[17937]
August 31, 2004
TO: EQUITY MARKETS ADVISORY COMMITTEE No. 40-04
RE: NYSE PROPOSED RULE CHANGE RELATING TO PROCEDURES FOR GAPPING
THE QUOTE
The Securities and Exchange Commission has issued a notice of the filing and
immediate effectiveness of a proposed rule change by the New York Stock Exchange updating
the NYSE’s procedures for “gapping” the quote.1
According to the NYSE, the purpose of the gapped quote procedures is to provide
public dissemination of an order imbalance and to minimize short-term price dislocation
associated with such an imbalance by allowing appropriate time for the entry of offsetting
orders or the cancellation of orders on the side of the imbalance.2 When an imbalance exists, the
gapped quote procedures provide that the specialist widen the spread between the bid and
offer, a process known as “gapping.” In such cases, the quote on the side of the imbalance must
match (“touch”) the prior sale price. Once a quotation has been gapped, it must remain in place
for a reasonable time to allow interested parties to respond to the order imbalance.
Prior to the proposed change in gapping procedures, the specialist was required to show
the size associated with the gapped quotation as 100 x 100 and a senior-level NYSE Floor
Official determined a reasonable period of time for the gapped quotation to be maintained
(generally, not to exceed five minutes) to allow for adequate public disclosure and sufficient
time to attract contra-side interest. The NYSE is updating the gapped quotation procedures to
require that the specialist disseminate a quote size of 100 shares on only one side of the market.
Size consistent with the order imbalance is to be shown on the other side, i.e., 100 x size or size x
100. The 100-share side represents the specialist’s determination of the price at which the stock
would trade if no contra-side interest develops or no cancellations occur as a result of the
gapped quotation. The size side represents the extent of the order imbalance, which can
represent orders in the crowd as well as SuperDot orders. The new procedures also shorten the
1 Securities Exchange Act Release No. 50237 (August 24, 2004), 69 FR 53123 (August 31, 2004) (“Release”). The
NYSE’s proposal can be found on the SEC’s website at http://www.sec.gov/rules/sro/nyse/34-50237.pdf.
2 The Release states that an imbalance may occur when the specialist receives a sudden influx of orders on the same
side of the market at the same time, or when there are one or more large-size orders and there is no offsetting interest.
An imbalance also may occur when a member proposes to effect a one-sided block transaction at a significant
premium or discount from the prevailing market.
2
reasonable period of time for the gapped quotation to remain in place in light of faster market
conditions and technology.3
Ari Burstein
Associate Counsel
3 The Release notes that proposed changes to the Exchange’s Direct+ facility to facilitate the NYSE becoming a hybrid
market may affect the updated gapping procedures but that until such changes are approved and implemented, the
procedures described in the proposed rule change will remain in place.