[Federal Register Volume 77, Number 236 (Friday, December 7, 2012)]
[Notices]
[Pages 73109-73111]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-29566]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68339; File No. SR-NYSEArca-2012-130]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Amending NYSE Arca 
Rule 6.62(cc) Making Available the Post No Preference Light Only 
Quotation to Options Classes Not Participating in the Penny Pilot

December 3, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on November 20, 2012, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. 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

    The Exchange proposes to amend NYSE Arca Rule 6.62(cc) to make 
available the Post No Preference Light Only Quotation (``PNPLO 
Quotation'') to options classes not participating in the penny pilot 
(``non-Penny Pilot Issues''). The text of the proposed rule change is 
available on the Exchange's Web site at www.nyse.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 self-regulatory organization 
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 those 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
    The Exchange proposes to amend Rule 6.62(cc) to make available the 
Post No Preference Light Only Quotation (``PNPLO Quotation'') to non-
Penny Pilot Issues.
    A PNPLO Quotation is an electronic Market Maker quotation that, 
upon initial entry into the NYSE Arca System, is only eligible to 
execute against displayed liquidity on the Consolidated Book.\3\ A 
PNPLO Quotation is similar to the Post No Preference Light Order 
(``PNP-Light Order'') under NYSE Arca Options Rule 6.62(v), which is a 
non-routable order type that is only eligible to execute against 
displayed liquidity. The PNPLO Quotation was recently approved by the 
Commission in June of 2012 \4\ and provides a useful tool for Market 
Markers to provide quotations in the market. Upon entry of a PNPLO 
Quotation, the NYSE Arca System automatically removes the pre-existing 
quotation(s) of a Market Maker, as it does upon the entry of any other 
quotation, regardless of the acceptance or rejection of the PNPLO 
Quotation by the NYSE Arca System.\5\ The PNPLO Quotation also provides 
Market Makers with greater control over the circumstances in which 
their quotations interact with contra-side trading interest on the 
Exchange by preventing interaction with non-displayed liquidity. The 
increase in control afforded by the PNPLO Quotation is desirable from 
the perspective of Market Makers because it is difficult for them to 
account for non-displayed liquidity in their quoting models.
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    \3\ See Exchange Rule 6.62(cc). In this regard, a PNPLO 
Quotation is similar to the Post No Preference Light Order (``PNP-
Light Order'') under NYSE Arca Options Rule 6.62(v), which is a non-
routable order type that is only eligible to execute against 
displayed liquidity. A PNPLO Quotation that, upon entry, would 
execute exclusively against non-displayed liquidity on the 
Consolidated Book is immediately rejected by the NYSE Arca System. 
Additionally, a PNPLO Quotation that, upon entry, would execute 
against both displayed and non-displayed liquidity on the 
Consolidated Book immediately executes only against the displayed 
liquidity, but not against the non-displayed liquidity, and any 
remaining size of the PNPLO Quotation will be immediately rejected 
by the NYSE Arca System. Furthermore, a PNPLO Quotation that, upon 
entry, would execute exclusively against displayed liquidity on the 
Consolidated Book immediately executes against the displayed 
liquidity and any remaining size of the PNPLO Quotation is placed on 
the Consolidated Book and treated like a standard Market Maker 
quotation. Lastly, a PNPLO Quotation that would not execute against 
either displayed or non-displayed liquidity is placed in the 
Consolidated Book and treated as a standard Market Maker quotation.
    \4\ See Securities Exchange Act Release No. 67252 (June 25, 
2012), 77 FR 38879 (June 29, 2012) (Order approving PNPLO Quotation) 
(``Order''). See also Securities Exchange Act Release No. 66937 (May 
7, 2012), 77 FR 27820 (May 11, 2012) (``Notice'').
    \5\ Accordingly, in the event that a PNPLO Quotation is rejected 
by the NYSE Arca System, the Market Maker is required to re-enter a 
quotation for purposes of satisfying any applicable quoting 
obligations under NYSE Arca Options Rule 6.37B. See Notice, 77 FR at 
27821.
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    Currently, the PNPLO Quotation is only available for options 
classes participating in the Penny Pilot Program. Market Makers may 
only submit PNPLO Quotation orders for options classes in the Penny 
Pilot Program. The Exchange now proposes to allow the use of the PNPLO 
Quotation by Market Makers for quoting in non-Penny classes as well.
    In the initial Notice, the Exchange stated that Market Makers on 
NYSE Arca in penny pilot issues receive post liquidity credits for 
electronic

