[Federal Register Volume 78, Number 219 (Wednesday, November 13, 2013)]
[Notices]
[Pages 68128-68133]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-27052]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70822; File Nos. SR-NYSE-2013-54; SR-NYSEMKT-2013-66;
SR-NYSEARCA-2013-77]
Self-Regulatory Organizations; New York Stock Exchange LLC; NYSE
MKT LLC; NYSE Arca, Inc.; Notice of Filing of Amendment No. 1 and Order
Granting Approval to Proposed Rule Changes, as Modified by Amendment
No. 1, That Address the Exchanges' Emergency Powers
November 6, 2013.
I. Introduction
On July 22, 2013, the New York Stock Exchange LLC (``NYSE''), NYSE
MKT LLC (``NYSE MKT''), and NYSE Arca, Inc. (``NYSE Arca'' and,
together with NYSE and NYSE MKT, the ``Exchanges'') each filed with the
Securities and Exchange Commission (``Commission'') pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule
19b-4
[[Page 68129]]
thereunder,\2\ proposed rule changes to address their emergency powers.
The proposed rule changes were published for comment in the Federal
Register on August 8, 2013.\3\ The Commission received two comments on
the proposals.\4\ The Exchanges submitted a response to the comment
letters on September 9, 2013.\5\ On September 20, 2013, the Commission
designated a longer period for action on the proposed rule changes,
noting that the Exchanges had yet to conduct a planned industry-wide
test of the changes contemplated by the proposals.\6\ On October 29,
2013, as a result of the industry-wide test, the Exchanges submitted
Amendment No. 1 to the proposals.\7\ This order approves the proposed
rule changes, as amended.\8\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release Nos. 70099 (August 2,
2013), 78 FR 48522 (SR-NYSE-2013-54) (``NYSE Notice''); 70098
(August 2, 2013), 78 FR 48513 (SR-NYSEMKT-2013-66) (``NYSE MKT
Notice''); and 70097 (August 2, 2013), 78 FR 48528 (SR-NYSEARCA-
2013-77) (``NYSE Arca Notice'').
\4\ See Letters to the Commission from Elizabeth King, Global
Head of Regulatory Affairs, KCG Holdings, Inc., dated August 28,
2013 (``KCG Letter''), and Manisha Kimmel, Executive Director,
Financial Information Forum (``FIF''), dated August 29, 2013 (``FIF
Letter''). The Commission notes that the KCG Letter addresses only
the NYSE proposal.
\5\ See Letter to the Commission from Janet McGinnis, General
Counsel, NYSE Markets, dated September 9, 2013 (``Exchanges'
Response Letter'').
\6\ See Securities Exchange Act Release No. 34-70463, 78 FR
59390 (September 26, 2013).
\7\ In Amendment No. 1, NYSE modified its proposal to (1) change
how certain trade and quote messages would be disseminated by NYSE
Arca during an emergency and (2) clarify how the proposed rules
would apply when a stock opened on a quote or if an issuer chose to
proceed with an initial public offering during an emergency. NYSE
MKT and NYSE Arca submitted conforming amendments. The Exchanges
note that these amendments were submitted to incorporate feedback
received in response to an industry-wide test they conducted on
September 21, 2013. Because Amendment No. 1 is technical in nature,
the Commission is not publishing it for comment. The Commission
notes, however, that the Exchanges each submitted on October 30,
2013, a comment letter attaching Amendment No. 1 so that this
amendment could be posted on the Commission's Web site.
\8\ Because the NYSE MKT filing would simply copy and adopt the
substance of revised NYSE Rule 49, and because the NYSE Arca filing
simply conforms NYSE Arca's current emergency powers rule to
incorporate the changes to NYSE Rule 49 and NYSE MKT Rule 49--
Equities, the Commission is addressing the NYSE, NYSE MKT, and NYSE
Arca proposals together in this Order.
