Federal Register, Volume 79 Issue 194 (Tuesday, October 7, 2014)

[Federal Register Volume 79, Number 194 (Tuesday, October 7, 2014)]
[Notices]
[Pages 60547-60552]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-23841]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73282; File No. SR-NYSEArca-2014-04]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To
Amend NYSE Arca, Inc.'s Rules by Revising the Order of Priority of Bids
and Offers When Executing Orders in Open Outcry

October 1, 2014.

I. Introduction

On January 15, 2014, NYSE Arca, Inc. (``Exchange'' or ``NYSE
Arca'') 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 revise the order of priority of bids and offers
when executing orders in open outcry. The proposed rule change was
published for comment in the Federal Register on February 3, 2014.\3\
On March 18, 2014, the Commission extended the time period for
Commission action on the proposal to May 2, 2014.\4\ The Commission
received ten comment letters from seven commenters regarding the
proposal,\5\ as well as a response to the comment letters from NYSE
Arca.\6\ On April 29, 2014, the Exchange filed Amendment No. 1 to the
proposed rule change.\7\ On May 2, 2014, the Commission instituted
proceedings pursuant to Section 19(b)(2)(B) of the Act \8\ to determine
whether to approve or disapprove the proposed rule change.\9\ The Order
Instituting Proceedings was published for comment in the Federal
Register on May 8, 2014.\10\ The Commission received an additional
response letter and data submission from NYSE Arca.\11\ This order
approves the proposed rule change, as modified by Amendment No. 1.
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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. 71425 (January 28,
2014), 79 FR 6258 (``Notice'').
\4\ See Securities Exchange Act Release No. 71733 (March 18,
2014), 79 FR 16072 (March 24, 2014).
\5\ See Letter from Darren Story, dated January 29, 2014
(``Story Letter I''); Letter from Abraham Kohen, AK FE Consultants
LLC, dated January 31, 2014 (``Kohen Letter I''); Letter from David
Spack, Chief Compliance Officer, Casey Securities, LLC, dated
February 3, 2014 (``Casey Letter''); Letter from Abraham Kohen, AK
FE Consultants LLC, dated February 4, 2014 (``Kohen Letter II'');
Letter from Angel Alvira, dated February 12, 2014 (``Alvira
Letter''); Letter from Donald Hart, dated February 12, 2014 (``Hart
Letter I''); Letter from Doug Patterson, Chief Compliance Officer,
Cutler Group, LP, dated February 13, 2014 (``Cutler Letter'');
Letter from Donald Hart, dated February 18, 2014 (``Hart Letter
II''); Letter from Gerald D. O'Connell, Chief Regulatory Officer,
Susquehanna International Group, LLP (``SIG''), dated March 14, 2014
(``SIG Letter''); and Letter from Darren Story, dated March 21, 2014
(``Story Letter II'').
\6\ See Letter from Martha Redding, Chief Counsel, NYSE
Euronext, dated April 4, 2014 (``NYSE Arca Response I'').
\7\ In Amendment No. 1, the Exchange revised the rule text for
proposed Rule 6.47: (1) To clarify that Floor Brokers, when crossing
two orders in open outcry, may not trade through any non-Customer
bids or offers on the Consolidated Book that are priced better than
the proposed execution price; and (2) to conform the term ``bids and
offers'' to ``bids or offers'' in paragraphs (a) and (c) thereunder.
Amendment No. 1 has been placed in the public comment file for SR-
NYSEArca-2014-04 at http://www.sec.gov/comments/sr-nysearca-2014-04/nysearca201404.shtml (see letter from Martha Redding, Chief Counsel,
NYSE Euronext, to Kevin M. O'Neill, Deputy Secretary, Commission,
dated April 30, 2014) and also is available on the Exchange's Web
site at http://www.nyse.com/nysenotices/nysearca/rule-filings/pdf.action;jsessionid=FACF4F6772B1316D973F5D4E2D258ACE?file_no=SR-
NYSEArca-2014-04&seqnum=2.
\8\ 15 U.S.C. 78s(b)(2)(B).
\9\ See Securities Exchange Act Release No. 72081 (May 2, 2014),
79 FR 26474 (``Order Instituting Proceedings'').
\10\ See Order Instituting Proceedings at 79 FR 26474. The
comment period closed on May 29, 2014, and the rebuttal period
closed on June 12, 2014. On July 29, 2014, the Commission extended
the time period for the proceedings for the Commission to determine
whether to approve or disapprove the proposed rule change to October
1, 2014. See Securities Exchange Act Release No. 72703 (July 29,
2014), 79 FR 45535 (August 5, 2014).
\11\ See Letter from Martha Redding, Chief Counsel, New York
Stock Exchange, dated September 11, 2014 (``NYSE Arca Response
II''). The response letter included summary data concerning
participation and competition in non-Customer-to-Customer open
outcry crossing transactions on NYSE Arca and NYSE Amex Options and
is available at http://www.sec.gov/comments/sr-nysearca-2014-04/nysearca201404.shtml.
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II. Description of the Proposal

