[Federal Register Volume 79, Number 15 (Thursday, January 23, 2014)]
[Notices]
[Pages 3895-3897]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-01251]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71330; File No. SR-NYSE-2013-71]
Self-Regulatory Organizations; New York Stock Exchange LLC; Order
Approving Proposed Rule Change Amending NYSE Rules 13, 70.25, 107C and
1000 To Adopt a New Order Type Called a Midpoint Passive Liquidity
Order
January 16, 2014.
I. Introduction
On November 18, 2013, New York Stock Exchange LLC (``NYSE'' or
``Exchange'') 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 thereunder,\2\ a
proposed rule change to amend: (1) NYSE Rule 13 to adopt a new order
type called a Midpoint Passive Liquidity (``MPL'') Order; (2) NYSE Rule
1000 to specify that the proposed MPL Orders may interact with Capital
Commitment Schedule (``CCS'') interest; (3) NYSE Rule 70.25 to permit
d-Quotes to be designated with a midpoint modifier in order to set the
discretionary price to the midpoint of the protected best bid or best
offer (``PBBO''); and (4) NYSE Rule 107C to incorporate the proposed
MPL Order into the Retail Liquidity Program. The proposed rule change
was published for comment in the Federal Register on December 4,
2013.\3\ The Commission received no comment letters on the proposed
rule change. 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. 70956 (November 27,
2013), 78 FR 72968.
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II. Description of the Proposed Rule Change
A. Proposed MPL Order
The Exchange proposes the MPL Order as an undisplayed limit order
that would automatically execute at the mid-point of the protected best
bid (``PBB'') and the protected best offer (``PBO''). An MPL Order
could interact with any incoming order, including another MPL Order,
and could execute at prices out to four decimal places.
The proposed rule specifies certain limitations on the usage and
execution of an MPL Order. First, an MPL Order would not be eligible to
trade if it would trade at a price below $1.00 or if the execution
price would be out to five decimal places above $1.00. Second, an MPL
Order could not be designated as Good Till Cancelled. Finally, an MPL
Order would not execute if the market were locked or crossed. When a
market that had been locked or crossed becomes no longer locked or
crossed, the Exchange would execute all eligible MPL Orders and other
hidden interest eligible to execute at the midpoint of the PBBO.
With regards to order allocation, MPL Orders would be allocated on
a parity-by-agent basis, consistent with NYSE Rule 72. Moreover, an MPL
Order's time priority would be based on its time of entry into Exchange
systems and would not reset when an MPL Order's price shifted due to
changes in the PBBO.
Under the proposal, an MPL Order could also include a Minimum
Triggering Volume (``MTV''), in which case the MPL Order would not be
eligible to trade unless the aggregated contra-side quantity of all
interest marketable at the midpoint of the PBBO were equal to or
greater than the MPL Order's MTV. There would be no guaranteed trade
size based on the MTV. Exchange systems would enforce an MTV
restriction even if the unexecuted portion of an MPL Order with an MTV
were less than the MTV.
An MPL Order that included an MTV would be rejected if it also
included a Self Trade Prevention (``STP'') Modifier. As proposed, STP
Modifiers could be used with MPL Orders that do not include an MTV. An
MPL Order with an STP Modifier, however, might be cancelled depending
on the type of order on the contra-side. An MPL Order with an STP
Modifier would not execute against another MPL Order or against a non-
MPL Order with an STP Modifier with the same market participant
identifier (``MPID'').
Further, under the proposal, users could designate an MPL Order
with an add-liquidity-only (``ALO'') modifier (``MPL-ALO Order''). An
MPL-ALO Order would not execute on arrival, even if marketable, but
would remain non-displayed in the book until triggered to trade by
arriving contra-side marketable interest. An incoming non-marketable
MPL-ALO Order, however, could trigger a discretionary trade.\4\ An MPL-
ALO Order would only be eligible to trade against incoming contra-side
interest and would not interact with contra-side interest resting in
the book. A resting MPL-ALO Order would not be eligible to trade when
arriving same-side interest triggered a trade with contra-side
interest. An MPL-ALO Order would have to be at least one round lot.
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\4\ Under the proposal, an MPL-ALO Order triggering a
discretionary trade would be the ``liquidity provider,'' and the
triggered discretionary order would be the ``liquidity taker.''
