[18190]
November 12, 2004
TO: EQUITY MARKETS ADVISORY COMMITTEE No. 44-04
SEC RULES COMMITTEE No. 89-04
RE: NYSE PROPOSED RULE CHANGE RELATING TO AMENDMENTS TO "HYBRID"
PROPOSAL
The New York Stock Exchange has filed a proposed rule change with the Securities and
Exchange Commission amending its “hybrid” market proposal.1 The proposed rule change
contains additional information on the operation of the hybrid proposal as well as additional
amendments to NYSE rules. The most significant aspects of the proposed rule change are
summarized below.
If you have any questions regarding the proposal or any comments you would like
the Institute to consider including in its comment letter on the proposed rule change, please
contact Ari Burstein by phone at 202-371-5408 or by e-mail at aburstein@ici.org.
I. Broker Agency Interest File
Under the hybrid proposal, brokers would have the ability to place within the NYSE’s
Display Book an “agency interest file” at varying prices at or outside the best bid or offer with
respect to orders the broker is representing. As originally proposed, this interest would not be
publicly disseminated unless it is at or becomes the Exchange’s best bid or offer. Under the
amendments to the proposal, however, when a broker’s agency interest is at or becomes the
Exchange’s best bid or offer, only a minimum of 1,000 shares per broker would be required to
be displayed.2 The displayed agency interest would be entitled to parity with other displayed
orders at the best bid or offer price. Broker agency interest that is not displayed (“reserve
interest”) would yield to displayed interest in the best bid or offer. Non-displayed agency
interest at other prices, however, would continue to be on parity with all other orders, whether
displayed or not.
1 The proposed rule change can be found on the NYSE’s website at http://www.nyse.com/pdfs/2004-05amend2.pdf.
For a full description of the NYSE’s hybrid proposal, see Memorandum to Equity Markets Advisory Committee No.
37-04 and SEC Rules Committee No. 71-04, dated August 19, 2004 [17909].
2 A broker would have discretion to display more than 1,000 shares of his or her agency interest at the best bid or
offer. In addition, the actual amount of a broker’s agency interest, if less than 1,000 shares, would be displayed and
included in the quote.
2
II. Specialist Interest File and Algorithm
Under the hybrid proposal, specialists, through proprietary algorithms, would have the
ability to systemically supplement the quote, determine price points outside the Exchange’s best
bid and offer to which they want to provide liquidity, facilitate a single-price execution at the
bid or offer price, and systemically match outgoing ITS commitments.
The amendments provide further information on the specialist algorithm, including
information on how the algorithm would permit specialists to electronically provide price
improvement to automatic executions. Specifically, under the proposal, specialists could
provide price improvement to automatic executions under the following conditions: (i) the
quotation spread is at least three cents; (ii) the specialist is represented in the published bid or
offer in a meaningful amount, i.e., the lesser of 10,000 shares or twenty percent of the respective
bid (offer) size; (iii) the order receiving price improvement is of “retail” order size, i.e., 2,000
shares or less and the specialist fills the order; and (iv) the price improvement provided by the
specialist is (a) at least .02 where the quote spread is .03 - .05, (b) at least .03 where the quote
spread is .06 - .10, (c) at least .04 where the quote spread is .11 - .20, and (d) at least .05 where the
quote spread is more than .20.
III. Liquidity Replenishment Points
The hybrid proposal would include two types of “Liquidity Replenishment Points” or
“LRPs” - a price-based LRP and a momentum-based LRP. When an LRP is reached, the
automatic execution functionality on the Exchange would “shut off” and the quotation would
not be available for automatic execution and would be designated as such. The original filing
did not state the precise parameters for the momentum-based LRP. The amendments, however,
clarify that the momentum-based LRP would be reached when the price of a security has
moved the greater of twenty-five cents or one percent of its price, within 30 seconds or less.3
IV. Availability of Automatic Executions and Autoquote
Under the original filing, during the time that a report of an execution was being made
through the NYSE’s Display Book, automatic executions would have continued until the
volume associated with the bid and/or offer decrements to 100 shares and then would have
been suspended until the market is requoted. The amendments clarify that autoquote, but not
automatic executions, would be suspended only during the time it takes to manually report a
block-sized transaction. The amendments state that this would be the only instance in which
manual reporting would cause the suspension of autoquote and may, under certain
circumstances, cause the suspension of automatic executions. Once the hybrid market is
implemented, all other instances of manual reporting, autoquote, and automatic executions
would continue to operate without suspension.
Ari Burstein
Associate Counsel
3 The price-based LRP would be a minimum of five cents from the Exchange’s best bid or offer, rounded to the next
nearest nickel.