[Federal Register Volume 78, Number 212 (Friday, November 1, 2013)]
[Notices]
[Pages 65736-65739]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-26032]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70760; File No. SR-NYSEMKT-2013-85]
Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and
Immediate Effectiveness of Proposed Rule Change Amending Rule 980NY to
Specify That the Specialist Pool and Directed Order Market Makers
Receive Execution Allocations of Incoming Electronic Complex Orders and
Complex Order Auction Eligible Orders in Accordance With the Guaranteed
Participation Provision of Rule 964NY(c)(2)(B), Without Any Exceptions
October 28, 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 October 24, 2013, NYSE MKT LLC (the ``Exchange'') filed
with the Securities and Exchange Commission (the ``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the self-regulatory organization. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 980NY to specify that the
Specialist Pool and Directed Order Market Makers receive execution
allocations of incoming Electronic Complex Orders and Complex Order
Auction (``COA'') eligible orders in accordance with the guaranteed
participation provision of Rule 964NY(c)(2)(B), without any exceptions.
The text of the proposed rule change is available on the Exchange's Web
site at www.nyse.com, at the principal office of the Exchange, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange is proposing to amend Rules 980NY(c)(i), (c)(iii),
(e)(6)(A), and (e)(6)(D) to specify that the Specialist Pool and
Directed Order Market Makers receive execution allocations of the
individual components of a legged out incoming Electronic Complex Order
or COA-eligible order in accordance with the guaranteed participation
provision of Rule 964NY(c)(2)(B), without any exceptions. Exchange
systems currently provide the Specialist Pool with such guaranteed
participations when Electronic Complex Orders are legged out to trade
with individual quotes and orders in the leg markets that include bids
or offers from the Specialist Pool. Directed Order Market Makers,
however, do not currently receive guaranteed participation with respect
to Electronic Complex Orders. As proposed, an Electronic Complex Order
that is marked as a Directed Order may execute against Directed Order
Market Makers if it legs out to trade with individual quotes and orders
in the leg markets and there is a Directed Order Market Maker quoting
in one or more of the leg markets.
Rule 980NY governs trading of ``Electronic Complex Orders,'' as
that term is defined in Rule 900.3NY(e).\4\ Rule 980NY(c)(i) currently
provides that Electronic Complex Orders accepted in the Exchange's
Complex Matching Engine (``CME'') \5\ are executed automatically
against other Electronic Complex Orders in the Consolidated Book,\6\
unless individual orders or quotes in the Consolidated Book can execute
against incoming Electronic Complex Orders, subject to specified
conditions, in which case such individual orders and quotes have
priority. Rule 980NY(c)(iii) currently provides that ATP Holders can
view Electronic Complex Orders in the Consolidated Book via an
electronic interface and may submit Electronic Complex Orders to the
CME to trade against orders in the Consolidated Book.
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\4\ Rule 900.3NY(e) defines an Electronic Complex Order as ``any
order involving the simultaneous purchase and/or sale of two or more
different option series in the same underlying security, for the
same account, in a ratio that is equal to or greater than one-to-
three (.333) and less than or equal to three-to-one (3.00) and for
the purpose of executing a particular investment strategy.''
\5\ Rule 980NY(a) defines the CME as ``the mechanism in which
Electronic Complex Orders are executed against each other or against
individual quotes and orders in the Consolidated Book.''
\6\ Rule 900.2NY(14) defines the Consolidated Book as ``the
Exchange's electronic book of limit orders for the accounts of
Customers and broker-dealers, and Quotes with Size. All orders and
Quotes with Size that are entered into the Book will be ranked and
maintained in accordance with the rules of priority as provided in
Rule 964NY.''
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Rule 980NY(e) governs the COA process, and specifically, Rule
980(e)(6) governs the execution of COA-eligible orders.\7\ Upon
receiving a COA-eligible order and a request by the ATP Holder
representing the order that an auction be initiated, the Exchange sends
an automated request for responses
[[Page 65737]]
(``RFR'') message to ATP Holders with an interface connection to the
Exchange that have elected to receive such RFR messages. Market Makers
with an appointment in the relevant options class, and ATP Holders
acting as agent for orders resting at the top of the Consolidated Book
in the relevant options series may electronically submit responses
(``RFR Responses''), and modify, but not withdraw, the RFR response at
anytime during the request response time interval (the ``Response Time
Interval''). When the Response Time Interval expires, the COA-eligible
order is executed and allocated to the extent it is marketable, or
routed to the Consolidated Book to the extent it is not marketable.