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An MPL Order would not be eligible for manual executions, including
openings, re-openings, or closing transactions. As such, MPL Orders
would not be available to be designated as Limit ``On-the-Open''
(``LOO'') or Limit ``At-the-Close'' (``LOC'') Orders. As fully
undisplayed interest, MPL Orders would not be visible to the DMM on the
Floor under any circumstances.
Additionally, MPL Orders would not be available to be entered for
high-priced securities. High-priced securities are securities with a
closing price--or, if the security did not trade, the closing bid
price--on the Exchange of $10,000 or more on the previous trading
day.\5\ Such securities are not available for automatic execution.
Because MPL Orders are not eligible for manual executions, MPL Orders
would not be available for these high-priced securities.
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\5\ See NYSE Rule 1000(a)(vi).
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B. MPL Order Interaction With CCS Interest
The CCS is a liquidity schedule setting forth various price points
at which the DMM is willing to interact with incoming orders. CCS
interest will either execute at the price at which the full size of the
order can be satisfied (``completion price'') or at the next price that
is one minimum price variation (``MPV'') higher (in the case of an
order to sell) or lower (in the case of an order to buy). The Exchange
has stated that it believes that CCS interest cannot be designated as
an MPL Order because MPL Orders are priced at the midpoint of the PBBO
and could be priced less than one MPV above or below the completion
price.
While, under the proposal, CCS interest cannot be designated as an
MPL Order, CCS interest would be eligible to interact with MPL Orders.
Currently, CCS interest is eligible to trade inside the Exchange BBO at
a price representing (1) the non-displayable reserve interest of
Reserve Orders \6\ or (2) the reserve interest of Floor broker agency
interest files. The Exchange is
[[Page 3896]]
proposing to expand this list by amending NYSE Rule 1000(f)(1)(B) to
include MPL Orders.
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\6\ A Reserve Order means a limit order entered into Exchange
systems that may contain displayable and non displayable interest.
See NYSE Rule 13.
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C. Proposed MPL Order Interaction With d-Quotes
MPL Orders would not be available for d-Quotes \7\ since the
Exchange proposes to allow d-Quotes with a mid-point modifier as
described below. MPL Orders would not be available for pegging interest
since pegging interest is set to track the PBB or the PBO as the PBBO
changes, while MPL Orders would always be priced at the midpoint of the
PBBO.
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\7\ See NYSE Rule 70.25 (defining d-Quotes as discretionary
instructions with respect to a Floor broker's agency interest file
(e-Quotes)).
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The Exchange proposes to make a midpoint modifier available for d-
Quotes that would have a discretionary range up to the midpoint of the
PBBO.\8\
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\8\ The Exchange notes that the MPL Order and the midpoint
modifier are distinct functionalities. An MPL Order would always be
priced at the midpoint of the PBBO and would execute at that price.
A d-Quote designated with a midpoint modifier would use its
discretion to execute up to the midpoint but could execute at a
less-aggressive price. As such, a d-Quote with a midpoint modifier
would operate as a d-Quote that updated with changes in the PBBO to
set the discretionary price range to the midpoint of the PBBO.
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In order to accommodate the use of a midpoint modifier, the
Exchange is proposing to amend Rule 70.25(b)(ii), which states that the
minimum price range for a d-Quote is the minimum price variation set
forth in Exchange Rule 62. Rule 62 sets the minimum price variation at
$0.01 for stocks priced greater than $1.00. However, with the midpoint
modifier, a d-Quote can have a minimum price variation of $0.005.
Therefore, the Exchange is proposing to amend this restriction by
excepting d-Quotes with a midpoint modifier.
D. Incorporation of MPL Orders Into Retail Liquidity Program
Retail Orders or Retail Price Improvement Interest, as defined in
NYSE Rule 107C, could not be designated as MPL Orders. MPL Orders,
however, could interact with incoming Retail Orders.
