor, a member, whether acting as agent for another 
member on the Floor or otherwise, is obligated to make sure that the 
details of such order have been entered in an electronic system in 
accordance with the requirements of this rule. The details of the order 
may be entered into the system by an individual or organization other 
than the member who is representing or executing the order, but this 
does not relieve such member of the obligation not to represent the 
order unless such details have been recorded in an electronic system.
    This proposed rule change does not replace existing requirements 
for recording orders contained in Exchange or Commission rules. For 
example, NYSE Rule 123, under the heading ``Receipt of Orders,'' 
requires each member to preserve for three years a record of every 
order received by that member on the Floor from off the Floor, 
including the time when such order was received. NYSE Rule 410 requires 
each member or member organization to preserve for three years a record 
of every order transmitted to the Floor or received and carried to the 
Floor by such member or member organization, including the name and 
amount of security, the terms of the order, the time it was transmitted 
or received, and the time an execution report was received.
    Mandatory order details specified in the proposed amendments to 
NYSE Rule 123 consist of: symbol; clearing member organization; order 
identifier (as assigned by the member or member organization recording 
the order details) \8\ that uniquely identifies the order; 
identification of member or member organization recording order 
details; quantity; side of market (e.g., buy, sell long, sell short, 
sell short exempt); designation as market, limit, stop or stop limit; 
limit price, stop price or stop limit price (if applicable); time in 
force (e.g., day, GTC, GTX);\9\ designation as held or not held;\10\ 
special conditions (e.g., rule 10b-18, ``G'' order and any request by a 
customer that an order not be displayed); and, a system-generated 
timestamp. The proposed rule would also require the systemic entry of 
such other details as the Exchange may require from time to time.
---------------------------------------------------------------------------

    \8\ The Broker Booth Support System automatically assigns a 
unique order identifier to the order, but a member or member 
organization can choose instead to override this feature and assign 
its own unique identifier.
    \9\ NYSE Rule 13 provides that, if not executed, a day order 
expires at the end of the Exchange's 9:30 a.m. to 4:00 p.m. trading 
session; an order designated ``GTC'' remains in effect until it is 
either executed during the Exchange's 9:30 a.m. to 4:00 p.m. trading 
session or cancelled. An order designated ``GTX'' is similar to a 
GTC order, but is also eligible for execution during the Exchange's 
Off-Hours Trading Session. An order designated as good until a 
specific time would be recorded in a separate memo field (rather 
than in the time in force field) as a special condition or special 
instruction.
    \10\ Also recorded in a separate memo field (or fields) that 
will allow other special instructions and special conditions to be 
entered in a free format.
---------------------------------------------------------------------------

    Data elements tied to execution, such as executing broker, contra 
broker, execution time and price are not required to be entered by this 
rule, as they are not available at the time that order details are 
entered into the system. NYSE Rule 132, the Exchange's audit trail 
rule, requires that these items, as well as account type and other 
items specified in that rule,\11\ be submitted for each round lot 
transaction effected on the Exchange, either directly to the Exchange 
(for non-regular way trades) or through a qualified clearing agency 
which has agreed to supply the Exchange with such data (for regular way 
trades). These requirements for

[[Page 44071]]

audit trail submissions have been in place since 1985 and are separate 
from the proposed rule change.\12\
---------------------------------------------------------------------------

    \11\ NYSE Rule 132.30 requires the submission of the following 
trade data elements; (1) Security name or symbol; (2) number of 
shares or quantity of security; (3) transaction price; (4) time the 
trade was executed; (5) executing broker badge number or symbol; (6) 
contra side broker badge number or symbol; (7) clearing firm number 
or symbol; (8) contra side clearing firm number or symbol; (9) 
account type; and (10) such other information as the Exchange may 
require.
    \12\ See File No. SR-NYSE-85-34 and Securities Exchange Act 
Release No. 22444 (September 20, 1985).
---------------------------------------------------------------------------