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\7\ Rule 980NY(e)(1) defines a COA-eligible order as ``an
Electronic Complex Order that, as determined by the Exchange on a
class-by-class basis, is eligible for a COA considering the order's
marketability (defined as a number of ticks away from the current
market), size, number of series, and complex order origin types
(i.e., Customers, broker-dealers that are not Market-Makers or
specialists on an options exchange, and/or Market-Makers or
specialists on an options exchange).''
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Rule 980NY(e)(6) provides that COA-eligible orders are executed
against the best priced contra-side interest, and provides an
allocation process for orders at the same net price. Rule
980NY(e)(6)(A) currently provides that individual orders and quotes in
the leg markets resting in the Consolidated Book prior to the
initiation of a COA will have first priority to trade against a COA-
eligible order, provided the COA-eligible order can be executed in full
(or in a permissible ratio) by the orders and quotes in the
Consolidated Book.\8\ Rule 980NY(e)(6)(D) currently provides that
individual orders and quotes in the leg markets that cause the derived
Complex Best Bid/Offer to be improved during the COA and match the best
RFR Response and/or Electronic Complex Orders received during the
Response Time Interval will be filled after Electronic Complex Orders
and RFR Responses at the same net price. Allocations to individual
orders or quotes in the leg markets that cause the derived BBO to be
improved occur on a Customer/order/size pro rata basis.
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\8\ Allocations to individual orders and quotes in the leg
markets in the Consolidated Book occur in time, with Customer orders
having priority ahead of non-customer orders and quotes at the same
price.
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Under Rules 980NY(c)(i) and (c)(iii), incoming orders or quotes, or
those residing in the Consolidated Book, that execute against
Electronic Complex Orders are allocated pursuant to Rule 964NY.\9\
Additionally, under Rules 980NY(e)(6)(A) and (e)(6)(D), individual
orders or quotes residing in the Consolidated Book that execute against
a COA-eligible order are allocated pursuant to Rule 964NY. Rule
964NY(c)(2)(B) grants the Specialist Pool and Directed Order Market
Makers guaranteed participation after Customer interest is filled,
which means that if the Specialist Pool or Directed Order Market Maker
is quoting at a price equal to the National Best Bid or Offer
(``NBBO'') in an option series that the Specialist Pool or Directed
Order Market Maker is assigned, incoming bids and offers in that series
will, depending on order ranking provisions of Rule 964NY, be matched
against the Specialist Pool's or Directed Order Market Makers' quotes,
up to specified thresholds.\10\ Currently, Rules 980NY(c)(i), (c)(iii),
(e)(6)(A), and (e)(6)(D) provide that the Specialist Pool and Directed
Order Market Maker guaranteed participation afforded in Rule
964NY(c)(2)(B) will not apply to executions against an Electronic
Complex Order or a COA-eligible order. However, Exchange systems do
apply the Specialist Pool guaranteed participation afforded in Rule
964NY(c)(2)(B) to Electronic Complex Orders and COA-eligible orders
that execute against individual quotes and orders in the Consolidated
Book.
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\9\ The Exchange proposes a technical, non-substantive amendment
to Rule 964NY(c)(2)(B) to change the cross-reference from Rule
964NY(a) to Rule 964NY(b).
\10\ Rule 900.3NY(s) defines a ``Directed Order'' as ``any
marketable order to buy or sell which has been directed to a
particular Market Maker by an Order Flow Provider. To qualify as a
Directed Order, an order must be delivered electronically to the
System.'' An incoming order marked as a ``Directed Order'' is
matched against the quotes of ``Directed Order Market Makers'' under
Rule 964NY(b)(2)(B).