The Exchange proposed that MPL Orders be available to interact with
Retail Orders within the Retail Liquidity Program (``Retail Program''),
a pilot program.\9\ The Exchange proposes to permit all Retail Orders
to interact with, in addition to available contra-side RPIs, available
contra-side MPL Orders. When determining the price to execute a Retail
Order, Exchange systems would consider all eligible RPIs and MPL
Orders. If the only interest were MPL Orders, the Retail Order would
execute against one or more MPL Orders at the midpoint of the PBBO. If
the only interest were RPIs, then the execution would occur against one
or more RPIs at the price level that completes the incoming order's
execution. If both RPIs and MPL Orders were present on the book, then
Exchange systems would determine the price level at which the incoming
Retail Order could be executed in full (``clean-up price''). If the
clean-up price were equal to the midpoint of the PBBO, RPIs would
receive priority over MPL Orders, and Retail Orders would execute
against both RPIs and MPL Orders at the midpoint. If the clean-up price
were worse than the midpoint of the PBBO, the Retail Order would
execute first with the MPL Orders at the midpoint of the PBBO, and any
remaining quantity of the Retail Order would execute with the RPIs at
the clean-up price. If the clean-up price were better than the midpoint
of the PBBO, then the Retail Order would execute against the RPIs at
the clean-up price and would ignore the MPL Orders.
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\9\ Under the Retail Program, retail liquidity providers
(``Providers'') are able to provide potential price improvement in
the form of a non-displayed order that is priced better than the
PBBO, called a Retail Price Improvement Order (``RPI''). Retail
Member Organizations (``RMOs'') can submit a Retail Order to the
Exchange, which interacts, to the extent possible, with available
contra-side RPIs. Retail Orders may be designated as Type 1, Type 2,
or Type 3. A Type 1 Retail Order interacts with available contra-
side RPIs and does not interact with other available contra-side
interest in Exchange systems or route to other markets. A Type 2
Retail Order interacts with available contra-side RPIs and any
remaining portion of the Retail Order is executed as a Regulation
NMS-compliant Immediate or Cancel Order pursuant to NYSE Rule 13. A
Type 3 Retail Order interacts first with available contra-side RPIs
and any remaining portion of the Retail Order is executed as an NYSE
Immediate or Cancel Order pursuant to Rule 13.
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III. Discussion and Commission's Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\10\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\11\ which
requires, among other things, that the rules of a national securities
exchange be designed 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 and that the rules of a national
securities exchange not be designed to permit unfair discrimination
between customers, issuers, brokers, or dealers.
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\10\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\11\ 15 U.S.C. 78f(b)(5).
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The Commission finds that the proposed rule change is consistent
with the requirements of the Act. The Commission believes that the
proposed MPL Order is designed to enhance order execution opportunities
on the Exchange by providing market participants with an additional
order type to interact with other trading interests. The Commission
also believes that the proposed MPL Orders is designed to allow for
additional opportunities for investors to trade at the midpoint of the
PBBO, which may provide price improvement to incoming orders.
Additionally, the Commission believes that the proposed introduction of
the MPL Order could provide market participants with better control
over their execution costs and with a means to offer price improvement
opportunities. The Commission notes that other exchanges offer similar
functions as the MPL Order.\12\
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\12\ See e.g., NYSE Arca Equities Rule 7.31(h)(5). See also EDGA
Exchange, Inc. Rule 11.5(c)(7); BATS Exchange, Inc. Rule 11.9(c)(9);
and NASDAQ Stock Market LLC Rule 4751(f)(4).
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The Commission believes that it is appropriate for the Exchange not
to allow DMMs to enter MPL Orders through CCS, because CCS interest
must observe the MPV in certain circumstances, but MPL Orders would be
tied to the midpoint of the protected NBBO and could therefore have
prices that do not observe the MPV. Further, the Commission believes
that it is appropriate not to allow d-Quotes to enter MPL Orders, as d-
Quotes would have a mid-point modifier that would provide a
functionality similar to MPL Orders.\13\ Finally, the Commission
believes that allowing MPL Orders to interact with retail orders in the
Retail Program is designed to expand the potential for price
improvement to retail investors.
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\13\ The Commission notes that pegging interests would also
conflict with the nature of MPL Order, since pegging interests are
orders that are pegged to the PBB or PBO as the PBBO changes. See
NYSE Rule 13.
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Therefore, the Commission finds that the proposed rule change is
consistent with the requirements of the Act.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\14\ that the proposed rule change (SR-NYSE-2013-71) be, and it
hereby is, approved.
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\14\ 15 U.S.C. 78s(b)(2).
[[Page 3897]]
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-01251 Filed 1-22-14; 8:45 am]
BILLING CODE 8011-01-P