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Notice

Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change and Amendment No. 1 thereto by the New York Stock Exchange, Inc. To Disengage NYSE Direct+ in Five Actively-Traded Stocks on a One-Week Pilot Basis

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Start Preamble May 2, 2003.

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 April 9, 2003, the New York Stock Exchange, Inc. (“NYSE” or the “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. On April 28, 2003, the Exchange filed Amendment No. 1 to the proposed rule change.[3] The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons and to grant accelerated approval of the proposed rule change.

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

The Exchange is proposing to disengage NYSE Direct+®[4] in five Start Printed Page 25072actively-traded stocks on a one-week pilot basis to assess the impact of autoquoting of bids and offers in connection with the Exchange's initiative to disseminate “liquidity quotes.” Below is the text of the proposed rule change. Proposed new language is italicized.

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Rule 1000

Automatic Execution of Limit Orders Against Orders Reflected in NYSE Published Quotation

Only straight limit orders without tick restrictions are eligible for entry as auto ex orders. Auto ex orders to buy shall be priced at or above the price of the published NYSE offer. Auto ex orders to sell shall be priced at or below the price of the NYSE bid. An auto ex order shall receive an immediate, automatic execution against orders reflected in the Exchange's published quotation and shall be immediately reported as NYSE transactions, unless:

(i)-(vi) No change.

Auto ex orders that cannot be immediately executed shall be displayed as limit orders in the auction market. An auto-ex order equal to or greater than the size of the NYSE's published bid or offer shall trade against the entire published bid or offer, and a new bid or offer shall be published pursuant to Rule 60(e). The unfilled balance of the auto ex order shall be displayed as a limit order in the auction market.

During a one-week pilot program in 2003, NYSE Direct+ shall not be available in the following five stocks: American Express (AXP), Pfizer (PFE), International Business Machines (IBM), Goldman Sachs (GS), and Citigroup (C). The Exchange will announce in advance to its membership the week the pilot will run.

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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. 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.

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

1. Purpose

The Exchange has begun to test on the Exchange's floor its initiative to disseminate “liquidity quotes” [5] in addition to the NYSE's highest bid and lowest offer. As part of this initiative, the Exchange has amended Rule 60 to provide that the Exchange will “autoquote” or automatically update the NYSE's highest bid or lowest offer whenever a limit order is transmitted to the specialist's book at a price higher (lower) than the previously disseminated highest (lowest) bid (offer).[6] When the NYSE's highest bid or lowest offer has been traded with in its entirety, the Exchange will autoquote a new bid or offer reflecting the total size of orders on the specialist's book at the next highest (in the case of a bid) or lowest (in the case of an offer) price.[7]

The NYSE believes that both NYSE Direct+ and autoquoting have the potential to impact the functioning of the NYSE's auction market, as they involve, without specialist or trading crowd intervention, changes to the depth of the market and prices at which securities may trade. NYSE Direct+ involves automatic executions of limit orders of 1,099 shares or less against the Exchange's best bid or offer.[8] According to the Exchange, NYSE Direct+ executions have the potential to change the depth of the market, as well as the tick and last reported sale. Autoquoting involves the automatic adjustment of the Exchange's disseminated bids/offers as new limit orders are received onto the specialist's book.

In anticipation of the rollout of NYSE Liquidity Quote,SM as approved in SR-NYSE-2002-55,[9] the Exchange would like to test the impact of autoquoting without the impact of NYSE Direct+ occurring at the same time. To do so, the Exchange is proposing to disengage NYSE Direct+ in five actively-traded stocks during a one-week pilot program. The stocks, which include one company from each of the Exchange's five largest specialist units, are American Express (AXP), Pfizer (PFE), International Business Machines (IBM), Goldman Sachs (GS), and Citigroup (C). The Exchange represents that it will study the impact of autoquoting on the Exchange floor [10] with regard to liquidity, continuity, spread, depth, number of trades, and other variables.

The Exchange notes that any NYSE Direct+ order (“auto-ex order”) that would be entered during the one-week pilot in the five stocks mentioned above would automatically be converted to a SuperDOT order during that time for representation by the specialist in the Exchange's auction market.[11] Further, the Exchange intends to implement the one-week pilot as soon as practicable after Commission approval and will notify the Exchange's membership at least one week prior to the actual implementation date of the one-week pilot.[12]

2. Statutory Basis

The Exchange believes that the proposed rule change, as amended, is consistent with Section 6(b)(5) of the Act,[13] which requires, among other things, that the Exchange's rules 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.