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The Exchange is proposing to amend Rules 980NY(c)(i), (c)(iii),
(e)(6)(A), and (e)(6)(D) to specify that both the Specialist Pool and
Directed Order Market Makers receive execution allocations of incoming
Electronic Complex Orders and COA-eligible orders in accordance with
the guaranteed participation provision of Rule 964NY(c)(2)(B), without
any exceptions. The proposed change would codify existing processing of
Electronic Complex Orders that leg out to the individual markets and
how they may interact with the Specialist Pool in the individual
markets. In addition, the proposed change would add the ability to
designate an Electronic Complex Orders as a Directed Order. As
proposed, the Directed Order instructions for an Electronic Complex
Order would only be applicable if the Electronic Complex Order legs out
to the individual markets and a Directed Order Market Maker is quoting
in one or more of those markets. The proposed change does not provide
for a Direct Order program for Electronic Complex Orders that trade
with other Electronic Complex Orders.\11\
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\11\ The Exchange will announce, via Trader Update, the
allocation process that applies when an Electronic Complex Order
legs out to the individual markets and the implementation date of
the proposed change to designate an Electronic Complex Order as a
Directed Order.
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The Exchange notes that under the proposed amendment to Rule
980NY(c)(iii), the execution of an Electronic Complex Order against
another Electronic Complex Order in the Consolidated Book would not
result in a guaranteed participation for a Specialist or Directed Order
Market Maker. Rather, the guaranteed participation provision of that
rule is only applicable if an Electronic Complex Order legs out
individual components to trade with the quotes of a Specialist or
Directed Order Market Maker. Consequently, the individual options
components of an Electronic Complex Order, and not the Electronic
Complex Order itself, may be designated as Directed Orders. The
guaranteed participation associated with the allocation of Directed
Orders will, therefore, only be available where the Electronic Complex
Order legs out individual components to trade with the quotes of a
Directed Order Market Maker that meets its quoting obligations, as
discussed in more detail below.
The Exchange believes that it is appropriate to provide Specialists
and Directed Order Market Makers with guaranteed participation in
relation to execution allocations of the individual components of an
Electronic Complex Order. The guaranteed participation strikes a
reasonable balance between rewarding certain participants for making
markets (in the case of Specialists) or bringing liquidity to the
Exchange (in the case of Directed Order Market Makers), and providing
other market participants an incentive to quote aggressively.\12\
Although Exchange rules did not originally afford the Specialist Pool
and Directed Order Market Makers any guaranteed participation when an
Electronic Complex Order executes against the individual leg markets,
the Exchange believes that permitting such guaranteed participation
will further incentivize the provision of liquidity that is
aggressively priced. Therefore, the Exchange believes it is reasonable
to provide the Specialist Pool and Directed Order Market Makers with
guaranteed participations whether the contra-side
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order is a leg of an Electronic Complex Order or an individual order.
The Exchange notes that the proposed rule change is consistent with the
allocation process for executing Complex Orders against individual
orders and quotes on the Chicago Board Options Exchange (``CBOE'') and
NASDAQ OMX PHLX LLC (``PHLX'').\13\
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\12\ See Exchange Act Release No. 59472 (Feb. 27, 2009), 74 FR
9843, 9847 (Mar. 6, 2009) (SR-NYSEALTR-2008-14) (approving
guaranteed participation for the Specialist Pool and Directed Order
Market Makers) (``The Commission believes that these guarantees
strike a reasonable balance between rewarding certain participants
for making markets (in the case of Specialists and e-Specialists) or
bringing liquidity to the exchange (in the case of Directed Order
Market Makers), with providing other market participants an
incentive to quote aggressively.'').
\13\ See CBOE Rules 6.53C(c)(ii)(2), 6.53C(d)(v)(1),
6.45A(a)(i)(C), and 6.45B(a)(ii)(C). The CBOE's rules governing
priority and allocation include cross references to the CBOE's
participation entitlement programs: CBOE Rules 8.13 (Preferred
Market-Maker Program), 8.15B (Participation Entitlement of LMMs),
and 8.87 (Participation Entitled of DPMs and e-DPMs). See also
Commentaries .08(e)(vi)(A)(1) and .08(f)(iii) to PHLX Rule 1080 and
PHLX Rule 1014(g)(vii) (setting forth PHLX's guaranteed
participation program, including the Enhanced Specialist
Participation program).
