NYSE – The New York Stock Exchange
(Photograph Copyright © 2005 by Andis Kaulins)
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See NYSE Euronext generally for news and e.g. Ray Pellechia at the Exchanges blog specifically for the new reserve display requirements effective today, October 4, 2007.
The full NYSE Regulation Number 07-98 of October 3, 2007, provides:
“TO: ALL MEMBERS AND MEMBER ORGANIZATIONS
SUBJECT: NEW MINIMUM DISPLAY SIZE IN CONNECTION WITH
RESERVE LIQUIDITY FUNCTION (NYSE RULES 70.20(c) AND 104(d))
The purpose of this Information Memo is to advise members and member organizations that the NYSE has filed with the Securities and Exchange Commission for immediate effectiveness to amend NYSE Rules 70.20(c)(ii) and (iii) and 104(d)(i) and (ii). The amendments reduce from 1,000 shares to 100 shares the minimum size that a Floor broker or specialist must display at the NYSE best bid or offer in order to use the reserve liquidity function. The rule change is effective as of the opening of trading on October 4, 2007.
NYSE rules provide that Floor brokers’ agency interest is represented electronically by including these orders in a separate file, known as the Floor broker agency interest file (commonly known as “e-Quotes”), within the NYSE’s Display Book® system. Floor brokers are permitted to place e-Quotes at or outside the best bid or offer on the NYSE (“NYSE BBO”). Similarly, specialists have the ability to place in a separate file (“specialist interest file” or “s-Quotes”) within the Display Book system their dealer interest at prices at or outside the NYSE BBO.
Pursuant to NYSE Rules 70.20(c)(ii) and (iii) and 104(d)(i) and (ii), some of the interest in either of these files that is at the NYSE BBO may, at the choice of the Floor broker or specialist, be nondisplayed interest. That is, the Floor broker (with respect to e-Quotes) or specialist (with respect to s-Quotes) may decide to hold additional interest in “reserve” and not have it be part of the published bid or offer. Reserve interest is eligible to participate in automatic executions on the NYSE after displayed interest on that side of the market trades. Reserve Floor broker and specialist interest on the same side of the market participate on parity with each other when trading with contra-side interest.
NYSE Rules 70.20(c)(ii) and (iii) and 104(d)(i) and (ii) further provide that Floor brokers and specialists must display a minimum of 1,000 shares of interest at the NYSE BBO on the same side of the market in order to maintain interest at that price. So, for example, if a Floor broker or specialist were to choose to have non-displayed interest in their files at the NYSE bid, 1,000 shares must be made part of the disseminated bid. Both Rules 70.20(c)(ii) and (iii) and 104(d)(i) and (ii) require that if an execution occurs involving the Floor broker or specialist displayed interest that reduces or exhausts such displayed interest at the NYSE BBO, the displayed interest would automatically be replenished from any reserve so that at least 1,000 shares of the Floor broker or specialist reserve interest (or whatever amount remains if less than 1,000 shares) would be displayed.
III. Reduction of minimum displayed size in connection with reserves
Beginning on October 4, 2007, the NYSE is reducing the minimum displayed size requirement that Floor brokers and specialists must meet to 100 shares1 in order to have non-displayed interest at the NYSE quotation.
The NYSE is retaining the ability for Floor broker and specialist reserve interest to automatically replenish the displayed amount of interest at the NYSE BBO when trades reduce or exhaust such displayed interest. As before, the displayed quantity will be replenished based on the initial instructions from the Floor broker or specialist.
Assume a Floor broker or specialist had originally placed 2,000 shares in reserve and had given instructions to maintain 500 shares as a displayed amount in the quote. If an execution takes place which reduces the displayed amount to 200 shares, 300 shares would be shifted from the reserve to replenish the displayed amount.
The NYSE also is retaining the way in which the residual reserve amounts are handled: if the remaining reserve quantity is less than the amount to be displayed then the remainder of the reserve interest will be displayed in full.
Using the facts of the aforementioned example, if only 200 shares of the original reserve interest remains then the displayed quantity will be the final 200 shares, bringing the total displayed amount to 400 shares.
When entering reserve interest, brokers should be mindful of their best execution obligation to their customers, and should ensure that their choices as to the size of the displayed amount (and the replenishment amount) are consistent with that obligation.
1 Although the amendments state that the minimum display size will be “one round lot”, NYSE systems do not currently support a minimum display for less than 100 shares even in securities where the unit of trading is less than 100 shares.
IV. Staff Contacts
Questions concerning this Information Memorandum should be directed to:
Deanna Logan, Office of the General Counsel, at (212) 656-2389
Jerome Reda, Market Surveillance, at (212) 656-5354
Questions may also be directed to Market Surveillance On-Floor Surveillance Unit via the White Phone or in person at their booth in the EBR. Questions that do not require an answer same day may also be submitted to Ask Market Surveillance. (For information about the Ask Market Surveillance system, refer to Member Education Bulletin 2006-3, which was issued on January 30, 2006, if you or your firm is not already a subscriber.)
John F. Malitzis
Senior Vice President