[Federal Register Volume 79, Number 41 (Monday, March 3, 2014)]
[Notices]
[Pages 11849-11852]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-04552]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71609; File Nos. SR-NYSE-2013-72; SR-NYSEMKT-2013-91]
Self-Regulatory Organizations; New York Stock Exchange LLC; NYSE
MKT LLC; Order Instituting Proceedings to Determine Whether To
Disapprove Proposed Rule Changes To Establish an Institutional
Liquidity Program on a One-Year Pilot Basis
February 25, 2014.
I. Introduction
On November 7, 2013, New York Stock Exchange LLC (``NYSE'') and
NYSE MKT LLC (``NYSE MKT'' and together with NYSE, 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 thereunder,\2\ a proposed rule change to
establish an Institutional Liquidity Program (``ILP'' or ``Program'')
on one-year pilot basis. The proposed rule changes were published for
comment in the Federal Register on November 27, 2013.\3\ The Commission
received three comments on the NYSE Proposal.\4\ On January 9, 2014,
the Commission designated a longer period for Commission action on the
proposed rule changes, until February 25, 2014.\5\ The Exchanges
submitted a consolidated response letter on January 14, 2014.\6\ This
order institutes proceedings under Section 19(b)(2)(B) of the Act to
determine whether to disapprove the proposed rule changes.
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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. 70909 (November 21,
2013), 78 FR 71002 (SR-NYSE-2013-72) (``NYSE Proposal''); and 70910
(November 21, 2013), 78 FR 70992 (SR-NYSEMKT-2013-91) (``NYSE MKT
Proposal'') (collectively, the ``Proposals'').
\4\ See Letters to the Commission from James Allen, Head, and
Rhodri Pierce, Director, Capital Markets Policy, CFA Institute (Dec.
18, 2013) (``CFA Letter''); Clive Williams, Vice President and
Global Head of Trading, Andrew M. Brooks, Vice President and Head of
U.S. Equity Trading, and Christopher P. Hayes, Vice President and
Legal Counsel, T. Rowe Price Associates, Inc. (Dec. 18, 2013) (``T.
Rowe Price Letter''); and Theodore R. Lazo, Managing Director and
Associate General Counsel, Securities Industry and Financial Markets
Association (Dec. 20, 2013) (``SIFMA Letter''). The Commission notes
that these comment letters address the NYSE Proposal only. However,
since the Proposals are nearly identical, the Commission will
consider the letters to address the NYSE MKT Proposal as well.
\5\ See Securities Exchange Act Release No. 71267, 79 FR 2738
(January 15, 2014).
\6\ See Letter to the Commission from Janet McGinnis, EVP &
Corporate Secretary, NYSE Euronext (Jan. 14, 2014) (``Response
Letter'').
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II. Description of the Proposals
A. Overview
Each Exchange is proposing to establish, for a pilot term of one
year, an Institutional Liquidity Program intended to attract buying and
selling interest in greater size to the NYSE for NYSE-listed securities
and to NYSE MKT for NYSE MKT-listed securities and securities listed on
the Nasdaq Stock Market and traded pursuant to unlisted trading
privileges. To do so, the Program would introduce two new order types
to facilitate interactions between market participants with block-size
trading interest and liquidity providers that submit orders that meet
certain size thresholds. The Exchanges have characterized the Program
as a ``targeted size discovery mechanism'' that would enable market
participants to execute trades that are larger than the average size of
trades executed on the Exchanges or in most dark pools.\7\
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\7\ See, e.g., NYSE Proposal, 78 FR at 71002.
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B. Proposed New Order Types--ILOs and OLOs
The two proposed order types are the ``Institutional Liquidity
Order'' (``ILO'') and the ``Oversize Liquidity Order'' (``OLO'').
