[Federal Register Volume 79, Number 8 (Monday, January 13, 2014)]
[Notices]
[Pages 2219-2224]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-00334]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71253; File No. SR-NYSEArca-2013-148]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Amending NYSE Arca
Options Rule 6.40 To Expand the Scope of the Existing Risk Limitation
Mechanism To Address Multiple, Successive Triggers of the Risk
Limitation Mechanism
January 7, 2014.
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 December 26, 2013, NYSE Arca, Inc. (the ``Exchange'' or
``NYSE Arca'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III 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 NYSE Arca Options Rule 6.40 to
expand the scope of the existing Risk Limitation Mechanism to address
multiple, successive triggers of the Risk Limitation Mechanism. 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 proposes to amend NYSE Arca Options Rule 6.40 to
expand the scope of the existing Risk Limitation Mechanism to address
multiple, successive triggers of the Risk Limitation Mechanism.
Overview
The Exchange has in place a risk-limitation system that is designed
to help Market Makers and non-Market Maker OTP Firms and OTP Holders
(collectively, referred to herein as ``dealers'') better manage risk
during periods of increased and significant trading activity. The three
existing Risk Limitation Mechanisms (described below) are designed to
mitigate the potential risks of multiple executions against a dealer's
trading interest that, in today's highly automated and electronic
trading environment, can occur simultaneously across multiple series
and multiple option classes. In operation, under current Rule 6.40,
when a dealer has triggered a Risk Limitation Mechanism in a given
option class (by breaching preset thresholds), the Exchange will cancel
all resting quotes and/or certain orders and will reject all subsequent
quotes and/or
[[Page 2220]]
certain orders in the affected option class (underlying symbol) until
the dealer submits a message to the Exchange requesting to re-enable
the entry of quotes or certain orders. This temporary suspension from
the market in the affected option classes (specifically as relates to
quoting or certain orders) is meant to operate as a safety valve that
forces dealers to re-evaluate their positions before requesting to re-
enter the market. As discussed below, the Exchange believes that the
majority of dealers that avail themselves of the Risk Limitation
Mechanism utilize automated, system-generated messages to request that
the Exchange re-enable the entry of their quotes or certain orders
after triggering the Risk Limitation Mechanism. Provided the dealer
does not experience multiple triggers of the Risk Limitation Mechanism
in rapid succession, the Exchange believes the automated re-enable
message is sufficient.
The goal of the current proposal is to address circumstances where
a dealer experiences multiple, successive triggers of the Risk
Limitation Mechanism, which the Exchange believes would be indicative
of the dealer experiencing a bona fide problem (i.e., a potential
system error). Thus, when a dealer experiences multiple, successive
triggers of the Risk Limitation Mechanism, the Exchange proposes a two-
pronged remedial response. First, the Exchange would cancel all of the
dealer's quotes or Applicable Orders (defined below)--as opposed to
cancelling only those quotes or certain orders in the option class
(underlying symbol) in which the dealer triggered the Risk Limitation
Mechanisms. Second, the Exchange would require that the dealer make
non-automated contact with the Exchange to re-enable the submission of
the dealer's quotes or Applicable Orders.\4\
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\4\ The Exchange will include as part of a Trader Update
appropriate contact information to be used by dealers when
requesting to re-enable the entry of quotes and orders.
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The Exchange believes that the proposed enhancement to current Rule
6.40 would help maintain a fair and orderly market because it would
suspend all of the dealers' quoting or trading in certain orders
following multiple, successive triggers of the Risk Limitation
Mechanism and would require non-automated contact with the Exchange
before this suspension is lifted. The proposed modifications would
therefore encourage increased attention by dealers to their risk
tolerance and related controls. The Exchange is also proposing these
modifications in response to requests from its clients and believes the
changes will assist these clients in better managing their risks.
Existing Risk Limitation Mechanism
The Exchange first adopted a risk-limitation system, as embodied in
Rule 6.40, to manage risk during periods of increased and significant
trading activity.\5\ The prior version of the Rule provided only a
Transaction-Based Risk Limitation Mechanism that applied solely to
Market Maker quotes.
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\5\ See Securities Exchange Act Release No. 54238 (July 28,
2006), 71 FR 44758 (August 7, 2006) (SR-NYSEArca-2006-13).
