[Federal Register Volume 79, Number 118 (Thursday, June 19, 2014)]
[Notices]
[Pages 35201-35205]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-14312]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72389; File No. SR-NYSEMKT-2014-51]
Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and
Immediate Effectiveness of Proposed Rule Change Amending Rule
971.1NY(c)(4)(D) To Add Specificity Regarding When a Customer Best
Execution Auction Would Conclude Early
June 13, 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 June 4, 2014, NYSE MKT LLC (the ``Exchange'' or ``NYSE MKT'')
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 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\ 17 CFR 240.19b-4.
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[[Page 35202]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 971.1NY(c)(4)(D) to add
specificity regarding when a Customer Best Execution (``CUBE'') Auction
would conclude early. 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 the
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 971.1NY(c)(4)(D) to add
specificity regarding when a CUBE Auction would conclude early. The
Exchange recently received approval for new Rule 971.1NY, which sets
forth an electronic crossing mechanism with a price improvement auction
on the Exchange to be referred to as the Auction or CUBE Auction, which
stands for Customer Best Execution.\3\ The Exchange has not yet
implemented the CUBE Auction mechanism.
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\3\ See Securities Exchange Act Release No. 34-72025 (April 25,
2014), 79 FR 24779 (May 1, 2014) (SR-NYSEMKT-2014-17) (Approval
Order).
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Background
Rule 971.1NY provides for an electronic price improvement auction
for single-leg options orders. The CUBE Auction is designed to work
seamlessly with the Exchange's Consolidated Book, which is the
Exchange's single electronic order book where all quotes and limit
orders sent to the Exchange are placed and reside as a file on the NYSE
Amex System (``System''). As specified in Rule 971.1NY(a), using the
CUBE Auction, an ATP Holder can guarantee the execution of a limit
order it represents as agent on behalf of a public customer, broker-
dealer, or any other entity (``CUBE Order''). The ATP Holder that
submits the CUBE Order (``Initiating Participant'') agrees to guarantee
the execution of the CUBE Order at a specified price by submitting a
contra-side order (``Contra Order'') that represents principal interest
or interest it has solicited to trade with the CUBE Order. An Auction
begins with an ``initiating price,'' which for a CUBE Order to buy
(sell) is the lower (higher) of the CUBE Order's limit price or the
National Best Offer (``NBO'') (National Best Bid (``NBB'')).\4\
Although there is a specified period for the Auction, the time at which
the Auction is initiated is considered the time of execution for the
CUBE Order and the execution of orders in the Auction qualify as
exceptions to Trade-Through Liability, pursuant to Rule 991NY(b)(5) and
(9).\5\
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\4\ See Rule 971.1NY(a). Pursuant to Rule 971.1NY(b)(1)(B), the
initiating price for a CUBE Order to buy (sell) must be lower
(higher) than the NBO (NBB) by at least one penny if the CUBE Order
is for less than 50 contracts.
\5\ See Rule 971.1NY(b).
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Rule 971.1NY(b)(1) sets forth the ranges of permissible execution
for a CUBE Auction. Unless otherwise specified, the references to
National Best Bid or Offer (``NBBO'') and Exchange Best Bid or Offer
(``BBO'') in the rule refer to the NBBO and BBO at the time the Auction
was initiated.\6\ Specifically, Rule 971.1NY(b)(1) provides that a CUBE
Order to buy (sell) would generally have a range of permissible
executions with an upper (lower) bound equal to the initiating price
and the lower (upper) bound equal to the NBB (NBO). However, pursuant
to paragraphs (b)(1)(A) and (b)(1)(B) of Rule 971.1NY, there is a
tighter range of permissible executions for when there is Customer
interest in the BBO on the same-side as the CUBE Order of 50 contracts
or more or for when the CUBE Order is for fewer than 50 contracts. In
addition, Rule 971.1NY(b)(1)(C) separately provides that if the BBO on
the same side as the CUBE Order updates during the Auction, the range
of permissible executions will adjust in accordance with the updated
BBO, unless the Auction concludes early pursuant to paragraph (c)(4)(D)
of the Rule.
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\6\ See Rule 971.1NY(b).
