[Federal Register Volume 78, Number 82 (Monday, April 29, 2013)]
[Notices]
[Pages 25102-25112]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-10016]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69428; File No. SR-NYSEMKT-2013-25]
Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of
Proposed Rule Change To Amend NYSE MKT Rule 104--Equities To Codify
Certain Traditional Trading Floor Functions That May Be Performed by
Designated Market Makers To Make Exchange Systems Available to DMMs
That Would Provide DMMs With Certain Market Information, To Amend the
Exchange's Rules Governing the Ability of DMMs To Provide Market
Information To Floor Brokers, and To Make Conforming Amendments to
Other Rules
April 23, 2013.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on April 9, 2013, NYSE MKT LLC (the ``Exchange'' or ``NYSE
MKT'') 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. On April 18, 2013, the Exchange filed Partial Amendment
No. 1 to the proposal.\4\ 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\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
\4\ In Partial Amendment No., 1, the Exchange filed the Exhibit
3 which was not included in the April 9, 2013 filing.
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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 MKT Rule 104--Equities to
codify certain traditional Trading Floor \5\ functions that may be
performed by
[[Page 25103]]
Designated Market Makers (``DMMs''),\6\ to make Exchange systems
available to DMMs that would provide DMMs with certain market
information, to amend the Exchange's rules governing the ability of
DMMs to provide market information to Floor brokers, and to make
conforming amendments to other rules. 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.
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\5\ NYSE MKT Rule 6A--Equities defines the term ``Trading
Floor'' to mean, in relevant part, ``the restricted-access physical
areas designated by the Exchange for the trading of securities.''
\6\ NYSE MKT Rule 2(i)--Equities defines the term ``DMM'' to
mean an individual member, officer, partner, employee or associated
person of a DMM unit who is approved by the Exchange to act in the
capacity of a DMM. NYSE MKT Rule 2(j)--Equities defines the term
``DMM unit'' as a member organization or unit within a member
organization that has been approved to act as a DMM unit under NYSE
MKT Rule 98--Equities.
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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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend NYSE MKT Rule 104--Equities to
codify certain traditional Trading Floor functions that may be
performed by DMMs; these functions were previously described in the
Exchange's Floor Official Manual. In addition, the Exchange proposes to
amend its rules to make Exchange systems available to DMMs that would
provide DMMs with certain market information about securities in which
the DMM is registered. The Exchange also proposes to amend its rules
governing the ability of DMMs to make available certain order and
market information to Floor brokers provided that the market
participant entering the order had not opted out of such availability.
Finally, the Exchange proposes to make clarifying and conforming
amendments to other rules.\7\ As described below, the Exchange believes
that enabling DMMs to perform certain additional Trading Floor
functions previously performed by specialists would improve the quality
of certain interactions experienced by investors (specifically, by
increasing the likelihood of transaction cost-reducing block
transactions).
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\7\ The Exchange's affiliate, New York Stock Exchange LLC, has
submitted substantially the same proposed rule change to the
Commission. See SR-NYSE-2013-21.
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Specifically, on October 31, 2011, the New York Stock Exchange LLC
(``NYSE'') and NYSE MKT each filed with the Commission, pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \8\
and Rule 19b-4 thereunder,\9\ proposed rule changes to amend Rule 104.
The proposals were published for comment in the Federal Register on
November 17, 2011.\10\ The Commission received no comment letters on
the Proposals. On December 22, 2011, the Commission extended the time
period to February 15, 2012, in which either to approve the Proposals,
disapprove the Proposals, or to institute proceedings to determine
whether to disapprove the Proposals.\11\ The Commission received no
comment letters on the Proposals during the extension. On February 15,
2012, the Commission issued an order instituting proceedings to
determine whether to disapprove the Proposals.\12\ The Commission
received six comment letters supporting the Proposals after the
Commission instituted proceedings to determine whether to disapprove
the Proposals. After the Commission issued a notice of designation of
longer period for Commission action on May 14, 2012,\13\ the Commission
disapproved the proposed rule changes on July 13, 2012.\14\
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\8\ 15 U.S.C. 78s(b)(1).
\9\ 17 CFR 240.19b-4.
\10\ See Securities Exchange Act Release Nos. 65735 (November
10, 2011), 76 FR 71405 (SR-NYSEAmex-2011-86) (``NYSE Amex Notice'')
and 65736 (November 10, 2011), 76 FR 71399 (SR-NYSE-2011-56) (``NYSE
Notice'').
\11\ See Securities Exchange Act Release No. 66036, 76 FR 82011
(December 29, 2011).
\12\ See Securities Exchange Act Release No. 66397, 77 FR 10586
(February 22, 2012).
\13\ See Securities Exchange Act Release No. 66981, 77 FR 29730
(May 18, 2012).
\14\ See Securities Exchange Act Release No. 67437, 77 FR 42525
(July 13, 2012) (``Disapproval Order'').
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As discussed more fully below, the Commission's disapproval was
based principally on concerns related to the fairness and competitive
impact of providing certain order information to Floor participants.
The Exchange is submitting the present filing to provide more detailed
support demonstrating the consistency of the proposed rule change in
general, and the provision of such order information in particular,
with Section 6(b)(5) of the Act and to otherwise address the concerns
raised by the Commission in its disapproval order. The Exchange
believes that the Commission's application of the Act's fairness and
competition-related standards must take specific account of the
transformational competitive dynamics that have reshaped the role of
the Floor over the last decade, particularly with the potential of the
proposal to improve size interactions and reduce transaction costs for
the public. Accordingly, this filing: (1) Explains the mechanics and
operation of the proposal; (2) provides an overview of the reshaped
competitive context within which the Floor operates; and (3) offers
three detailed scenarios illustrating the potential benefits to the
public of making the proposed order information available to Floor
participants and a demonstration of how the proposed availability would
improve error resolution. The improved order interactions illustrated
in the scenarios and the demonstration of improved error resolution
explain in detail why the proposed consensual availability of the order
information in question should apply not only to orders entered on the
Floor, but also to orders entered by off-Floor participants.
DMM Trading Floor Functions
On October 24, 2008, the Commission approved, as a pilot program,
certain core rules that govern the current operation of the
Exchange.\15\ These rules embody the Exchange's ``New Market Model.''
The New Market Model pilot rules include NYSE Rule 104, which sets
forth certain affirmative obligations of DMMs, the category of market
participant that replaced specialists. DMMs have obligations with
respect to the quality of the markets in securities to which they are
assigned that are similar to certain obligations formerly held by
specialists. NYSE MKT adopted amendments to implement the New Market
Model, including amendments to NYSE MKT Rule 104--Equities, on November
26, 2008.\16\
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\15\ Securities Exchange Act Release No. 58845, 73 FR 64379
(October 29, 2008) (``New Market Model Release'').
\16\ See Securities Exchange Act Release No. 59022 (November 26,
2008), 73 FR 73683 (December 3, 2008) (SR-NYSEALTR-2008-10).
