[Federal Register Volume 77, Number 91 (Thursday, May 10, 2012)]
[Notices]
[Pages 27505-27508]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-11245]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66923; File No. SR-NSX-2012-05]
Self-Regulatory Organizations; National Stock Exchange, Inc.;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend Its Rules Regarding Routing of Limit Orders
May 4, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 26, 2012, National Stock Exchange, Inc. (``NSX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
National Stock Exchange, Inc. (``NSX[supreg]'' or ``Exchange'') is
proposing to modify the text of NSX Rule 11.15 to harmonize it with
current system functionality of routed limit orders.
The text of the proposed rule change is available on the Exchange's
Web site at http://www.nsx.com, at the principal office of the
Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant parts of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
NSX Rule 11.15(a)(ii)(A) (Routing to Away Trading Centers)
currently provides that, for orders other than sweep orders that are,
consistent with the terms of the order, routed to away trading centers,
the order will be converted into one or more limit orders, as
necessary, to be matched for execution against each protected quotation
at the Protected National Best Bid or Offer (``NBBO'') available at
away trading centers. With respect to the price of the routed limit
order, Rule 11.15(a)(ii)(A) currently provides: ``Each such converted
limit order shall be priced at the price of the protected quotation
that it is to be matched for execution against'' (italics added).
Notwithstanding the text of Rule 11.15(a)(ii)(A), the Exchange's
trading system, NSX BLADE[supreg] (``Blade''), currently prices each
such converted limit order at a price that is one trading increment
inside the best bid or offer on the NSX book, but in any case not
higher (if a bid) or lower (if an offer) than the limit price specified
by the terms of the original order. The proposed edits to Rule
11.15(a)(ii)(A) would conform the text of the rules to current Blade
functionality. Specifically, new subsections (1) and (2) are proposed
to be added to Rule 11.15(a)(ii)(A). Subsection (1) would address the
pricing of routed market orders (the treatment of which remains
unchanged, namely, such orders shall be routed at the price of the
protected quotation that it is to be matched against for execution).
Subsection (2) would address the pricing of converted limit orders, and
specifies in clauses (x) and (y) the converted limit price for each a
buy and sell order, respectively. In the case of a buy order, the
converted limit price shall be the lower of the limit price of the
original order and one increment lower than the lowest offer on the NSX
book. In the case of a sell order, the converted limit price shall be
the higher of the limit price of the original order and one increment
higher than the highest bid on the NSX book.
The proposed pricing methodology benefits ETP Holders by minimizing
the risk of non-fills or delayed fills that might arise as a result of
the order being routed at the NBBO price. NBBO quotes may flicker and/
or be cancelled by the time a routed order arrives at the away
destination. Under such circumstances, if priced at the NBBO, a routed
limit order may be rejected by the away destination and, upon return to
NSX, undergo a re-evaluation within Blade (consistent with Regulation
NMS and NSX rules), after which it may be subjected to one or more
repeat cycles of the foregoing process (``unfilled routing cycles'').
The orders are routed as Immediate or Cancel (``IOC'') orders and thus
retain the full protections of Rule 611. By re-pricing routed limit
orders as proposed above, the chances are maximized that an ETP
Holder's routed limit order is filled quickly and at the best price
available (and never worse than the original order's limit price), and
not at a price that can otherwise be filled against the NSX book.
The following examples reflect both the current functionality of
routed limit orders in Blade and also routed limit order pricing under
the proposed rules:
Example 1
------------------------------------------------------------------------
Original order NSX best offer National best offer
------------------------------------------------------------------------
Buy Limit @ 10.10............. 10.05 9.95
------------------------------------------------------------------------
Result: The original limit order is converted to a buy limit order
at a price of $10.04 (one increment lower than the lowest offer on the
NSX book, which is lower than the original order limit price of
$10.10), and routed to the market displaying the National Best Offer of
$9.95. The order may then be executed at that away market, in whole or
in part, subject to the applicable trading rules of
[[Page 27506]]
that trading center.\3\ In this example, an execution at the away
market would generally be at a price of $9.95.\4\ Current rule text
would price the routed limit order at $9.95 (the price of the protected
quotation against which it is matched for execution). This pricing
methodology (which routes the buy order at $10.04 rather than $9.95) is
beneficial to an ETP Holder because it minimizes the chances of
repeated unfilled routing cycles as described above, intends to access
the best priced displayed liquidity, and does not route the order at a
price that can be filled against the NSX book.
