[Federal Register Volume 79, Number 219 (Thursday, November 13, 2014)]
[Notices]
[Pages 67488-67491]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-26842]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73543; File No. SR-NYSEArca-2014-14]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change Amending Rule 6.60 To Enhance the Functionality
of the Trade Collar Protection Mechanism
November 6, 2014.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on October 24, 2014, NYSE Arca, Inc. (the ``Exchange'' or
``NYSE Arca'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III 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\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to amend Rule 6.60 to enhance the
functionality of the trade collar protection mechanism. 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 6.60(a) to clarify and
conform with the functionality of the trade collar protection mechanism
in use on the Exchange. The Exchange's amendment is to specify (a) how
marketable Limit Orders behave when received in a wide market, (b) how
subsequently-arriving Market Orders effect collared orders, and (c) the
values associated with a Trading Collar. The Exchange also seeks to
make non-substantive wording changes to Rule 6.60(a) and fix a
typographical error in Rule 6.37(b)(1)(E).
Background
Pursuant to Rule 6.60(a), the Exchange applies a ``Trade Collar
Protection'' mechanism that prevents the immediate execution of certain
orders at prices outside of a specified parameter (referred to as a
``Trading Collar'').\4\ Pursuant to Rule 6.60(a)(3), the Trade Collar
Protection mechanism is not available for quotes or for orders with
execution conditions IOC, AON, FOK and NOW.
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\4\ The Exchange adopted Rule 6.60 governing Trade Collar
Protection in 2013. See, Exchange Rule 6.60 (Securities Exchange Act
Release No. 70038) (July 25, 2013), 78 FR 46392 (July 31, 2013)
(NYSEArca-2013-72).
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Trading Collars are determined by the Exchange on a class-by-class
basis and, unless announced otherwise via Trader Update, are the same
value as the bid-ask differential guidelines established pursuant to
Rule 6.37(b)(1), as set forth in Rule 6.60(a)(2). For example, Rule
6.37(b)(1) sets the bid-ask differential for an option priced less than
$2.00 at $0.25. For any option that has a bid less than $2.00, the
Trading Collar will be $0.25. Accordingly, if the National Best Bid and
Offer (``NBBO'') for XYZ is $0.75 bid and $1.75 offer, certain orders
the Exchange receives will be subject to a $0.25 Trading Collar.\5\ If
necessary to preserve a fair and orderly market, the Exchange may, with
the approval of two Trading Officials,\6\ widen or narrow the Trading
Collar for one or more option series.
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\5\ The bid-ask differential changes as the price increases.
Rule 6.37(b)(1) sets the bid-ask differential at no more than $0.40
where the bid is $2.00 or more but does not exceed $5.00.
Accordingly, if the NBBO for XYZ is $3.00 bid and $3.50 offer,
certain orders the Exchange receives will be subject to a $0.40
Trading Collar Protection.
\6\ A Trading Official, as defined by Rule 6.1(b)(34) is an
officer or employee of the Exchange. Trading Officials are not
affiliated with OTP Holders.
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Trade Collar Protection applies to two scenarios. First, pursuant
to Rule 6.60(a)(1)(i), Trade Collar Protection prevents executions of
certain orders when the difference between the National Best Offer
(``NBO'') and the National Best Bid (``NBB'') is greater than one
Trading Collar. Second, pursuant to Rule 6.60(a)(1)(ii), Trade Collar
Protection prevents the execution of the balance of an eligible buy
order if it were to execute at a price that is the NBO plus a Trading
Collar (or a price that is the NBB minus a Trading Collar for an
eligible sell orders).
Pursuant to Rule 6.60(a)(1)(i), if the difference between the NBO
and the NBB is greater than one Trading Collar, the Exchange will
prevent execution or routing of certain orders. Instead, pursuant to
Rule 6.60(a)(4)(A), the Exchange will display the order at a price
equal to the NBO minus one Trading Collar for sell orders or the NBB
plus one Trading Collar for buy orders (the ``collared order''). The
Exchange will then attempt to execute or route the collared order to
buy (sell) against any contra interest priced within one Trading Collar
above (below) the displayed price of the collared order.\7\ As set
forth in Rule 6.60(a)(4)(C)(iii), should market conditions prevent the
order from trading or recalculating for a period of one second, the
order will improve its displayed price by an amount equal to an
additional Trading Collar.