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II. Description of the Proposals
The Exchanges' proposals seek to establish clear and operationally
feasible procedures that would govern the Exchanges' conduct during
emergency conditions. NYSE currently sets forth its emergency powers in
its Rule 49, which includes the power to designate NYSE Arca as its
backup trading facility during an emergency. NYSE proposes to revise
Rule 49 in several key ways to respond to operational capabilities and
preferences expressed by its members and the industry. NYSE MKT, which
currently has no rule setting forth its emergency powers, proposes to
adopt the text of revised NYSE Rule 49 as NYSE MKT Rule 49--Equities,
which would provide its officials with the same emergency powers that
NYSE officials may exercise. NYSE Arca, which currently has in place
NYSE Arca Equities Rule 2.100 to mirror and effect the operation of
NYSE Rule 49, would revise Rule 2.100 to reflect the changes to NYSE
Rule 49 and the adoption of NYSE MKT Rule 49--Equities. The Exchanges
submitted the proposals in part in response to the aftermath of
Superstorm Sandy, which struck the New York City area in October 2012,
causing the NYSE and NYSE MKT to remain closed for two days and
highlighting certain operational difficulties with current NYSE Rule
49.
NYSE's Current Emergency Powers Rule (Rule 49)
The NYSE's current Rule 49 was adopted in 2009 to provide the
Exchange with the authority to declare an emergency condition \9\ with
respect to trading on or through the systems and facilities of the
exchange and to act as necessary in the public interest and for the
protection of investors.\10\ The authority in Rule 49 may be exercised
when: (i) There exists a regional or national emergency that would
prevent the NYSE from operating normally; and (ii) such a declaration
is necessary so that the securities markets in general, and the NYSE's
systems and facilities, including the trading floor, in particular, may
continue to operate in a manner consistent with the protection of
investors and in pursuit of the public interest.\11\ To date, the NYSE
has never invoked the rule.
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\9\ NYSE Rule 49(a)(3)(i) incorporates the same definition of
``emergency'' as that found in Section 12(k)(7) of the Act. Section
12(k)(7) defines an emergency to mean ``(A) a major market
disturbance characterized by or constituting--(i) sudden and
excessive fluctuations of securities prices generally, or a
substantial threat thereof, that threaten fair and orderly markets;
or (ii) a substantial disruption of the safe or efficient operation
of the national system for clearance and settlement of transactions
in securities, or a substantial threat thereof; or (B) a major
disturbance that substantially disrupts, or threatens to
substantially disrupt--(i) the functioning of securities markets,
investment companies, or any other significant portion or segment of
the securities markets; or (ii) the transmission or processing of
securities transactions.'' 15 U.S.C. 78l(k)(7).
\10\ See Securities Exchange Act Release No. 61177 (December 16,
2009), 74 FR 68643 (December 28, 2009) (SR-NYSE-2009-105) (Order
approving proposal to adopt Rule 49) (``NYSE Rule 49 Approval
Order''). At the same time, NYSE Arca amended NYSE Arca Rule 2.100
to allow it to act as the designated alternative trading facility of
NYSE in an emergency. See Securities Exchange Act Release No. 61178
(December 16, 2009), 74 FR 68434 (December 24, 2009).
\11\ See NYSE Rule 49(a)(2). Rule 49(c)(1) provides further that
the NYSE will make reasonable efforts to contact the Commission
prior to taking action under Rule 49. The authority granted under
NYSE Rule 49 may be operative for up to 10 calendar days from the
date that the NYSE invokes such authority. Any longer exercise of
such authority must be approved by the Commission. See NYSE Rule
49(c)(2).
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If such an emergency condition is declared, NYSE Rule 49 authorizes
a ``qualified Exchange officer'' \12\ to designate NYSE Arca, the
NYSE's affiliate, to serve as a backup facility to receive and process
bids and offers and to execute orders on behalf of the NYSE so that the
NYSE, as a self-regulatory organization (``SRO''), can remain
operational. In essence, the NYSE would use NYSE Arca's system as the
execution engine for NYSE trades.\13\ During such an emergency
condition, NYSE Arca also would continue to operate simultaneously in
its own capacity. NYSE Arca Rule 2.100 provides NYSE Arca with the
authority to effectuate the provisions of NYSE Rule 49.
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\12\ A ``qualified Exchange officer'' is the NYSE Euronext Chief
Executive Officer or his or her designee, or the NYSE Regulation,
Inc. Chief Executive Officer or his or her designee. If these
individuals are unable to act due to incapacitation, the most senior
surviving officer of NYSE Euronext or NYSE Regulation, Inc. will be
a ``qualified Exchange officer'' for purposes of NYSE Rule 49. See
NYSE Rule 49(a)(3)(ii).
