[Federal Register Volume 78, Number 147 (Wednesday, July 31, 2013)]
[Notices]
[Pages 46399-46402]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-18345]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70037; File No. SR-NYSEMKT-2013-62]
Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and
Immediate Effectiveness of Proposed Rule Change Adding a New Rule To
Codify Existing Price Protection Mechanisms
July 25, 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 July 17, 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. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C.78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to add a new rule to codify existing price
protection mechanisms. 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange is proposing to add Rule 967NY to codify and clarify
price protection mechanisms already in use on the Exchange. The
Exchange has in place various price check parameter features that are
designed to help maintain a fair and orderly market by preventing
incoming options orders from automatically executing at potentially
erroneous prices. The Exchange believes that the features assist with
the maintenance of fair and orderly markets by helping to mitigate the
potential risks associated with orders sweeping through multiple price
points, thereby resulting in executions at prices that are away from
the last sale price or best bid or offer and that are potentially
erroneous. The Exchange is proposing to add a new rule to codify
existing price check protection and order handling features to provide
clarity on the operation of the functionality.
Trading Collars
The Exchange applies a ``Trade Collar Protection'' mechanism that
prevents the immediate execution of incoming market orders or
marketable limit orders (``marketable orders'') outside of a specified
parameter (referred to as a ``Trading Collar''). Pursuant to proposed
Rule 967NY(a)(3), the Trade Collar Protection mechanism is not
available for quotes \4\ or for orders with execution conditions IOC,
AON, FOK and NOW.\5\
---------------------------------------------------------------------------
\4\ Market Makers have obligations to provide liquidity through
the quoting obligations set forth in Rule 925.1NY. The Exchange does
not believe it is necessary to provide Trade Collar Protection to
quotes, as they may be priced to address dislocation in the market.
The Exchange provides Market Makers with a dedicated trade
protection mechanism set forth in Rule 928NY.
\5\ IOC, AON, FOK or NOW are time in force indicators added to
orders that notify the Exchange that the order is not eligible for
Trade Collar Protection. When Trade Collar Protection does not
apply, marketable orders will receive an immediate execution. The
Exchange does not believe that Trade Collar Protection is necessary
for orders with IOC, FOK, or NOW instructions because by definition,
those orders are intended to access all availability liquidity
without delay and cancel if they do not execute. Because Trade
Collar Protection may hold a market or marketable limit order for
execution, the Exchange believes that it would contradict the
explicit instruction of a customer using IOC, FOK, or NOW
instructions (immediately execute or cancel). The Exchange further
believes that the Trade Collar Protection is not necessary for AON
orders because by definition, an AON order must meet sufficient size
before executing, and so partial executions at multiple price points
would contradict the explicit instruction of a customer using an AON
instruction.
---------------------------------------------------------------------------
Trading Collars are determined by the Exchange on a class-by-class
basis and, unless announced otherwise via Trader Update, are the same
value as the bid-ask differential guidelines established pursuant to
Rule 925NY(b)(4), as set forth in proposed Rule 967NY(a)(2). For
example, Rule 925NY(b)(4) sets the bid-ask differential for an option
priced less than $2.00 at $0.25. For any option that
[[Page 46400]]
has a bid less than $2.00, the Trading Collar will be $0.25.
Accordingly, if the National Best Bid and Offer (``NBBO'') for XYZ is
$0.75 bid and $1.75 offer, any marketable orders the Exchange receives
will be subject to a $0.25 Trading Collar.\6\ If necessary to preserve
a fair and orderly market,\7\ the Exchange may, with the approval of
two Trading Officials,\8\ widen or narrow the Trading Collar for one or
more option series.\9\
---------------------------------------------------------------------------
\6\ The bid-ask differential changes as the price increases.
Rule 925NY(b)(4) sets the bid-ask differential at no more than $0.40
where the bid is $2.00 or more but does not exceed $5.00.
Accordingly, if the NBBO for XYZ is $3.00 bid and $3.50 offer, any
marketable orders the Exchange receives will be subject to a $0.40
Trading Collar Protection.
\7\ As an example, situations of extreme market volatility or a
major news announcement in an underlying security may prompt a
review of the Trading Collar values.
\8\ A Trading Official, as defined by Rule 900.2NY(82) is an
officer or employee of the Exchange. Trading Officials are not
affiliated with ATP Holders.