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In addition to their trading-related functions and obligations,
DMMs, under the New Market Model, provide support on the Trading Floor
to assist in the efficient operation of the Exchange market and
maintain fair and orderly markets. These Trading Floor functions were
performed by specialists before the
[[Page 25104]]
New Market Model was adopted, and described in the Exchange's Floor
Official Manual.\17\ Under the New Market Model, there is a continued
need for DMMs to perform these Trading Floor functions. The Exchange
proposes to add new subparagraph (j)(i) to Rule 104--Equities to codify
these historic functions.\18\
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\17\ See 2004 Floor Official Manual, Market Surveillance June
2004 Edition, Chapter Two, Section I.A. at 7 (``specialist helps
ensure that such markets are fair, orderly, operationally efficient
and competitive with all other markets in those securities''),
Section I.B.3. at 10-11 (``[i]n opening and reopening trading in a
listed security, a specialist should * * * [s]erve as the market
coordinator for the securities in which the specialist is registered
by exercising leadership and managing trading crowd activity and
promptly identifying unusual market conditions that may affect
orderly trading in those securities, seeking the advice and
assistance of Floor Officials when appropriate'' and ``[a]ct as a
catalyst in the markets for the securities in which the specialist
is registered, making all reasonable efforts to bring buyers and
sellers together to facilitate the public pricing of orders, without
acting as principal unless reasonably necessary''), Section I.B.4.
at 11 (``In view of the specialist's central position in the
Exchange's continuous two-way agency auction market, a specialist
should proceed as follows * * * [e]qually and impartially provide
accurate and timely market information to all inquiring members in a
professional and courteous manner.''), and Section I.B.5. at 12 (A
specialist should ``[p]romptly provide information when necessary to
research the status of an order or a questioned trade and cooperate
with other members in resolving and adjusting errors.''). Relevant
excerpts of the 2004 Floor Official Manual are attached as Exhibit 3
of this filing.
\18\ The Exchange proposes to redesignate the rule text
currently set forth in section (j) as section (k) of Rule 104--
Equities.
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In particular, DMMs perform four categories of Trading Floor
functions: (1) Maintaining order among Floor brokers manually trading
at the DMM's assigned panel, including managing trading crowd activity
and facilitating Floor broker executions at the post; (2) facilitating
Floor broker interactions, including either participating as a buyer or
seller, and appropriately communicating to Floor brokers the
availability of other Floor broker contra-side interest; (3) assisting
Floor brokers with respect to their orders, including resolving errors
and, for example, inputting Floor interest into Exchange systems in the
event of handheld technology outages; and (4) researching the status of
orders or questioned trades. The current performance of these four
functions can be illustrated as follows:
First, a DMM may maintain order among Floor brokers manually
trading at the DMM's assigned panel. For example, where there is
significant agency interest in a security, the DMM may help Floor
Officials maintain order by managing trading crowd activity and
facilitating the execution of one or more Floor broker's orders
trading at the post.
Second, a DMM may bring Floor brokers together to facilitate
trading, which may include the DMM acting as a buyer or seller. This
function is consistent with the floor-based nature of the Exchange's
hybrid market. For example, if a DMM is aware that a Floor broker
representing buying interest inquired about selling interest in one
of his or her assigned securities and later a Floor broker
representing selling interest makes an inquiry about buying
interest, the assigned DMM may inform the Floor broker representing
the buying interest of the other Floor broker's selling interest. In
addition, the DMM itself may provide contra-side interest to a Floor
broker representing interest at the post.
Third, DMMs may assist Floor brokers with respect to their
orders by providing information regarding the status of a Floor
broker's orders, helping to resolve errors or questioned trades,
adjusting errors, and cancelling or inputting Floor broker agency
interest on behalf of a Floor broker. For example, if a Floor
broker's handheld device is not operational, the DMM may assist the
Floor broker by entering or canceling broker interest on the Floor
broker's behalf.\19\
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\19\ The Exchange maintains a full audit trail of all Floor
broker orders, including information reflecting entry, modification,
cancellation, and execution of such orders.
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Fourth, DMMs may research the status of orders or questioned
trades. DMMs may do so on their own initiative or at the request of
the Exchange or a Floor broker when a Floor broker's hand-held
device is not operational, when there is activity indicating that a
potentially erroneous order was entered or a potentially erroneous
trade was executed, or when there otherwise is an indication that
improper activity may be occurring.
DMM Access to Exchange Systems
The Exchange proposes to amend Rule 104--Equities to add new
subparagraph (j)(ii), which would state that the Exchange may make
systems available to a DMM at the post that display the following types
of information about securities in which the DMM is registered: (a)
Aggregated information about buying and selling interest; \20\ (b)
disaggregated information about the price and size of any individual
order or Floor broker agency interest file, also known as ``e-Quotes,''
except that Exchange systems would not make available to DMMs
information about any order or e-Quote, or portion thereof, that a
market participant has elected not to display to a DMM; and (c) post-
trade information. For the latter two categories, the DMM would have
access to entering and clearing firm information and, as applicable,
the badge number of the Floor broker representing the order. The
systems would not contain any information about the ultimate customer
(i.e., the name of the member or member organization's customer) in a
transaction. Importantly, aggregated information at each price level
about buying and selling interest that is not marked dark is already
visible to DMMs. Similarly, aggregated information for interest not
marked dark is visible to any market participant beyond the Floor via
OpenBook.\21\
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\20\ Exchange systems make available to DMMs aggregate
information about the following interest in securities in which the
DMM is registered: (a) All displayable interest submitted by off-
Floor participants; (b) all Minimum Display Reserve Orders,
including the reserve portion; (c) all displayable Floor broker
agency interest files (``e-Quotes''); (d) all Minimum Display
Reserve e-Quotes, including the reserve portion; and (e) the reserve
quantity of Non-Display Reserve e-Quotes, unless the Floor broker
elects to exclude that reserve quantity from availability to the
DMM.
\21\ Floor brokers currently have the ability to make an order
visible to the DMM but not in OpenBook. They would maintain that
ability under the proposed rule.
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Under the proposed rule change, Exchange systems would make
available to DMMs disaggregated information about the following
interest in securities in which the DMM is registered: (a) The price
and size of all displayable interest submitted by off-Floor
participants; and (b) all e-Quotes, including reserve e-Quotes, that
the Floor broker has not elected to exclude from availability to the
DMM.\22\ Importantly, both Floor brokers and off-Floor participants
would have the continued ability to enter partially or completely
``dark'' orders that are not visible to the DMM, which would prevent
any communication about such interest between the DMM and Floor
brokers. The Exchange believes that it is appropriate to provide DMMs
with this disaggregated order information because the information will
assist DMMs in carrying out their Trading Floor functions. In addition
to the potential for improved interaction of larger-sized orders
illustrated by the three scenarios and related information below,
providing DMMs with access to the disaggregated order information will
contribute to the DMMs' ability to carry out their responsibility for
managing the auction market process at the Exchange, which includes the
function of bringing buyers and sellers together to facilitate trading.
The proposed rule change would specifically prohibit DMMs from using
any trading information available to them in Exchange systems,
including disaggregated order information, in a manner that would
violate the Exchange rules or federal securities laws or regulations.
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\22\ The Exchange previously permitted DMMs to have access to
Exchange systems that contained the disaggregated order information
described above. The Exchange stopped making such information
available to DMMs on January 19, 2011. See Information Memo 11-03.
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[[Page 25105]]
The Exchange believes that the proposed rule change would
contribute substantially to the fair and orderly operation of the
Exchange Trading Floor. As illustrated in detail below, the proposed
consensual availability of the order information in question offers the
potential for improved error resolution. DMM assistance at the post
through the performance of the Trading Floor functions continues to be
an invaluable resource to minimize any disruption to the market,
particularly if the Exchange or a customer is experiencing a systems
issue; the Exchange systems that provide disaggregated order
information play a pivotal role in that assistance. Allowing DMMs to
have access to those Exchange systems to perform the Trading Floor
functions is more efficient than diverting Exchange resources to attend
to individual Floor broker issues, particularly when the DMMs are ready
and able to perform the same functions.