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\3\ See NSX Rule 11.15(c)(i).
\4\ This predicted result is dependent on the rules of the away
market and assumes certain things, including without limitation the
absence of an un-displayed, lower priced offer at the away market
that would interact at a lower price, and that the away market's
displayed NBO of 9.95 has not changed (e.g., been cancelled or
improved by a lower priced offer) by the time the routed order is
received at the away trading center.
Example 2
------------------------------------------------------------------------
Original order NSX best offer National best offer
------------------------------------------------------------------------
Buy Limit @ 10.00............. 10.05 9.95
------------------------------------------------------------------------
Result: The original limit order is converted to a buy limit order
at a price of $10.00 (the limit price of the original order, which is
lower than one increment lower than the lowest offer on the NSX book)
and routed to the market displaying the National Best Offer of $9.95.
The order may then be executed at that away market, in whole or in
part, subject to the applicable trading rules of that trading center.
In this example, an execution at the away market would generally be at
a price of $9.95.\5\ Current rule text would price the routed limit
order at $9.95 (the price of the protected quotation against which it
is matched for execution). This pricing methodology (which routes the
buy order at $10.00 rather than $9.95) is beneficial to an ETP Holder
because it minimizes the chances of repeated unfilled routing cycles as
described above, intends to access the best priced displayed liquidity,
and does not route the order at a price higher than the limit price.
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\5\ Id.
Example 3
------------------------------------------------------------------------
Original order NSX best offer National best offer
------------------------------------------------------------------------
Buy Limit @ 9.95.............. 10.05 9.95
------------------------------------------------------------------------
Result: The original limit order is converted to a buy limit order
at a price of $9.95 (the limit price of the original order, which is
lower than one increment lower than the lowest offer on the NSX book)
and routed to the market displaying the National Best Offer of $9.95.
The order may then be executed at that away market, in whole or in
part, subject to the applicable trading rules of that trading center.
In this example, an execution at the away market would generally be at
a price of $9.95.\6\ Current rule text would likewise price the routed
limit order at $9.95 (the price of the protected quotation against
which it is matched for execution).
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\6\ Id.
Example 4
------------------------------------------------------------------------
Original order NSX best bid National best bid
------------------------------------------------------------------------
Sel Limit @ 9.90.............. 9.95 10.05
------------------------------------------------------------------------
Result: The original limit order is converted to a sell limit order
at a price of $9.96 (one increment higher than the highest bid on the
NSX book, which is higher than the original order limit price of $9.90)
and routed to the market displaying the National Best Bid of $10.05.
The order may then be executed at that away market, in whole or in
part, subject to the applicable trading rules of that trading center.
In this example, an execution at the away market would generally be at
a price of $10.05.\7\ Current rule text would price the routed limit
order at $10.05 (the price of the protected quotation against which it
is matched for execution). This pricing methodology (which routes the
sell order at $9.96 rather than $10.05) is beneficial to an ETP Holder
because it minimizes the chances of repeated unfilled routing cycles as
described above, intends to access the best priced displayed liquidity,
and does not route the order at a price that can be filled against the
NSX book.
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\7\ This predicted result is dependent on the rules of the away
market and certain things, including without limitation the absence
of an un-displayed, higher priced bid at the away market that would
interact at a higher price, and that the away market's displayed NBB
of 10.05 has not changed (e.g., been cancelled or improved by a
higher priced bid) by the time the routed order is received at the
away trading center.
Example 5
------------------------------------------------------------------------
Original order NSX best bid National best bid
------------------------------------------------------------------------
Sell Limit @ 10.00............ 9.95 10.05
------------------------------------------------------------------------
[[Page 27507]]
Result: The original limit order is converted to a sell limit order
at a price of $10.00 (the limit price of the original order, which is
higher than one increment higher than the highest bid on the NSX book)
and routed to the market displaying the National Best Bid of $10.05.