\13\ See NYSE Rule 49 Approval Order, supra note 10, 74 FR at
68643.
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Upon the declaration of an emergency, the NYSE would halt all
trading conducted on its systems and facilities. Unexecuted orders
would remain on the NYSE's systems unless cancelled. The NYSE would
open trading on the systems and facilities of NYSE Arca as soon
thereafter as possible, but not earlier than the next trading day. As
soon as practicable following the commencement of trading on the
systems and facilities of NYSE Arca, any unexecuted orders would be
purged from the NYSE's own systems and facilities.\14\
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\14\ See NYSE Rule 49(b)(2)(i).
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Quotes or orders for NYSE-listed securities entered or executed on
or through the systems and facilities of NYSE Arca would be reported to
the Consolidated Quotation System (``CQS'') as bids and offers, or to
the Consolidated Tape Association (``CTA'') as executions, made on or
through the systems and facilities of the NYSE, not NYSE Arca. This
means that, for the
[[Page 68130]]
duration of the emergency condition, trades in NYSE-listed securities
would print to the CTA with the NYSE's ``N'' symbol, and quotes would
be designated as NYSE quotes in the CQS, notwithstanding that they were
processed on or through the systems and facilities of NYSE Arca.\15\
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\15\ See NYSE Rule 49 Approval Order, supra note 10, 74 FR at
68643 n.12.
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NYSE members, member organizations, and Sponsored Participants
Members would be permitted to enter quotes and to execute orders on or
through the systems and facilities of NYSE Arca, regardless of whether
these members, member organizations, or Sponsored Participants are
members or sponsored participants of NYSE Arca at the time an emergency
condition was declared.\16\ Additionally, NYSE members and member
organizations would be required to have contingency plans for changing
the routing instructions for their order entry systems and to take such
other appropriate actions as instructed by the Exchange to accommodate
the use of the systems and facilities of NYSE Arca to trade NYSE-listed
securities.\17\ Furthermore, NYSE member organizations registered as
Designated Market Makers (``DMMs'') would, if designated as a temporary
member of NYSE Arca during an emergency condition, be considered a
``Market Maker'' under NYSE Arca Equities Rules.\18\ As such, these
member organizations would be subject to the quoting obligations that
NYSE Arca imposes on its ``Market Makers'' in NYSE Arca Equities Rule
7.23.
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\16\ See NYSE Rule 49(b)(3)(i)(A); see also NYSE Arca Equities
Rule 2.100(b)(3).
\17\ See NYSE Rule 49(b)(2)(iii).
\18\ See NYSE Rule 49(b)(3)(i)(B); see also NYSE Arca Equities
Rule 2.100(b)(3)(i)(C).
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All trades of NYSE-listed securities entered or executed on or
through the systems and facilities of NYSE Arca would be subject to the
NYSE Arca Equities Rules governing trading, and these rules would be
considered NYSE rules for the purposes of such transactions, except
that (i) the NYSE's rules governing member firm conduct--including, but
not limited to, membership requirements and net capital requirements--
would continue to apply to its members, member organizations, and
Sponsored Participants and (ii) the NYSE's listing requirements for its
listed securities would continue to apply.\19\
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\19\ See NYSE Rule 49(b)(4)(i)-(ii); see also NYSE Arca Equities
Rule 2.100 (b)(4).
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Surveillance of trading of NYSE-listed securities on or through the
systems and facilities of NYSE Arca would be conducted by NYSE Arca on
behalf of the NYSE. Members and member organizations of the NYSE would
remain subject to the jurisdiction of the NYSE for any disciplinary
actions related to the trading of NYSE-listed securities on or through
the systems and facilities of NYSE Arca. Violations of the rules of
NYSE Arca would be referred to the NYSE for prosecution according to
the NYSE's disciplinary rules. NYSE members and member organizations
could not assert as an affirmative defense to prosecution the lack of
jurisdiction of the NYSE over trading of NYSE-listed securities on or
through the systems and facilities of NYSE Arca.\20\
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\20\ See NYSE Rule 49(b)(5); see also NYSE Arca Equities Rule
2.100(b)(5).
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NYSE's Proposed Revisions to Rule 49
As a result of Superstorm Sandy, which caused NYSE and NYSE MKT to
close for two days on October 29 and 30, 2012, the industry identified
certain difficulties with the operation of NYSE's current Rule 49.
