United States: NYSE Rule 97 To Be Rescinded

NYSE Regulation, Inc. ¹ (the "NYSE") has proposed to rescind NYSE rule 97 ("Limitation on Members' Trading Because of Block Positioning"). As discussed below, NYSE rule 97 has outlived its usefulness from a regulatory perspective and weakened the competitive position of the New York Stock Exchange. The NYSE filed the proposed rule change with the Securities and Exchange Commission (the "SEC") on January 11, 2008. ²

Effective Date

The SEC published the proposed rule change in the Federal Register soliciting comments from interested persons on February 6, 2008. Comments were due on February 27, 2008, within twenty-one (21) days from the publication of the notice.

The SEC is expected to approve the rule change within thirty-five (35) days of the date of the publication, by March 12, 2008, unless the SEC designates a longer period up to ninety (90) days. Once approved, NYSE rule 97 will no longer be in effect.

Overview

NYSE rule 97 governs transactions involving a long position in a security held by a member firm in its proprietary account that results from one or more "block" ³ transactions that it effected with a customer ("Block Position"). When a member firm holds a Block Position, the member firm is prohibited from purchasing the same security on a "plus tick" during the last twenty (20) minutes of the trading day on the New York Stock Exchange at a price higher than the lowest price on that day at which the member firm acquired any portion of the Block Position. The rule states as follows:

NYSE rule 97 was adopted to address concerns that a member firm holding a Block Position might attempt to influence the price of securities held in the Block Position in order to liquidate the position more profitably. The NYSE sought to prevent member firms from marking-up the price in order to maximize profits or from maintaining the price in order to minimize losses. ⁵ Each of the associated persons responsible for entering orders for a member firm's proprietary account was presumed to know about Block Positions, and could be found to have violated NYSE rule 97, unless the member firm had implemented "a reasonable system of policies and procedures" to prevent such persons from gaining access to information about the member firm's Block Positions ⁶

Amendments to NYSE Rule 97

The NYSE made two significant amendments to NYSE rule 97. In each instance, the amendment cut back the scope of the rule's application.

2002 Amendment

The NYSE made substantial revisions to NYSE rule 97 in 2002. ⁷ Significantly, the NYSE limited the tick test to a "plus" tick test (eliminating the "zero plus" tick test), and restricted the prohibition on purchasing securities held in Block Positions on a "plus" tick to the last twenty (20) minutes of the trading day on the New York Stock Exchange. Prior to the amendment, the prohibition applied from the time the member firm acquired a Block Position through the remainder of the trading day. The rationale behind the amendment was to "limit the rule's 'tick' restriction to the most sensitive part of the trading day." ⁸ The NYSE believed that member firms were more likely to engage in price manipulation at the end of the trading day. ⁹

2007 Amendment

After Regulation NMS was amended in 2007, NYSE rule 97 posed a conflict with Regulation NMS's provision on intermarket sweep orders ("ISOs") facilitation. Pursuant to Regulation NMS, member firms would place proprietary ISOs to facilitate customer orders that trade through protected bids or offers. During the last twenty (20) minutes of the trading hours, member firms could be found to violate NYSE rule 97 when such proprietary ISOs trade at a "plus tick." ¹⁰ In such instances, member firms would be forced to choose to comply with one set of rules over another. In response, the NYSE created an exemption for proprietary ISOs that were effected pursuant to Regulation NMS.

Rationale for Rescinding the Rule

The NYSE has determined that, in spite of the efforts to update NYSE rule 97 through amendments, the rule has become outmoded and should be rescinded. In its proposal, the NYSE concedes that "the practical application of the rule in today's market no longer addresses the concerns that prompted its implementation." ¹¹ In particular, the NYSE points out two changes in the industry that rendered continued application of the rule impractical:

• At the time NYSE rule 97 was implemented, the majority of Block Positions were traded on the NYSE. With the development of competing market-centers, as well as the mandate to access multiple market-centers under Regulation NMS, member firms can liquidate their Block Positions at venues other than the New York Stock Exchange and avoid application of the rule entirely. NYSE rule 97 does not have the regulatory impact it had when block trades in listed securities were rarely executed away from the New York Stock Exchange. Rescinding the rule brings greater consistency to industry practice.
• There is less of a concern that member firms will engage in manipulative transactions to "mark-up" the price of securities that are held in Block Positions in "active and volatile" markets. In markets where the price of a stock changes constantly and instantaneously, member firms have less ability to predict the direction of price movement or influence the closing price.

NYSE is undoubtedly concerned that NYSE rule 97 hampers the ability of the New York Stock Exchange to compete with other market-centers that do not have comparable restrictions on block transactions. By rescinding NYSE rule 97, which makes it more difficult for the member firms to execute block transactions at the end of the trading day, the NYSE would increase the likelihood that member firms will execute block transactions on the New York Stock Exchange. This eliminates a significant competitive disadvantage for the New York Stock Exchange.

We believe that the NYSE has wisely determined that NYSE rule 97 should be rescinded. The proposal has been welcomed by the industry. ¹² The rule no longer serves its intended purpose and has only weakened the competitive position of the New York Stock Exchange. Under the circumstances, rescission of the rule is the best course of action.

Footnotes:

^{1. NYSE Regulation, Inc. is a subsidiary and regulatory arm of New York Stock Exchange LLC. The proposed rule change has been submitted to the SEC by New York Stock Exchange LLC on behalf of NYSE Regulation, Inc.}

^{2. NYSE Rule Filing SR-NYSE-2008-03, 72 Fed. Reg. 7022.}

^{3. For purposes of NYSE rule 97, a "block" is a quantity of stock "having a market value of $500,000 or more which is acquired by a member organization on its own behalf and/or for others from one or more buyers or sellers in a single transaction." NYSE rule 97/.10 ("Definitions").}

^{4. NYSE rule 97(a).}

^{5. See NYSE Rule Filing SR-2008-03, at 4; NYSE Rule Filing SR-NYSE-2001-24, 67 Fed. Reg. 47588.}

^{6. See NYSE rule 97(a); NYSE Rule Filing SR-NYSE-2001-24, 67 Fed. Reg. 47588.}

^{7. The NYSE revised the rule in three respects. Specifically, it (i) limited the scope of prohibition on Block Position transactions, (ii) added an exemption from the prohibition to allow hedging transactions, and (iii) added a provision on informational walls for associated persons who transact orders for the member firms' proprietary accounts. See NYSE Rule Filing SR-NYSE-2001-24, 67 Fed. Reg. 47588.}

^{8. See NYSE Rule Filing SR-2008-03, at 4. See also NYSE Rule Filing SR-NYSE-2001-24, 67 Fed. Reg. 47588.}

^{9. See id.}

^{10. See NYSE Rule Filing SR-NYSE-2007-61, 72 Fed. Reg. 38643, 38644; NYSE Rule Filing SR-2008-03, at 4.}

^{11. NYSE Rule Filing SR 2008-03, at 4.}

^{12. See Comment Letter from Ann Vlcek, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association, Feb. 27, 2008.}

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