[Federal Register Volume 79, Number 60 (Friday, March 28, 2014)]
[Notices]
[Pages 17623-17625]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-06889]
[[Page 17623]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71780; File No. SR-NYSEArca-2014-21]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Amending NYSE Arca
Equities Rule 7.44 To Change the Priority of Displayable Odd Lot
Interest Within the Recently Approved Retail Liquidity Program
March 24, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on March 10, 2014, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the Exchange. 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\ 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 Equities Rule 7.44, which
governs the Exchange's recently approved Retail Liquidity Program
(``Program''), to provide that odd-lot interest priced between the PBBO
will trade together with other undisplayed interest according to price-
time priority. 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 is proposing to amend Rule 7.44, which governs the
Exchange's recently approved Program,\3\ to provide that odd-lot
interest priced between the PBBO will trade together with other
undisplayed interest according to price-time priority. The current rule
provides that displayable odd-lot interest priced between the PBBO will
be ranked ahead of any Retail Price Improvement Orders (``RPIs'') and
other non-displayed interest at any given price point. For purposes of
this rule, displayable odd lot interest refers to odd lot interest that
is not displayed because it is priced better than the best protected
bid or offer (``PBBO''), but would be displayed if, when aggregated
with other same-priced displayable interest, [sic] equals a round lot
or greater.
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\3\ See Securities Exchange Act Release No. 71176 (Dec. 23,
2013), 78 FR 79524 (Dec. 30, 2013) (SR-NYSEArca-2013-107).
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Background
Under the Program, ETP Holders are able to provide price
improvement to Retail Orders, as defined in Rule 7.44(a)(3) and (k), by
submitting an RPI, which is non-displayed liquidity in NYSE Arca-listed
securities and UTP Securities, excluding NYSE-listed (Tape A)
securities, that is priced more aggressively than the PBBO by at least
$0.001 per share and that is identified as an RPI in a manner
prescribed by the Exchange. RPIs are entered at a single limit price,
rather than being pegged to the PBBO; however, RPIs can be designated
as a Mid-Point Passive Liquidity (``MPL'') Order, in which case the
order will re-price as the PBBO changes.\4\ RPIs remain non-displayed
and only execute against Retail Orders.
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\4\ RPIs not designated as MPL Orders would alternatively need
to be designated as a Passive Liquidity (``PL'') Order.
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Odd Lot Interest Within the Program
According to NYSE Arca Equities Rule 7.44(l), displayable odd-lot
interest priced between the PBBO is currently ranked ahead of any RPIs
and other non-displayed liquidity at any given price point. The
Exchange is proposing to amend Rule 7.44(l) to rank odd-lot interest
priced better than the PBBO in price-time priority with RPIs and other
non-displayed liquidity. The Exchange believes that ranking undisplayed
odd lots priced better than the PBBO in price-time priority with other
undisplayed interest is consistent with expectations of market
participants entering odd-lot sized interest. Specifically, odd-lot
sized interest, standing alone, is not eligible to be part of the
displayed quote.\5\ Because odd-lot orders are not displayed, they are
not the protected bid or offer of a market and can be traded through.
The Exchange therefore believes it is consistent with the expectations
of market participants that when odd-lot interest is not displayed, it
should be treated similarly to other undisplayed interest. The Exchange
does not believe that the proposed rule change would provide a
disincentive for market participants to enter odd-lot interest because
market participants are already on notice that odd-lot interest does
not receive the benefit of displayed interest if it is not part of the
displayed quote.
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\5\ See Rule 604(b)(3) of Regulation NMS (excepting odd-lot
orders from the limit order display rule).
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The Exchange believes that the proposed rule change is consistent
with Rule 7.38 (Odd and Mixed Lots), which provides that round lot,
mixed lot, and odd lot orders are treated in the same manner in the
NYSE Arca Marketplace. Specifically, the Exchange believes that
consistent with this rule, odd-lot orders that are undisplayed should
be treated in the same manner as round-lot orders that are undisplayed.