\9\ If the Exchange announces by Trader Update that the Trading
Collars are being modified outside the bid-ask differential
guidelines established pursuant to Rule 925NY(b)(4), the Exchange
will publish a Trader Update that advises ATP Holders when the
Trading Collars will return to the bid-ask differential guidelines
set forth in Rule 925NY(b)(4). The Exchange will maintain records
regarding when and why a Trading Collar may be modified and will
make such records available to NYSE Regulation.
---------------------------------------------------------------------------
Trade Collar Protection applies to two scenarios. First, pursuant
to proposed Rule 967NY(a)(1)(i), Trade Collar Protection prevents
executions of certain incoming marketable orders when the difference
between the National Best Offer (``NBO'') and the National Best Bid
(``NBB'') is greater than one Trading Collar. Second, pursuant to
proposed Rule 967NY(a)(1)(ii), Trade Collar Protection prevents the
execution of the balance of an incoming marketable order if it were to
execute at a price that is the NBO plus a Trading Collar for eligible
marketable buy orders (or a price that is the NBB minus a Trading
Collar for eligible marketable sell orders).
The purpose of Trade Collar Protection in the first scenario, set
forth in proposed Rule 967NY(a)(1)(i), is to prevent executions when
the spread between the bid and ask exceeds the bid-ask differential
guidelines and to provide an opportunity to attract additional
liquidity at tighter spreads by displaying the incoming marketable
order at successive prices until the displayed bid and offer is equal
to the bid-ask differential guideline for that option, i.e., equal to
the Trading Collar. Accordingly, if the difference between the NBO and
the NBB is greater than one Trading Collar, the Exchange will prevent
execution or routing of the incoming marketable order. Instead,
pursuant to proposed Rule 967NY(a)(4)(A), the Exchange will display the
incoming marketable order at a price equal to the NBO minus one Trading
Collar for sell orders or the NBB plus one Trading Collar for buy
orders (the ``collared order''). The Exchange will then attempt to
execute or route the collared order to buy (sell) against any contra
interest priced within one Trading Collar above (below) the displayed
price of the collared order.\10\ As set forth in proposed Rule
967NY(a)(4)(C)(iii), should market conditions prevent the order from
trading or recalculating for a period of one second,\11\ the order will
improve its displayed price by an amount equal to an additional Trading
Collar. In accordance with proposed Rule 967NY(a)(D), if the order
subject to Trade Collar Protection is a limit order, the order will not
be posted at a price beyond its limit. Once the limit price is reached
through the re-pricing of a collared order, the order will be posted
and displayed at its limit price in the Consolidated Book. Until there
is an opportunity to execute consistent with the parameters of Trade
Collar Protection, the Exchange will not execute or route market orders
or eligible limit orders that would execute outside it. As new prices
are calculated, the Exchange will continue to evaluate whether the
marketable orders may execute consistent with Trade Collar Protection.
---------------------------------------------------------------------------
\10\ See, proposed Rule 967NY(a)(4)(B).
\11\ The Exchange believes that displaying the order for one
second before recalculating to the next Trading Collar provides an
appropriate length of time to attract additional contra-side
liquidity for that option.
---------------------------------------------------------------------------
In the above example of the NBBO for XYZ being $0.75 bid and $1.75
offer with a $0.25 Trading Collar, an incoming market order to sell
will be displayed at $1.50 (i.e., $1.75 offer minus the $0.25 Trading
Collar). For a period of one second, the Exchange will attempt to
execute the sell order against any contra interest (on any market)
priced $1.25 or greater (i.e., $1.50 offer minus the $0.25 Trading
Collar). At the expiration of one second, the Exchange will redisplay
the market sell order subject to Trade Collar Protection at the next
Trading Collar value of $1.25. For a period of one second, the Exchange
will then attempt to execute the sell order against any contra interest
priced $1.00 or greater ($1.25 offer minus the $0.25 Trading Collar).
At the expiration of another one second, the Exchange will redisplay
the market sell order subject to Trade Collar Protection at $1.00.
Assuming the hypothetical market remained unchanged, the new market
would be $0.75-$1.00. Since the market would now equal the $0.25 bid-
ask differential guidelines established pursuant to Rule 925NY(b)(4),
Trade Collar Protection would no longer apply and the market order
would immediately execute against the $0.75 bid.