Accordingly, NYSE has proposed to revise the Rule to more effectively
delineate the SRO functions of the NYSE and NYSE Arca during an
emergency condition, to reflect the operational capabilities and
preferences of the industry, and to reflect the current structure of
member-organization connectivity to and system coding for exchange
systems.
The NYSE proposes to amend Rule 49(a)(1) to state that the
authority of a ``qualified Exchange officer'' to declare an ``Emergency
Condition''--which would become a defined term under the amended rule--
shall include the authority to designate NYSE Arca to perform the
functions set forth in the Rule ``on behalf of and at the direction''
of the NYSE.
Rule 49(a)(2) would be amended to remove a reference to the NYSE's
systems and facilities, including the trading floor, continuing to
operate during the Emergency Condition. The text would be revised to
provide that an Emergency Condition declaration may be made if
necessary so that the securities markets, in general, may continue to
operate and so that trading in NYSE-listed securities, in particular,
may continue to occur in a manner consistent with the protection of
investors and in pursuit of the public interest. In Rule 49(a)(3), the
subparagraphs would be re-designated so that the rule text follows a
consistent convention.
Current Rules 49(b)(1) and 49(b)(2)(i), which include text
describing how the NYSE would halt trading and how NYSE Arca would
begin receiving and processing bids and offers and executing orders on
behalf of the Exchange beginning on the next trading day, would be
deleted and replaced with text that more specifically describes the
steps that each exchange would take upon the declaration of the
Emergency Condition.
Specifically, proposed Rule 49(b)(1) would provide that, when an
Emergency Condition is declared, the NYSE would: (A) Halt all trading
conducted on the NYSE's systems and facilities and would not route any
unexecuted orders to NYSE Arca; (B) accept cancellations for Good `Til
Cancelled (``GTC'') orders; and (C) purge any unexecuted orders from
the NYSE's own systems and facilities as soon as practicable following
declaration of the Emergency Condition.
Proposed Rule 49(b)(2) would provide that, beginning on the next
trading day following the declaration of the Emergency Condition,\21\
NYSE Arca, on behalf of and at the direction of the NYSE, would: (A)
Disseminate the official opening, re-opening, and closing transactions
in NYSE-listed securities as messages of the NYSE (with the ``N''
designation); and (B) disseminate notifications to the CQS for NYSE-
listed securities of (i) regulatory halts and resumption of trading
thereafter, (ii) trading pause and resumption of trading thereafter,
and (iii) Short Sale Price Test trigger and subsequent lifting
(collectively, ``primary listing market notifications'') as messages of
both the NYSE (with the ``N'' designation) and NYSE Arca (with the
``P'' designation).\22\ Bids and offers for NYSE-listed securities
entered on NYSE Arca during the Emergency Condition would be reported
to CQS as bids or offers of NYSE Arca, except that the opening quote
would be reported to CQS as a bid or offer of both the NYSE and NYSE
Arca.\23\ Bids and offers for NYSE-listed securities executed on or
through NYSE
[[Page 68131]]
Arca during the Emergency Condition would be reported to CTA as
executions of NYSE Arca, except that executions in the opening,\24\ re-
opening, or closing auctions would be reported only as NYSE executions
and NYSE volume in order to avoid any double counting.
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\21\ The NYSE noted in its filing that its current and proposed
disaster recovery plans do not enable the intra-day failover of the
NYSE's system onto NYSE Arca.
\22\ See NYSE Rules 80B, 80C, and 440B. As the NYSE observed in
its filing, each of these types of notifications is a responsibility
of the primary listing market for a security. Because the NYSE is
not able to force an intra-day failover of the NYSE's system to NYSE
Arca, see supra note 21, in the event of an intra-day declaration of
an Emergency Condition, the NYSE would manually disseminate these
primary listing market notifications to CQS.
\23\ The Exchanges noted that the plan to disseminate the
opening quote as a bid or offer of both the NYSE and NYSE Arca would
apply in the event there were no opening auction, for instance, as a
result of insufficient volume, and trading opened on a quote, to the
extent doing so is authorized under the NYSE's current rules. See
NYSE Rules 115A(b)(2) and 123D(1).