Ability of DMMs To Provide Market Information on the Trading Floor
The Exchange proposes to modify the terms under which DMMs would be
permitted to provide market information to Floor brokers and visitors
on the Trading Floor. Specifically, Rule 104(j)(iii)--Equities would
permit a DMM to provide the market information to which he or she has
access under proposed Rule 104(j)(ii)--Equities to: (1) A Floor broker
in response to an inquiry in the normal course of business; or (2) a
visitor to the Trading Floor for the purpose of demonstrating methods
of trading. This aspect of the proposal builds on and modifies current
NYSE MKT Rule 115--Equities, and the Exchange therefore proposes to
delete NYSE MKT Rule 115--Equities, which covers the same subject.\23\
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\23\ Rule 115--Equities will be redesignated as ``Reserved.''
The Exchange further proposes to make conforming amendments to Rules
13--Equities and 104(a)(6)--Equities.
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Currently, NYSE MKT Rule 115--Equities provides that a DMM may
disclose market information for three purposes. First, a DMM may
disclose market information for the purpose of demonstrating the
methods of trading to visitors on the Trading Floor. This aspect of
current Rule 115--Equities would be replicated in proposed Rule
104(j)(iii)(B)--Equities. Second, a DMM may disclose market information
to other market centers in order to facilitate the operation of the
Intermarket Trading System (``ITS''). This text is obsolete as the ITS
Plan has been eliminated and therefore would not be included in amended
Rule 104--Equities.\24\ Third, a DMM may, while acting in a market
making capacity, provide information about buying or selling interest
in the market, including: (a) Aggregated buying or selling interest
contained in Floor broker agency interest files other than interest the
broker has chosen to exclude from the aggregated buying and selling
interest; (b) aggregated interest of Minimum Display Reserve Orders;
and (c) the interest included in DMM interest files, excluding Capital
Commitment Schedule (``CCS'') interest as described in Rule 1000(d)--
Equities, in response to an inquiry from a member conducting a market
probe \25\ in the normal course of business.
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\24\ See Securities Exchange Act Release No. 55397 (March 5,
2007), 72 FR 11066 (March 12, 2007) (Intermarket Trading System;
Notice of Filing and Immediate Effectiveness of the Twenty Fourth
Amendment to the ITS Plan Relating to the Elimination of the ITS
Plan).
\25\ Generally, a market probe refers to when a Floor broker is
seeking to ascertain the depth of the market in a security to
determine at what price point a security may trade. However, it is a
term of art whose meaning is not codified.
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Proposed Rule 104(j)(iii)--Equities would permit DMMs also to
provide disaggregated and post-trade order information to Floor
brokers.\26\ Broadening the scope of information that DMMs can provide
Floor brokers will assist DMMs with carrying out their historical
function of bringing Floor brokers together to facilitate block and
other large transactions, as demonstrated by the scenarios illustrated
herein. The Exchange notes that the proposed visibility is not without
precedent--NYSE Rule 115 previously allowed NYSE specialists to provide
disaggregated order information to Floor brokers prior to adoption of
the Hybrid Market.\27\ And, as noted above, both Floor brokers and off-
Floor participants currently have and will continue to have the ability
to enter partially or completely ``dark'' orders that are not visible
to the DMM. DMMs, in other words, would be unable to see or disseminate
information about such ``dark'' orders or the dark portion of the
orders in response to an inquiry from a Floor broker. When providing
information, the individual DMM is responsible for fairly and
impartially providing accurate and timely information to all inquiring
Floor brokers about buying and selling interest in his or her assigned
security.
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\26\ Because DMMs on the Trading Floor do not have access to CCS
interest information, the proposed rule does not specify that DMMs
would not be disseminating such information.
\27\ See NYSE Regulation Information Memo 05-5 (stating that,
under NYSE Rule 115, specialists may disclose the identity of the
members or member organizations representing any orders entrusted to
the specialist). The NYSE amended NYSE Rule 115 in connection with
the Hybrid Market because at that time, there was no way for Floor
brokers to enter fully dark electronic interest. Now that NYSE and
Exchange systems can accept fully dark electronic interest from both
Floor brokers and off-Floor participants, the Hybrid Market change
to NYSE Rule 115 has been obviated and the rule can return to its
former status.
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Proposed Rule 104(j)(iii)--Equities also would permit a DMM to
provide market information to a Floor broker in response to a specific
request by the Floor broker to the DMM at the post, rather than
specifying that the information must be provided ``in response to an
inquiry from a member conducting a market probe in the normal course of
business,'' as currently provided in Rule 115--Equities. The Exchange
believes that the term ``market probe'' no longer accurately reflects
the manner in which DMMs and Floor brokers interact on the Trading
Floor. Rather, the Exchange believes that the Floor broker's normal
course of business, as an agent for customers, includes both seeking
market probes into the depth of the market as well as seeking out
willing contra-side buyers and sellers in a particular security. In
addition, the rule would specify that a Floor broker may not submit an
inquiry to the DMM by electronic means and that the DMM may not use
electronic means to transmit market information to a Floor broker in
response to an inquiry. Under the proposed rule change, Floor brokers
would not have access to Exchange systems that provide disaggregated
order information, and they would only be able to access such market
information through a direct interaction with a DMM at the post.
The Exchange believes that providing Floor brokers with access to
the disaggregated order information would serve a valuable function by
increasing the ability of Floor brokers to source liquidity and provide
price discovery for block transactions, as demonstrated in the three
detailed scenarios below. In particular, the ability of Floor brokers
to receive the disaggregated order information should, in turn, enhance
their ability to facilitate transactions for their customers by
identifying market participants with trading interest that could trade
with the Floor brokers' customers. Floor brokers have historically
served this role on behalf of their customers, which include
institutional clients and block-trading desks, and they continue to
perform this agency function today.
Effect of Market Structural Changes on the Exchange and the Floor
Before illustrating in detail how the proposed changes will
facilitate block trades and expedite error resolution, the
[[Page 25106]]
Exchange believes it is essential to take into account the structural
and competitive changes the Exchange and the Floor have experienced in
recent years. Indeed, the Act's fairness and competition-related
standards cannot appropriately guide the Commission's review absent a
concrete recognition of the reshaped competition of the Exchange and
the Floor and the array of execution choices available to market
participants today. Toward that end, it must be recognized that NYSE
and the Exchange have undergone fundamental, structural changes since
2006 and has been reshaped by the competitive dynamics that have
accompanied these changes. The reforms and the intensely competitive
environment within which they have taken place have their roots in the
Commission's effort to modernize and strengthen the national market
system for equity securities through Regulation NMS.\28\ In particular,
in March 2006, the Commission approved the beginning of NYSE's historic
shift ``from a floor-based auction market with limited automated order
interaction to a more automated market with limited floor-based auction
market availability.'' \29\ With the approval of the ``Hybrid Market,''
the NYSE began the substantial expansion of automatic execution and the
ability of its Floor members to participate in its automated market
electronically.\30\ At the time of approval, automatic executions on
the NYSE represented approximately 11% of its market share volume, and
the bulk of executions occurred manually in its floor-based
auction.\31\ The average speed of execution was over ten seconds.\32\
In 2005, the average trade size in NYSE-listed securities was 724
shares.\33\ NYSE's share of consolidated volume in NYSE-listed names
for the year preceding the approval of the Hybrid Market was 79.1%.\34\
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\28\ See Securities Exchange Act Release No. 51808, 70 FR 37496
(June 29, 2005) (``NMS Adopting Release'').
\29\ See Securities Exchange Act Release No. 53539, 71 FR 16353
(March 31, 2006).
\30\ Id.
\31\ Id.
\32\ See Securities Exchange Act Release No. 61358, 75 FR 3594,
3595 (January 21, 2010) (``Equity Market Structure Release'').
\33\ Id.
\34\ Id. at 3595.
