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July 15, 2007

Rule Change Brings NYSE a Little Closer to Nasdaq

By Peter Chapman

In another sign the markets are converging, the New York Stock Exchange will add an exception to a key rule to make it look more like its NASD counterpart.

The Big Board will amend its Rule 92 to permit traders to handle orders on a riskless principal basis. The move aligns Rule 92, which covers trading ahead and alongside customer orders, with the NASD's Manning Rule.

"The idea is to make it easier for broker-dealers to treat that principal trade as a customer trade and not have to worry about trading ahead," said Ed Johnsen, an attorney with Winston & Strawn. "A riskless principal trade is a proprietary trade, but is only being done to facilitate a customer."

Under Rule 92, NYSE members cannot trade for their own accounts ahead of or alongside customer orders, unless they get the customer's consent.

The rule is in place to prevent broker-dealers from trading proprietary positions before filling customer orders in hand. That could generate profits for the broker at the expense of the customer.

The proposed changes to Rule 92 will make handling one or more customer orders more efficient, the NYSE told the Securities and Exchange Commission in a filing. It will permit a broker-dealer handling multiple customer orders-retail or institutional-to aggregate those orders into one big order and then trade that order for its own account.

As long as the shares are allocated to the customers within 60 seconds of the fill, the trade will qualify as a riskless principal trade.

In general, riskless principal trades are those done on behalf of customers, but for the position of the broker-dealer. The shares are later allocated to the customers at the same price received by the broker. They are, in effect, agency trades, because the broker took on no risk and the customer paid no markup.

Nasdaq amended its Manning Rule, which also governs trading ahead, in 2002 to permit market makers to trade ahead or alongside on a riskless principal basis.

The move to harmonize NYSE Rule 92 with Manning is expected to make order handling more consistent across markets.