\24\ The Exchanges noted that if an issuer were to proceed with
an initial public offering during an emergency, then, consistent
with the proposal, the opening execution would print only with the
NYSE's ``N'' designation. The Exchanges noted further that an issuer
could alternatively choose to delay a scheduled initial public
offering until the emergency was resolved and the NYSE was fully
operational again.
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Current Rule 49(b)(2)(iii) provides that members and member
organizations must have contingency plans for changing the routing
instructions for their order entry systems, and that they take such
other appropriate actions as instructed by the NYSE, to accommodate the
use of the systems and facilities of NYSE Arca to trade NYSE-listed
securities. The proposed rule change would re-designate this provision
as Rule 49(b)(3) and amend the text to provide that members and member
organizations wishing to trade NYSE-listed securities during an
Emergency Condition would be responsible for having contingency plans
to establish connectivity to NYSE Arca and for changing the routing
instructions for their order entry systems to route quotes and orders
in NYSE-listed securities to NYSE Arca.
Such connectivity and routing could be established either directly
by becoming an NYSE Arca member (technically referred to as an NYSE
Arca Equity Trading Permit (``ETP'') Holder) or indirectly through a
third party, such as a service bureau, that is an ETP Holder. The NYSE
would not have the ability to reroute quotes and orders from NYSE to
NYSE Arca on behalf of members and member organizations, as noted in
proposed Rule 49(b)(1)(A). The proposed rule change would also delete
text stating that the NYSE would provide instructions to its members
and member organizations about using NYSE Arca facilities because, as
NYSE members would be required under the proposed rule either to become
NYSE Arca ETP Holders or to access NYSE Arca through an ETP Holder,
such instructions would no longer be necessary.
Current Rule 49(b)(3), which, during an emergency, provides NYSE
members with temporary membership at NYSE Arca and deems NYSE DMMs to
be NYSE Arca Market Makers, would be deleted in its entirety. The NYSE
explained that it proposed this change because all trading would occur
under the NYSE Arca SRO either via a direct membership as an ETP Holder
or indirectly via a service bureau as described above, making temporary
memberships unnecessary. Additionally, the NYSE stated that, upon
further review, it has determined that there would be substantial
technological difficulties for NYSE DMMs to become established as NYSE
Arca Market Makers during the Emergency Condition and to comply with
quoting obligations under NYSE Arca Equities Rule 7.23, as that rule
was amended in 2011.\25\ At the same time, the NYSE asserted that it
would be technologically impracticable and inconsistent with the
structure of the proposed rule change to impose NYSE's DMM requirements
in a different market. Accordingly, under the proposed rule, if an NYSE
DMM wanted to be able to act as an NYSE Arca Market Maker during the
Emergency Condition, it would have to apply for and obtain this market
maker status in advance.
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\25\ See Securities Exchange Act Release No. 64422 (May 6,
2011), 76 FR 27691 (May 12, 2011) (SR-NYSEArca-2011-26).
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Rule 49(b)(4) would be amended to state that all trading on NYSE
Arca during an Emergency Condition would occur pursuant to NYSE Arca
rules, surveillance, and discipline. Current Rule 49(b)(4) already
provides that that NYSE Arca trading rules would apply to all trading
on NYSE Arca during an emergency condition, so this feature of the rule
would not change.\26\ Current Rule 49(b)(4), however, further provides
that NYSE Arca rules will, during the emergency, be considered rules of
the NYSE, and this provision would be deleted by the proposal.
Furthermore, the NYSE proposes to delete current Rule 49(b)(5), which
states that NYSE Arca will provide surveillance on behalf of the NYSE
for trading of NYSE-listed securities during an emergency and that
members and member organizations shall remain subject to the NYSE's
jurisdiction for any disciplinary actions related to the trading of
NYSE-listed securities on or through the systems and facilities of NYSE
Arca. Thus, under the terms of the proposal, if an NYSE member
organization violated an NYSE Arca trading rule while trading on NYSE
Arca during an Emergency Condition, it would be subject to discipline
by NYSE Arca, not the NYSE.
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\26\ The proposed revisions to Rule 49(b)(4) would also specify
that such NYSE Arca trading rules include, but are not limited to,
the opening, reopening, and closing auction processes applicable to
securities for which NYSE Arca is the primary listing market set
forth in NYSE Arca Equities Rule 7.35. As the NYSE noted in its
filing, NYSE Arca's auction processes at the open, at the close, and
following a trading halt differ from those of NYSE. The provision in
current Rule 49(b)(4)(ii) that specifies that the NYSE's listing
requirements would continue to apply to any NYSE-listed security
that was trading on NYSE Arca during the Emergency Condition would
be incorporated without change into revised Rule 49(b)(4).