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Rule 971.1NY(c)(4) specifies scenarios when a CUBE Auction would
conclude early. The purpose of these provisions is to enable the CUBE
Auction to integrate seamlessly within the Exchange's Consolidated
Book. Accordingly, a CUBE Auction will conclude early as a result of
certain events that would otherwise disrupt the priority of the Auction
within the Consolidated Book. Early conclusion allows the System to
appropriately handle unrelated orders without the CUBE Auction
impacting that handling, and further allows the CUBE Order, which has
been guaranteed an execution, to execute against the Contra Order and
any RFR Responses that may have been entered up to that point.
Rule 971.1NY(c)(4)(D) specifies that the CUBE Auction will conclude
early if same-side incoming interest improves the initiating price. For
example, if both the NBBO and BBO (with no customer interest) at the
time a CUBE Auction initiates is $1.00-$1.10, and the initiating price
for a CUBE Order to buy 60 contracts is $1.04, the permissible range of
executions for that Auction is $1.00-$1.04. If the Exchange receives an
unrelated order to buy priced at $1.05, because that order would set a
new BB that is priced higher than the initiating price of $1.04,
pursuant to Rule 971.1NY(b)(1)(C), the new lower bound of the range of
permissible executions would be adjusted to $1.05, which does not allow
for any execution opportunity because an execution of the CUBE Order to
buy would trade through the new BB. Because this would prevent proper
conclusion of the auction and price improvement for the CUBE Order,
pursuant to Rule 971.1NY(c)(4)(D), the Auction is instead subject to an
early conclusion event, in order both to allow the CUBE order to
receive its guaranteed execution and to allow the Book to update its
BB. The rationale for this early conclusion scenario therefore ties
back to Rule 971.1NY(b)(1)(C), which provides that the permissible
range of executions of a CUBE Auction adjusts if the BBO on the same
side of the CUBE Order updates during the Auction.
Proposed Amendment
The Exchange proposes to amend Rule 971.1NY(c)(4)(D) to add
additional specificity regarding when a CUBE Auction would conclude
early. The proposed revisions are intended to add transparency
regarding when the arrival of interest on the same side as the CUBE
Order that would require an updated BBO during an Auction would require
the Auction to conclude early. Specifically, the arrival of same-side
interest that is priced the same as the initiating price may, in
certain circumstances, similarly require an early conclusion to a CUBE
Auction.
Assuming the same facts as above, if there is new same-side
interest priced at $1.04 entered during the Auction on behalf of a
Customer, pursuant to Rule 971.1NY(b)(1)(C), such interest would need
to update the BB and would adjust
[[Page 35203]]
the lower bound of the range of permissible executions for the Auction
to $1.05.\7\ This adjusted lower bound for the range of permissible
executions would also not allow for any execution opportunity because
it would be higher than the initiating price, and therefore the CUBE
Order would not be able to execute. Therefore, just as in the case
described above, the Exchange proposes that the CUBE Auction instead
conclude early, before the BBO is updated. An early conclusion would
allow the CUBE Order to receive its guaranteed execution and to allow
the Book to update its BB.
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\7\ See Rule 971.1NY(b)(1)(A) (lower (upper) bound of the range
of permissible executions for a CUBE Order to buy (sell) when there
is customer interest on the BB (BO) is the BB (BO) plus (minus) one
cent).
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Similarly, assuming the same facts as above, but the CUBE Order to
buy is for 40 contracts, if there is new same-side interest priced at
$1.04 entered during the Auction, pursuant to Rule 971.1NY(b)(1)(C),
such interest would need to update the BB and would again adjust the
lower bound of the range of permissible executions to $1.05.\8\ As
above, this adjusted lower bound for the range of permissible
executions would not allow for any execution opportunity because it
would similarly be higher than the initiating price, and therefore the
CUBE Order would not be able to execute. Therefore, again for the same
reasons as above, the Exchange proposes that the CUBE Auction conclude
early, before the BBO is updated. An early conclusion would similarly
allow the CUBE Order to receive its guaranteed execution and allow the
Book to update its BB.
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\8\ See Rule 971.1NY(b)(1)(B) (lower (upper) bound of the range
of permissible executions for a CUBE Order to buy (sell) for fewer
than 50 contracts is the BB (BO) plus (minus) one cent).