NYSE Arca proposed to amend its rules governing the priority of
bids and offers on its Consolidated Book by revising the order of
priority in open outcry to afford priority to bids and offers
represented by Market Makers \12\ and Floor Brokers \13\ (collectively,
``Crowd Participants'') \14\ over certain equal-priced bids and offers
of non-Customers \15\ on the Consolidated Book \16\ during the
execution of an order in open outcry on the Floor \17\ of the
Exchange.\18\
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\12\ See Rule 6.32 (Market Maker Defined).
\13\ See Rule 6.43 (Options Floor Broker Defined).
\14\ The term ``Crowd Participants'' means the Market Makers
appointed to an option issue under Rule 6.35, and any Floor Brokers
actively representing orders at the best bid or offer on the
Exchange for a particular option series. See Rule 6.1(b)(38).
\15\ A non-Customer is a market participant who does not meet
the definition of Customer as defined in paragraph (c)(6) of Rule
15c3-1 under the Securities Exchange Act of 1934, 17 CFR 240.15c3-1.
See Rule 6.1(b)(29).
\16\ The term ``Consolidated Book'' means the Exchange's
electronic book of limit orders for the accounts of Public Customers
and broker-dealers, and Quotes with Size. See Rule 6.1(b)(37).
\17\ See Rule 1.1(i).
\18\ The Exchange also proposed to make non-substantive changes
to existing rule text contained in Rules 6.47 and 6.75. See Notice,
79 FR at 6260 for a description of these non-substantive changes.
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Current Rule 6.75(a) provides that any bids displayed on the
Consolidated Book have priority over same-priced bids represented in
open outcry. Such priority also is described in current Rule 6.47,
which governs crossing orders in open outcry. Floor Broker crossing
transactions, as described in Rule 6.47(a)(3), may not trade ahead of
bids or offers on the Consolidated Book that are priced equal to or
better than the proposed crossing price. The Exchange stated that,
because of this priority afforded to the Consolidated Book, Crowd
Participants who have negotiated a large transaction ultimately might
not be able to participate in its execution.\19\
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\19\ See Notice, 79 FR at 6258. The Exchange stated that Crowd
Participants could negotiate a transaction with an understanding of
the make-up of bids and offers on the Consolidated Book at the
beginning of open outcry. However, as the trade is executed, the
Consolidated Book could update with newly-arriving electronically-
entered bids and offers that have priority under current Rule
6.75(a). The Exchange noted that, given the speed at which quotes
can flicker in the Consolidated Book, Crowd Participants who have
agreed to a transaction in open outcry do not know if they will
actually participate on the trade until after execution. Id. at
6258-59.
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The Exchange proposed to restructure its priority rules so that
bids and offers of Crowd Participants would have priority over equal-
priced bids and offers of non-Customers on the Consolidated Book that
are ranked in time priority behind any equal-priced Customer bids and
offers on the Consolidated Book. Equal-priced Customer \20\ interest
would continue to be afforded priority over Crowd Participants in the
execution of an open outcry transaction. In addition, consistent with
the existing price/time priority presently applicable to bids and
offers on the Consolidated Book, equal-priced non-Customer bids and
offers ranked in time priority ahead of Customer interest also would be

[[Page 60548]]