Generally, ILOs would represent non-displayed block-size interest: a
limit order of at least 5,000 shares with a market value of at least
$50,000 or a ``child'' order of an original ``parent order'' meeting
these size requirements.\8\ OLOs would represent non-displayed orders
of at least 500 shares (or at least 300 shares for less liquid
securities) submitted to provide liquidity to ILOs. ILOs could be
submitted with a Minimum Triggering Volume (``MTV'') instruction and
would interact first with displayed interest at the Exchanges before
interacting with other interest in the Program (i.e., OLOs and other
resting ILOs) or routing to other markets. OLOs would interact only
with ILOs. Orders within the Program would be executed according to
price-size-time priority, rather than the Exchanges' parity allocation.
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\8\ Where an ILO represented the child order of recorded parent
instructions, the parent instruction would not need to be submitted
in whole to the Program; instead, parts of the recorded parent order
instruction could be executed in the Program, on the Exchanges
outside of the Program, or at other venues.
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To qualify as an ILO, an order would need to be submitted to
establish, increase, liquidate, or decrease a position in the subject
security and could not be part of an expression of two-sided (i.e.,
market making) interest
[[Page 11850]]
on the part of the account that originated the order. An ILO, or the
recorded parent instruction of a child order, would need to satisfy
applicable size requirements independently, meaning that interest could
not be aggregated across multiple member organizations \9\ to become
eligible for participation in the Program. An ILO, or recorded parent
order instruction, that initially met the minimum size requirements
would not become ineligible to stay in the Program if it received a
partial execution that reduced its size below the minimum size
requirements. If an ILO or its recorded parent instruction were
partially cancelled so that it became smaller than the Program's
minimum size requirements, the ILO would no longer be eligible to
participate in the Program but would maintain its time priority in the
Exchanges' systems.
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\9\ The term ``member organization'' is defined in NYSE Rule
2(b) and NYSE MKT Rule 2(b)--Equities, respectively, and includes
Floor brokers acting as agents.
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An ILO could be designated Immediate-or-Cancel or entered as a
Reserve Order, in which case the order or any residual unexecuted
portion would remain executable against contra-side interest in
accordance with the Program's rules. An ILO could also be submitted
with an MTV requirement that would be a necessary condition for the
order's execution.
ILOs could be submitted with one of two designations to dictate how
and where they could execute. A Type-1 designated ILO would interact
with other interest at the Exchange to which it was submitted, but it
would not route to other markets. A Type-1 ILO would interact, at each
price level, first with displayed interest in the respective Exchange's
systems, then available contra-side OLOs and ILOs in size-time
priority, and then with any remaining non-displayed interest in the
Exchange's systems--except that a Type 1-designated ILO would not trade
through a protected quotation.\10\
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\10\ Any remaining portion of a Type-1 ILO would be cancelled if
designated as a Regulation NMS-compliant Immediate or Cancel Order
pursuant to NYSE Rule 13 or NYSE MKT Rule 13--Equities, or if it
were designated as a Reserve Order, it would rest on the Exchange's
book and be available to interact with other incoming contra-side
OLOs, ILOs, and other available interest in the Exchange's systems,
provided it does not trade through a protected quotation.
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A Type-2 ILO would interact with other interest at the Exchange to
which it was submitted, but it could also route to away markets. The
Type-2 ILO would interact, at each price level, first with displayed
interest in the respective Exchange's systems, then available contra-
side OLOs and ILOs in size-time priority, and then with any remaining
non-displayed interest in the Exchange's systems; it would then route
to away markets as necessary to avoid trading through a protected
quotation.\11\
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\11\ Any remaining portion of a Type-2 ILO would be cancelled if
designated as an Immediate or Cancel Order pursuant to NYSE Rule 13
or NYSE MKT Rule 13--Equities, or if designated as a Reserve Order,
rest on the Exchange's book and be available to interact with other
incoming contra-side OLOs, ILOs, and other available interest in the
Exchange's systems.