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Roughly two years later, the NYSE proposed further and substantial
structural reforms with its New Market Model.\35\ Foremost in
significance were: (1) The phasing out of the specialist system and the
concurrent creation of the DMM; (2) the alteration of the NYSE's
longstanding priority and parity rules to allow DMMs to trade on equal
footing with other market participants where the specialist previously
had been obligated to yield to public customer orders in the book; and
(3) the elimination of the advance electronic ``look'' at incoming
orders that had been a historical feature of the specialist system.\36\
By 2009, the average speed of execution was less than a second, and the
average trade size in NYSE-listed securities had fallen to 268
shares.\37\ In 2009, the year following the adoption of the New Market
Model, NYSE's share of consolidated volume in NYSE-listed names was
25.1%.\38\ At the risk of stating the obvious, these transformative
changes have had the effect of reducing substantially the scope and
utility of market information accessible to DMMs and Floor brokers--a
perspective from a point of sale with roughly 80% market share differs
starkly from one with less than 25%. Such changes demonstrate the
flexibility that the market has with respect to utilizing different
venues and various market models that best suit their needs.
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\35\ See New Market Model Release.
\36\ Id. at 64380, 64387-88.
\37\ Id.
\38\ Equity Market Structure Release at 3595.
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Today, the Exchange continues to operate a limited Floor-based
auction model. Not surprisingly, the Floor itself reflects directly the
transformation recounted above. The current Floor broker community is
distinguished in significant part by its embrace of technology, as
reflected by the introduction of Floor broker algorithms in 2009.
Though competitive dynamics have reduced the Floor's numbers,
significant demand remains among the most informed market participants
for the technology-enabled services of today's Floor brokers.
The Exchange seeks to compete by offering market participants a
product that is entirely distinct from the trading venues of its
competitors in one essential respect--the integration of human judgment
into the price discovery process at a single, physical point of sale
for each security.\39\ This product stands more or less alone among a
diverse array of completely automated execution venues available to
investors today. It is important to note that the nature and extent of
the integration of human judgment, delivered through DMMs and Floor
brokers, is driven by the demands of informed consumers--there is no
shortage of competing execution venues that have no DMMs, Floor brokers
or substantial equivalents. Moreover, those market participants who
choose to trade on the Exchange have no obligation to utilize the
services of a Floor broker, or to use those services in a particular
way. Whether and how Floor brokers are used today reflects directly, in
other words, the judgment of market participants as to the value the
Floor adds.
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\39\ See S. Rept. 94-75 (1975) (``This is not to say that it is
the goal of [the 1975 Amendments] to ignore or eliminate
distinctions between exchange markets and over-the-counter markets
or other inherent differences or variations in components of a
national market system. Some present distinctions may tend to
disappear in a national market system, but it is not the intention
of the bill to force all markets for all securities into a single
mold.'')
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As demonstrated below, this wholly consensual integration of human
judgment at the point of sale, and in particular the visibility of
certain limited order information discussed herein to DMMs and Floor
brokers, serve legitimate Floor functions (as well as broader market
structure goals) in three important respects. They: (1) Increase the
possibility that buyers and sellers of size positions can meet, thereby
enhancing opportunities to reduce transaction costs; (2) expedite the
discovery and resolution of errors, thereby reducing disruptive impacts
and promoting fair and orderly markets; and (3) leverage the informed
choices of users, allowing the interplay of competitive forces to
determine the scope and nature of human interaction in the price
discovery process.\40\ Acute concerns with respect to the potential
benefits of the referenced order information in the hands of DMMs and
Floor brokers, the Exchange respectfully submits, are misplaced. The
information in question would add only a view of the components and the
entering and clearing firm (not the customer) for trading interest that
is already visible in the aggregate to DMMs today. Given the clear
obligations of DMMs and the strictly agency capacity of Floor brokers,
the benefit attributable to the proposed visibility would enure to the
benefit of the customer or member placing the order, not the DMM or
Floor broker. The utility of the information, therefore, lies in its
potential to bring buyers and sellers of size together, not to
advantage intermediaries.
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\40\ See H.R. Rept. 94-229 (1975).
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Benefits of Proposed Rule to Trading Floor and Investors
The Commission's Disapproval Order focused on the availability to
DMMs and communication by DMMs to Floor brokers of disaggregated order
information (specifically, the price and size of individual orders and
the identity of the entering and clearing firms for such orders).
Before turning to the particulars of the Disapproval Order,
[[Page 25107]]
the Exchange would respectfully underscore its contention that the
acute concern with respect to the availability of disaggregated order
information to DMMs and Floor brokers is misplaced. The incremental
information to be made available is demonstrably useful to DMMs, as
illustrated in the scenarios and situations below, in bringing together
buyers and sellers of block positions and in expediting the resolution
of errors and would thereby promote both order interaction and orderly
markets. However, the information simply does not add to a DMMs trading
view in any meaningful way. It does no more than make visible to the
DMM and available to Floor brokers the component orders of trading
interest that is already visible to the DMM in the aggregate (and to
off-Floor market participants via OpenBook) and the entering and
clearing firm and Floor broker, if any. Importantly, the benefit
attributable to the availability of such information would accrue as a
practical matter to the customer or member organization behind a trade
and not to the DMM or Floor broker involved in the trade.
In finding that the proposed rule changes were not consistent with
the requirements of the Act, the Commission stated that: (1) The
Exchange and commenters had not explained how the particular
information proposed to be provided would further legitimate Floor
functions; (2) the Exchange was ``not proposing to require any
additional obligations from DMMs and Floor brokers in exchange for the
additional information''; (3) the Commission was concerned that the
benefit to Floor members of receiving disaggregated order information
may be more than slight, ``particularly with respect to less liquid
securities where order information is less likely to become rapidly
stale''; and (4) the provision of disaggregated order information to
Floor Members and, by extension exclusively to Floor broker customers
``could have a detrimental effect on competition between on-Floor and
off-Floor members of the Exchanges.'' This revised proposed rule change
addresses these concerns.
Scenarios Illustrating How the Particular Information Proposed To Be
Provided Would Further Legitimate Floor Functions
The Commission stated in the Disapproval Order that neither the
Exchange nor the commenters have explained how making available
``disaggregated information about public orders on the Exchange books
as well as Floor broker e-Quotes'' to DMMs and Floor brokers would
further legitimate Floor functions. The scenarios below illustrate how
the particular information proposed to be provided--the price and size
of individual orders, the identity of the entering and clearing firm,
and Floor broker badge number for such orders--would serve the goals of
facilitating block trades and expediting error resolution. Importantly,
each of the scenarios makes clear that the benefits to the public flow
from not only the proposed consensual availability of the information
in question for orders entered on the Floor, but also those entered by
off-Floor participants.
Scenario 1: DMM Facilitates Block Trade Between Floor Broker and
Upstairs Seller by Sharing Price, Size, and Entering Firm
Assume a pension fund customer gives Floor broker a 20,000 share
order to buy ABC, a mid-cap stock, at up to $10.08 at 11:00 a.m. when
the PBBO for the stock is $10.03 by $10.06 with 500 shares on displayed
on each side. There is no crowd at the ABC post at the time the order
is received, but Floor broker can see from the tape that the stock is
trading electronically on the Exchange. On the book a penny away from
the inside offer at $10.07, there is a sell order for 10,000 that has
been entered by Member Organization. There is no Floor broker
representing the sell order, and there are no Floor broker e-Quotes on
the book. Floor broker tells DMM for ABC that he or she represents a
buyer of size beyond the displayed market. Currently, the DMM is
permitted to inform the Floor broker of the aggregate selling interest
at different price points on the book, but may not access or provide
the identity of the Member Organization--an off-floor participant--that
entered such selling interest. Under the proposed rule, the DMM could
inform Floor broker that the off-Floor Member Organization is an
entering firm for an order to sell 10,000 shares at $10.07. Floor
broker could then contact the upstairs desk of Member Organization or
Member Organization's on-floor representative, if any, who could then
contact his or her upstairs desk, to explore a possible transaction.