The collared order will re-price before the expiration of one
second as a result of certain changes in the market. Pursuant to
proposed Rule 967NY(a)(4)(C)(i), an update to the NBBO (based on
another market center or an inbound quote or order on the Exchange)
that improves the same side of the market as the collared order will
cause the collared order to be redisplayed at the same price as the
updated NBBO. In accordance with proposed Rule 967NY(a)(4)(C)(ii), an
inbound limit order (which is not an IOC Order, AON Order, FOK Order or
NOW Order) on the same side of the market priced better than one
Trading Collar from the collared order will also become subject to
Trade Collar Protection and will cause the collared order to improve by
one Trading Collar (which will redisplay at the new price and
additional size of the new limit order). A new incoming market order on
the same side as a collared order will not cause the order subject to
Trade Collar Protection to be recalculated (but will redisplay with the
additional size of the new market order).\12\ As set forth in proposed
Rule 967NY(a)(6), the order that has been held subject to the Trading
Collar retains priority over later arriving quotes and all orders,
except those with execution conditions IOC, AON, FOK or NOW.\13\
---------------------------------------------------------------------------
\12\ See, proposed Rule 967NY(a)(4)(C)(iv).
\13\ As stated above, orders with execution conditions IOC, AON,
FOK and NOW are not eligible for Trade Collar Protection. As such,
marketable orders with these conditions will receive an immediate
execution (even if there is an order held subject to the Trading
Collar).
---------------------------------------------------------------------------
As an example, if the NBBO is $0.25 bid and $2.00 offer with a
$0.25 Trading Collar, a new incoming market order to buy 100 contracts
will be displayed at $0.50. If the NBBO becomes a $1.00 bid and $2.00
offer (via an updated quote from a market maker or another market
center), the market order subject to the Trading Collar will redisplay
at $1.00. If, instead, a limit order to buy was received with a limit
price of $1.00, the market order and the limit order will redisplay
with combined size at $0.75 (for which the market order will have
priority over the later arriving limit order). If, however, the limit
order to buy was received with a limit price of $0.60, the market order
and the limit
[[Page 46401]]
order will redisplay with combined size at $0.60 (for which the market
will have priority over the later arriving limit order).
The purpose of Trade Collar Protection in the second scenario, set
forth in proposed Rule 967NY(a)(1)(ii), is to prevent an order from
executing at prices away from the market after exhausting interest at
or near the top of the book. Trade Collar Protection seeks to provide
an opportunity for liquidity to reenter the market creating tighter
spreads by displaying the partially executed marketable order instead
of allowing it to further execute. When the difference between the NBB
and NBO is within the bid-ask differential guidelines and after an
incoming marketable order executes against the NBB or NBO, Trade Collar
Protection prevents execution of the balance of that incoming order at
prices that are a Trading Collar above the NBO for buy orders (or at
prices that are a Trading Collar below the NBB for sell orders).
Essentially, the Exchange will permit the immediate execution of an
incoming marketable order up to a Trading Collar away from the NBBO.
Pursuant to proposed Rule 967NY(a)(5), the balance of the partially
executed order will be subject to Trade Collar Protection and will
display at the last sale price. However, if there is an opportunity for
trading within one Trading Collar of the last sale price, the order
will continue to be displayed at the NBB (NBO) established at the time
of the initial execution. Once subject to Trade Collar Protection, the
order will follow the re-pricing mechanism described above.
As an example, assume the Exchange received a 1000 contract buy
market order for ABC when the NBBO is $1.50-$1.60 with a $0.25 Trading
Collar. The incoming 1000 contract buy market order would immediately
execute against the $1.60 offer. If there is insufficient interest at
the $1.60 offer to fill the order, the buy market order would execute
against subsequently higher offer prices. Pursuant to Trade Collar
Protection, the order would execute against all available interest up
to and including $1.85 ($1.60 offer added with the $0.25 Trading
Collar). The remaining balance of the order that could not be executed
up to and including $1.85 would then be subject to Trade Collar
Protection. The balance of the order will display at $1.85 so long as
there are no offers at $2.10 or less ($1.85 plus the $0.25 Trading
Collar). If, however, there is an offer at $2.10 or less, the balance
of the order will display at $1.60.