afforded priority over Crowd Participants in the execution of an open
outcry transaction. In the Exchange's view, the proposed rule change
strikes the appropriate balance between encouraging larger negotiated
transactions in open outcry, while at the same time protecting Customer
interest on the Consolidated Book, and any interest that has time
priority over such protected Customer interest.\21\
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\20\ See supra note 15.
\21\ See Notice, 79 FR at 6259.
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To effect this change to its floor priority rules, the proposal
would amend the Exchange's rules as follows. As noted above, Rule
6.75(a) presently states that the highest bid shall have priority but
where two or more bids for the same option contract represent the
highest price and one such bid is displayed on the Consolidated Book,
such bid shall have priority over any bid at the post (i.e., the
Trading Crowd \22\). The Exchange proposed to amend Rule 6.75(a) \23\
by limiting the priority of bids in the Consolidated Book over bids in
the Trading Crowd solely to those bids for Customers along with non-
Customers that are ranked in time priority ahead of such Customers.\24\
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\22\ The term ``Trading Crowd'' means all Market Makers who hold
an appointment in the option classes at the trading post where such
trading crowd is located and all Market Makers who regularly effect
transactions in person for their Market Maker accounts at that
trading post, but generally will consist of the individuals present
at the trading post. See Rule 6.1(b)(30).
\23\ The Exchange noted that the changes made to Rule 6.75(a)
dealing with the priority of ``bids'' also would effect a
corresponding change to the meaning of Rule 6.75(b) dealing with
``offers,'' although there would be no change to the rule text in
Rule 6.75(b). See Notice, 79 FR at 6259.
\24\ See Notice, 79 FR at 6259-60 for examples illustrating how
the Exchange's priority and allocation rules would be applied under
the proposed rule change.
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Rule 6.76 presently governs order ranking, display and allocation
of orders on the NYSE Arca Options platform (``OX system''). The
Exchange proposed new paragraph (d) to Rule 6.76 that would set forth
the priority of bids and offers on the Consolidated Book against orders
executed through open outcry in the Trading Crowd. The proposed text
provides a step-by step-description of the order of priority to be
afforded bids and offers of both Customers and non-Customers on the
Consolidated Book. The Exchange noted that the priority scheme
described in proposed Rule 6.76(d) is consistent with the proposed
changes to Rule 6.75.\25\
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\25\ See Notice, 79 FR at 6259. According to the Exchange, the
inclusion of a description of open outcry priority procedures in
Rule 6.76 would serve as a useful cross reference to Rule 6.75. The
Exchange stated that including such a cross reference is consistent
with similar rule structures by the Chicago Board Options Exchange,
Inc. (``CBOE'') and NYSE MKT LLC (``NYSE MKT''). See id. (citing
CBOE Rule 6.45A(b) and NYSE MKT Rule 964NY(e)).
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The Exchange also proposed to include language in Rule 6.76(d)(4)
that sets forth certain OTP Holder \26\ obligations under Section 11(a)
of the Act.\27\ The proposed rule text states that, notwithstanding the
priority scheme set forth in proposed Rule 6.76(d)(2), an OTP Holder
effecting a transaction on the Floor for its own account, the account
of an associated person, or an account with respect to which it or an
associated person has investment discretion pursuant to the ``G Rule''
must still yield priority to any equal-priced non-OTP Holder bids or
offers on the Consolidated Book.\28\
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\26\ See Rule 1.1(q).
\27\ Specifically, pursuant to Section 11(a)(1)(G) of the
Exchange Act and Rule 11a1-1(T) thereunder (the ``G Rule''), an OTP
Holder may effect transactions on the Floor for its own account, the
account of an associated person, or an account with respect to which
it or an associated person has investment discretion, provided that
such transaction yields priority in execution to orders for the
account of persons who are not OTP Holders or associated with OTP
Holders. See 15 U.S.C. 78k(a)(1)(G) and 17 CFR 11a1-1(T). The
Exchange stated that the proposed rule text is based on the rules of
the CBOE and NYSE MKT on behalf of NYSE Amex Options. See Notice, 79
FR at 6259 (citing CBOE Rule 6.45A(b)(i)(D) and NYSE MKT Rule
910NY).
\28\ According to the Exchange, at this time, no OTP Holder that
currently operates on the Exchange's Floor as a Floor Broker enters
orders for its own account, the account of an associated person, or
an account with respect to which it or an associated person has
investment discretion. The Exchange stated, however, that the
Financial Industry Regulatory Authority, Inc. on behalf of NYSE
Regulation, Inc., monitors whether Floor Brokers comply with Section
11(a) of the Act. See id.
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Rule 6.47 outlines the procedures used when a Floor Broker attempts
to cross two orders in open outcry. Currently, Floor Brokers must trade
against all equal-priced Customer and non-Customer bids and offers in
the Consolidated Book before effecting a cross transaction in the
Trading Crowd. The Exchange proposed to revise Rule 6.47 to conform the
priority rules applicable to open outcry cross transactions to the
proposed changes described above. Accordingly, the Exchange proposed to
amend the procedures for the crossing scenarios described in Rule 6.47
\29\ by stating that Floor Brokers, when crossing two orders in open
outcry, must yield priority to: (1) Any Customer bids or offers on the
Consolidated Book that are priced equal to or better than the proposed
execution price and to any non-Customer bids or offers on the
Consolidated Book that are ranked ahead of such equal or better-priced
Customer bids or offers; and (2) to any non-Customer bids or offers on
the Consolidated Book that are priced better than the proposed
execution price.\30\ The Exchange noted that Floor Brokers would be
required to trade against equal and better-priced Customer bids or
offers on the Consolidated Book, any better-priced bids or offers of
non-Customers on the Consolidated Book and any non-Customer bids or
offers that are ranked ahead of equal-priced Customer bids or offers,
before attempting a cross transaction.\31\ Consistent with proposed
Rule 6.75(a), Floor Brokers would not be required to trade against
equal-priced non-Customer bids and offers that are ranked behind such
Customer and non-Customer bids and offers.\32\
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\29\ The crossing scenarios described in Rule 6.47 are: (a) Non-
Facilitation (Regular Way) Crosses; (b) Facilitation Procedures; (c)
Crossing Solicited Orders; (d) Mid-Point Cross; and (e) Customer-to-
Customer Cross. The Exchange did not propose any change to Rule
6.47(d) relating to Mid-Point Cross, and thus Mid-Point Cross
transactions would not be affected by the proposed rule change.
Telephone conversation between Glenn Gsell, Managing Director, NYSE
Arca and Commission staff, dated April 23, 2014.
\30\ See Notice, 79 FR at 6259-60 for examples illustrating the
proposed priority changes as applicable for Non-Facilitation and
Facilitation Crosses. See also Amendment No. 1, supra note 7.
\31\ See Notice, 79 FR at 6259.
\32\ The Exchange stated its belief that affording priority to
Crowd Participants ahead of such non-Customer interest on the
Consolidated Book would create an increased incentive for block-
sized transactions on the Floor. See Notice, 79 FR at 6259.
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The Exchange stated that it would announce the implementation date
of the proposed rule change by Trader Update to be published no later
than 90 days following approval \33\ and the implementation date would
be no later than 90 days following the issuance of the Trader Update.
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\33\ See Notice, 79 FR at 6260.
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III. Comment Letters and NYSE Arca's Responses

