I thought it would be helpful to explain the opening process at the NYSE as it relates to Rule 48, Rule 15, and Rule 123 (d). These are rules which govern the opening of stocks with respect to dislocation from the last sale and the dissemination of that information. They were enacted to provide transparency in the price discovery process on the opening and assist the DMM’s in attaining a fair price, not a fast price.

NYSE rule 15 illustrates the prices of securities and the related acceptable parameters for opening without a mandatory indication. This is the most commonly used rule and requires a DMM to send out a notification to the intermarket trading community when an equity will open outside of ordinary pricing. Keep in mind there is a difference between an “indication” and a “mandatory indication” as described below.

Rule 15 states:

“If the opening transaction on the Exchange is anticipated to be at a price that represents a change from

Exchange closing Price Price change more than

under $20 — $.50

$20-49.99 — $1.oo

$50-99.99 — $2.00

$100.00-500.00 — $5.00

above $500.00 — 1.5%

the DMM or the Exchange shall issue a pre-opening indication, which includes the security and the price range within which the opening transaction is anticipated to occur.”

Rule 123 (d): (This Rule relates to more significant/impactful moves than Rule 15.)

A mandatory indication is a manual process performed by the DMMs and serves to inform the public and market professionals a security will potentially open outside of the typical parameters associated with a security in that price range. This information creates transparency in the price discovery process and allows investors the opportunity to react to the indicated price range. As an example, if a customer enters an order to sell 500 shares at the market before the opening and the last sale in the security is $50.00, that customer might assume he will sell his stock relatively close to the last sale. If the DMM, however, issues a mandatory indication with a price range of $40.00 to 42.00 the customer may not want to participate, cancel the order and take the chance of selling the stock in the aftermarket.

As stated in the previous paragraph, this is a manual process and was designed to address “one-off” situations where news driven or liquidity events impact the opening from the previous trading session. Rule 15 and the mandatory indication processes were not designed to attain a “fast” price, they were designed to attain a “fair” price.

The parameters under Rule 123D for mandatory indications are as follows:

Previous NYSE Closing Price Price Change (equal or greater than)

Under $10 1 point

$10-$99.99 the lesser of 10% or $3.00

$100 and over 5 Points

It is important to note there is no DMM discretion with respect to these rules. A Designated Market Maker is obligated to provide a notification or mandatory indication if the price of an opening will fall outside of acceptable parameters. Failure to provide the indication may result in regulatory consequences. Exchange officials are also required to participate throughout the indication process. It is also important to note that once an indication has been disseminated to the public the DMM must wait 3 minutes to open the stock. The process was designed this way to allow customers the opportunity to react to the pricing dissemination. Also, if the price where a stock will open moves outside of the original mandatory indicated price range, the DMM must publish an additional indication to reflect the new pricing. (very time consuming)

Key to these discussions is the fact that there are limitations to electronic openings on the Floor of the NYSE regardless of rule 48. My understanding is if a stock’s opening volume will exceed 100,000 shares or will open outside of rule 15 parameters the issue is not eligible to opening electronically, which I am sure was the case in most stocks on August 24th. While not having to indicate stocks should intuitively speed up the opening, having to manually open multiple issues with limited staff will inevitably take a good amount of time. Thus, while the DMMs struggled to open multiple stocks expeditiously, orders in the marketplace searched for liquidity in other trading venues. This might have been one of the contributing factors for the sharp downdraft in the market post 9:30. Had the DMMs been able to open their stocks electronically where indicative pricing would allow at 9:30, I would make the argument the downdraft would not have taken place. The opening transaction on the NYSE still represents a large percentage of the overall opening volume across all markets and to not take this into account is doing a disservice to the process. It would be very interesting to cross reference the opening trades in the S&P 500 issues on the NYSE and contrast them to the trades that took place before that opening in other markets. My guess is you wouldn’t have wanted to be a seller in those markets. Although one may argue for the attributes of a fragmented market i.e. July 8th, it is difficult to argue for what took place on August 24th.

In my opinion, the opening on August 24th was neither good for the industry nor good for the public’s confidence in our markets. There are steps being taken to remediate the issues on opening transactions but more needs to be done. One such step is the NYSE’s filing to provide indicative pricing past 9:35. Allowing this information to continue to be published until a stock is open can only help to provide transparency at times of market stress. Consideration should also be given to expanding the limitations of the NYSE’s electronic opening. The opening, across the industry, on August 24 highlighted the inefficiencies of the opening process. Changes need to take place and while I do not claim to have all of the answers do believe and always will that a FAIR price is the most important price and something for which we all must strive to achieve.

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