Assume that the 10,000 share sell order that Member Organization
sent to the Exchange is a child of a 30,000 order entered
electronically by a mutual fund customer into Member Organization's
customer-facing execution management system with non-displayed price
discretion to $10.05. (The parent order size and price discretion
obviously would not be visible to the DMM or Floor broker.) Knowing
Member Organization's identity and the size and price of the trading
interest Member Organization has entered into Exchange systems, the
Floor broker may now contact Member Organization or Member
Organization's on-floor representative and the Floor broker can
indicate the size of the buying interest he or she is representing. In
this respect, the Floor broker now can enter into negotiations
directly, similar to how off-Floor participants, particularly broker
dealers that internalize flow from their customers, can reach out
directly to other broker dealers to negotiate block-sized trades. By
making contact, Member Organization and Floor broker may agree to do a
larger transaction at a more aggressive price. Assume Floor Broker and
Member Organization agree to 20,000 shares at $10.05.
Both sides of the trade would have secured a size transaction
within the parameters of their stated limit. More importantly, both
would have avoided the potential market impact that a series of smaller
size transactions might have produced. The transaction in all
likelihood would not have occurred without the Floor broker's knowledge
of the price and size of the order and the identity of the Member
Organization entering it. The Floor broker, in other words, would have
had no incentive to reveal that he or she represented a buyer without
the meaningful possibility of an interaction that was indicated by the
size and price of the trading interest and the identity of the Member
Organization representing it.
The Disapproval Order notes that the Commission can envision an
argument whereby enabling DMMs to see Floor broker e-Quotes or the
identity of Floor brokers would facilitate the bringing together of
buyers and sellers of large orders, apparently suggesting that limiting
DMM visibility to this Floor broker interest would serve this end of
order interaction effectively. The above scenario illustrates why
limiting access only to other Floor broker interest would ignore a
large segment of the trading population, and limit the ability of
buyers and sellers to negotiate directly, regardless of their location.
Specifically, allowing DMMs to access the disaggregated information of
off-Floor participants permits DMMs to facilitate block transactions
between Floor brokers and those same off-Floor participants. In the
above scenario, the member organization that has not elected to utilize
a Floor broker is still able to benefit from the proposed rule changes
by permitting his order information to be relayed to Floor brokers on a
disaggregated basis. And importantly, the member organization
[[Page 25108]]
has permitted the order information to be relayed on a disaggregate
basis: if the member organization determines that the cost of exposing
an order on a disaggregated basis outweighs any potential benefit, then
the member organization can enter the order dark. Thus, the member
organization can determine--on an individual basis--the benefits and
costs of the permitting its own information disclosed on a
disaggregated basis. Visibility of price, size, and entering firm opens
up a wider range of wholly consensual channels of communication that
more fully and effectively enhance the potential for order interaction.
Put another way, Member Organization remains at all time in full
control of the information he or she is duty-bound to protect as agent
for the mutual fund seller--when entering the order on the Exchange and
making it visible to the DMM and Floor brokers (i.e., Member
Organization could have decided to enter the order dark), and when he
engages with Floor broker following Floor broker's initiation of
contact (i.e., Member Organization could have declined to engage with
the Floor broker when he or she initiated contact). Moreover, with
Floor broker share of Exchange volume currently at approximately 9%,
the contra-side interest represented by a Floor broker in any given
situation will likely be only a small subset of total available
interest.
Scenario 2: DMM Facilitates Block Trade by Sharing Post-Trade
Information With Floor Broker
An interaction similar to Scenario 1 could be facilitated by a DMM
sharing post-trade information with a Floor broker pursuant to the
proposed rule. Assume Floor broker has the same 20,000 share order to
buy ABC from his or her pension fund customer. Assume in this scenario
that Member Organization has no current interest entered in Exchange
systems, but was a seller on the Exchange earlier in the day. Assume
the upstairs desk of Member Organization has the same parent order of
30,000 shares of ABC as in Scenario 1. Floor broker approaches the DMM
and asks if there is enough sell-side interest to accommodate. DMM
tells Floor broker that there is no interest to accommodate, but that
Member Organization was a seller earlier in the day. As in Scenario 1,
assume there is no Floor broker representing the seller. Floor Broker
approaches the upstairs desk of Member Organization or Member
Organization's on-floor representative, if any, who could then contact
his or her upstairs desk, and achieves the same result as in Scenario
1. As with Scenario 1, the benefit of the interaction illustrated here
stems from the consensual availability of information related to orders
entered by an off-Floor participant.
Scenario 3: DMM Facilitates Block Issuer Repurchase Transaction by
Sharing Price, Size, and Entering Firm
Assume an Exchange-listed issuer engages a Floor broker to handle a
Rule 10b-18 repurchase with a goal of repurchasing 500,000 shares at a
maximum price of $10.15. Assume the highest current independent
published bid is $10.03, the last independent transaction price
reported was $10.08, and the offer is quoted at $10.07. The issuer
wishes to make a block purchase of up to 100,000 at $10.07 or
better.\41\ The Floor broker approaches the DMM and asks about selling
interest at the $10.07 price level. Under the proposed rule, the DMM
could inform Floor broker that Member Organization is a seller of
10,000 shares at $10.07. Assume as in the prior scenarios that there is
no Floor broker representing the selling interest and that the Floor
broker initiates contact with the upstairs desk of Member Organization
or Member Organization's on-floor representative, if any, who could
then contact his or her upstairs desk, and finds additional selling
interest upstairs as in Scenario 1. Assume the Floor broker and Member
Organization agree upon a transaction of 100,000 shares at $10.07.
---------------------------------------------------------------------------
\41\ Rule 10b-18 provides an issuer with a safe harbor from
liability under Section 9(a)(2) of the Act and Rule 10b-5 under the
Act based on the manner, timing, price, and volume of their
repurchased when in accordance with Rule 10b-18's conditions. Rule
10b-18(b)(4) provides the condition that the total volume of the
purchases cannot exceed 25 percent of the average daily total volume
for that security; however, once per week the issuer may make one
block purchase without regards to the volume limit if no other Rule
10b-18 purchase takes place on the same day and the block purchase
is not included when calculating a security's four week average
daily total volume.
---------------------------------------------------------------------------
In this scenario, the issuer receives a large fill at better than
the last independent transaction price, and both sides have minimized
the impact of their transaction. As the Commission has previously
stated in considering block purchases by issuers, ``the market impact
of a block purchase is likely to be less than that of a series of
purchases of smaller amount that in the aggregate are equal in size to
the block but are accomplished over a period of time.'' \42\ As with
Scenarios 1 and 2, the benefit to the repurchasing issuer and the
seller illustrated here stems from the consensual availability of
information related to orders entered by an off-Floor participant.
---------------------------------------------------------------------------
\42\ Exchange Act Release No. 17222 (October 17, 1980) (``10b-18
Proposing Release''). Rule 10b-18 was originally proposed as Rule
13e-2.