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In 2012, in response to an increasingly automated and electronic
trading environment, the Exchange adopted the risk protections afforded
under current Rule 6.40 (Risk Limitation Mechanism).\6\ Current Rule
6.40 expanded upon the earlier version by extending the transaction-
based limitation mechanism to orders from Market Makers as well as to
orders from non-Market Maker OTP Firms and OTP Holders (together,
``non-Market Makers'') \7\ and providing for two additional risk
limitation mechanisms--a volume-based mechanism and a percentage-based
mechanism (collectively, the ``Risk Limitation Mechanisms''). In
addition to applying to all Market Maker quotes, the existing Risk
Limitation Mechanisms apply to dealers' orders submitted via ArcaDirect
and those designated as one of three ``post no preference'' order
types--specifically, PNP, PNP-Blind and PNP-Light, or as Liquidity
Adding Orders (``ALO''), which account for upwards of ninety-five
percent of order flow to the Exchange (collectively, the ``Applicable
Orders'').\8\ Each Risk Limitation Mechanism is designed to measure a
dealer's risk exposure within a time period specified by the Exchange,
based on either the number of trades executed by the dealer (the
``Transaction-Based Risk Limitation Mechanism''); the number of
contacts entered by the dealer (the ``Volume-Based Transaction-Based
Risk Limitation Mechanism''); or the percentage of a dealer's quoted
size that gets traded (the ``Percentage-Based Risk Limitation
Mechanism'').
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\6\ See Securities Exchange Act Release No. 34-67714 (August 22,
2012), 77 FR 167 (August 28, 2012) (SR-NYSEArca-2012-87). The Risk
Limitation Mechanisms as set forth in current Rule 6.40 (and the
proposal described herein) are only applicable to electronic trading
on the Exchange.
\7\ The Exchange specified within Rule 6.40(a) that non-Market
Maker OTP Firms and OTP Holders would be referred to as ``non-Market
Makers'' for purposes of Rule 6.40.
\8\ See paragraphs (p), (u), (v) and (t) of NYSE Arca Options
Rule 6.62 (Certain Types of Orders Defined), respectively. The
Exchange notes that the rule is currently silent as to the source
and order types that are subject to the Risk Limitation Mechanisms.
The Exchange therefore proposes to modify Commentary .07 to Rule
6.40 to identify the source and the order types to which the
existing (and modified) Risk Limitation Mechanisms apply and would
announce via Trader Update any changes to these source(s) or order
types. Similarly, for the sake of clarity, the Exchange proposes to
replace ``order'' with ``Applicable Order'' in existing paragraphs
(b), (c), (d) and (e) to Rule 6.40, and elsewhere in the rule as
necessary.
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Per current Rule 6.40(a), the Exchange utilizes Trade Counters,
based on trading permit identification (or ``TPID''), to determine when
a Risk Limitation Mechanism has been triggered. The dealer selects from
within a range specified by the Exchange individual risk parameters
that, if breached, will trigger the selected Risk Limitation
Mechanism.\9\
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\9\ Per current Commentary .03 to Rule 6.40, the Exchange will
not (i) specify a minimum setting of less than one or a maximum
setting of more than 100 for the Transaction-Based Risk Limitation
Mechanism; (ii) specify a minimum setting of less than 20 or a
maximum setting of more than 5,000 for the Volume-Based Risk
Limitation Mechanism; or (iii) specify a minimum setting of less
than 100 or a maximum setting of more than 2,000 for the Percentage-
Based Risk Limitation Mechanism. The Exchange proposes to amend
Commentary .03 to Rule 6.40 to reflect that any changes to these
settings would be announced to dealers via Trader Update, rather
than Regulatory Bulletin.
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Per Commentary .08 to the Rule, while the existing Risk Limitation
Mechanisms apply to quotes and Applicable Orders from Market Makers and
non-Market Makers, use of this risk-limitation feature is mandated only
for Market Makers' quotes.\10\ Thus, Market Makers are required to
activate one of the three Risk Limitation Mechanisms at all times for
their quotes for each class in their appointment. However, the existing
Risk Limitation Mechanisms are entirely voluntary for Applicable Orders
submitted by Market Makers and non-Market Makers. With respect to the
Applicable Orders, Market Makers and non-Market Makers have the option
of availing themselves of one of the three Risk Limitation Mechanisms
for some or all of the option classes in which they trade/provide
quotes.\11\ A Market Maker
[[Page 2221]]
may activate one Risk Limitation Mechanism for its quotes and a
different Risk Limitation Mechanism for its Applicable Orders, even if
both are activated for the same class.