The order may then be executed at that away market, in whole or in
part, subject to the applicable trading rules of that trading center.
In this example, an execution at the away market would generally be at
a price of $10.05.\8\ Current rule text would price the routed limit
order at $10.05 (the price of the protected quotation against which it
is matched for execution). This pricing methodology (which routes the
sell order at $10.00 rather than $10.05) is beneficial to an ETP Holder
because it minimizes the chances of repeated unfilled routing cycles as
described above, intends to access the best priced displayed liquidity,
and does not route the order at a price higher than the limit price.
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\8\ Id.
Example 6
------------------------------------------------------------------------
Original order NSX best bid National best bid
------------------------------------------------------------------------
Sell Limit @ 10.05............ 9.95 10.05
------------------------------------------------------------------------
Result: The original limit order is converted to a sell limit order
at a price of $10.05 (the limit price of the original order, which is
higher than one increment higher than the highest bid on the NSX book)
and routed to the market displaying the National Best Bid of $10.05.
The order may then be executed at that away market, in whole or in
part, subject to the applicable trading rules of that trading center.
In this example, an execution at the away market would generally be at
a price of $10.05.\9\ Current rule text would likewise price the routed
limit order at $10.05 (the price of the protected quotation against
which it is matched for execution).
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\9\ Id.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6 of the Act,\10\ and the rules and regulations thereunder and,
in particular, the requirements of Section 6(b) of the Act.\11\
Specifically, the Exchange believes the modification of Rule 11.15
furthers the objective of Section 6(b)(1) of the Act because it aligns
the text of the rule with the actual functionality regarding how limit
orders are currently routed. By conforming the text of the Exchange's
rules to accurately reflect the method by which the Exchange's system
currently re-prices routed limit orders, the proposed rule change
harmonizes the Exchange's trading system functionality with the text of
NSX rules and thereby promotes clarity and eliminates confusion. In
addition, the manner in which limit orders are routed by the Exchange
as described herein allows an ETP Holder's routed limit order to be
filled more quickly and at the best price available (and never worse
than the original order's limit price), and not at a price that can
otherwise be filled against the NSX book. The Exchange believes that
this manner of pricing routed limit orders best serves its ETP Holders.
Accordingly, the Exchange believes that the proposed rule change
promotes just and equitable principles of trade, removes impediments,
and perfects the mechanism of a free and open market and a national
market system and, in general, protects investors and the public
interest.
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\10\ 15 U.S.C. 78f.
\11\ 15 U.S.C. 78f(b).
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The proposed rule change provides transparency and certainty with
respect to routed limit orders by providing detail on precisely how
Blade prices and routes limit orders to away market centers. In so
doing, the proposed rule change promotes the maintenance of a fair and
orderly market, the protection of investors and the protection of the
public interest, consistent with the Act and the rules promulgated
thereunder.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change were neither solicited
nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the proposed rule change does not (i) significantly affect
the protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative for 30
days from the date on which it was filed, or such shorter time as the
Commission may designate if consistent with the protection of investors
and the public interest, the proposed rule change has become effective
pursuant to Section 19(b)(3)(A) of the Act \12\ and Rule 19b-4(f)(6)
thereunder.\13\ At any time within 60 days of the filing of such
proposed rule change, the Commission summarily may temporarily suspend
such rule change if it appears to the Commission that such action is
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Act.
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\12\ 15 U.S.C. 78s(b)(3)(A).
\13\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written
notice of its intent to file the proposed rule change along with a
brief description and the text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NSX-2012-05 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NSX-2012-05. This file
number should be included on the subject line if email is used. To help
the Commission process and review your
[[Page 27508]]
comments more efficiently, please use only one method. The Commission
will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent
amendments, all written statements with respect to the proposed rule
change that are filed with the Commission, and all written
communications relating to the proposed rule change between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for Web site viewing and printing in the Commission's Public
Reference Room, 100 F Street NE., Washington, DC 20549, on official
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of
the filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly.
All submissions should refer to File Number SR-NSX-2012-05 and
should be submitted on or before May 31, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-11245 Filed 5-9-12; 8:45 am]
BILLING CODE 8011-01-P