    The Exchange is proposing to design a data base system that will 
enable compliance with this rule and enhance its Broker Booth Support 
System (``BBSS'') to support various trading floor business models, 
while minimizing the impact on the timely execution of orders. 
According to the NYSE, these systems are being developed in 
consultation with various member committees as well as the individuals 
on the Upstairs Traders Advisory Committee and the Exchange Traders 
Advisory Committee. In addition, the Exchange has interviewed 
individual brokers, member firm technology departments, and service 
bureaus.
    In addition to the data elements required by NYSE Rule 123, the 
Exchange's data base system will be able to record optional order data 
elements, including special instructions (e.g., go along, percent of 
volume), account type identifier (this is optional or order entry but 
mandatory on submission to trade comparison for audit trail), account 
number and any other information the firm chooses to include in the 
record, provided it is consistent with the format(s) accepted by the 
Exchange.
    The Exchange also plans to modify the existing BBSS to enable 
compliance at trading floor booths for firms that choose a NYSE (versus 
a proprietary) system to comply with the proposed rule. The BBSS 
enables firms to enter orders that are phoned to the Floor; to receive 
orders delivered to the booth systemically via a proprietary system/
NYSE system interface; and to enter orders from off-floor using a NYSE 
system. The planned enhancements to BBSS are designed to support entry 
of all order types and all required information as well as to speed 
data entry by providing quick entry templates and other data entry 
enhancements. The BBSS upgrade would also improve order and information 
management features resulting in operational efficiencies for the 
firms.
    BBSS does not currently accept orders with fractional prices less 
than 1/64 or integer prices greater than 99,999. However, orders with 
such prices will be accepted when NYSE systems are converted to decimal 
format. In the event that BBSS cannot accommodate such orders at the 
time NYSE Rule 123 becomes effective, brokers relying on BBSS or comply 
with the Rule would be exempt for orders that could not be entered 
through BBSS until such time as BBSS is compatible with the entry of 
such orders. Section .21 of the Supplementary Material to the proposed 
rule would specify that any orders which by their terms are 
incompatible for entry in an Exchange system relied on by a Floor 
member to record the details of the order in compliance with the 
proposed rule shall be exempt from its order entry requirements. 
However, if a proprietary system is used, that system must be capable 
of transmitting details of all orders to the Exchange data base.
    The NYSE's system development plan includes building a new database 
to collect and consolidate records of orders in NYSE systems and orders 
that are sent to the Exchange Floor for execution through a member 
firm's proprietary system. The NYSE systems will be designed to provide 
for member firms' proprietary systems interface to the NYSE data base 
in Common Message Switch (``CMS''), Financial Information Exchange 
Protocol (``FIX''), or other NYSE-approved industry standard format. 
Such systems must submit a copy of the order details to the NYSE data 
base upon receipt of the order by the member firm's proprietary system 
on the Floor.\3\ An ``as of'' time indicator will be required for 
orders entered late due to system problems. Member firms would have to 
notify the Exchange by the end of the following day and provide 
documentation of the system problem that necessitated the use of an 
``as of'' time indicator.
---------------------------------------------------------------------------

    \13\ ``Upon receipt'' means as soon as practicable, but no later 
than 60 seconds after receipt. This 60 seconds is intended to 
provide flexibility in implementation and is not intended to be 
incorporated into proprietary systems; e.g., a system that was 
programmed to routinely transmit a copy to the Exchange database 
system 60 seconds after receipt of an order would not comply with 
the system requirement.
---------------------------------------------------------------------------

    The Exchange intends to communicate its system plan to member 
firms, then finalize NYSE system specifications, and issue interface 
specifications to member firms. The effective date of the proposed rule 
will be based on the implementation of enhancements to NYSE systems as 
well as the state of readiness of the member firm community. The 
current target is to complete NYSE systems enhancements by the end of 
second quarter 2000. However, this is subject to the completion of 
specification and design work, as well as the finalization of 
development, testing, and cutover schedules.
    The Exchange believes that the implementation of this system will 
allow the NYSE to track more accurately via systemic records whether an 
order has been received on the Floor prior to its execution. It also 
would address the issue of falsification of order entry times. 
Therefore, the Exchange believes that its ability to surveil for 
anomalous trading situations--such as on-Floor trading and the creation 
of inaccurate records, frontrunning of orders, and improper execution 
of customers' orders--will be enhanced.
    If the Exchange, upon investigation, determines that a particular 
violation of this proposed rule is minor in nature, the Exchange could 
issue a cautionary letter. The Exchange would consider seeking approval 
to add the proposed provisions of NYSE Rule 123 to the list of rules 
contained in NYSE Rule 476A, which provides for the imposition of fines 
for minor violations of rules. In those instances where investigation 
reveals a more serious violation or repetitive violations of NYSE Rule 
123, the Exchange would commence disciplinary procedures under NYSE 
Rule 476.\14\
---------------------------------------------------------------------------

    \14\ The Exchange does not include specific reference to 
disciplinary matters in each rule because it believes the language 
in NYSE Rules 476 and 476A in all-encompassing.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the basis under the Act for the proposed 
rule change is the requirement under Section 6(b)(5) \15\ that an 
exchange have rules that are designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest. According to the 
NYSE, the proposed rule change is designed to accomplish these ends by 
strengthening the Exchange's ability to surveil the Floor activities of 
members.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has neither solicited nor received any written 
comments on the proposed rule change.

[[Page 44072]]

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reason for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (a) By order approve such proposed rule change, or
    (b) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW, Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld form the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the NYSE. All submissions should refer to File No. 
SR-NYSE-98-25 and should be submitted by September 7, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-20851 Filed 8-11-99; 8:45 am]
BILLING CODE 8010-01-M