The Commission received ten comment letters from seven
commenters.\34\ NYSE Arca submitted a response to the comment letters
and an additional letter and data submission in response to the Order
Instituting Proceedings.\35\
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\34\ See supra note 5.
\35\ See supra notes 6 and 11.
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Five of the commenters, four of whom identified themselves as Crowd
Participants on NYSE Arca,\36\ generally were supportive of the
proposal to revise the order of priority of bids and offers when
executing orders in open outcry.\37\ Four of these commenters stated a
view that the proposal would

[[Page 60549]]

allow NYSE Arca to compete with other exchanges that currently have
similar priority rules.\38\ Three of these commenters stated that the
proposal would allow Crowd Participants to compete with bids and offers
of non-Customers on the Consolidated Book,\39\ and two of them stated
that Crowd Participants were the market participants most likely to
provide services during times of market duress.\40\ Two commenters also
noted that the rule change would maintain priority for Customer orders
resting on the Consolidated Book.\41\
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\36\ See Casey Letter (Floor Broker); Alvira Letter (Market
Maker); Hart Letters I and II (Market Maker); Cutler Letter (Crowd
Participant), supra note 5.
\37\ See Story Letters I and II; Casey Letter; Alvira Letter;
Hart Letter I and II; and Cutler Letter.
\38\ See Casey Letter (``The Proposal would still leave Arca
Crowd Participants at a slight disadvantage to crowd participants on
CBOE and Amex, but would go a long way towards leveling the playing
field''); Alvira Letter (``I would like to see us in a competitive
balance with the AMEX who have already implemented the change'');
Cutler Letter (``AMEX and CBOE currently have similar rules in
place''); and Hart Letter II (``This would enable the PCX to level
the rules with other exchanges''). See also SIG Letter (``the
proposal at least relates in part to a legitimate competitive
concern'').
\39\ See Casey Letter (``The current market structure leaves
NYSE Arca Crowd Participants and their customers at a distinct
disadvantage . . . to non-customer professional traders, including
High Frequency Traders''); Hart Letter I (``This rule disadvantages
floor based market makers, which are the only ones providing
liquidity when the markets are under duress''); and Cutler Letter
(``This Proposed Rule change will level the competitive balance
between floor market makers and electronic non-customer professional
traders'').
\40\ See Hart Letter I (``market makers . . . are the only ones
providing liquidity when the markets are under duress'') and Story
Letter II (``Perhaps one of the most compelling arguments for floor
based market-makers is that they are required to stand in and make
two-sided markets in volatile environments. They cannot just turn
off the machines and walk away'').
\41\ See Story Letter I (``It will allow for price discovery and
improvement, but at the same time maintaining protection for
customer orders resting on the order book'') and Casey Letter (``As
Crowd Participants will still be required to interact with any
Customer orders in the Consolidated Book, public Customers will not
be adversely affected'').
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Two commenters stated their belief that the proposal would increase
competition on the floor for orders,\42\ and one of these commenters
noted that this competition would benefit the investing public.\43\
Similarly, two commenters stated their view that the proposal would
improve investor executions on the floor.\44\ One commenter noted that
the proposal would create an advantage for price improving
customers.\45\
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\42\ See Casey Letter (``The Proposal, by creating more uniform
open outcry priority rules across floors, will increase competition
for execution of these negotiated transactions'') and Story Letter
II (``This filing will create an advantage for price improving
CUSTOMER orders'') (emphasis in original).
\43\ See Casey Letter (``Increasing competition in financial
markets is nearly always beneficial for investors; the Proposal
would increase competition among options floor brokers, and would
ultimately benefit the investing public'').
\44\ See Story Letter I (``This rule change will allow market
participants to IMPROVE fills for customers without creating any
disadvantage for other market participants'') and Casey Letter
(``The execution of sizeable negotiated transactions in listed
options is an important service provided to investors almost
exclusively by the few remaining options Floor Brokers. The Proposal
. . . will provide investors with greater flexibility, greater
access to liquidity, and lower execution costs'') (emphasis in
original).
\45\ See Story Letter II.
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Two commenters expressed concerns about the proposal.\46\ One
commenter stated its view that the proposal would disenfranchise and
disadvantage certain market participants, and suggested instead that