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The Exchange notes, moreover, that to receive a guaranteed
participation, the Specialist and Directed Order Market Maker are
subject to heightened quoting obligations. A Specialist must provide
continuous two-side quotations throughout the trading day in its
appointed issues for 90% of the time the Exchange is open for trading
in each issue.\14\ Further, a Directed Order Market Maker must provide
continuous two-sided quotations throughout the trading day in issues
for which it receives Directed Orders for 90% of the time the Exchange
is open for trading in each issue.\15\
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\14\ See Rule 925.1NY(b).
\15\ See Rule 964.1NY(iv).
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Finally, the Exchange also believes that eliminating the
inconsistency between Rule 964NY and Rule 980NY with respect to the
guarantee will eliminate potential confusion as to whether the
Specialist Pool and Directed Order Market Makers are receiving their
guaranteed participation when they quote at a price equal to the NBBO.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act,\16\ in general, and furthers the objectives of Section
6(b)(5),\17\ in particular, in that it is designed to promote just and
equitable principles of trade, to remove impediments to and perfect the
mechanism of a free and open market and, in general, to protect
investors and the public interest. The Exchange believes that providing
the guaranteed participation allocation for the Specialist Pool and
Directed Order Market Makers for the execution of incoming Electronic
Complex Orders and COA-eligible orders removes impediments to and
perfects the mechanism of a free and open market by (1) promoting
liquidity on the Exchange because the Specialist Pool's and Directed
Order Market Markers' quotes interact with incoming Electronic Complex
Orders and COA-eligible orders, (2) providing consistency among
Exchange rules by applying the same allocation logic to the execution
of incoming Electronic Complex Orders/COA-eligible orders and single-
leg orders, and (3) eliminating potential confusion with respect to
guaranteed participation for such participants trading in Electronic
Complex Orders. Additionally, the Exchange believes that the proposal
is designed to protect investors and the public interest because the
proposed rule change is consistent with the allocation process for
executing Complex Orders against individual orders and quotes on CBOE
and PHLX. The Exchange further believes that the proposal will promote
liquidity on the Exchange because the Specialist Pool and Directed
Order Market Maker guaranteed participation strike a reasonable balance
between rewarding certain participants for making markets or bringing
liquidity to the Exchange and providing other market participants an
incentive to quote aggressively.
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\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes the proposed rule change will not impose a
significant burden on competition; instead, the Exchange believes the
proposed rule change will enhance competition by increasing liquidity
in the options market. By permitting the guaranteed participation
allocation with respect to Electronic Complex Orders and COA-eligible
orders, the Specialist Pool and Directed Order Market Makers are
encouraged to quote at the NBBO in their assigned options series, which
increases the level of liquidity in the options market. While
allocations due to guaranteed participations may direct order flow to
particular participants, the Commission has previously approved such
allocations as a reasonable balance between rewarding such participants
for making markets or bringing liquidity to the exchange, and providing
other market participants an incentive to quote aggressively.\18\ By
allocating 40 percent of the order to the Specialist Pool or Directed
Order Market Maker, the Exchange believes that it properly incentivizes
the provision of liquidity from the Specialist Pool or Directed Order
Market Makers, while still ensuring that other market participants are
able to participate and receive allocations.
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\18\ See 74 FR at 9847.
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In addition, eliminating the current exception from the guaranteed
participation allocation will also provide consistency and eliminate
potential confusion concerning guaranteed participation allocation for
such participants with respect to Electronic Complex Orders and COA-
eligible orders. Further, the Exchange does not believe the proposal
will impose a significant burden on competition since the proposal is
consistent with the allocation process on CBOE and PHLX.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days after the date of the filing, or such
shorter time as the Commission may designate, it has become effective
pursuant to Section 19(b)(3)(A) of the Act \19\ and Rule 19b-4(f)(6)
\20\ thereunder.
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\19\ 15 U.S.C. 78s(b)(3)(A).
\20\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the 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) \21\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\21\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
[[Page 65739]]
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-2013-85 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-2013-85. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSEMKT-2013-85 and should
be submitted on or before November 22, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-26032 Filed 10-31-13; 8:45 am]
BILLING CODE 8011-01-P