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NYSE MKT's Adoption of NYSE Rule 49
NYSE MKT currently does not have a rule setting forth its authority
and procedures in the event of an emergency. NYSE MKT thus proposes to
adopt an identical version of NYSE Rule 49 as NYSE MKT Rule 49--
Equities. The proposed rule would provide NYSE MKT officials with the
same emergency powers that NYSE Rule 49 would vest in NYSE officials.
Proposed NYSE MKT Rule 49--Equities would also, like NYSE Rule 49, rely
on NYSE Arca for trading and quoting activity in NYSE MKT-listed
securities during an Emergency Condition.
NYSE Arca's Proposed Revisions to NYSE Arca Equities Rule 2.100
Current NYSE Arca Equities Rule 2.100 mirrors and effectuates
current NYSE Rule 49. NYSE Arca proposes to amend Rule 2.100 to
incorporate the proposed revisions to NYSE Rule 49. NYSE Arca also has
proposed to add NYSE MKT as an affiliate exchange that may declare an
Emergency Condition and designate NYSE Arca as its alternative trading
facility. No elements of the NYSE Arca proposal would have any
independent operation beyond effectuating the proposed revisions to
NYSE Rule 49 and NYSE MKT Rule 49--Equities.
III. Comment Letters and the Exchanges' Responses
The Commission received two comments on the proposals. Both comment
letters broadly supported the Exchanges' proposals.
The first letter asserted that the proposed changes to NYSE Rule 49
``would appropriately focus [the NYSE's] trading operations during an
emergency condition on those services for which the NYSE is the sole
provider in the securities market.'' \27\ Specifically, this commenter
expressed support for the NYSE's proposal to eliminate the requirement
that NYSE DMMs satisfy market maker obligations as NYSE Arca Market
Makers during an emergency condition, because the commenter believes
that such a revision would eliminate potential and unnecessary
operational risks.\28\ For instance, according to the commenter, the
NYSE's proposal to eliminate the requirement
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that NYSE members and member organizations connect and send quotes and
orders for NYSE-listed securities to NYSE Arca during an emergency
condition would avoid the risks associated with NYSE members trading on
NYSE Arca without sufficient experience.\29\ Additionally, the
commenter supported the feature of the NYSE's proposal concerning NYSE
Arca's dissemination of the opening and closing prices and the primary
listing market notifications as messages of both NYSE Arca and the
primary listing market, because doing so would minimize operational
risks and challenges to market participants.\30\
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\27\ See KCG Letter, supra note 4, at 2.
\28\ See id.
\29\ See id. at 4 .
\30\ See id. at 2.
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The second commenter similarly characterized the proposals as ``a
step forward to addressing industry concerns with the current NYSE Rule
49.'' \31\ In particular, the second commenter highlighted the
following elements of the Exchanges' proposals that it considers
critical to an orderly transition of trading activity during an
emergency: (1) Next-day resumption of trading on NYSE Arca, because an
intra-day failover would not allow firms sufficient time to make
necessary changes and adequately test those changes; (2) printing
orders routed to NYSE Arca as orders of NYSE Arca, with the ``P''
designation, rather than as orders of NYSE, because doing so will
conform to firms' front, middle, and back office expectations that
orders routed to an exchange will result in executions and clearing
activity associated with that same exchange; (3) printing opening
closing prints with both the ``P'' and the ``N'' or ``A'' designations,
because doing so accommodates the reliance of some firms and processes
on the primary market print; \32\ and (4) the provisions of the
proposal relating to NYSE Arca membership.\33\
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\31\ See FIF Letter, supra note 4, at 1.
\32\ The commenter qualified its support of this point by
observing that firms will need to test this process to ensure that
they can properly handle both prints. The Commission notes that, as
a result of the industry-wide test conducted on September 21, 2013,
the Exchanges in fact altered this element of the proposal. As
described more fully above, supra notes 21 to 24 and accompanying
text, under the amended proposals, NYSE Arca would disseminate
primary listing market notifications and opening or re-opening
quotes with both the primary market ``N'' or ``A'' designation along
with the NYSE Arca's ``P'' designation. However, under the amended
proposals, the opening, re-opening, and closing transactions would
be disseminated as messages only of the primary listing market,
i.e., as ``N'' or ``A'' only.
