Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change by the New York Stock Exchange, Inc., Amending Exchange Rule 123B To Prohibit Specialists From Charging Commissions on SuperDot Orders

[Federal Register Volume 64, Number 235 (Wednesday, December 8, 1999)]
[Notices]
[Pages 68710-68712]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31781]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42184; File No. SR-NYSE-99-40]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the New York 
Stock Exchange, Inc., Amending Exchange Rule 123B To Prohibit 
Specialists From Charging Commissions on SuperDot Orders

November 30, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on October 4, 1999, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change. The Exchange 
filed Amendment No. 1 on November 17, 1999 \3\ and Amendment No. 2 on 
November 29, 1999.\4\ The proposed rule change, as amended, is 
described in Items I and II below, which Items have been prepared by 
the Exchange. The Commission is publishing this notice and order to 
solicit comments on the proposed rule change from interested persons 
and to grant accelerated approval to the proposed rule change for a 90-
day pilot to expire on February 26, 2000.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1 the Exchange increased the timeframe for 
commission-free orders executed through the Exchange's SuperDOT 
System from two minutes to five minutes. See letter from James E. 
Buck, Senior Vice President and Secretary, Exchange, to Richard 
Strasser, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated November 16, 1999.
    \4\ In Amendment No. 2, the Exchange requested that the 
Commission approve the proposal on a pilot basis for 90 days. See 
letter from James E. Buck, Senior Vice President and Secretary, 
Exchange, to Richard Strasser, Assistant Director, Division, 
Commission, dated November 29, 1999.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes three amendments to Exchange Rule 123B. The 
first relates to commission-free execution of orders received by 
specialists through the SuperDOT System pursuant to Rule 123B(b)(1); 
the second sets forth the Exchange's policy under Rule 123B(b)(3) with 
respect to the timeframe in which specialists must issue an execution 
report for stopped orders; and the third clarifies the treatment of 
canceled and replaced orders. The text of the proposed rule change is 
available at the Exchange and at the Commission.

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 III below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

[[Page 68711]]

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

1. Purpose
    The Exchange proposes the following three amendments to Rule 123B.
    Commission-Free Execution. Under Exchange Rule 123B(b)(1), 
specialists may not charge floor brokerage (i.e., a commission imposed 
on exchange floor brokers) for executing market and marketable limit 
orders \5\ received by means of the Exchange's automated order routing 
system known as SuperDOT. The Exchange proposes to amend Rule 123B and 
add .10 in the Supplementary Material to the Rule to extend the no 
commission policy to all orders received by specialists via SuperDOT 
that are executed within five minutes of receipt. This proposal would 
extend the commission-free execution to include limit orders that are 
not marketable at the time of receipt by the specialist but that are 
executed within the five-minute timeframe. The Rule will be amended to 
eliminate reference to ``market'' and ``marketable limit orders'' since 
all orders received through SuperDOT will be eligible for commission-
free execution. The provision allowing the specialist to charge a 
commission on orders to sell short is also being eliminated.
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    \5\ A marketable limit order is defined as an order with a limit 
price which is at or better than the prevailing quotation at the 
time the order is received by the specialist. See Exchange Rule 
123B(b)(1).
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    Execution of Guaranteed Orders. Orders received by specialists via 
SuperDOT must be executed in accordance with Exchange auction market 
procedures. Specialists must expose system orders to the trading crowd, 
and system orders are deemed to be ``held'' orders. A specialist may be 
deemed to have ``missed the market'' if any such order is not executed 
against prevailing contra side interest in the market at the time the 
order is received.\6\
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    \6\ If a specialist has ``missed the market'' and the order is 
executed outside of the five-minute timeframe, the specialist will 
not be allowed to charge floor brokerage. Telephone conversation 
between Don Siemer, Director, Market Surveillance, Exchange, and 
Marc McKayle, Attorney, Division, Commission, on October 20, 1999.
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    Exchange specialists may ``stop'' and order in an attempt to better 
the price that order would receive in the current market. Under 
Exchange Rule 116, a stop by the specialist at a specific price 
guarantees that the order will receive that price if the specialist is 
unable to improve it.\7\
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    \7\ For orders that are stopped within the five-minute timeframe 
from receipt but executed outside of the five-minute timeframe from 
receipt, specialists will not be allowed to charge floor brokerage. 
As with all stopped orders, if the order is executed at a price less 
favorable than the stopped price, the specialist will be liable for 
the differences in the two prices. Id.
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    Exchange Rule 123B(b)(3) provides that the Exchange's SuperDOT 
system will issue a report of execution at the stop price if the 
specialist has not done so ``within such time period as the Exchange 
may specify from the time the stop was granted.'' The Exchange proposes 
to amend Rule 123B to specify in .10 in the Supplementary Material to 
the Rule that the time period after which a system-generated execution 
report will be issued at the stop price will be two minutes. This 
proposed provision should help to ensure the timely execution of orders 
that are stopped.
    Canceled and Replaced Orders. The Exchange proposes to add .20 in 
the Supplementary Material to Rule 123B to clarify that if an order 
with the specialist is canceled and replaced, the replacement order is 
considered a new order for purposes of the Rule.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with and furthers the objectives of Section 6(b)(5) \8\ in that it is 
designed to remove impediments to and perfect the mechanism of a free 
and open market and a national market system, and to protect investors 
and the public interest.
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    \8\ 15 U.S.C. 78f(b)(5).
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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.

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

    The Exchange reviewed the proposed rule change with members and 
organizations representing various constituencies of the Exchange. No 
written comments were solicited or received with respect to the 
proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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 from 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 
Exchange. All submissions should refer to File No. SR-NYSE-99-40, and 
should be submitted by December 29, 1999.

IV. Commission's Findings and Order Granting Accelerated Approval 
of the Proposed Rule Change

    The Commission finds that the proposed pilot is consistent with the 
requirements of the Act.\9\ In particular, the Commission finds the 
proposal is consistent with Section 6(b)(5) \10\ of the Act. Section 
6(b)(5) requires, among other things, that the rules of the exchange be 
designed to facilitate transactions in securities and to remove 
impediments to and perfect the mechanisms of a free and open market and 
a national market system, and to protect investors and the public.
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    \9\ In addition, pursuant to Section 3(f) of the Act, the 
Commission has considered the proposal's impact on efficiency, 
competition and capital formation. 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed rule change, by reducing 
transaction costs associated with SuperDot orders, should facilitate 
such transactions. Also, clearly identifying the time within which an 
execution report must be issued for stopped orders should help to 
ensure that timely execution of stopped orders takes place, thereby 
providing for the efficient execution of orders received through the 
SuperDOT system. Finally, because new orders are granted specific 
execution rights, it is important to clearly identify what will be 
considered a new order for purposes of rule 123B.
    In light of the cost-saving benefits that will flow to market 
participants entering SuperDot orders, the Commission finds good cause 
for approving the proposed rule change prior to the thirtieth day after 
the date of publication of notice thereof in the Federal Register.
    It is therefore ordered, pursuant to 19(b)(2) of the Act,\11\ that 
the proposed

[[Page 68712]]

rule change (SR-NYSE-99-40) is approved through February 26, 2000.\12\

    \11\ 15 U.S.C. 78s(b)(2).
    \12\ The approval of the pilot should not be interpreted as 
suggesting that the Commission is predisposed to approving the 
proposal permanently.
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(9)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 99-31781 Filed 12-7-99; 8:45 am]
BILLING CODE 8010-01-M