As such, they should be ranked in price-time priority together.
Conversely, if odd-lot interest is included in the displayed quote,
then odd-lot interest should be treated the same as other displayed
round-lot interest at the same price.
The Exchange further believes that the current rule provides a
potential incentive for market participants to game the Program. One of
the goals of the Program is to incentivize the provision of price-
improving liquidity to retail investors. Because the Exchange
publicizes when there is RPI interest available in a symbol,\6\ market
participants are on notice when there is resting RPI interest for a
symbol. A market participant could use that knowledge to enter odd-lot
interest priced better than the PBBO in order to trade ahead of the
previously-entered RPI interest. The Exchange believes that allowing
odd-lot interest to have priority over such previously-entered RPI
interest could create a disincentive for market participants to enter
RPI interest, thereby frustrating one of the goals of the Program.
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\6\ The Exchange disseminates an identifier that reflects the
symbol for a particular security and whether it is buy or sell RPI
interest. See Rule 7.44(j).
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[[Page 17624]]
To demonstrate the proposed rule change, consider the following
example: \7\
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\7\ The Exchange is proposing to amend one of the examples in
Rule 7.44(l) to include the updated treatment of odd lot interest
within the Program.
PBBO for security ABC is $10.00-$10.05.
RLP 1 enters a Retail Price Improvement Order to buy ABC at
$10.01 for 500.
RLP 2 then enters a Retail Price Improvement Order to buy ABC at
$10.02 for 500.
RLP 3 then enters a Retail Price Improvement Order to buy ABC at
$10.03 for 500.
LMT 1 then enters an odd lot limit order to buy ABC at $10.02
for 60.
As proposed, an incoming Type 1-designated Retail Order to sell for
1,000 will execute first against RLP 3's bid for 500 at $10.03, because
it is the best priced bid, then against RLP 2's bid for 500 at $10.02,
because it is the next best priced bid entered earliest in time, at
which point the entire size of the Retail Order to sell 1,000 is
depleted. As proposed, the odd lot interest entered by LMT 1 would not
receive an execution because such odd lot interest is ranked in price-
time priority with RPIs and all other non-displayed interest. Without
the rule change, LMT 1 would be able to execute its 60 shares at $10.02
before RLP 2, even though RLP 2 arrived earlier in time.
Because of the ranking and allocation proposed herein, the Exchange
is proposing to delete the provision in Rule 7.44(l) stating that
executions within the Program will occur in accordance with NYSE Arca
Equities Rule 7.36. Rule 7.36 provides that incoming orders will be
executed first in the Display Order Process, and then in the Working
Order Process. But within the Program, odd lot interest will now be
ranked and allocated in price-time priority with other equally-priced
non-displayed interest. As explained above, the Exchange believes this
is appropriate since, for purposes of the operation of the Program,
there is little difference between undisplayed odd lot interest and
other non-displayed liquidity, including that neither are protected
from being traded through pursuant to Regulation NMS.
Further, the Exchange is proposing to amend Rule 7.44(l) to provide
that, within the Program, PL Orders will be ranked behind all other
equally-priced non-displayed interest. Currently, Rule 7.31(h)(4)
provides that PL Orders are executed in the Working Order Process after
all other Working Orders except undisplayed discretionary orders.
Therefore, under the current version of Rule 7.44(l), which provides
that executions occur pursuant to Rule 7.36, PL Orders are executed
behind all other non-displayed liquidity. Because the Exchange is
removing the reference to Rule 7.36 from Rule 7.44(l), some Users might
interpret Rule 7.44(l) as stating that it overrides all other
provisions in NYSE Arca Equities Rules, and therefore, all non-
displayed liquidity is ranked and allocated in price-time priority.