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

The Exchange believes that the proposed rule change will not 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 not solicited nor received written comments on the proposed rule change.

III. Solicitation of Comments

Interested persons are invited to submit written data, views and Start Printed Page 25073arguments 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 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 NYSE. All submissions should refer to File No. SR-NYSE-2003-10 and should be submitted by May 30, 2003.

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

The Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange. In particular, the Commission believes that the proposed rule change is consistent with the requirements of Section 6(b)(5) of the Act,[14] which requires, among other things, that the rules of the Exchange be 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.[15]

The Commission believes that the proposal should help the NYSE to maintain a fair and orderly market by enabling the NYSE to test its autoquoting feature without the interruption of NYSE Direct+, which automatically changes the depth of market, as well as the tick and last reported sale in these stocks. In addition, the Commission notes that NYSE has represented that it will notify members at least one week in advance of the implementation date of the pilot.

The Commission finds good cause for accelerating approval of the proposed rule change and Amendment No. 1 prior to the thirtieth day after publication in the Federal Register. The Commission believes that accelerated approval will permit the Exchange, without undue delay, to assess the impact of autoquoting on the Exchange's auction market, particularly with regard to liquidity, continuity, spread, depth, number of trades, and other such variables.

Accordingly, the Commission finds good cause, consistent with Section 19(b)(2) of the Act,[16] to approve the proposed rule change, as amended, prior to the thirtieth day after publication of the notice of filing, on a pilot basis for seven days.

V. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,[17] that the proposed rule change, as amended, (File No. SR-NYSE-2003-10) be approved as a one week pilot, on an accelerated basis.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[18]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  See letter from Darla C. Stuckey, Corporate Secretary, NYSE, to Nancy J. Sanow, Assistant Director, Division of Market Regulation (“Division”), Commission, dated April 24, 2003 (“Amendment No. 1”). Among other things, Amendment No. 1: (1) Clarifies that the NYSE is disengaging NYSE Direct+ in five stocks to assess the impact of its automated dissemination of quotes feature on Exchange floor transactions without Direct+ changing the depth of the market; (2) clarifies that during this pilot, the Exchange intends to monitor variables such as liquidity, continuity, spread, depth, and number of trades; and (3) provides proposed rule text regarding the pilot and the five stocks that will not be participating in NYSE Direct+. On April 30, 2003, the NYSE submitted a new exhibit A to Amendment No. 1. The new exhibit, which supercedes only Exhibit A to Amendment No. 1, makes corrections to the proposed rule text by inserting previously approved rule language under NYSE Rule 1000 that the NYSE inadvertently excluded from the original filing. See letter from Donald Siemer, Director, Rule Development, NYSE, to Lisa N. Jones, Attorney, Division, Commission, dated April 30, 2003.

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4.  NYSE Rules 1000-1005 provide for the automatic execution of limit orders of 1,099 shares or less against the Exchange's disseminated bid or offer. NYSE Direct+ was originally filed as a one-year pilot. See Securities Exchange Act Release No. 43767 (December 22, 2000), 66 FR 834 (January 4, 2001) SR-NYSE-00-18). The Direct+ pilot was subsequently extended for an additional year by Securities Exchange Act Release No. 45331 (January 24, 2002), 67 FR 5024 (February 1, 2002) (SR-NYSE-2001-50), and recently extended for an additional year by Securities Exchange Act Release No. 46906 (November 25, 2002), 67 FR 72260 (December 4, 2002) (SR-NYSE-2002-47).

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5.  Liquidity quotes represent additional buying and selling interest below the best bid and above the best offer.

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6.  See Securities Exchange Act Release No. 47614 (April 2, 2003), 68 FR 17140 (April 8, 2003) (order approving SR-NYSE-2002-55).

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7.  See id.

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8.  See supra note 4.

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9.  See supra note 6.

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10.  Telephone conversation among Sonia Trocchio, Special Counsel, Division, Commission, Donald Siemer, Director, Rule Development and Jeffrey Rosenstruck, NYSE, dated May 2, 2003.

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11.  Currently, under Exchange Rule 1000, auto-ex orders that cannot be immediately executed shall be converted into SuperDot orders and displayed as limit orders in the auction market. Telephone conversation among Sonia Trocchio, Special Counsel, Division, Commission, Donald Siemer, Director, Rule Development and Jeffrey Rosenstruck, NYSE, dated May 2, 2003.

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12.  See Amendment No. 1, supra note 3.

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15.  In approving the proposed rule, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

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[FR Doc. 03-11588 Filed 5-8-03; 8:45 am]

BILLING CODE 8010-01-P