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The Exchange proposes to amend Rule 971.1NY(c)(4)(D) to provide for
these early conclusion events. First, the Exchange proposes to amend
the subsection title, which currently states ``Same Side New BBO
Improves initiating price,'' to instead provide ``Same Side Incoming
Interest Would Create an Adjusted Range of Permissible Executions that
Improves initiating price.'' The Exchange believes that the additional
text makes clear that this provision concerns any circumstance when the
range of permissible executions would need to be adjusted, consistent
with Rule 971.1NY(b)(1)(C), because of incoming same-side interest such
that the CUBE Auction must conclude early to allow for the CUBE Order
to receive is [sic] guaranteed execution before the Book updates its
BBO.
Next, the Exchange proposes to amend the body of the subsection.
The rule text currently specifies a single event that would result in
an early conclusion, i.e., when the Exchange receives during the
Response Time Interval an unrelated, non-marketable quote or limit
order that is on the same side of the market as the CUBE Order to buy
(sell) and that is priced higher (lower) than the initiating price and
therefore creates a new BB (BO). As noted above, an early conclusion
must occur any time the Exchange receives during an Auction same-side
interest that is priced such that it would require the lower (upper)
bound of the range of permissible executions to be adjusted to be
higher (lower) than the initiating price, which includes both the
scenario currently specified in Rule 971.1NY(c)(4)(D) as well as the
additional scenarios described above.
Accordingly, the Exchange proposes to amend Rule 971.1NY(c)(4)(D)
to provide more generally that a CUBE Auction will conclude early any
time same-side interest arrives during an Auction that would adjust the
lower (upper) bound of the range of permissible executions higher
(lower) than the initiating price. The Exchange believes that the
proposed amended text captures both the existing specified scenario in
Rule 971.1NY(c)(4)(D), as well as the additional scenarios described
above. The proposed new text would read as follows (new text
italicized, deletions bracketed):
(D) Same Side [New BBO] Incoming Interest Would Create an Adjusted
Range of Permissible Executions that Improves initiating price. A CUBE
Auction will conclude early if the Exchange receives during the
Response Time Interval an unrelated, non-marketable quote or limit
order that is on the same side of the market as the CUBE Order to buy
(sell) and that would adjust the lower (upper) bound of the range of
permissible executions to be higher (lower) than the initiating price.
[is priced higher (lower) than the initiating price and therefore
creates a new BB (BO) that is higher (lower) than the initiating
price.] When the Auction concludes, the CUBE Order will execute
pursuant to paragraph (c)(5) of this Rule. Unfilled GTX Orders are
eligible to execute against the unrelated interest that caused the CUBE
Auction to conclude early and then will cancel. Contracts remaining, if
any, from such unrelated quote or order at the time the Auction ends
will be processed in accordance with Rule 964NY Order Display and
Priority.
The Exchange further proposes to amend Rule 971.1NY(b)(1)(C) to
clarify that the early conclusion events identified in Rule
971.1NY(c)(4)(D) would occur before the same-side BBO is updated.
Currently, Rule 971.1NY(b)(1)(C) provides that if the BBO on the same
side as the CUBE Order updates during the Auction, the range of
permissible executions adjusts in accordance with the updated BBO,
unless the Auction concludes early pursuant to Rule 971.1NY(c)(4)(D).
The Exchange proposes to revise the second clause of the sentence to
instead provide: ``unless the incoming same-side interest that would
update the BBO would cause the Auction to conclude early pursuant to
paragraph (c)(4)(D) of this Rule.'' The Exchange believes that the
revised text, read together with amended Rule 971.1NY(c)(4)(D), makes
clear that the arrival of certain same-side interest may cause an
Auction to end early, before the BBO is updated.
The Exchange believes that the proposed rule change is consistent
with the manner that the Auction operates, as specified in Rule
971.1NY(b)(1)(C), and will provide transparency in the rule regarding
the circumstances when the CUBE Auction should conclude early in order
to allow the CUBE Order to receive its guaranteed execution without
interfering with the priority of orders on the Book when the same-side
BBO is updated.
The Exchange further notes that it intends to issue guidance
advising ATP Holders that Contra Orders for the account of a Customer
may not be entered into a CUBE Auction. This guidance is consistent
with how other markets operate electronic auction mechanisms.\9\
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\9\ See NASDAQ OMX PHLX Frequently Asked Questions regarding
PIXL, which provides that its auction mechanism will not accept
customer orders as the guaranteeing order, available at: http://www.nasdaqtrader.com/content/phlx/PIXLfaqs.pdf; and Chicago Board
Options Exchange, Inc. guidance on its Automated Improvement
Mechanism (``AIM''), which provides that customer crosses do not
participate in the AIM auction mechanism, available at: https://www.cboe.org/hybrid/aim.aspx.