[[Page 73110]]

executions against their quotes that are resting in the Consolidated 
Book, and are charged take liquidity fees when their quotes execute 
against resting liquidity in the Consolidated Book.\6\ The Exchange 
also stated that Market Makers consider these fees when calculating 
their quotes, and they may provide a wider quote than they otherwise 
would if they believe there is a chance that they would be charged a 
take liquidity fee for submitting a quote that executes against non-
displayed liquidity (instead of receiving a post liquidity credit for 
executions against a resting quote).\7\ The Exchange further stated 
that by eliminating the risk of incurring additional fees, the PNPLO 
Quotation may lead Markets Makers to provide narrower quotes on the 
Exchange, which in turn would benefit investors.\8\
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    \6\ See Notice, 77 FR at 27821.
    \7\ See id.
    \8\ See id.
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    On October 25, 2012, the Exchange filed for immediate effectiveness 
a proposed rule change to provide Post-Take pricing for electronic 
transactions in all non-Penny issues.\9\ The Exchange believes that the 
same reasons in support of the PNPLO Quotation for Penny classes are 
now valid for non-Penny classes. The Exchange believes that with the 
new Post-Take pricing for electronic transactions in non-Penny classes, 
Market Makers in non-Penny classes would also benefit from the PNPLO 
Quotation functionality. Market Makers on the Exchange, whether they 
quote in Penny classes or non-Penny classes, will benefit from the 
functionality that the PNPLO Quotation provides. Market Markers in non-
Penny classes would benefit from the ability upon entry of a PNPLO 
Quotation, the NYSE Arca System automatically removing the pre-existing 
quotation(s) of a Market Maker, as it does upon the entry of any other 
quotation, regardless of the acceptance or rejection of the PNPLO 
Quotation by the NYSE Arca System. Market Markers in non-Penny classes 
would also benefit from the greater control that the PNPLO Quotation 
provides over the circumstances in which their quotations interact with 
contra-side trading interest on the Exchange by preventing interaction 
with non-displayed liquidity. Market Markers in non-Penny classes would 
also benefit from the greater control afforded by the PNPLO Quotation 
because it is difficult for them to account for non-displayed liquidity 
in their quoting models.
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    \9\ See Securities Exchange Act Release No. 68179 (November 8, 
2012), 77 FR 68163 (November 15, 2012) (SR-NYSEArca-2012-121).
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    The Exchange sees no reason to continue to treat equally positioned 
Market Makers differently by making the PNPLO Quotation functionality 
available based on whether they are quoting in Penny classes versus 
non-Penny classes. The Exchange notes that all market participants, 
including Market Makers, already have the ability to avoid trading with 
non-displayed liquidity by entering PNP-Light Orders, which have 
existed on the Exchange since 2009.\10\ PNP-Light Order is available 
equally to all participants whether they chose to trade in Penny or 
non-Penny classes. The Exchange also notes that market participants 
that enter non-displayed liquidity (i.e., orders with reserve size) are 
choosing not to have the full size of their trading interest displayed, 
which is in contrast to the Commission's encouragement of a market 
structure in which trading interest is displayed,\11\ and accordingly 
do not receive all of the benefits with respect to that non-displayed 
liquidity that are afforded to displayed liquidity.\12\
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    \10\ The Exchange notes that it adopted the PNP-Light Order type 
pursuant to Section 19(b)(3)(A) of the Exchange Act, and that the 
rule filing adopting that order type was not abrogated. See 
Securities Exchange Act Release 59603 (March 19, 2009), 74 FR 13279 
(March 26, 2009) (SR-NYSEArca-2009-21) (Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change by NYSE Arca, Inc.) 
Amending Rule 6.62 to Provide Additional Order Types).
    \11\ See, e.g., Securities Exchange Act Release No. 60684 
(September 18, 2009), 74 FR 48632, 48636 (September 23, 2011) [sic] 
(File No. S7-21-09) (Proposed Elimination of Flash Order Exception 
from Rule 602 of Regulation NMS) (``The Commission long has 
emphasized the need to encourage displayed liquidity in the form of 
publicly displayed limit orders.'').
    \12\ In this regard, the Exchange notes that non-displayed 
liquidity is not afforded trade-through protection under Section 5 
of the Options Order Protection and Locked/Crossed Market Plan. See, 
e.g., Securities Exchange Act Release No. 60405 (July 30, 2009), 74 
FR 39362 (August 6, 2009) (File No. 4-546).
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    The Exchange notes that the Commission also has found that the 
current Rule was not unfairly discriminatory.\13\ The Exchange believes 
that the proposal only makes the functionality even less discriminatory 
by allowing equally positioned Market Makers to be offered the same 
functionality.
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    \13\ See Order, 77 FR at 38880. Specifically, the Commission 
stated that the ``Commission also believes that the proposed rule 
change is not unfairly discriminatory. Currently, market 
participants including Market Makers can achieve functionality 
similar to the PNPLO Quotation through use of the PNP-Light Order, 
which is a non-routable order type that is only eligible to execute 
against displayed liquidity. The Exchange is proposing a similar 
functionality for use by Market Makers when quoting. The PNPLO 
Quotation would be available for use by all Market Makers quoting in 
the penny pilot classes on the Exchange.''
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    The Exchange will announce the implementation date of the proposed 
rule change in a Trader Update to be published no later than 90 days 
following the date of filing. The implementation date will be no later 
than 90 days following publication of the Trader Update announcing the 
date of filing.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) \14\ of 
the Act, in general, and furthers the objectives of Section 
6(b)(5),\15\ in particular, in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system and, in general, to protect 
investors and the public interest.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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    Like the existing Price Improving Quote and the existing PNPLO 
Quotation for Penny classes, the proposed PNPLO Quotation would provide 
a Market Maker with the ability to control its interactions with 
contra-side liquidity.\16\ Specifically, upon initial entry, a PNPLO 
Quotation would not be eligible to interact with non-displayed 
liquidity. In this regard, the Exchange understands that a Market 
Maker's quoting algorithm can take into account existing liquidity in 
the marketplace, but may not be able to accurately account for the risk 
of interacting with non-displayed liquidity. As noted, Market Makers on 
NYSE Arca in Penny Pilot issues receive post liquidity credits for 
electronic executions against their quotes that are resting in the 
Consolidated Book, and are charged take liquidity fees when their 
quotes execute against resting liquidity in the Consolidated Book. 
Market Makers consider these fees when calculating their quotes, and 
they may provide a wider quote than they otherwise would if they 
believe there is a chance that they would be charged a take liquidity 
fee for submitting a quote that executes against non-displayed 
liquidity (instead of receiving a post liquidity credit for executions 
against a resting quote). As noted, the PNP-Light Order is available 
equally to all participants whether they chose to trade