the Exchange give size preference for equal bid prices.\47\ The
commenter believed that such preference would be a more fair way of
revising the priority of bids and offers.\48\ This commenter further
noted that, under the Exchange's proposal, even small bids from Crowd
Participants would take priority over electronic non-Customer bids.\49\
The same commenter also noted its belief that best execution is not
enhanced by allowing more exchanges to disadvantage other traders.\50\
The commenter suggested that, regardless of the merits of high
frequency trading, there was no reason to disadvantage all non-
Customers by giving priority to one class of traders that would allow
them to jump ahead of the queue.\51\ One commenter who supported the
proposal took issue with views expressed by this commenter and noted
that current NYSE Arca rules are structured so as to disadvantage on-
floor market makers.\52\
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\46\ See Kohen Letters I and II; and SIG Letter.
\47\ See Kohen Letter I.
\48\ See Kohen Letter I.
\49\ See Kohen Letter I (``otherwise Crowd Participants' 1
contract or 100 share bid will always take priority'').
\50\ See Kohen Letter II.
\51\ See Kohen Letter II.
\52\ See Story Letter II.
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Another commenter also raised concerns with the proposal.\53\ The
commenter acknowledged that the proposal would reduce the number of
instances where high-frequency, non-Customer orders arriving on to the
book could cause Crowd Participants to be ``scaled-back'' from agreed-
upon negotiated amounts. The commenter acknowledged that this ``scaling
back'' currently presented certain operational and hedging challenges
to Crowd Participants.\54\ The commenter remarked, however, that the
proposal apparently was focused on attracting block cross volume to the
Exchange.\55\
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\53\ See SIG Letter.
\54\ See SIG Letter at 1.
\55\ See SIG Letter at 1 (``This focus is made apparent by Arca
when it asserts that the new rule . . . will provide greater
opportunity for bids and offers of crowd participants to participate
in open outcry transaction [sic] and therefore promote larger-sized
negotiated transactions'').
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The commenter noted that when NYSE Arca uses the term ``Crowd
Participants,'' it appears to refer to off-floor trading houses that
attempt to internalize, in large part, block orders from institutional
customers (i.e., clean cross orders). The commenter acknowledged that
this term also includes option market makers on the NYSE Arca Floor,
but stated its view that the market maker participation in such orders
is often minimal as a percentage of the total order size.\56\ The
commenter stated that the majority of available market maker liquidity
at the Exchange is represented by a group of off-floor market maker
firms that are collectively responsible for over 90% of displayed
liquidity in multiply traded options, rather than on-floor market
makers.\57\
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\56\ See SIG Letter at 2.
\57\ See SIG Letter at 2. The commenter remarked that, due to
the off-floor market makers, electronic crossing systems for block
sized orders generally have shown to be a better alternative to
floor crosses, at least on a transparency and price competition
basis. Id.
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The commenter further stated its view that the proposal would
attract more clean-cross type orders that it believes would further
insulate customer interest from competition by parties other than crowd
participants.\58\ In its view, because such negotiations usually occur
outside the view of off-floor market makers, the crosses often occur at
prices that have not been sufficiently vetted by those most likely to
offer price improvement.\59\ Given its concerns, the commenter believed
that the proposal would be detrimental to investors, as the opportunity
for price improvement would be significantly diminished.\60\
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\58\ See SIG Letter at 2.
\59\ See SIG Letter at 2. The commenter also noted that it had
submitted a Petition for Rulemaking filed with the Commission in
April 2013. The commenter represented that, in that petition,
several market making firms (including the commenter) asserted their
belief that exchanges with trading floors would generate better
priced executions for customers if they required crosses to be
auctioned through electronic systems that included off-floor
registered market makers in the respective option classes. See
Petition for Rulemaking Regarding Option Floor Crosses, File No. 4-
662 (April 22, 2013), available at http://www.sec.gov/rules/petitions/2013/petn4-662.pdf.
\60\ See SIG Letter at 2-3.
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The commenter stated that the proposal did not provide an
explanation regarding how more crowd participation in larger-sized
block floor crosses would benefit customers or the market in
general.\61\ The commenter acknowledged that, as other floor exchanges
have rules that place booked