---------------------------------------------------------------------------
Situations Where DMM Access to Entering Firm's Identity Would Prevent
Errors or Expedite Resolution Thereof
In addition to promoting the interaction of buyers and sellers in
size transactions, DMM access to the identity of firms entering
individual orders would improve a DMM's ability to identify erroneous
trades and to intervene where entering firms, whether a Floor broker or
off-Floor participant, are experiencing technology problems. The
proposed visibility would expedite the identification and possible
prevention of such errors. Moreover, the Exchange's recent experience
in identifying the source of millions of unintended trades in more than
150 symbols attributable to a member's software malfunction \43\
confirms the potential contribution of the proposed visibility to the
diagnosis and resolution of problems and the maintenance of orderly
markets. Specifically, in that situation, the DMMs were the first to
identify the anomalous trades and report the trades to Exchange
officials. The Exchange believes that had DMMs also been able to see
the commonality of the entering firm in the spike of incoming orders,
the source of the disruption may have been identified more quickly,
potentially avoiding millions of dollars in firm losses. Finally,
entering firm information can serve to mitigate the effect of less
severe but still important technology problems, such as Floor broker
handheld outages. DMMs currently are unable to identify individual
Floor broker orders and cancel them during handheld outages; the
proposed rule would enable them to perform this important function.
---------------------------------------------------------------------------
\43\ Loss Swamps Trading Firm, Wall Street Journal, August 2,
2012.
---------------------------------------------------------------------------
Burdens Placed on DMMs and Floor Brokers
The Disapproval Order notes that the Exchange was ``not proposing
to require any additional obligations from DMMs and Floor brokers in
exchange for the additional information.'' \44\ As noted
[[Page 25109]]
above, the Exchange does not believe the additional information adds
meaningfully to the trading view of the DMM, and that any such addition
would benefit customers, not DMMs and Floor brokers. Indeed, the
function of providing disaggregated order information to Floor brokers
upon request would be an administrative burden to DMMs rather than a
benefit. Additionally, as noted above, Floor brokers, as agents, would
receive no benefit attributable to the information, as such benefit
would flow directly and entirely to the customer whose order they are
representing and the contra side to it. Moreover, the Exchange
believes, based on fundamental changes in the competitive context since
the approval of the New Market Model and the continuing and significant
obligations of DMMs and Floor brokers, that the proposed availability
of disaggregated order information would not constitute a
disproportionate benefit. In other words, the potential value of the
information in question has been substantially diminished since 2006 in
that that DMMs only have information about orders at the Exchange,
which represent approximately 22% of market-wide volume in Exchange-
listed stocks across the market.
---------------------------------------------------------------------------
\44\ See Disapproval Order at 10. The Exchange believes that a
close reading of the precedent indicates that this level of scrutiny
of the incremental obligations associated with a proposal such as
this one is not required. The source of the scrutiny stems from New
Market Model Order in which the NYSE proposed fundamental structural
changes, including phasing out the specialist system and a wholesale
alteration of the NYSE's historic priority and parity rules. See
Securities Exchange Act Release No. 58845, 73 FR 64379 (October 29,
2008) (``New Market Model Release''). What was proposed in the New
Market Model, in other words, called for a review by the Commission
that was necessarily intense, in stark contrast with the modest
changes proposed here. Additionally, in support of what would be
regarded as ``special advantages'' and ``rewards that are not
disproportionate to the services provided,'' the Commission
previously cited a series of orders approving proposals that
generally involve the creation or registration of a new class of
market maker or participation of an existing class in a new market.
Those proposals, similar to the New Market Model, were structural in
nature and in stark contrast to the limited nature of this proposed
rule change. Furthermore, the principal market participant impacted
by the present proceeding, Floor brokers, is not a market maker at
all, but an agent, rendering much of the referenced precedent
factually distinct. Accordingly, the Exchange respectfully suggests
that the level of scrutiny associated with the precedents cited is
not required here.
---------------------------------------------------------------------------
Notwithstanding the DMM's evolving role in the overall trading of
Exchange-listed securities, the obligations and restrictions placed on
DMMs and Floor brokers have remained unchanged. In addition, the manual
process by which disaggregated order information is accessed reduces to
a minimum any potential benefit. As demonstrated by the scenarios
above, perhaps its principal value is the opportunity it offers to open
a consensual dialogue with a counterparty--an opportunity aligned with
both the interests of other Floor and non-Floor members as well as
investors. The disaggregated order information, while inconsequential
from a trading perspective, is thus important administratively in
clearing the way to size interactions, reducing transaction costs, and
enhancing the quality of the Exchange's market.
Specifically, with respect to the continuing and significant
burdens on DMMs, pursuant to NYSE MKT Rule 104--Equities, a function of
a DMM is:
[T]he maintenance, in so far as reasonably practicable, of a
fair and orderly market on the Exchange in the stocks in which he or
she is so acting. The maintenance of a fair and orderly market
implies the maintenance of price continuity with reasonable depth,
to the extent possible consistent with the ability of participants
to use reserve orders, and the minimizing of the effects of
temporary disparity between supply and demand. In connection with
the maintenance of a fair and orderly market, it is commonly
desirable that a member acting as DMM engage to a reasonable degree
under existing circumstances in dealings for the DMM's own account
when lack of price continuity, lack of depth, or disparity between
supply and demand exists or is reasonably to be anticipated.\45\
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\45\ See NYSE Rule 104(a)(1)--Equities.
Additionally, any transaction by a DMM for the DMM's account must
``be effected in a reasonable and orderly manner in relation to the
condition of the general market and the market in the particular
stock.'' \46\
---------------------------------------------------------------------------
\46\ See NYSE Rule 104(g)--Equities.
---------------------------------------------------------------------------
Furthermore, the Exchange notes that any non-public market
information that a DMM receives through Exchange systems would be
subject to specific restrictions as ``non-public order information''
\47\ under NYSE MKT Rule 98--Equities. For example, Rule 98(c)(2)(A)--
Equities would require DMMs to maintain the confidentiality of any such
non-public market information and would prohibit the DMM member
organization's departments, divisions, or aggregation units that are
not part of the DMM unit, including investment banking, research, and
customer-facing departments, from having access to that information. In
addition, Rule 98--Equities sets forth restrictions on access to non-
public order information by the off-Floor locations of a DMM unit,
including restrictions on the ability of a DMM located on the Trading
Floor from communicating directly with off-Floor individuals or systems
responsible for making off-Floor trading decisions.\48\
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\47\ NYSE Rule 98(b)(7)--Equities defines the term ``non-public
order'' to mean ``any order, whether expressed electronically or
verbally, or any information regarding a reasonably imminent non-
public transaction or series of transactions entered or intended for
entry or execution on the Exchange and which is not publicly
available on a real-time basis via an Exchange-provided datafeed,
such as NYSE OpenBook[supreg] or otherwise not publicly available.
Non-public orders include order information at the opening, re-
openings, the close, when the security is trading in slow mode, and
order information in the NYSE Display Book[supreg] that is not
available via NYSE OpenBook[supreg].''
\48\ See Rules 98(d)(2)(B)(i)-(iii), (f)(1)(A)(i)-(ii), and
(f)(3)(C)(ii)--Equities. In addition, Rule 98(c)(2)(A)(ii)--Equities
provides that a DMM may make available to a Floor broker associated
with an approved person or member organization any information that
the DMM would be permitted to provide under Exchange rules to an
unaffiliated Floor broker.
---------------------------------------------------------------------------
The manner by which the DMM would access disaggregated order
information aligns precisely with the information's relative lack of
trading utility and its administrative significance in facilitating
size interactions. A DMM can access the disaggregated order information
only while located at the post on the Trading Floor, and a DMM's
ability to access the disaggregated order information is largely
manual. The DMM must query the specific information about a particular
security, which limits the number of securities about which
disaggregated order information can be accessed at any given time.
