[Federal Register Volume 78, Number 249 (Friday, December 27, 2013)]
[Notices]
[Pages 79048-79049]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-30938]
[[Page 79048]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71157; File No. SR-NYSEMKT-2013-88]
Self-Regulatory Organizations; NYSE MKT LLC; Order Approving
Proposed Rule Change Amending Certain Rules That Address Wash Sales in
Order To Harmonize the Exchange's Rules With the Rules of New York
Stock Exchange LLC and the Financial Industry Regulatory Authority
December 20, 2013.
I. Introduction
On October 29, 2013, NYSE MKT LLC (``NYSE MKT'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend certain rules that address wash sales in
order to harmonize the Exchange's rules with the rules of New York
Stock Exchange LLC (``NYSE'') and the Financial Industry Regulatory
Authority (``FINRA''). The proposed rule change was published for
comment in the Federal Register on November 14, 2013.\3\ The Commission
received no comments on the proposal. This order approves the proposed
rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 70832 (November 7,
2013), 78 FR 68488 (``Notice'').
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II. Description of the Proposal
In the filing, the Exchange proposed to amend its wash sale rules
to achieve a greater level of internal consistency as well as
consistency with FINRA's and NYSE's rules. First, the Exchange proposed
to eliminate Rule 476(a)(8), instead utilizing Rule 6140--Equities for
wash sale disciplinary actions in its equities market, as the Exchange
believes that the conduct described in that rule should not be treated
as a wash sale violation in all instances. The Exchange stated that it
believes that the scienter requirement in Exchange Rule 6140--Equities,
NYSE Rule 6140 and FINRA Rule 6140 recognizes that in today's markets,
there can be certain instances of trading activity that may
inadvertently and unknowingly result in executions with no change in
beneficial ownership, and that such conduct should not always be
treated as a wash sale violation if the market participant did not act
with purpose--for example, the Exchange noted that activity involving
an off-floor market participant's algorithmic orders that inadvertently
execute against themselves due to latency issues could be deemed a
violation of the second prong of Rule 476(a)(8).
Second, so that there is no change in the scope of equity market
participants subject to disciplinary action for wash sales, the
Exchange proposed a conforming amendment to Rule 6140(a) and (b)--
Equities to provide that the rule applies not only to members and
member organizations, but also to principal executives, approved
persons, registered or non-registered employees of a member or member
organization or persons otherwise subject to the jurisdiction of the
Exchange.\4\
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\4\ These persons were subject to Rule 476(a)(8).
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The Exchange also proposed to delete Rule 4,\5\ marking it
``Reserved.'' Finally, the Exchange proposed to add substantially the
same text of Rule 6140(a) and (b)--Equities to (options) Rule 995NY, in
new subparagraphs (e) and (f). As such, the Exchange is extending the
substance of the specific wash sale prohibitions in Rule 6140(a) and
(b)--Equities to trading on the Exchange's options market.\6\ The
Exchange stated that locating these provisions in the options rules
will give options market participants better notice of this prohibited
conduct.\7\
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\5\ Rule 4 in Part 1 of the General Rules provides that ``[n]o
member or member organization shall execute or cause to be executed,
or participate in an account for which there is executed on the
Exchange, the purchase of any security at successively higher prices
or the sale of any security at successively lower prices for the
purpose of creating or inducing a false, misleading or artificial
appearance of activity in such security or for the purpose of unduly
or improperly influencing the market price of such security or for
the purpose of making a price which does not reflect the true state
of the market in such security.'' Rule 4 applies to both the
Exchange's equities and options markets.
\6\ The references to a ``designated security'' in the text of
Rule 6140(a) and (b)--Equities would be replaced with ``listed
option'' in proposed Rule 995NY and similarly references to a
``member'' or ``member organization'' would be replaced with ``ATP
Holder.''
\7\ The Exchange also proposed a technical amendment to move a
definition of a term that is used in Rule 995NY(c) to that
subparagraph of the rule. Specifically, the definition of the term
``related instrument'' currently appears at the end of the rule
following the designation of subparagraph (d) and the text thereof,
although that term is used in subparagraph (c). As such, the
Exchange proposed to move the text of the definition of ``related
instrument'' to Rule 995NY(c).