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\10\ When first implemented, Rule 6.40 was entitled ``Market
Maker Risk Limitation Mechanism-- OX'', and applied solely to--and
was mandated for--Market Maker quotes. However, when the rule was
revised in 2012, and the risk-limitation functionality was expanded
to cover Applicable Orders as well as quotes, the changes to the
title of the rule and the accompanying rule text did not make
entirely clear that the Risk Limitation Mechanism is required for
all Market Maker quotes. Thus, as proposed, new Commentary .04 will
state that use of the Risk Limitation Mechanism is mandated only for
Market Maker quotes and is otherwise optional.
\11\ With respect to Applicable Orders submitted by dealers, the
Exchange has included in current Rule 6.40 the concept of a
``specified class'' to indicate the option class for which a Risk
Limitation Mechanism is activated; if a dealer does not identify any
``specified class,'' none of the Risk Limitation Mechanisms will be
activated.
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Per current Rule 6.40(e), and Commentary .01 to the Rule, once a
dealer's specified risk exposure is exceeded within the time period
specified by the Exchange (as tracked by the Trade Counter), the Risk
Limitation Mechanism is triggered and the NYSE Arca System (``System'')
automatically cancels electronic Applicable Orders or quotes by
generating a ``bulk cancel'' message.\12\ Per Commentary .01, the bulk
cancel message is processed in time priority with any other quote,
order or other message received by the System.\13\ Thus, any quotes or
orders that match with a Market Maker's quote or with a dealers' [sic]
Applicable Orders that were received by the System prior to the receipt
of the bulk cancel message would be automatically executed. Similarly,
quotes or orders received by the System after receipt of the bulk
cancel message would not be executed against the cancelled quotes or
Applicable Orders. In this regard, Rule 6.40--in its current form and
as proposed--would not relieve dealers of their ``firm quote''
obligations under Rule 602 of Regulation NMS \14\ or NYSE Arca Options
Rule 6.86. Furthermore, the proposed rule change would not relieve
Market Makers of their quoting obligations under the Exchange's
Rules.\15\
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\12\ See NYSE Arca Options Rule 6.40(b)(1)-(3); (c)(1)-(3); and
(d)(1)-(3).
\13\ As previously noted, for the sake of clarity, the Exchange
proposes to revise the rule text to utilize ``Applicable Order''
rather than ``order'' where necessary.
\14\ 17 CFR 242.602.
\15\ See, e.g., NYSE Arca Options Rule 6.37B.
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A dealer that has been suspended from quoting or submitting
Applicable Orders in the affected class, pursuant to current Rule
6.40(e), may only re-enter the market by submitting a message to the
Exchange requesting re-entry and, until such message is submitted, any
subsequent quotes or Applicable Orders will be rejected by the
Exchange.\16\ The intended purpose of this forced suspension from
quoting and from certain trading in the affected class is to afford the
dealer an opportunity to evaluate its positions before opting to re-
enter the market. In practice, the Exchange has received responses to
bulk cancel messages from dealers requesting to re-enter the market
within as few as two milliseconds. This rapid response time leads the
Exchange to conclude that the messages being submitted in response to
the bulk cancel messages are automated, system-generated messages. The
effect of this apparent automation is that dealers that are effectively
kicked out of the market (for their quotes or Applicable Orders) in the
affected class for triggering the Risk Limitation Mechanism can re-
enter the market within milliseconds. The Exchange believes that an
automated response is sufficient, provided the dealer does not
experience multiple triggers of the Risk Limitation Mechanism in rapid
succession.
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\16\ See NYSE Arca Options Rule 6.40(e), and Commentary .01.
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Under current Rule 6.40 there is no mechanism for addressing
multiple, successive triggers of the Risk Limitation Mechanisms within
a time period specified by the Exchange, which could be particularly
problematic for dealers if the markets turns in an unexpected
direction.
