ALL MEMBERS AND MEMBER ORGANIZATIONS. AMENDMENTS TO ERROR AND ERRONEOUS REPORT RULES [NYSE Rules 134 and 411]

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1 Information Memo Market Surveillance NYSE Regulation, Inc. 11 Wall Street New York, NY nyse.com Number July 18, 2007 TO: SUBJECT: ALL MEMBERS AND MEMBER ORGANIZATIONS AMENDMENTS TO ERROR AND ERRONEOUS REPORT RULES [NYSE Rules 134 and 411] I. Purpose The purpose of this Information Memo is to announce recent amendments to NYSE Rule 134 (Differences and Omissions Cleared Transactions), which, among other things, governs use of the Floor broker error accounts, and NYSE Rule 411 (Erroneous Reports). The Rule amendments permit Floor brokers to use their error accounts in certain instances that were previously not permitted under Rules 134 and 411. II. Background Historically, the Exchange has recognized two types of legitimate trading errors, (i) missing the market on a held order and (ii) executing outside of the order s written instructions (e.g., wrong security, wrong side of the market, outside the limit price, over buying or selling, duplicate execution, etc.), whether the order was a held order or a not held order. Floor brokers were entitled to use their error account to assume or acquire a position as a result of a legitimate error. However, brokers were not permitted to use the error account in any other situations. Where customers complained of failure to execute all or part of a not held order, the broker could either issue a difference check or offer a commission adjustment to address the complaint. Prior to the recent amendments to Rule 411, members and members organizations were required to accept corrected reports of execution whether the mistake in the report was as to price or the number of shares traded. Only nonmembers had an option to reject corrections as to price if certain requirements were met.

2 III. Recently Approved Amendments to NYSE Rules 134 and 411 On June 5, 2007, the Securities and Exchange Commission ( SEC ) approved amendments to NYSE Rules 134 and 411 regarding errors and erroneous reports. 1 The text of the amended rules is attached as Exhibit A, and the amendments are described in more detail below. Briefly, the amendments rationalize the manner in which Floor brokers may use their error accounts to correct errors where an order is routed to an NYSE Floor broker for handling. A. Amendments to NYSE Rule 134 Among other things, Rule 134 has been amended to codify categories of recognized trading errors for purposes of using the Floor broker error account. [Rule 134(g) and (h)] These are (1) mistakes in executing an order and (2) failure to execute an order. In addition, the rule provides for different treatment depending on the type of error. Where a Floor broker is the employee of a member organization that also is a member of one or more other market centers, the member organization may choose to make a customer that has been negatively impacted by a Floor broker s trading error whole by trading in another market center with the proviso that the execution is not represented to have occurred on the Exchange. Should the customer require an execution on the Exchange, the member firm is guided in its actions by Rule 134 unless the firm determines to use a customer accommodation account, not an upstairs error account, to satisfy the customer. 1. Mistakes in Executing an Order NYSE Rule 134(g) addresses situations in which a broker executes an order outside of the customer instructions as entered in the electronic database on the Floor pursuant to NYSE Rule 123(e) (commonly described as Front End Systemic Capture, or FESC). Types of errors in this category include, but are not limited to, the execution of a held or not held order (i) in the wrong security, (ii) on the wrong side of the market, (iii) at a price outside of the price instructions, (iv) that over buys or over sells the size instructions, and (v) that duplicates an execution. In addition, the amendment expands the permissible use of Floor broker error accounts to include situations where a not held order remains unexecuted as the result of an error as to symbol, side or price. Such expanded use of the error account is described in the examples that follow. a. Wrong Symbol Scenario: The Floor broker purchases or sells the incorrect security, and the market in the correct security is adverse to the customer s interest when the error is discovered. Resolution: The amendment allows the broker to review reports of execution on the Consolidated Tape in the correct security and determine if, from the time the Floor broker executed the order in the incorrect security until the time the error was discovered, the customer s order was executable in the correct security. In the event the customer s order was executable in whole or in part during the period of time, the customer is given an execution in the correct stock at the price(s), within the customer s limit price if any, on the Consolidated Tape. The report(s) of execution given to the 1 Securities Exchange Act Rel ; see 72 F.R (June 12, 2007).