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The Program would require member organizations that submit ILOs to
maintain policies and procedures reasonably designed to ensure that
applicable Program requirements are satisfied. The member organizations
would further need to maintain records sufficient to reconstruct, in a
time-sequenced manner, all orders routed to the Exchanges as ILOs,
including how parent order instructions from which child-order ILOs
were derived met the Program's size requirements and related to the
child-order ILOs.
The Exchanges would allow a member organization to presume that an
account's intent to establish, increase, liquidate, or decrease a
position was bona fide, absent concrete indications to the contrary.
According to the Exchanges, examples of such contrary indications
include: (1) An account attempting to enter contemporaneous orders in
the same security on both sides of the market; (2) An account entering
a pattern of orders and cancellations apparently designed to implement
a market-making or spread-trading strategy; and (3) An account entering
a pattern of cancellations that consistently produced positions that
were smaller that the Program's minimum size requirements.
In addition to the ILO, the Program would create a second new order
type, the OLO. The OLO would be a non-displayed limit order with a
minimum size of 500 shares, except for securities that trade with an
Average Daily Volume of less than one million shares, in which case the
minimum size would be 300 shares. An OLO that met the minimum size
requirement and received a partial execution that reduced its size
below the size requirement would still be eligible to interact with
incoming ILOs. An OLO would become size ineligible if the size of the
OLO was reduced below the minimum size requirement because of a partial
cancellation. An OLO could be priced at, inside, or outside the
Exchange's protected best bid or offer (``PBBO''), or as non-displayed
Primary Pegging Interest pursuant to NYSE Rule 13 or NYSE MKT Rule 13--
Equities. As noted above, OLOs would be eligible to interact only with
ILOs.
The Exchanges, along with the Financial Industry Regulatory
Authority (``FINRA''), would monitor activity in the Program and
conduct surveillance for non-compliance with Program rules. The
Exchanges would exclude non-compliant member organizations from
participation in the Program when necessary to ensure that the Program
functions properly.
C. Proposed Priority and Allocation of Proposed Order Types
The Exchanges have proposed that, in the Program, competing OLOs
and ILOs would be ranked and allocated according to price, then size,
then the time of their entry into each Exchange's systems. The size
priority of OLOs and ILOs would be based upon their initial size at
time of entry, but any partial cancellations of OLOs or ILOs would
reduce their original size for priority purposes.
Displayed orders would have priority over equally priced ILOs and
OLOs. An incoming ILO would execute first against displayed interest,
then against contra-side ILOs and OLOs, and finally against any non-
displayed interest in Exchange systems. Any remaining unexecuted ILO
interest would remain available to interact with other incoming OLOs or
ILOs if that ILO interest were at an eligible price, unless that
interest were designated IOC.
D. Proposed Liquidity Identifier
The presence of OLOs or the remainder of partially executed ILOs in
Exchange systems would be advertised with a new indicator, the
Liquidity Identifier (``Identifier''), which would be disseminated
through the Consolidated Quotation System. The Identifier would
communicate only the presence of liquidity in a symbol and would not
state the side, size, or price. The Exchanges have stated that the
Identifier would be disseminated first by the Exchanges' proprietary
data feeds. The Exchanges have represented that the Identifier would be
disseminated through the publicly-available Consolidated Quotation
System as soon as practicable.
E. Fees for the Program
The Exchanges have represented that, after approval of the Program
by the Commission, they would each submit a proposed rule filing to set
fees for the Program. The Exchanges have represented that the
anticipated fee schedule would charge member organizations for
executions of their
[[Page 11851]]
ILOs against OLOs and, conversely, would provide credits or free
executions to member organizations for executions of their OLOs against
the ILOs of other member organizations. If two ILOs executed against
each other, the Exchanges expect that they would charge both member
organizations.