Proposed Changes to Risk Limitation Mechanism
The Exchange proposes to modify Rule 6.40 to address circumstances
where a dealer experiences multiple, successive triggers of the Risk
Limitation Mechanism. The Exchange proposes a two-pronged remedial
response. First, the Exchange would cancel all of the dealer's quotes
or Applicable Orders (defined below)--as opposed to cancelling only
those quotes or certain orders in the option class (underlying symbol)
in which the dealer triggered the Risk Limitation Mechanism. Second,
the Exchange would require that the dealer make non-automated contact
with the Exchange to re-enable the submission of the dealer's quotes or
certain orders.
Proposed Rule 6.40(a)(2) would provide for a ``trigger counter''
that (similar to the Trade Counter, which serves as the basis for
determining whether a Risk Limitation Mechanism has been triggered)
would track the number of times that a dealer has triggered any of the
Risk Limitation Mechanisms pursuant to current Rule 6.40(b), (c), or
(d).\17\
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\17\ This proposed addition would require that current Rule
6.40(a) be renamed from ``Trade Counter'' to ``Counters,'' and
renumbered such that ``Trade Counter'' would be numbered as proposed
Rule 6.40(a)(1). The Exchange also proposes to amend paragraph (a)
to refer to ``Applicable Orders,'' as referenced in Commentary .07
to the Rule (instead of ``orders'') to make clear which orders are
subject to the Risk Limitation Mechanisms.
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Proposed Rule 6.40(f) outlines the actions that the System would
take if the trigger counter indicates that any of the Risk Limitation
Mechanisms have been triggered in excess of the number of times
specified by the dealer (within a parameter set by the Exchange, as
noted below) within the time period specified by the Exchange. In
short, once a dealer has exceeded the number of triggers of the Risk
Limitation Mechanisms, pursuant to paragraph (f) of Rule 6.40, all
Applicable Orders or quotes by a Market Maker or all Applicable Orders
by a non-Maker Maker would be cancelled.
Specifically, per proposed Rule 6.40(f)(1), if the Risk Limitation
Mechanism is triggered pursuant to paragraph (b)(1), (c)(1) or (d)(1)
to this Rule, the System would automatically cancel all of the non-
Market Maker's Applicable Orders, regardless of which specified class
caused the underlying trigger of the Risk Limitation Mechanism. Per
proposed Rule 6.40(f)(2), if the Risk Limitation Mechanism is triggered
pursuant to paragraph (b)(2), (c)(2) or (d)(2) to this Rule, the System
would automatically cancel all of the Market Maker's Applicable Orders,
regardless of which specified class caused the underlying trigger of
the Risk Limitation Mechanism. And, per proposed Rule 6.40(f)(3), if
the Risk Limitation Mechanism is triggered pursuant to paragraph
(b)(3), (c)(3) or (d)(3) to this Rule, the System would automatically
cancel all of the Market Maker's quotes, regardless of which appointed
class caused the underlying trigger of the Risk Limitation Mechanism.
The difference between the existing Risk Limitation Mechanism
versus the proposed enhancement is the cancellation of all of a
dealer's Applicable Orders or quotes upon breach of proposed paragraph
(f) to Rule 6.40. Thus, if a dealer triggers a Risk Limitation
Mechanism, pursuant to paragraph (e) of current Rule 6.40, only the
dealer's quotes or Applicable Orders in the option class that triggered
the Risk Limitation Mechanism would be cancelled by the Exchange;
whereas if a dealer breaches proposed paragraph (f) of Rule 6.40, by
engaging in multiple triggers of the Risk Limitation Mechanism in a
time period specified by the Exchange, all of that dealer's Applicable
Orders or quotes in any option class(es) submitted that day would be
cancelled--not just the Applicable Orders or quotes in the option
class(es) that led to the most recent trigger of the Risk Limitation
Mechanism.\18\ The Exchange believes
[[Page 2222]]
that this modification--to temporarily suspend quoting or Applicable
Orders in all classes actively traded by the dealer--would strengthen
the efficacy of the existing Risk Limitation Mechanisms by providing
dealers with increased sensitivity in setting risk tolerance and
controls.