[[Page 73111]]

in Penny or non-Penny classes. Accordingly, the proposal would permit 
Market Makers to eliminate from their quoting decisions the risk of 
incurring interaction with non-displayed liquidity, and therefore may 
result in narrower quote widths, which would increase the quality of 
the Exchange's market and thereby benefit investors.
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    \16\ See supra note 4.
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    The Exchange believes that allowing Market Makers to use the PNPLO 
Quotation for non-Penny classes is just, equitable and not unfairly 
discriminatory. For example, the PNPLO Quotation treats all similarly 
situated market participants the same in that it would be available for 
use by all Market Makers on the Exchange. Moreover, the Exchange notes 
that all market participants, including Market Makers, already have the 
ability to avoid trading with non-displayed liquidity by entering PNP-
Light Orders, which have existed on the Exchange since 2009.\17\ The 
Exchange also notes that market participants that enter non-displayed 
liquidity (i.e., orders with reserve size) are choosing not to have the 
full size of their trading interest displayed, which is in contrast to 
the Commission's encouragement of a market structure in which trading 
interest is displayed,\18\ and accordingly do not receive all of the 
benefits with respect to that non-displayed liquidity that are afforded 
to displayed liquidity.\19\ The Exchange notes that the Commission also 
has found that the current Rule was not unfairly discriminatory.\20\ 
The Exchange believes that the proposal only makes the functionality 
even less discriminatory by allowing equally positioned Market Makers 
to be offered the same functionality. For the forgoing reasons, the 
Exchange believes that the proposal is not unfairly discriminatory. 
Overall, the Exchange believes that the proposal protects investors and 
the public interest because it may contribute to more aggressive 
quoting by Market Makers and may lead to more displayed liquidity on 
the Exchange, which, in turn, should increase the quality of the 
Exchange's market and benefit investors.
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    \17\ The Exchange notes that it adopted the PNP-Light Order type 
pursuant to Section 19(b)(3)(A) of the Exchange Act, and that the 
rule filing adopting that order type was not abrogated. See 
Securities Exchange Act Release 59603 (March 19, 2009), 74 FR 13279 
(March 26, 2009) (SR-NYSEArca-2009-21) (Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change by NYSE Arca, Inc. 
Amending Rule 6.62 to Provide Additional Order Types).
    \18\ See, e.g., Securities Exchange Act Release No. 60684 
(September 18, 2009), 74 FR 48632, 48636 (September 23, 2011) [sic] 
(File No. S7-21-09) (Proposed Elimination of Flash Order Exception 
from Rule 602 of Regulation NMS) (``The Commission long has 
emphasized the need to encourage displayed liquidity in the form of 
publicly displayed limit orders.'').
    \19\ In this regard, the Exchange notes that non-displayed 
liquidity is not afforded trade-through protection under Section 5 
of the Options Order Protection and Locked/Crossed Market Plan. See, 
e.g., Securities Exchange Act Release No. 60405 (July 30, 2009), 74 
FR 39362 (August 6, 2009) (File No. 4-546).
    \20\ See Order, 77 FR at 38880.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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 prior to 
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 \21\ and Rule 19b-
4(f)(6)(iii) thereunder.\22\ 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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    \21\ 15 U.S.C. 78s(b)(3)(A).
    \22\ 17 CFR 240.19b-4(f)(6)(iii). 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 rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2012-130 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-NYSEArca-2012-130. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your 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-NYSEArca-2012-130 and should 
be submitted on or before December 28, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-29566 Filed 12-6-12; 8:45 am]
BILLING CODE 8011-01-P