III. Comments Letters and the Exchanges' Response
As noted above, the Commission has received three comment letters
on the proposed Program. One commenter was supportive of the
Proposals.\12\ This commenter stated its belief that the Program should
improve the executions of institutional investors trading in large size
and reduce transaction costs in such trades.\13\ Additionally, the
commenter stated its belief that the ability of ILOs to interact with
displayed orders should not negatively affect, and may even positively
affect, the incentives to use displayed markets.\14\
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\12\ See CFA Letter.
\13\ Id. at 2.
\14\ Id.
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The two remaining commenters expressed concern with the Program.
Both commenters suggested that the Program would add undue complexity
to the public equity markets. For instance, one commenter argued that
the Program's introduction of new order types would create another
layer of quoting, additional messaging, and undue complexity to order
routing.\15\ The other commenter questioned whether it is appropriate
to add additional message traffic to the Securities Information
Processor, particularly message traffic that serves only one market and
not the investing public at large.\16\
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\15\ See T. Rowe Price Letter at 1.
\16\ See SIFMA Letter at 5. This commenter also took the
position that the Program's use of the Liquidity Identifier could
implicate the same concerns that the Commission voiced in 2009 when
it proposed a rule that would, among other things, address the use
of privately transmitted actionable ``indications of interest.'' See
id. at 4 (citing Securities Exchange Act Release No. 60997 (November
13, 2009), 74 FR 61208 (November 23, 2009) (``Regulation of Non-
Public Trading Interest'')).
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The two commenters also argued that the Program could segment order
flow in a way that is inconsistent with the role that public exchanges
are supposed to play in the marketplace. One commenter stated its
belief that the Proposals would further chip away at the statutory
mandate that exchanges provide fair, equal, non-discriminatory, and
open access and that the Program would reflect a departure from the
idea that exchanges are meant to provide interaction among all types of
orders.\17\ In this commenter's view, exchanges and dark pools serve
distinct purposes and the Program could ``further blur the lines''
between exchanges and dark pools in a way that ``will unnecessarily
increase market fragmentation and dilute an investor's ability to gauge
best execution.'' \18\ The other commenter raised similar issues and
stated its belief that the Commission should address how permitting an
exchange to segment order flow is consistent with the exchanges'
obligation under Section 6(b)(5) of the Act to prevent unfair
discrimination among market participants.\19\
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\17\ See T. Rowe Price Letter at 1-2.
\18\ Id. at 1.
\19\ See SIFMA Letter at 3.
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Additionally, both commenters disagreed with the Exchanges about
the extent to which the Program could provide public benefit. One
commenter questioned whether the Program would in fact encourage lit
markets and increased price discovery, since the new order types would
not be displayed.\20\ The other commenter expressed doubt that the
Program could attract block-size interest and instead thought it was
more likely that the Program would only receive child orders from
larger block-size parent orders.\21\ The commenter then stated its
belief that the goal of increasing exchange execution volumes does not
support a change in legal and regulatory policy.\22\
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\20\ See T. Rowe Price Letter at 2.
\21\ See SIFMA Letter at 3.
\22\ See id.
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In response to these comments, the Exchanges' Response Letter
contended that the Program is justified by the potential benefits it
could provide to the public markets. According to the Exchanges, the
Program would improve market structure by addressing three concerns:
(1) The migration toward dark venues of orders entered by investors who
are less informed with respect to short-term price movements; (2) The
related isolation of such orders from displayed liquidity; and (3) The
selective pre-trade transparency and inadequate post-trade transparency
of broker internalization venues and dark pools.\23\ The Response
Letter asserted that competition with dark pools would provide a more
transparent and price-competitive environment for the interaction of
large orders and would reduce transaction costs; in the Exchanges'
view, Section 11A of the Act promotes such competition. Additionally,
the Exchanges noted that the dissemination of the Identifier could
bolster pre-trade transparency and stimulate further the expression of
institutional interest and the interest of liquidity providers that
seek to interact with institutional orders.\24\
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\23\ See Response Letter at 5.
\24\ See id. at 1.