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\18\ The cancellation will only apply to those quotes or
Applicable Orders submitted by the dealer that trading day. With
respect to the cancellation of all Applicable Orders, pursuant to
proposed paragraph (f) to Rule 6.40, this would include a
cancellation of Applicable Orders in option classes for which the
dealer may not have opted to utilize a Risk Limitation Mechanism.
Thus, even though dealers are not required to subject all option
classes traded to this risk-limitation feature, a breach of proposed
paragraph 6.40(f) would affect all Applicable Orders in all option
classes traded that day.
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Pursuant to proposed Commentary .01 to Rule 6.40, upon breaching
proposed paragraph (f) of Rule 6.40, the System would automatically
cancel electronic Applicable Orders or quotes by generating a ``bulk
cancel'' message--just as the system currently does in the event of a
breach of the Risk Limitation Mechanism (i.e., current paragraph (e) of
Rule 6.40).\19\ In addition to the bulk cancel message, the System
would generate an alert message providing notice that the dealer has
exceeded the number of triggers of the Risk Limitation Mechanisms,
pursuant to paragraph (f) of Rule 6.40.
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\19\ Relatedly, the Exchange also proposes to amend Commentary
.08 to Rule 6.40 regarding the cancellation of Applicable Orders to
make it pertinent to paragraph (f), in addition to its current
application to paragraph (e) to Rule 6.40.
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The Exchange also proposes to amend current Commentary .02 to Rule
6.40 to reflect that the Exchange would (and does) accept automated
messages from dealers requesting the re-enabling of quotes or
Applicable Orders, following a breach of paragraph (e). The Exchange
believes that this proposed change would add transparency to the
functioning of the Exchange and the types of messages it would accept
when a Risk Limitation Mechanism is triggered pursuant to paragraph (e)
of the Rule.
The Exchange proposes to further amend current Commentary .02 to
Rule 6.40 to require that, upon a dealer's breach of proposed paragraph
(f) to current Rule 6.40, the dealer would have to make non-automated
contact with the Exchange to enable the entry of all new Applicable
Orders or quotes, which had been cancelled pursuant to proposed
paragraph (f).\20\ The Exchange believes that requiring this
additional, non-automated contact will strengthen the efficacy of the
existing Risk Limitation Mechanisms by providing dealers with increased
sensitivity in setting risk tolerance and controls.
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\20\ Specifically, proposed Commentary .03 to Rule 6.40 provides
that ``[i]f any of the Risk Limitation Mechanisms are triggered
pursuant to paragraphs (f)(1) or (f)(2) of Rule 6.40, any Applicable
Orders sent by the non-Market Maker or Market Maker, respectively,
in any class, shall be rejected until the non-Market Maker or Market
Maker makes non-automated contact with the Exchange to enable the
entry of new Applicable Orders. If any of the Risk Limitation
Mechanisms are triggered pursuant to Rule 6.40(f)(3), any quotes
sent by the Market Maker, in any class, shall be rejected until the
Market Maker makes non-automated contact with the Exchange to enable
the entry of new quotes.''
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Pursuant to proposed Commentary .03 to Rule 6.40, the Exchange
would specify via Trader Update the applicable range within which
dealers could select the number of times the Risk Limitation Mechanism
could be triggered before breaching proposed paragraph (f) to Rule
6.40, but this setting would not be less than a minimum of one and a
maximum of 100. The Exchange believes that setting the parameters
within this broad range would provide dealers with ample flexibility in
setting their tolerance for risk. Those dealers with a lower risk
tolerance or those that may be prone to multiple, successive triggers
of the Risk Limitation Mechanisms in shorter periods of time, may opt
to select a number of triggers on the lower end of the range, thereby
optimizing the protection afforded by this proposed rule change, while
those dealers with a higher risk tolerance or that are less likely to
experience multiple, successive triggers of the Risk Limitation
Mechanism, may select the maximum allowable triggers to decrease the
protections afforded by the proposed rule change. Moreover, while the
Exchange retains discretion with respect to the levels at which it
could adjust these settings, the Exchange would not be permitted to
adjust the settings below the minimum or maximum proposed, which, the
Exchange believes would reasonably ensure that the settings are at all
times within a reasonable range.