The Exchange believes that Trade Collar Protection applicable to
certain incoming marketable orders (i.e., orders that do not include a
time in force indicator) supports a fair and orderly market because it
prevents the execution of orders that may be potentially erroneous
while at the same time displaying such interest at sequentially tighter
increments in an effort to attract contra-side interest at prices
closer to the bid-ask differential for the option.
Limit Order Filter
As set forth in proposed Rule 967NY(b), the Exchange also employs a
filter for incoming limit orders, pursuant to which the Exchange
rejects limit orders priced a specified percentage away from the NBB or
NBO. As the Exchange receives limit orders, the Exchange System will
check the price of the limit order against the contra-side NBB or NBO
at the time of the order entry to determine whether the limit order is
within the specified percentage.
Unless determined otherwise by the Exchange and announced to ATP
Holders via Trader Update, the specified percentage will be 100% for
the contra-side NBB or NBO priced at or below $1.00 and 50% for contra-
side NBB or NBO priced above $1.00. If the limit order is priced
outside of the specified percentage, the limit order will be rejected.
For example, if the NBB is $4.00, a sell order priced at or below
$2.00, which is 50% below the NBB, would be rejected. Likewise, if the
NBO is $0.75, a buy order priced at or above $1.50, which is 100% above
the NBO, would be rejected.
The Exchange believes that this mechanism will prevent the entry of
limit orders that have similar market impact as market orders because
they are priced so far away from the prevailing market price that
execution of such orders could cause significant price dislocation in
the market. The Exchange also believes that this mechanism will further
serve to mitigate the occurrence of executions that are potentially
erroneous.
2. Statutory Basis
The statutory basis for the proposed rule change is Section 6(b)(5)
of the Securities Exchange Act of 1934 (the ``Act''), in general, and
furthers the objectives of Section 6(b)(5) \14\ which requires the
rules of an exchange to promote just and equitable principles of trade,
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. The proposed rule change also is
designed to support the principles of Section 11A(a)(1) \15\ of the Act
in that it seeks to assure fair competition among brokers and dealers
and among exchange markets. The Exchange believes that the proposed
rule assists with the maintenance of fair and orderly markets by
helping to mitigate the potential risks associated with orders sweeping
through multiple price points, thereby resulting in executions at
prices that are away from the last sale price or best bid or offer and
that are potentially erroneous, thereby protecting investors from
receiving executions away from the prevailing prices at any given time.
Specifically, the Exchange believes that holding and displaying certain
incoming marketable orders for options with a bid-ask differential
wider than one Trading Collar at successive Trading Collar prices
removes impediments to and perfects the mechanism of a free and open
market by preventing executions at potentially erroneous prices while
at the same time seeking to attract contra-side liquidity for a tighter
market. The Exchange believes that the maintenance of fair and orderly
markets is further enhanced by the ability to adjust the thresholds of
Trade Collar Protection to react to market conditions. In addition, the
Exchange believes that preventing executions of incoming marketable
orders at prices that are not [sic] more than one Trading Collar
outside of the NBBO and rejecting incoming limit orders that are priced
specified parameters away from the NBBO also assures that executions
will not occur at erroneous prices, thereby promoting a fair and
orderly market. Similarly, the Exchange believes that rejecting limit
orders priced a specified percentage away from the NBBO removes
impediments to and perfects the mechanism of a free and open market by
reducing the potential for executions at erroneous prices.
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78f(b)(5).
\15\ 15 U.S.C. 78k-1(a)(1).
---------------------------------------------------------------------------
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 not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange believes the
proposal will provide market participants with additional protection
from anomalous executions. Thus, the Exchange does not believe the
proposal creates any significant impact on competition.
[[Page 46402]]
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
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \16\ and Rule 19b-4(f)(6) thereunder.\17\
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 and Rule 19b-
4(f)(6)(iii) thereunder.
---------------------------------------------------------------------------
\16\ 15 U.S.C. 78s(b)(3)(A)(iii).
\17\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
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. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \18\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
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-2013-62 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-2013-62. 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 Section, 100 F Street
NE., Washington, DC 20549-1090. Copies of the filing will also be
available for inspection and copying at the NYSE's principal office and
on its Internet Web site at www.nyse.com. 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-2013-62 and should be submitted
on or before August 21, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
---------------------------------------------------------------------------
\19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-18345 Filed 7-30-13; 8:45 am]
BILLING CODE 8011-01-P