Importantly, Exchange systems would not provide disaggregated order
information to the algorithmic trading systems of any DMM unit,\49\ and
would not support any electronic dissemination of the disaggregated
order information to other market participants. As noted above,
participants who do not want the DMM to have access to disaggregated
order information have the option to enter dark interest that is not
visible to the DMM in disaggregated form. The Exchange also notes that
the proposed rule change would specifically prohibit DMMs from using
any trading information available to them in Exchange systems,
including disaggregated order information, in a manner that would
violate the Exchange rules or federal securities laws or
regulations.\50\
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\49\ The order information in these systems would be available
for a DMM to view manually at the post and as such is different from
the advance order-by-order information that DMM trading algorithms
previously received before implementation of the New Market Model
pilot (sometimes referred to as ``the look''). Under the proposed
rule change, as is the case today, DMM trading algorithms would have
the same information with respect to orders entered on the Exchange,
Floor broker agency interest files or reserve interest as is
disseminated to the public by the Exchange. See Rule 104(b)(iii)--
Equities.
\50\ See Proposed NYSE MKT Rule 104(j)(ii)--Equities.
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Benefit to Floor of the Proposed Availability of Disaggregated Order
Information
The Disapproval Order also raised concerns about the possible
benefit to Floor members of the proposed availability of order
information, stating that the benefit to Floor members may
[[Page 25110]]
be more than slight, ``particularly with respect to less liquid
securities where order information is less likely to become rapidly
stale.'' Respectfully, the Commission's concern about the possible
benefit to Floor members is misplaced, irrespective of whether the
security is highly liquid or less liquid.
It has been noted above, but is worth stressing, that DMMs
currently have access to aggregated order information that fully
reflects the size of trading interest for a particular security on the
Exchange that has not been designated as dark by the entering firm.
Similarly, such aggregated information for interest not marked dark is
visible to any market participant beyond the Floor via OpenBook. What
is proposed, therefore, is not making a new segment of trading interest
visible to DMMs, but rather making the components of already visible
trading interest available, along with the entering firm, clearing
firm, and badge number of the Floor broker, if any. Since the proposal
would not increase the visibility of trading interest in less liquid
securities, the question of whether such information is more or less
likely to remain fresh or become stale is not at issue in a meaningful
way. The point of the proposed availability of order information is to
enable Floor brokers to search more effectively for size counterparties
for their customers and to expedite the ability of DMMs to resolve
errors, not to improve the trading position of DMMs.
Moreover, the question of staleness is further beside the point
when one remembers that DMM trading today is predominantly automated
and algorithmic. Even if the proposed visibility included trading
interest that was not currently visible--it does not--DMMs as a
practical matter would need to integrate such information into their
automated trading models to use it. Exchange systems, however, would
specifically prevent such use.
To the extent that the Commission is concerned that a DMM could
otherwise use the proposed incremental information for trading
purposes, it is useful to consider the premise apparently underlying
the concern. The premise is presumably that learning the component
sizes of trading interest that is already visible in the aggregate, or
that learning the identity of the entering firm, clearing firm, or the
Floor broker for a component order, could somehow add sufficiently to
the DMMs view of the market to induce the DMM to trade on the same side
or opposite side of a component order. The Exchange is aware of no
facts, data or analyisis that would support such a premise.
Additionally, firms already advertise many of these particulars of
their trading interest on both a pre- and post-trade basis (IOIs and
other forms) through a variety of electronic vendor solutions, such as
Bloomberg \51\ and Autex.\52\ Therefore, the ability and willingness of
firms to advertise their interest is hardly a new concept in today's
marketplace. The proposal would simply restore within the Exchange
environment features and services previously available on the Floor and
currently offered beyond the Floor by multiple market data vendors.
---------------------------------------------------------------------------
\51\ Bloomberg allows brokers to disseminate IOIs to the buy-
side via Bloomberg's Execution Management Solutions.
\52\ Autex is an electronic platform from Thomson Financial that
allows potential buyers and sellers to identify other large traders
by showing ``trade advertisements'' in a stock. The interface
presents indicators of interest among traders, permitting buy-side
clients to identify optimum trading partners.
---------------------------------------------------------------------------
Moreover, the balance of benefits and potential costs would favor
unambiguously a choice on the part of a member or customer to make
disaggregated order information visible to the DMM and available to
Floor brokers. As illustrated in detail by Scenarios 1 and 2 above, the
potential benefits to a customer of sharing disaggregated order
information (again, by choosing not to enter the order dark) would be
both significant and concrete. A member's sharing of a customer's order
information, for example, would make it possible for contra side
interest to initiate contact with the member and for the customer to
experience a size transaction that avoids market impact and reduces
transaction costs. In contrast, the potential cost of sharing the
information would be de minimis because the component order information
would add nothing meaningful to the information reflected in the
aggregate trading interest already visible to DMM and to the market via
OpenBook. More fundamentally, members today can choose from an array of
alternatives to the Exchange's integration of human judgment into the
price discovery process at a single, physical point of sale. That
choice represents the ultimate check on any imbalance in the allocation
of benefits to DMMs or Floor brokers.
It is also worth noting that the utility of disaggregated order to
the Floor is largely independent from its freshness or staleness as
trading information. Information that is stale in trading terms, for
example, may nonetheless be enormously helpful to an agent like a Floor
broker in the search for a size counterparty. Assume, for instance,
that there is no live interest expressed in the Display Book at or near
a particular price point. It may nonetheless be useful for a Floor
broker to know that a particular firm had entered an order in the
security at a particular level a day or two before. Knowing the
identity of the entering firm could allow a Floor broker to identify a
counterparty in much the same way as Scenario 1 above, producing the
same size interaction and reduced transaction costs for both sides of
the trade. Notably, this utility is also distinct from how actively
traded a particular security is.
Moreover, Section 11(a) obligations on Floor brokers ensure that
investors, not Floor brokers, will reap the benefits of access to the
disaggregated order information, providing that Floor brokers will not
``effect any transaction on [the] exchange for its own account . . .
.'' \53\ This trading restriction has been in place since 1978, when
Floor brokers regularly had access to disaggregated order information
on the Floor. NYSE amended NYSE Rule 115 regarding what information
could be provided in connection with a market look because, at the
time, NYSE did not have the technology to replicate the ability of
Floor brokers to maintain certain interest as ``dark.'' Although NYSE
reduced the access to information available to Floor brokers--which was
always via the specialist, and now, DMM--the trading restrictions were
not lessened. Now that NYSE and the Exchange have enabled market
participants to replicate electronically the type of dark interest
formerly maintained manually by Floor brokers, the Exchange can restore
the access to disaggregated order information without any need to
adjust the applicable trading restrictions. These applicable trading
restrictions provide assurance that the Floor brokers will not be
reaping the benefits of access to disaggregated order information; the
benefits will directly flow to investors.
---------------------------------------------------------------------------
\53\ 15 U.S.C. 78k(a) (2012).
---------------------------------------------------------------------------
Existing trading restrictions and the additional affirmative
obligations required by the New Market Model provide appropriate
controls, ensuring that the adoption of Rule 104(j)--Equities meets the
requirements of Section 6(b)(5) of the Act. As previously enumerated,
DMMs are subject to a number of restrictions governing access to non-
public order information that remains unchanged since before the
adoption of the New Market Model, and which were put in place when DMMs
still had an agency role. Even though they no longer act as agents,
DMMs are still subject to those trading restrictions. The rules of the
Exchange are designed such that any additional access by
[[Page 25111]]
DMMs and Floor brokers to information not available generally to off-
Floor traders carries with it restrictive obligations regarding the
permitted use of such information.