\33\ See FIF Letter, supra note 4, at 1-2.
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The second commenter coupled its support with three recommendations
that it says are aimed at fully assessing the policies and procedures
outlined in the proposals: (1) The creation of a robust test plan for
the industry to test and evaluate readiness; (2) the establishment of
an ``Emergency Powers Playbook'' designed for operations and technology
staff that includes timelines and activities for entering, operating
under, and exiting the emergency powers state; and (3) the development
and deployment of a communications plan designed to familiarize the
industry with the proposals once approved.\34\
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\34\ See id. at 2.
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In response to the second comment letter, the Exchanges stated
their belief that the FIF's three recommendations relate to the
technical implementation of the proposed rules and do not require the
proposed rules to be amended.\35\ The Exchanges noted further that they
have already begun working closely with industry participants on the
implementation of the proposed rules.\36\ The Exchanges represented
that they had scheduled an industry test for September 21, 2013 and
that they would continue to work with industry groups and the
Exchanges' member organizations to ensure appropriate communications
and testing opportunities.\37\
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\35\ See Exchanges' Response Letter, supra note 4, at 1. As
noted above in this Order, the Exchanges did in fact amend the
proposals in response to the results of the industry-wide test that
was conducted on September 21, 2013.
\36\ See id. at 2.
\37\ See id.
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IV. Discussion and Commission Findings
After careful review of the proposals, the comment letters
received, the Exchanges' response, and the proposed amendments
reflecting the outcome of the industry-wide test of the changes
contemplated by the proposals, the Commission finds that the proposed
rule changes are consistent with the requirements of the Act and the
rules and regulations thereunder that are applicable to a national
securities exchange.\38\ In particular, the Commission finds that the
proposed rule changes are consistent with Section 6(b)(5) of the
Act,\39\ which requires, among other things, that the rules of a
national securities exchange be designed to prevent fraudulent and
manipulative acts and practices; to promote just and equitable
principles of trade; to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities; to remove impediments to and perfect the mechanism of a
free and open market and a national market system; and, in general, to
protect investors and the public interest. The Commission also finds
that the proposed rule changes are consistent with Section 6(b)(7) of
the Act,\40\ which requires, among other things, that the rules of a
national securities exchange provide a fair procedure for the
disciplining of members and persons associated with members.
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\38\ In approving the proposals, the Commission has considered
the proposed rules' impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\39\ 15 U.S.C. 78f(b)(5).
\40\ 15 U.S.C. 78f(b)(7).
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The Commission finds that the proposals are reasonably designed to
maintain orderly trading in NYSE- and NYSEMKT-listed securities in the
event those exchanges experience an emergency.\41\ The Commission
previously approved the NYSE's plan, under Rule 49, to rely on NYSE
Arca as a backup trading facility that would receive and process
quotations and orders in NYSE-listed securities.\42\ At that time, the
Commission noted that it had also approved proposals by other national
securities exchanges to establish back-up trading arrangements.
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\41\ The Commission notes, as did KCG in its comment letter,
that these proposals do not relate to the NYSE's role as
Administrator for Network A, or the NYSE's role as the Securities
Information Processor (SIP) for NYSE-listed securities.
\42\ See NYSE Rule 49 Approval Order, supra note 10, 74 FR at
68643.
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The NYSE's proposed Rule 49 would continue to rely on NYSE Arca as
a backup trading facility beginning no earlier than the next trading
day after an emergency. As such, it does not represent a fundamental
shift in the NYSE's approach to business continuity planning. Rather,
the most significant feature of the revisions to Rule 49 would provide
that, while acting as an emergency backup, NYSE Arca would disseminate
quotations and orders in NYSE-listed securities as quotations and
orders of NYSE Arca, rather than those of NYSE, with limited
exceptions. These exceptions would be the primary listing market
notifications and opening or re-opening quotes, which would be
disseminated as messages of both NYSE Arca and NYSE, and the opening,
re-opening, and closing transactions, which would be disseminated only
as messages of the NYSE. Likewise, under new NYSE MKT Rule 49--
Equities, NYSE Arca would serve as the backup for NYSE MKT, and it
would disseminate quoting and trading activity in NYSE MKT-listed
securities as ``P,'' with the same exceptions for primary
[[Page 68133]]
listing market notifications, opening or re-opening quotes, and
opening, re-opening, and closing trades.