Consistent with current Commentary .03 to Rule 6.40, the applicable
time period within which dealers would select the number of triggers
before breaching proposed paragraph (f) to Rule 6.40 would not be less
100 milliseconds, unless otherwise announced by the Exchange. The
Exchange believes that specifying the applicable minimum, maximum and/
or default settings via Trader Update, including any changes thereto in
the future designed to ensure that the mechanisms work as intended,
would be consistent with the manner in which the Exchange has
communicated any changes to the existing Risk Limitation Mechanism
settings and is consistent with the manner in which the Commission
currently permits option exchanges to communicate settings or
parameters for various exchange mechanisms to their members other than
through the rule filing process, i.e., via notices, bulletins or
circulars.\21\
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\21\ See, e.g., Securities Exchange Act Release No. 34-70038
(July 25, 2013), 78 FR 147 (July 31, 2013) (SR-NYSEArca-2013-72)
(NYSE Arca Rule 6.60, which applies a trade collar mechanism to
prevent the immediate execution of certain incoming orders outside
of a specified parameter (referred to as a ``Trading Collar'') and
provides that changes to the Trading Collar may be announced by
Trader Update. See also BOX Options Exchange LLC (``BOX'') Rule
8140, which provides that, related to BOX's Quote Removal Mechanism
Upon Technical Disconnect, BOX Market Makers will be notified of the
value that ``n'' seconds represents via Regulatory Circular. See
also Securities Exchange Act Release No. 58140 (July 10, 2008), 73
FR 41384 (July 18, 2008) (SR-BSE-2008-40), in which the Commission
noted that ``n'' seconds would be configurable by BOX and any
subsequent re-configurations will be announced to Market Makers via
Regulatory Circular. See also Interpretation and Policy .05 to
Chicago Board Options Exchange (``CBOE'') Rule 6.74A, which provides
that any determinations made by CBOE regarding CBOE's Automated
Improvement Mechanism, such as eligible classes, order size
parameters and the minimum price increment for certain responses,
shall be communicated in a Regulatory Circular. See also CBOE Rule
6.13(b)(i)(C)(2)(a), which provides that CBOE may establish certain
maximum order size eligibility requirements with respect to
automatic executions and announce such determinations via Regulatory
Circular.
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The Exchange also proposes at this time to make a procedural change
for making announcements regarding functionality associated with the
Risk Limitation Mechanism. Presently the Exchange issues Regulatory
Bulletins when making such announcements. Going forward, the Exchange
proposes to issue a Trader Update in lieu of a Regulatory Bulletin.
Regulatory Bulletins generally contain information regarding legal and
regulatory matters while Trader Updates deal with issues such as
trading, systems changes and real-time market announcements. The
Exchange believes that it is more appropriate to make announcements
regarding the Risk Limitation Mechanism via Trader Update. Trader
Updates, like Regulatory Bulletins, are electronically distributed to
all OTP Holders and OTP Firms and are posted on the Exchange's Web
site. Accordingly, the Exchange proposes amended current Commentaries
.03 and .07 to Rule 6.40 by replacing references to ``Regulatory
Bulletin'' with ``Trader Update.'' Should the Exchange make a change to
the Risk Limitation Mechanism settings, for example to accommodate
changes in market conditions or the technology needs and considerations
of dealers, the Exchange would issue a Trader Update at least one
trading day in advance of the settings becoming effective, which would
give dealers notice and
[[Page 2223]]
opportunity to make any necessary adjustments to their risk settings.
Pursuant to proposed Commentary .04 to Rule 6.40, those dealers
that utilize any of the Risk Limitation Mechanisms would be
automatically subject to proposed paragraph (f) to Rule 6.40. Thus,
while the Risk Limitation Mechanism is optional for each dealer's
Applicable Orders, once a dealer avails itself of the Risk Limitation
Mechanism for some of the option classes in which it trades, all of the
option classes in which that dealer trades would be subject to the
proposed rule change.\22\
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\22\ Market Makers are required to utilize the Risk Limitation
Mechanism for all of their quotes and therefore all quotes would be
subject to the proposed change.