However, the Exchange is maintaining the priority rule for PL Orders in
the Program, and therefore, the Exchange is proposing to explicitly
state in Rule 7.44(l) that PL Orders will be ranked behind all other
equally-priced interest.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the
Act,\8\ in general, and furthers the objectives of Section 6(b)(5),\9\
in particular, in that it is 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.
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\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that ranking odd lot interest in price-time
priority with other RPIs and non-displayed liquidity within the Program
will both promote just and equitable principles of trade and remove
impediments to and perfect the mechanism of a free and open market and
a national market system. The proposed rule change will ensure that
odd-lot interest priced better than the PBBO that is not displayed is
not given priority over previously-entered non-displayed liquidity
within the Program. The purpose of the Program is to incentivize the
provision of price-improving liquidity to retail investors. However,
the Exchange believes that this purpose could be frustrated by
permitting later-arriving odd-lot interest to have priority over
earlier-arriving RPIs and non-displayed liquidity. The Exchange
therefore believes that ranking odd-lot interest in strict price-time
priority with other undisplayed interest will remove impediments to a
free and open market by eliminating the potential for market
participants to use odd-lot interest to trade ahead of previously-
entered RPI interest. The Exchange further believes that the proposed
rule change is consistent with current Exchange rules because it would
treat undisplayed odd lot interest in the same manner as undisplayed
round lots.
The Exchange further believes that the proposed treatment of odd
lot interest is consistent with the Act and will not create a
disincentive to enter odd lot interest because market participants are
already on notice that undisplayed odd lot interest priced better than
the PBBO is not afforded the same protections as displayed interest.
The Exchange also believes the proposal will protect investors and
the public interest because the proposed rule change will promote the
incentives for liquidity providers to enter RPIs that improve upon the
PBBO. As a result, the proposal will increase competition among
execution venues, encourage additional liquidity, and offer the
potential for price improvement to retail investors. Additionally, the
Exchange believes it is appropriate to promote the incentive to bring
more retail order flow to a public market.
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 believes that
the Program is designed to increase competition among executive [sic]
venues, encourage additional liquidity, and offer the potential for
price improvement to retail investors. The Exchange notes that a
significant percentage of the orders of individual investors are
executed over-the-counter. The Exchanges believes that it is
appropriate to create a financial incentive to bring more retail order
flow to a public market.
Additionally, the Exchange believes the proposed rule change will
have a positive effect on competition since it will ensure that the
incentives of entering RPIs into the Program are not disrupted. Without
the proposed rule change, odd lot interest would have priority over
earlier-entered RPI and non-displayed liquidity at a particular price
point. Such a priority rule could disrupt the incentives of ETP Holders
to enter RPIs, and therefore, decrease the price improving
opportunities for retail investors.
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.
[[Page 17625]]
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 \10\ and Rule 19b-4(f)(6) thereunder.\11\
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 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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\10\ 15 U.S.C. 78s(b)(3)(A)(iii).
\11\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires the Exchange to give the Commission written notice of the
Exchange's intent to file the proposed rule change, along with a
brief description and text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission. The
Exchange has satisfied this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) \12\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\13\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposal
may become operative immediately upon filing. Doing so, the Exchange
contends, would correct an element of the Program that could otherwise
undermine the Program's purpose. The Commission believes that waiving
the 30-day operative delay is consistent with the protection of
investors and the public interest because this waiver would allow the
Exchange to implement the Program, which has already been subject to
notice and comment, without further delay. Accordingly, the Commission
hereby grants the Exchange's request and designates the proposal
operative upon filing.\14\
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\12\ 17 CFR 240.19b-4(f)(6).
\13\ 17 CFR 240.19b-4(f)(6)(iii).
\14\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of this proposed rule
change, the Commission summarily may temporarily suspend this 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.
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-2014-21 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2014-21. 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 this 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 publicly available. All
submissions should refer to File Number SR-NYSEArca-2014-21 and should
be submitted on or before April 18, 2014.
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. 2014-06889 Filed 3-27-14; 8:45 am]
BILLING CODE 8011-01-P