The Exchanges have represented, and the commenters have agreed,
that this proposed change would better align the Exchanges' rules with
the capabilities and preferences of the industry. In particular, the
Commission understands from the Exchanges that, when firms route quotes
or orders to an exchange, they expect to receive return messages, such
as confirmations, under the same exchange's designation.\43\ For
certain messages, however, such as the opening, re-opening, and closing
prints, opening and re-opening quotes, and primary listing market
notifications, the Exchanges have represented, based on the results of
an industry-wide test and feedback from market participants, that
firms' systems may need to see the listing market designation--``N''
for NYSE and ``A'' for MKT.\44\
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\43\ See FIF Letter, supra note 4, at 1.
\44\ The NYSE also provided additional justification for
utilizing a primary market print for the opening and closing
transactions, including that private corporate transactional
contracts involving stock purchases or valuations frequently make
reference to the primary market print rather than to the CTA print
and that the pricing and valuation of certain indices, funds, and
derivative products require primary market prints.
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Accordingly, the Commission believes that the proposals are
intended to maintain orderly trading during an emergency and to do so
in a way that is compatible with the systems of most industry
participants.\45\ The Commission notes, importantly, that the Exchanges
recognize that they remain the SROs that are legally responsible for
their primary listing market functions, even though certain messages,
such as primary listing market notifications, would be disseminated
with a ``P'' in addition to the primary listing market designation.\46\
The Commission further notes that, under the proposals, volume
associated with opening and closing transactions for NYSE-listed
securities would be reported only as NYSE volume to avoid double
counting.
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\45\ The Commission acknowledges that the proposed rule changes
could require systems changes across the industry, and it
appreciates the points that the FIF Letter raises concerning testing
and implementation. The Exchanges represent that they are working
with FIF and other industry participants to promote smooth adoption
of the changes. Moreover, the Exchanges have stated that the
proposals, as amended, incorporate feedback received from market
participants who took part in an industry-wide test of the proposed
changes.
\46\ See, e.g., NYSE Notice, supra note 3, 78 FR at 48524 n.9.
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The Commission also finds that the proposed revisions to Rule 49's
requirements concerning NYSE members and member organizations are
consistent with the Act. Rule 49, as revised, would require NYSE
members and member organizations wishing to trade NYSE-listed
securities during an Emergency Condition to be responsible for having
contingency plans to establish connectivity to NYSE Arca and for
routing quotes and orders there. As the FIF Letter points out, these
revised provisions should help ensure that the firms transacting in
NYSE- or NYSE MKT-listed securities on NYSE Arca have experience doing
so. And while the Exchanges propose to eliminate the current NYSE
rule's requirement that NYSE DMMs be subject to NYSE Arca quoting
obligations for Market Makers, DMMs trading NYSE- or NYSE MKT-listed
securities on NYSE Arca during an emergency would not receive any
special benefits in connection with such trading. DMMs that wish to act
as NYSE Arca Market Makers during an Emergency Condition would have to
apply for and obtain Market Maker status on NYSE Arca in advance.
Finally, the Commission finds the proposals consistent with the Act
to the extent that they would subject all trading on NYSE Arca during
an Emergency Condition to NYSE Arca rules, surveillance, and
discipline. Current Rule 49 already establishes that NYSE Arca trading
rules would apply to trading on its facility in NYSE-listed stocks
during an emergency, and this would remain unchanged under the
proposals. Accordingly, the Commission finds it appropriate for NYSE
Arca to be the SRO responsible for enforcing its rules with respect to
trading that occurs on its facility. The Commission notes again,
however, that these proposed provisions do not alter the NYSE's or NYSE
MKT's responsibilities as primary listing markets.
V. Conclusion
IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the
Act,\47\ that the proposed rules changes (SR-NYSE-2013-54; SR-NYSEMKT-
2013-66; and SR-NYSEARCA-2013-77) as amended, be, and hereby are,
approved.
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\47\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
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\48\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(83).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-27052 Filed 11-12-13; 8:45 am]
BILLING CODE 8011-01-P