Floor Competition With Off-Floor Members
The Disapproval Order expresses concern about the provision of
disaggregated order information to Floor Members and, by extension,
exclusively to Floor broker customers and the potential ``detrimental
effect on competition between on-Floor and off-Floor members of the
Exchanges.'' Several points bear emphasis here. The Floor broker's
ability to share information in this way aligns with the agency
relationship between the Floor broker and his or her customer, and is
complementary to other affected market participants. That is, the
agent-Floor broker is enabled to make full disclosure to his or her
principal-customer. The customer, given his or her own trading
interest, has an interest in not disseminating the information learned
from the Floor broker. The member organization and the member
organization's customer benefit in that the Floor broker's customer
potentially could initiate direct contact with the member organization.
In this way, the Floor broker's sharing of this type of information
with the customer provides a sort of check of the principal on the
agent and ensures that the agent adds value. The Exchange's integration
of human judgment into a point of sale occurs, in other words, within a
competitive landscape filled with customer choice among both exchange
and off-exchange venues. The modest increase in visibility offered by
the proposed rules, especially in light of increasing dispersal of
liquidity, in no way upsets that competitive balance.
In addition, extending the proposed visibility to other off-Floor
participants presents obvious dangers. NYSE MKT Rules 98--Equities and
104(b)--Equities are not applicable to other proprietary traders, for
example. Accordingly, if disaggregated information were provided
electronically to all market participants, there would be no mechanism
or informational barrier ensuring that the disaggregated information
could only be used for the benefit of investors. Rule 104(j)'s success
in protecting investors and the public interest is directly tied to its
limited access.
Finally, any off-Floor member is free to utilize the services of a
Floor broker, in which case, the benefits of the proposed rule change
would flow entirely to the off-Floor member (or the customer entering
the order). Additionally, the benefits of the proposed rule change
still inure to those participants who choose not to utilize Floor
brokers because Floor brokers may source liquidity from those
participants. The proposed rule change is not a zero-sum game: the
benefits of the proposal are spread across market participants, not
limited to a select few at the expense of others.
Conforming Amendments
To reflect the information that would be available to DMMs through
Exchange systems, the Exchange proposes amendments to Rules 70(e), (f)
and (i)--Equities and 70.25(a)(vii)--Equities to specify which
information is available to a DMM through Exchange systems. The
Exchange also proposes changes to Rule 70--Equities to specify what
information about e-Quotes is available to the DMM. The Exchange notes
that the proposed amendments to Rule 70--Equities do not change the
operation of the existing rule, other than to specify which interest
may be available to the DMM on a disaggregated basis, as discussed
above. Rather, the amendments are proposed as clarifying changes with
respect to the manner that Floor broker agency interest currently
operates and how such interest may be available to the DMM. For
example, current Rule 70(e)--Equities states that a Floor broker has
discretion to exclude all of his or her agency interest, subject to the
provisions in the rule, from the aggregated agency interest information
available to the DMM consistent with Exchange rules governing Reserve
Orders. Because ``excluding'' interest from the information available
to the DMM is similar to how Reserve Orders operate pursuant to Rule
13--Equities, the Exchange proposes to harmonize the terms and use term
``e-Quote'' to replace the term ``Floor broker agency interest,'' use
the term ``Minimum Display Reserve e-Quote'' to replace the concept in
current Rule 70(f)(ii)--Equities, and use the term ``Non-Display
Reserve e-Quotes'' to replace the concept in current Rule 70(f)(i)--
Equities. The Exchange also proposes to provide more specificity in
amended Rule 70--Equities of how such interest would be made available
to the DMM, consistent with the current operation of the Rule.
In addition, the Exchange proposes to delete Rule 104(a)(6)--
Equities, which currently provides that DMMs, trading assistants and
anyone acting on their behalf are prohibited from using the Display
Book[supreg] system to access information about Floor broker agency
interest excluded from the aggregated agency interest and Minimum
Display Reserve Order information other than for the purpose of
effecting transactions that are reasonably imminent where such Floor
broker agency and Minimum Display Reserve Order interest information is
necessary to effect such transaction.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the requirements of Section 6(b) of the Act,\54\ in general, and
Section 6(b)(5) of the Act,\55\ in particular, in that it is designed
to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism for a free and open market and
a national market system and, in general, to protect investors and the
public interest.
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\54\ 15 U.S.C. 78f(b).
\55\ 15 U.S.C. 78f(b)(5).
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Specifically, the Exchange believes that the proposed change
promotes just and equitable principles of trade because the proposed
change is an integration of human judgment into the price discovery
process at a single, physical point of sale, whose nature and extent is
driven by the demands of informed consumers. With no shortage of
competing execution venues and the lack of an obligation on the part of
market participants to utilize the services of a Floor broker, whether
and how Floor brokers are used reflect the value placed by market
participants on what the Floor adds. The wholly consensual integration
of human judgment will serve legitimate Floor functions in three
respects: (1) It increases the possibility that buyers and sellers of
size positions can meet, thereby enhancing their opportunities to
reduce transaction costs; (2) it expedites the discovery and resolution
of errors, thereby reducing disruptive impacts and promoting fair and
orderly markets; and (3) it leverages the informed choices of users,
allowing the interplay of competitive forces to determine the scope and
nature of human interaction in the price discovery process.
Similarly, the Exchange believes that the proposed change will
protect investors and the public interest because existing trading
restrictions and additional affirmative obligations required by the New
Market Model provide appropriate controls. As previously stated, DMMs
are subject to a number of restrictions governing access to non-public
order information. Additionally, the rules of the Exchange are designed
such that any additional access by DMMs and Floor brokers to
information not available generally to
[[Page 25112]]
off-Floor traders carries with it restrictive obligations regarding the
permitted use of such information.
Additionally, the Exchange believes that the proposed change will
remove impediments to, and perfect the mechanisms of, a free and open
market and a national market system because the proposed change
clarifies that DMMs may perform certain defined Trading Floor
functions, which were previously performed by specialists, in
furtherance of the efficient, fair, and orderly operation of the
Exchange. Increasing the amount of information, including disaggregated
order information, that a DMM is permitted to view and provide to Floor
brokers would further the ability of DMMs to carry out the defined
Trading Floor functions and, as a result is designed to remove
impediments to and perfect the mechanism of a free and open market
through the efficient operation of the Exchange, in particular by
facilitating the bringing of buyers and sellers together.
The Exchange also believes that the proposed change is equitable
and not unfairly discriminatory because extending the proposed
visibility to other off-Floor participants presents obvious dangers:
NYSE MKT Rules 98--Equities and 104(b)--Equities are not applicable to
other proprietary traders, and if disaggregated information were
provided electronically to all participants, there would be no
mechanism or informational barrier ensuring that the disaggregated
information could only be used for the benefit of investors.
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. The Exchange believes that
the proposed rule change will facilitate the execution of block trades,
and as a result, will reduce the market impact and associated
transactions costs for members wishing to take advantage of the rule
proposal. The reduction of transaction costs, along with the proposal's
other purpose of expediting error resolution, will improve the
efficiency of the market and remove barriers to order execution, thus
increasing the level of participation and competition in the
marketplace.
The Exchange operates in a highly competitive market in which
market participants can easily and readily direct order flow to
competing venues. The Exchange's integration of human judgment into a
point of sale occurs within that competitive landscape filled with
customer choice among both exchange and off-exchange venues. The modest
increase in visibility offered by the proposed rules, especially in
light of increasing dispersal of liquidity, in no way upsets that
competitive balance.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
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-NYSEMKT-2013-25 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-NYSEMKT-2013-25. 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
a.m. and 3 p.m. Copies of the filing will also 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-NYSEMKT-2013-25 and should
be submitted on or before May 20, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\56\
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\56\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-10016 Filed 4-26-13; 8:45 am]
BILLING CODE 8011-01-P