[[Page 60550]]

parity interest behind crowd participants, NYSE Arca's proposal at
least relates in part to a legitimate competitive concern for the
Exchange.\62\ However, the commenter stated that it was important that
exchanges give sufficient reason why a proposed rule is not injurious
to customers or the market in general, and that the Exchange's proposal
fails to give such reasons, perhaps, as the commenter opined, because
there were none to give.\63\ The commenter requested that the
Commission establish the reasoning behind the Exchange's desire to
increase block-cross volume and the reasons, if any, for NYSE Arca's
belief that more (and cleaner) block floor crosses were good for
investors.\64\
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\61\ See SIG Letter at 3.
\62\ See SIG Letter at 3 (``No doubt, Arca relies heavily on
open outcry crosses for transaction volume. And, no doubt, the more
often that high-frequency professional booked orders break-up
`matched' floor crosses, the more likely it becomes that off-floor
facilitating firms will send their orders to other exchanges to be
crossed'').
\63\ See SIG Letter at 3.
\64\ See SIG Letter at 3.
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One commenter who supported the proposal raised issues with the
arguments made by the commenter who expressed several concerns
regarding the proposal.\65\ The commenter who supported the proposal
stated that the other commenter's concerns were misguided and unfounded
because the proposal would allow for price improvement on any size
order, whether large or not. The commenter who supported the proposal
also noted that the proposal would allow large market-making groups
like itself to continue to provide inside markets and actually trade at
those prices on NYSE Arca.\66\ The commenter who supported the proposal
disagreed with the suggestion that the proposal was necessarily about
attracting clean-crosses outside the view of off-floor market makers,
and stated its belief that the rule was designed to provide opportunity
to improve markets.\67\
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\65\ See Story Letter II.
\66\ See Story Letter II.
\67\ See Story Letter II.
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NYSE Arca provided a response letter addressing issues raised by
the commenters.\68\ NYSE Arca emphasized that the proposal would align
the rules of the Exchange with other U.S. options exchange trading
floors, but with a unique caveat that any non-Customer electronic
interest with time priority over a Customer order in the Book also
would maintain priority over floor participants.\69\
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\68\ See NYSE Arca Response Letter I.
\69\ See NYSE Arca Response Letter I at 1-4.
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In response to one commenter's suggestion that the Exchange adopt a
pure size priority model,\70\ NYSE Arca stated that a wholesale
restructuring of its priority model was beyond the scope of the current
proposal.\71\ NYSE Arca further noted its view that such a model would
unduly disadvantage small size retail customer orders by allowing
later-arriving professional participants willing to trade a larger
quantity to be accorded priority.\72\
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\70\ See Kohen Letters I and II.
\71\ See NYSE Arca Response Letter I at 2.
\72\ See NYSE Arca Response Letter I at 2.
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In response to one commenter who expressed several concerns
regarding the proposal, NYSE Arca stated that the concerns about the
practice of crossing institutional orders without electronic
participants providing price improvement was unrelated to the proposal
to allocate priority among participants at the same price.\73\ NYSE
Arca noted that its rules would continue to give priority to
participants who display an improved price.\74\
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\73\ See NYSE Arca Response Letter I at 2.
\74\ See NYSE Arca Response Letter I at 2.
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NYSE Arca disagreed with that commenter's suggestion that the
proposal would attract more clean-cross type orders, noting that the
proposal was intended to promote liquidity and price discovery, and
stated that nothing would ``insulate customer interest from competition
by parties other than crowd participants.'' \75\ NYSE Arca stated that
the proposal is intended to promote liquidity and price discovery on
the Exchange by adopting a priority structure that would be similar to,
but more favorable for electronic non-Customer participants than, the
priority structure that exists on other U.S. options trading
floors.\76\ The Exchange pointed out that the execution price would
have to be equal to or better than the NBBO and that Crowd Participants
would have to yield to superior electronic bids or offers.\77\ NYSE
Arca stated further that the proposal would not reduce the ability or
incentive for any participant to improve its displayed quote
electronically, as the proposal only would impact the allocation of
orders among multiple participants at the same price.\78\
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\75\ See NYSE Arca Response Letter I at 2-3.
\76\ See NYSE Arca Response Letter I at 3.
\77\ See NYSE Arca Response Letter I at 3.
\78\ See NYSE Arca Response Letter I at 3.
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In response to the commenter's request that the Exchange explain
why more (and cleaner) block floor crosses are good for investors, the
Exchange noted its view that institutional trading desks provide a
valuable service by providing liquidity to their customers for block-
size orders.\79\ The Exchange stated, however, that it did not believe
that the total level of larger-size block floor crosses in the industry
would increase as a result of its proposal.\80\ The Exchange noted that
other trading floors currently execute existing institutional block
cross volume, and the Exchange's goal was to offer an alternative venue
for such executions.\81\
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\79\ See NYSE Arca Response Letter I at 3.
\80\ See NYSE Arca Response Letter I at 3.
\81\ See NYSE Arca Response Letter I at 3. The Exchange also
provided examples where a firm looking to facilitate its customer
order might choose to send the order to an exchange other than NYSE
Arca under the Exchange's current priority rules. Id.
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After the Commission issued the Order Instituting Proceedings, NYSE
Arca submitted a second comment letter, which concerned participation
in open outcry crossing transactions on NYSE Arca.\82\ According to the
Exchange, it believed that comparing data relating to non-Customer-to-
Customer Floor crossing transactions on NYSE Arca with similar data for
NYSE Amex Options, the Exchange's affiliated options market that
provides priority to Floor participants over non-Customers on its
electronic book, would support the argument that the proposed rule
change would create a more robust open outcry market and benefit
investors who choose to send orders to the Exchange.\83\
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\82\ See NYSE Arca Response Letter II.
\83\ See NYSE Arca Response Letter II at 1-2. The data provided
by the Exchange showed that floor market makers and/or book
participants participated in only 34.5% of the total crossing
contracts executed on the NYSE Arca Floor, whereas on NYSE Amex
Options, such participants participated in 53.4% of the total
crossing contracts executed. See id. at 2. Although the data did not
describe the actual contract execution participation percentages for
either floor market makers or book participants, the Exchange
believed that the data showed that, if it had rules similar to other
options exchange trading floors, the Exchange would see an increase
in Floor market maker participation in Floor crossing transactions.
See id.
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IV. Discussion and Commission Findings