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Pursuant to proposed Commentary .06 to Rule 6.40, absent a breach
pursuant to Rule 6.40(f), the trigger counter (which would serve as the
basis for determining a breach of proposed paragraph (f)) would be
automatically reset and would commence a new count for dealers (1) when
a time period specified by the Exchange elapses; or (2) following any
intraday update to configurable thresholds, as provided in Commentary
.03 to this Rule 6.40. Per proposed Commentary .06 to Rule 6.40, in the
event of a breach pursuant to proposed Rule 6.40(f), the trigger
counter would be reset and would commence a new count when the affected
dealer makes non-automated contact with the Exchange to enable the
entry of new Applicable Orders or quotes, as provided in proposed
Commentary .02 to Rule 6.40.
The Exchange believes that the proposed change to current Rule 6.40
will enhance the existing Risk Limitation Mechanisms and enable the
Exchange to aid in mitigating the potential risks of multiple
executions against a dealer's trading interest that, in today's highly
automated and electronic trading environment, can occur simultaneously
across multiple series and multiple option classes.
Implementation
The Exchange will announce the implementation date of the proposed
rule change by Trader Update to be published no later than 60 days
following the effective date of this filing. The implementation date
will be no later than 60 days following the issuance of the Trader
Update.
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) \23\ which requires the
rules of an exchange 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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\23\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change removes
impediments to and perfects the mechanism of a free and open market by
providing dealers with greater control and flexibility over setting
their risk tolerance and more protection over risk exposure, if the
market moves in an unexpected direction.
Specifically, the Exchange believes that cancelling all quotes or
Applicable Orders and requiring dealers to make non-automated contact
with the Exchange following multiple, successive triggers of the Risk
Limitation Mechanism allows dealers to be sensitive to the rapid
trading that occurs in today's highly automated and electronic trading
environment. This increased sensitivity will enable dealers to avoid
transacting against their interests and will help to ensure that
executions will not occur at erroneous prices, thereby removing
impediments to and promoting a fair and orderly market.
Moreover, the Exchange believes that the proposal is consistent
with the protection of investors and the public interests because it
will permit dealers to better manage the potential risks of multiple
executions against a dealer's proprietary interest that, in today's
highly automated and electronic trading environment, can occur
simultaneously across multiple series and multiple option classes.
Consistent with the ability to better manage risk, the Exchange
anticipates that the proposed enhancement to the existing Risk
Limitation Mechanism could likewise enhance the Exchange's overall
market quality as a result of narrowed quote widths and increased
liquidity for series traded on the Exchange, which would benefit
investors and the public interest. As with the intent of the existing
Risk Limitation Mechanism, the Exchange believes that the proposed
modifications to Rule 6.40 would further assist dealers in providing
aggressive quotes and increased liquidity, thus improving overall
market quality on the Exchange for the benefit of all investors and the
public.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange is proposing a
market enhancement that would provide dealers with greater control and
flexibility over setting their risk tolerance and more protection over
risk exposure, if the market moves in an unexpected direction. The
Exchange believes the proposal would provide market participants with
additional protection from erroneous executions. The proposal is
structured to offer the same enhancement to all dealers, regardless of
size, and would not impose a competitive burden on any participant. The
Exchange does not believe that the proposed enhancement to the existing
risk limitation mechanism would impose a burden on competing options
exchanges. Rather, the availability of this mechanism may foster more
competition. Specifically, the Exchange notes that it operates in a
highly competitive market in which market participants can readily
favor competing venues. When an exchange offers enhanced functionality
that distinguishes it from the competition and participants find it
useful, it has been the Exchange's experience that competing exchanges
will move to adopt similar functionality. Thus, the Exchange believes
that this type of competition amongst exchanges is beneficial to the
market place as a whole as it can result in enhanced processes,
functionality, and technologies.
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 \24\ and Rule 19b-4(f)(6) thereunder.\25\
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
[[Page 2224]]
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.
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\24\ 15 U.S.C. 78s(b)(3)(A)(iii).
\25\ 17 CFR 240.19b-4(f)(6).
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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) \26\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\26\ 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
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-NYSEArca-2013-148 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-NYSEArca-2013-148. 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-NYSEArca-2013-148 and should
be submitted on or before February 3, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-00334 Filed 1-10-14; 8:45 am]
BILLING CODE 8011-01-P