3 customer should follow the sequence of the prints as to size and price up to where the order is filled, if possible given the volume reflected on the Tape. The broker s error account is the contra side of this trade or trades and is then long or short the number of shares ordered by the customer at the price the stock was trading in the relevant time range. Example: Order: Buy 10,000 XYZ at the market, not held Execution: Bought 10,000 KYZ at $98.05 at 11:20 a.m. Error Discovered: At 11:45 a.m. prior to rendering a report of execution Result: Error account long 10,000 KYZ at $98.05 Resolution: If between 11:20 a.m. and 11:45 a.m. the customer s order in XYZ was executable in its entirety, then the customer buys 10,000 XYZ at the price(s) on the Consolidated Tape from the broker s error account. b. Wrong Side of Market Scenario: The broker incorrectly executes a customer s order on the wrong side of the market. Resolution: The amendment allows the Floor broker to use his or her error account to take over the incorrect position and execute the customer s order on the correct side of the market. Example: Order: Buy 10,000 XYZ at the market, not held Execution: Sold 10,000 XYZ at $45.10 Result: Error account is short 10,000 XYZ at $45.10 Resolution: The broker sells the customer 10,000 XYZ at $ The error account is ultimately short 20,000 shares of XYZ at $45.10 which is the sum of the mistakenly sold 10,000 shares of XYZ taken over by the error account plus the 10,000 shares XYZ sold to the customer at a price of $45.10 from the error account. c. Outside of Price Instructions Scenario: The Floor broker executes the customer s order at the incorrect price. Resolution: The amendment allows the Floor broker to take the position into the Floor broker s error account. The Floor broker would then be allowed to execute the customer s order consistent with the sequence of execution sizes and prices as printed on the Consolidated Tape, if between the time that the Floor broker committed the error and when the error was discovered, the stock traded within the customer s order price.

4 Example: Order: Buy 10,000 XYZ at $80.50, Not Held Execution: Bought 10,000 XYZ at $80.80 at 3:00 p.m. Error Discovered: after the Close Result: Error Account Long 10,000 at $80.80 Resolution: If XYZ traded within the customer s limit anytime from 3:00 p.m. to the close, the error account sells XYZ consistent with the execution sizes and prices as printed on the Consolidated Tape and customer order is executed in whole or in part. For example, if between 3:00 p.m. and 4:00 p.m. 5,000 XYZ traded at $80.50 and 3,000 traded at $80.49, the customer would buy 5,000 at $80.50, 3,000 at $80.49 and 2,000 shares would not be executed. In situations where a Floor broker has committed an error as to symbol, side of market or price on a not held order, but has issued a report in the correct symbol, on the correct side of the market or within the customer s price instructions, refer to Section B, below. 2. Failure to Execute an Order NYSE Rule 134(h) is a new provision that addresses situations in which a Floor broker misses the market, which means the broker failed to execute an order when market conditions permitted. (See NYSE Rule 91.) The amendment expands the use of Floor broker error accounts to covers both held and not held orders that were not executed in whole or in part, due to the order being lost or misplaced, or as the result of a system malfunction. A system malfunction is the failure of physical equipment, devices and/or programming employed by the Floor broker or otherwise provided by the Exchange and used in the execution of orders. In the event that a broker misses the market, the amended rule [Rule 134(j)(ii)] allows the Floor broker to execute the order based on the Exchange Tape prints up to the size of the order, between the time that the order was entered and the time that the Floor broker realized that the order was lost, misplaced or not executed as a result of a system malfunction. To execute an order in this manner, a broker must look to the Exchange (not Consolidated) Tape prints during the relevant time and may execute the order up to half of the volume of each Tape print at its print price until the erroneously unexecuted order has been filled, or the opportunities to execute during the relevant period are exhausted. If the Tape print was for an odd numbered multiple of a round lot (e.g., 300 shares), the customer would be entitled to the nearest full unit of shares rounded down (100 shares). Floor brokers executing trades under this section of the rule must meet a higher documentation standard, which is detailed in Section 4, below. 3. Documentation of All Errors The amended rule requires that records related to errors in general must be contemporaneous to the error and such record must be signed, time stamped and includes supporting documentation [Rule 134(i)]. Members and member organizations are reminded that such records shall include the audit trail data elements prescribed in Rule 132, as well as the nature and amount of the error, the means whereby the member resolved the error with the member or member organization that cleared the