After careful review of the proposed rule change as well as the
comment letters and the NYSE Arca response letter received on the
proposal, 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
and, in particular, with Section 6(b) of the Act.\84\ In particular,
the Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\85\ which requires, among other things,
that the rules of a national securities exchange be designed to

[[Page 60551]]

prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, 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 not be designed to
permit unfair discrimination between customers, issuers, brokers or
dealers.\86\
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\84\ 15 U.S.C. 78f(b). In approving this proposed rule change,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\85\ 15 U.S.C. 78f(b)(5).
\86\ The Exchange represented that the proposed rule change is
consistent with Section 11(a) of the Act and the rules thereunder
and would not limit in any way the obligations of OTP Holders to
comply with Section 11(a) or the rules thereunder. See Notice, 79 FR
at 6261. The Exchange also represented that the proposed rule change
raises no novel issues under Section 11(a) and the rules thereunder
from a compliance, surveillance or enforcement perspective. See id.
The Commission notes that each member of the Exchange is responsible
for ensuring that its conduct is in compliance with the requirements
of Section 11(a) of the Act and the rules promulgated thereunder.
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As noted above, the Commission received ten comment letters from
seven commenters in response to the proposed rule change.\87\ Five of
the commenters supported the proposed rule change,\88\ while two other
commenters raised concerns about whether the Exchange's proposed
revisions to its rules governing priority during open outcry were
appropriate, as more fully described above.\89\ In its review of the
proposal, the Commission has carefully considered all of the comments
received. The Commission acknowledges the concerns raised by one
commenter, as detailed above,\90\ about the potential impact on
competition resulting from the proposed change in the Exchange's rules
governing priority and order allocation for open outcry transactions.
At the same time, the Commission also acknowledges the Exchange's
belief that this proposal will lead to greater competition for orders
and will create a more robust open outcry market and its belief that,
without the proposal, the Exchange would be at a competitive
disadvantage compared to other exchanges that operate trading
floors.\91\
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\87\ See supra note 5.
\88\ See Story Letters I and II; Casey Letter; Alvira Letter;
Hart Letters I and II; and Cutler Letter.
\89\ See Kohen Letters I and II; and SIG Letter. See also notes
46-64 and accompanying text describing the issues and concerns
raised by these comments.
\90\ See supra notes 53-64 and accompanying text.
\91\ See Notice, 79 FR at 6261.
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Rule 6.75(a), as proposed to be revised, describes NYSE Arca's
priority and order allocation for open outcry transactions, including
procedures to be followed when there is interest at the same price in
the Consolidated Book as on the Floor. Rule 6.76(d), as proposed to be
revised, describes NYSE Arca's order ranking, display and allocation of
orders on the OX system, and the priority described in proposed Rule
6.76(d) is consistent with the changes to Rule 6.75(a). The proposed
rules governing priority during open outcry transactions on the
Exchange's floor are similar to the priority rules at other exchanges
with trading floors.\92\ Rule 6.47, as proposed to be revised,
describes priority and order allocation for crossing orders in open
outcry transactions. The proposed rules governing open outcry during
crossing transactions on the Exchange floor are similar to the rules
governing priority in crossing transactions at other exchanges.\93\
Given that other options exchanges currently have rules that provide
lower priority to non-priority customer orders on the electronic book
during floor transactions on those exchanges, including during crossing
transactions, the Exchange's proposed revisions to its priority scheme
for floor transactions will allow NYSE Arca to compete with other
floor-based exchanges that have substantially similar rules.
Accordingly, the Commission believes that it would be appropriate and
consistent with the Act to approve the Exchange's proposed rule
change.\94\
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\92\ See, e.g., CBOE Rule 6.45A; NYSE MKT Rules 963NY and 964NY.
CBOE Rule 6.45A(b)(i) provides that, after public customer orders in
the electronic book, in-crowd market participants shall have second
priority and broker-dealer orders in the electronic book and
electronic quotes of Market-Makers shall have third priority. NYSE
MKT Rule 963NY(a)-(b) provides that, after Customer orders displayed
on the Consolidated Book, an order in the crowd shall have priority
over a non-Customer order displayed in the Consolidated Book. NYSE