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III. Discussion and Commission Findings
The Commission has carefully reviewed the proposed rule change and
finds that it is consistent with the requirements of Section 6 of the
Act \8\ and the rules and regulations thereunder applicable to a
national securities exchange.\9\ In particular, the Commission finds
that the proposal is consistent with Section 6(b)(5) of the Act,\10\
which requires, among other things, that the Exchange's rules be
designed to prevent fraudulent and manipulative acts and practices, 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.
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\8\ 15 U.S.C. 78f.
\9\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\10\ 15 U.S.C. 78f(b)(5).
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The Exchange is deleting Rule 476(a)(8), a rule which the Exchange
explained was originally adopted by the NYSE (and subsequently adopted
by the Exchange) to address manual, floor-based trading activity. In
its place, the Exchange proposes to use Rule 6140--Equities for wash
sale disciplinary actions in its equities market. The Exchange stated
that Rule 6140--Equities, which has a scienter standard that the second
prong of Rule 476(a)(8) lacks, recognizes that certain inadvertent
trading activity, such as algorithmic trading, that results unintended
executions with no change in beneficial ownership should not always be
treated as a wash sale violation. In addition, the Exchange is amending
Exchange Rule 6140(a) and (b)--Equities to cover the same persons that
Exchange Rule 476(a)(8) covered. Finally, the Exchange is proposing to
delete Rule 4, and to add substantially the same text as Rule 6140(a)
and (b)--Equities to Exchange Rule 995NY so that the substance of the
wash sale prohibitions in Rule 6140(a) and (b)--Equities also applies
to trading on the Exchange's options market.
The Commission understands that algorithmic trading can result in
inadvertent executions with no change in beneficial ownership.\11\ The
Exchange has represented that the proposed rule change would not result
in any material change in the surveillance of potentially violative
activity nor any material diminution of the Exchange's enforcement
authority as it may still bring a disciplinary action in cases where a
market participant engages in a significant number of trades without a
change of beneficial ownership, even if such activity does not per se
violate Rule 6140(b)--Equities or proposed Rule 995NY(f)
[[Page 79049]]
because the participant did not act with ``purpose.'' The Exchange
further represented that such unintended activity could also give rise
to other violations, such as a failure to supervise under Rule 342--
Equities or Rule 922, or a violation of just and equitable principles
of trade or could otherwise constitute unethical activity under Rule
476(a)(6) or Rule 2010--Equities. Accordingly, the Commission expects
the Exchange to continue to surveil for potential wash sale activity
and to take necessary action as appropriate.
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\11\ The Commission notes that algorithmic trading resulting in
executions with no change in beneficial ownership, even if
unintended, raises concerns.
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The Commission believes that the proposed deletion of Rule
476(a)(8) and Rule 4 promotes harmonization, consistency and clarity
with respect to the Exchange's rules \12\ by resolving the current
inconsistent scienter standards of Exchange Rule 476(a)(8) and Exchange
Rule 4,\13\ Exchange Rule 6140--Equities, NYSE Rule 6140 and FINRA Rule
6140, as well as extending the breadth of persons covered by Rule
6140--Equities to those persons covered by Rule 476(a)(8). The
Commission also believes that the additions to Exchange Rule 995NY to
apply the specific provisions of Rule 6140(a) and (b)--Equities to the
Exchange's options market are appropriate because the Exchange's ATP
Holders will be subject to a rule that prohibits wash sales that were
designed to create or induce a false or misleading appearance of
activity in a designated security. The change will provide clear notice
to the ATP Holders of such prohibited activity, as well as make the
prohibited activity consistent across both the Exchange's equities and
options markets, as well as across NYSE and FINRA. The Commission
believes that the proposed rule change should result in less burdensome
and more efficient regulatory compliance for firms that are members of
the Exchange, NYSE and FINRA. As such, the Exchange's rules would
continue to protect investors and the public interest.
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\12\ The Exchange stated that it can bring disciplinary actions
under Rule 476(a)(8) for conduct that occurred prior to the time the
rule is deleted. Thus, the proposed rule change would have no impact
on ongoing disciplinary actions involving violations of Rule
476(a)(8).
\13\ The Exchange noted that Rule 4 is substantially the same as
Rule 6140(a)--Equities.
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For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act \14\ and the
rules and regulations thereunder applicable to a national securities
exchange.
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\14\ 15 U.S.C. 78f(b)(5).
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\15\ that the proposed rule change (SR-NYSEMKT-2013-88)
be, and it hereby is, approved.
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\15\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-30938 Filed 12-26-13; 8:45 am]
BILLING CODE 8011-01-P