5 trade on the member s behalf, the aggregate amount of liability that the member has incurred and has outstanding, as of the time each such error trade entry is recorded, and such other information as the Exchange may from time to time require. The mandatory error reporting form must be used in meeting these requirements. 4. Documentation of Errors Due to Lost/Misplaced Orders or System Malfunction In addition to the above, in situations where a Floor broker failed to execute due to lost/misplaced orders or systems malfunction, the Floor broker must provide sufficient documentation prior to the Opening of the next trading day following the error; if the Floor broker does not provide the information by the next day s Opening, the Floor broker may not take advantage of the relief outlined in Section 2 above. The Floor broker s documentation must include, but is not limited to, the date and time of the error, the date and time that the error was discovered, the size of the error, the stock in which the error occurred, the original order instructions, the names of all involved parties including the client and any upstairs trader, a detailed narrative of how the error occurred, a detailed narrative of discussions with the relevant parties, the steps taken to correct the error and the ultimate resolution of the error. The mandatory error reporting form must be used in meeting these requirements. Such reports should be submitted to the On-Floor Surveillance Unit. B. Amendments to NYSE Rule 411 The amendments to Rule 411 relate to errors on not held orders where the Floor broker executed in the wrong security, at the wrong price or on the wrong side of the market, but issued a report in the correct security, within the price instructions or on the correct side of the market (respectively). The amended portion of the rule applies only to Floor brokers and their trading assistants. The amended rule allows the erroneous report to stand when one of the specified trading errors has occurred, regardless of whether the customer to whom the report was issued was a member, member organization or nonmember, provided the price and size of the erroneous report were within the range of prices and sizes in the specified security reported to the NYSE portion of the Consolidated Tape on the day in which the order was executed. In these situations, the Floor broker is required to report the error to the customer, including explaining to the customer whether the error was favorable or unfavorable to the customer. The Floor broker is also required to document, on a trade-by-trade basis, the name of the individual authorized to accept the erroneous report for the customer, the amount of the error and whether the error was favorable to the customer. The Floor broker may use his or her error account to take over the erroneous report as a trade and to become the contra side to that trade. In addition, the Floor broker assumes any loss incurred; any profit that results must be paid to the New York Stock Exchange Foundation as required under NYSE Rule 411(a)(ii)(5).

6 IV. Staff Contacts Questions concerning this memorandum may be addressed to the following persons or areas in the Market Surveillance Division: Patrick Giraldi, Director, On-Floor Surveillance, at (212) , Brett Kofman, Director, Member Trading I, at (212) , or Carol Krusik, Director, Rule Interpretation and Member Education, at (212) Questions may also be directed to OFSU via the White Phone or in person at their booth in the EBR. Questions that are not time sensitive may also be submitted to Ask Market Surveillance. (For information about the Ask Market Surveillance system, refer to Member Education Bulletin , which was issued on January 30, 2006, if you or your firm is not already a subscriber.) Robert A. Marchman Executive Vice President Market Surveillance Attachments

TRADING DESKS, ORDER ROOMS, COMPLIANCE DIRECTORS ALL MEMBERS AND MEMBER ORGANIZATIONS EXPIRATION FRIDAY - SEPTEMBER 16, EXCHANGE RULE 123C

Information Memo New York Stock Exchange, Inc. 11 Wall Street New York, NY 10005 Market Surveillance Number 05-66 September 14, 2005 ATTENTION: TO: SUBJECT: TRADING DESKS, ORDER ROOMS, COMPLIANCE DIRECTORS