MKT Rule 964NY(e) further requires that for Floor Brokers manually
representing orders in the trading crowd, Customer orders in the
Consolidated Book have first priority, ATP Holders of the trading
crowd have second priority and broker-dealers, Professional
Customers (including Quotes with Size and orders of Market Makers)
in the Consolidated Book have third priority.
\93\ See, e.g., CBOE Rule 6.74; NYSE MKT Rule 934NY. CBOE Rule
6.74 provides that for purposes of establishing priority at the same
price, bids and offers of In Crowd Market Participants have first
priority, except with respect to public customer orders resting in
the electronic book; and all other bids and offers (including bids
and offers of broker-dealer orders in the electronic book and
electronic quotes of Market-Makers) have second priority. NYSE MKT
Rule 934NY(b)(3) provides that, for a non-facilitation cross, if
there are bids or offers in the Consolidated Book better than the
proposed execution price or Customer Orders in the Consolidated Book
priced at the proposed execution price, the Floor Broker must trade
against such bids or offers in the Consolidated Book. Once bids or
offers in the Book are satisfied, the Floor Broker may cross the
balance of the orders, if any, to be crossed.
\94\ As noted above, the Exchange's proposal is intended to
bring its floor priority rules for crossing orders in line with the
floor priority rules of certain other options exchanges. However,
the Commission is aware of the concerns, as expressed by commenters,
that the rules of an options trading floor should allow for
sufficient competition for orders. This concern is one that the
Commission staff intends to continue to evaluate in the context of
its ongoing empirical consideration of market structure. For
example, there currently is relatively little information available
about the extent and nature of floor crossing transactions. The
Commission staff, however, expects that an exchange with a trading
floor, as part of its regulatory obligations, will monitor the
extent to which competition is maintained in floor crossing
transactions. One way an exchange could do so would be to assess
periodically the level of participation in such crossing
transactions by market makers and other market participants, aside
from the firm that initiated the cross, and review whether its rules
appropriately allow for such competition. In addition, the
Commission reminds broker-dealers that the duty of best execution
requires them to assess periodically the quality of competing
markets to assure that order flow is directed to the markets
providing the most beneficial terms for their customer orders. See,
e.g., Order Execution Obligations, Securities Exchange Act Release
No. 37619A (September 6, 1996), 61 FR 48290 at 48322-33 (September
12, 1996). Broker-dealers must examine their procedures for seeking
to obtain best execution in light of market and technology changes
and modify those practices if necessary to enable their customers to
obtain the best reasonably available prices. See id. at 48323. In
doing so, broker-dealers must take into account price improvement
opportunities, and whether different markets may be more suitable
for different types of orders or particular securities. See id.
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As noted above, one commenter remarked that it had submitted a
Petition for Rulemaking with the Commission that asserts that exchanges
with trading floors would generate better priced executions for
customers if they required crosses to be auctioned through electronic
systems that included off-floor registered market makers in their
respective option classes.\95\ Although the Petition for Rulemaking
raises concerns involving how orders are crossed on options exchange
floors, the recommendations in the Petition for Rulemaking \96\ are
beyond the scope of the Commission's consideration in connection with
the instant proposed rule change. However, Commission staff will
evaluate the Petition for Rulemaking and how best to address the
concerns raised therein.
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\95\ See supra note 59 and accompanying text.
\96\ The Petition for Rulemaking requests, among other things,
that the Commission require each floor-based U.S. options exchange
to provide an electronic-cross auction mechanism for all multiply-
listed options traded on its trading floor and ensure that the
mechanism is made electronically accessible from on and off the
trading floor by qualified members and that all block-sized matched
option crosses involving customer orders be auctioned through such
mechanism. See Petition for Rulemaking regarding Option Floor
Crosses, supra note 59.

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[[Page 60552]]

V. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\97\ that the proposed rule change, as modified by Amendment No. 1,
(SR-NYSEArca-2014-04) is approved.
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\97\ 15 U.S.C. 78s(b)(2).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\98\
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\98\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-23841 Filed 10-6-14; 8:45 am]
BILLING CODE 8011-01-P