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The Exchanges further argued that, because ILO's must first
interact with displayed orders, ``the Program offers balanced and
limited segmentation to enhance the discovery of size on the Exchanges
and potentially increases the incentives for public price discovery.''
\25\ Ultimately, the Exchanges argued, the Program ``has the potential
to enhance the transparency and price competition associated with the
execution of larger orders and should be considered in the current
competitive and regulatory context rather than deferred until the
fundamental structural issues referenced [by the commenters] are
addressed.'' \26\
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\25\ Id. at 5-6.
\26\ Id. at 8. The Exchanges also responded to the point raised
in the SIFMA Letter about whether the Liquidity Identifier could
implicate the same concerns that the Commission has raised with
respect to privately transmitted actionable indications of interest.
The Exchanges noted that the Identifier is different than an
actionable indication of interest because it communicates only the
symbol, not the side, size or price of an OLO or ILO. Furthermore,
the Exchanges noted that the identifier would not be private or
limited to select market participants; rather, the Exchanges noted
their intent to disseminate the identifier through the publicly
available Consolidated Quotation System. See id. at 6-7.
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IV. Proceedings To Determine Whether to Disapprove SR-NYSE-2013-72 and
SR-NYSEMKT-2013-91 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \27\ to determine whether the Proposals should
be disapproved. Institution of such proceedings is appropriate at this
time in view of the legal and policy issues raised by the Proposals.
Institution of disapproval proceedings does not indicate that the
Commission has reached any conclusions with respect to any of the
issues involved. Rather, as described in greater detail below, the
Commission seeks and encourages interested persons to provide
additional comment on the Proposals.
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\27\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B),\28\ the Commission is providing
notice of the grounds for disapproval under consideration. The
Commission believes that the Program, which would seek to attract
larger trading interest to the Exchanges, raises important market-
structure issues that warrant further public comment and Commission
consideration. The Program would create a separate liquidity pool
within
[[Page 11852]]
each Exchange that would not be accessible to all market participants,
and the Commission believes that proceedings are appropriate to
consider (1) Whether the Program's segmentation of order flow would
inhibit price discovery and order interaction on an exchange, (2)
Whether the potential complexity of the Program would detract from the
efficient execution of securities transactions or the maintenance of
fair and orderly markets, (3) Whether the Program would permit unfair
discrimination, and (4) Whether the Program would create an unnecessary
or inappropriate burden on competition.
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\28\ See id.
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Accordingly, the Commission is instituting proceedings to allow for
additional analysis of the proposed rule changes' consistency with
Section 6(b)(5) of the Act,\29\ which requires that the rules of a
national securities exchange promote just and equitable principles of
trade, perfect the mechanism of a free and open market and a national
market system, protect investors and the public interest, and not
permit unfair discrimination, and with Section 6(b)(8) of the Act,\30\
which requires that the rules of an exchange not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act.
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\29\ 15 U.S.C. 78f(b)(5).
\30\ 15 U.S.C. 78f(b)(8).
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V. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
concerns identified above, as well as any others they may have with the
Proposals. In particular, the Commission invites the written views of
interested persons concerning whether the proposed rule changes are
inconsistent with Section 6(b)(5) or any other provision of the Act, or
the rules and regulation thereunder. Although there do not appear to be
any issues relevant to approval or disapproval which would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\31\
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\31\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposed rule changes should be
disapproved by March 24, 2014. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by April 7,
2014.
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-NYSE-2013-72 or SR-NYSEMKT-2013-91 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-NYSE-2013-72 or SR-
NYSEMKT-2013-91. 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. 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 publicly available. All
submissions should refer to File Number SR-NYSE-2013-72 or SR-NYSEMKT-
2013-91 and should be submitted on or before March 24, 2014. Rebuttal
comments should be submitted by April 7, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-04552 Filed 2-28-14; 8:45 am]
BILLING CODE 8011-01-P