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Implementation
When the Exchange filed to adopt Rule 971.1NY, it stated that it
would announce the implementation date of the proposed rule change in a
Trader Update to be published no later than 60 days following
Commission approval. The Exchange further provided that the
implementation date would be no later than 60 days following
publication of the Trader Update announcing Commission approval.
Because the Exchange will not implement Rule 971.1NY until this
rule
[[Page 35204]]
change is effective, the Exchange proposes to revise this
implementation schedule to provide that it will announce the
implementation date of Rule 971.1NY, as amended by this rule proposal,
in a Trader Update to be published no later than 30 days following the
effective date of this rule change. The Exchange further proposes that
the implementation date will be no later than 30 days following
publication of the Trader Update announcing Commission approval. The
Exchange believes that this implementation schedule would provide ATP
Holders with adequate notice of the Auction and would allow ample time
for ATP Holders to prepare their systems for participation in the
Auction process, if such participation is desired. The Exchange notes
that this proposed rule change would not require ATP Holders to make
any changes to their systems.
2. Statutory Basis
For the reasons set forth above, the Exchange believes the proposed
rule change is consistent with Section 6(b) of the Act in general, and
furthers the objectives of Section 6(b)(5) of the Act, in that it is
designed to promote just and equitable principles of trade, remove
impediments to and perfect the mechanisms of a free and open market and
a national market system and, in general, to protect investors and the
public interest.
In particular, the Exchange believes that the proposal would remove
impediments to and perfect the mechanisms of a free and open market and
a national market system because it would provide transparency in
Exchange rules of when a CUBE Auction would conclude early. As noted
above, the rationale for an early conclusion to an Auction is to allow
the System to appropriately handle unrelated orders without the CUBE
Auction impacting that handling, and further allow a CUBE Order, which
has been guaranteed an execution, to execute against the Contra Order
and any RFR Responses that may have been entered up to that point. The
Exchange believes that concluding the Auction early as proposed is
consistent with current Rule 971.1NY(b)(1)(C), which requires the
Exchange to adjust the range of permissible executions if the same-side
BBO as the CUBE Order updates during an Auction. As already provided
for in Rule 971.1NY(c)(4)(D), an Auction concludes early if the same-
side interest would update the BBO to a price better than the
initiating price, which would have required adjusting the lower (upper)
bound of the range of permissible executions to be higher (lower) than
the initiating price to buy (sell). The Exchange believes the same
rationale applies in any circumstance when the Exchange receives during
the Auction same-side interest that would update the BBO in such a
manner as to require the lower (upper) bound of the range of
permissible executions to be adjusted to be higher (lower) than the
initiating price to buy (sell). The Exchange believes that the proposed
change is therefore consistent with the protection of investors and the
public interest because it will provide specificity in Exchange rules
when an Auction concludes early, thereby allowing both the CUBE Order
to receive its guaranteed execution and the Book to update the BBO.
The Exchange further believes that the proposed revised
implementation schedule would remove impediments to and perfect the
mechanism of a free and open market and a national market system
because it will enable the Exchange to delay implementation of the CUBE
Auction until after this proposed rule change is effective, while also
providing time to give notice to ATP Holders of the implementation
date.
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 rule proposal is not
intended to address any competitive issues. Rather, the Exchange is
proposing to add more specificity of circumstances when an Auction
would conclude early, in a manner consistent with existing rule text.
The Exchange notes that it operates in a highly competitive market in
which market participants can readily direct order flow to competing
venues who offer similar functionality. The Exchange believes the
proposed rule change is pro-competitive because it would enable the
Exchange to provide market participants with functionality that is
similar to that of other options exchanges. The Exchange notes that not
having the CUBE Auction at the Exchange places the Exchange at a
competitive disadvantage vis-[agrave]-vis other exchanges that offer
similar price improvement mechanisms.
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 \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).
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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) \12\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\12\ 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 No. SR-NYSEMKT-2014-51 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-NYSEMKT-2014-51. This
file number should be included on the subject line if email is used. To
help the Commission process and review your
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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 such filing also will be available for inspection
and copying at the principal offices 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-NYSEMKT-2014-51, and should
be submitted on or before July 10, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-14312 Filed 6-18-14; 8:45 am]
BILLING CODE 8011-01-P