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\7\ See, Rule 6.60(a)(4)(B).
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The collared order will re-price before the expiration of one
second as a result of certain changes in the market. Pursuant to Rule
6.60(a)(4)(C)(i), an update to the NBBO (based on another market center
or a quote or order on the Exchange) that improves the same side of the
market as the collared order will cause the collared order to be
redisplayed at the same price as the updated NBBO. In accordance with
Rule 6.60(a)(4)(C)(ii), a Limit Order (which is not an IOC Order, AON
Order, FOK Order or NOW Order) on the same side of the market priced
better than one Trading Collar from the collared order will also become
subject to Trade Collar Protection and will cause the collared order to
improve by one Trading Collar (which will redisplay at the new price
and additional size of the new Limit Order).\8\
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\8\ Rule 6.60(a)(4)(C)(iv) states that a new Market Order on the
same side as a collared order will not cause the order subject to
Trade Collar Protection to be recalculated (but will redisplay with
the additional size of the new Market Order).
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[[Page 67489]]
As set forth in Rule 6.60(a)(1)(ii), when the difference between
the NBB and NBO is within the bid-ask differential guidelines, orders
execute against the NBB or NBO, but Trade Collar Protection prevents
execution of the balance of certain order at prices that are a Trading
Collar above the NBO for buy orders (or at prices that are a Trading
Collar below the NBB for sell orders). Essentially, the Exchange will
permit the immediate execution of a Market Order or a marketable Limit
Order (together a ``marketable order'') up to a Trading Collar away
from the NBBO. Pursuant to Rule 6.60(a)(5), the balance of the
partially executed order will be subject to Trade Collar Protection and
will display at the last sale price. However, if there is an
opportunity for trading within one Trading Collar of the last sale
price, the order will continue to be displayed at the NBB (NBO)
established at the time of the initial execution. Once subject to Trade
Collar Protection, the order will follow the re-pricing mechanism
described above.
Proposed Change
The Exchange seeks to clarify and correct Rule 6.60 so as to
conform to current functionality. Pursuant to the language of Rule
6.60(a)(1)(i), the Exchange will prevent the immediately [sic]
execution of ``Market Orders or marketable Limit Orders'' if the width
of the bid-ask differential of the NBBO is greater than one Trading
Collar. However, during wide market conditions, the Exchange only
prevents the immediate execution of Market Orders. Orders with limit
prices that are executable against the NBB or NBO, regardless of the
width of the bid-ask differential of the NBBO, immediately execute.\9\
The Exchange believes that Market Orders need this additional level of
protection as such orders do not suggest that the submitting market
participant is aware of the market (or the dislocation associated
therewith). Conversely, the Exchange believes that an order with a
limit price evidences specific interest at which the submitting market
participant is willing to trade. While marketable Limit Orders are
immediately executable in situations where the bid-ask differential of
the NBBO is greater than one Trading Collar, they nonetheless remain
subject to the protections of the Limit Order Filter of 6.60(b).
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\9\ Rule 6.60(a)(4)(C)(ii) and 6.60(b) explain two scenarios
where marketable Limit Orders might not immediately execute: (1)
When there is already a collared order or (2) when the Limit Order
is priced significantly through the contra-side BBO.
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The Exchange also seeks to delete 6.60(a)(4)(C)(iv), which states
that a Market Order that arrives while another order is being displayed
due to Trade Collar Protection will join the collared order and display
at the same price. While the Exchange believes this behavior beneficial
to the market, it has not yet deployed the functionality. While it
intends to incorporate such an enhancement in the near future, the
Exchange is deleting (a)(4)(C)(iv) in order for its rules to comply
with current functionality. Market Orders that arrive while another
order is displayed due to Trade Collar Protection will behave in the
same manner as later-arriving marketable Limit Orders. Specifically,
the later-arriving Market Order will join the already collared order
and both will display at a price one Trading Collar above (below) the
previous displayed price. The Exchange intends to make another filing
to re-establishing the language of (a)(4)(C)(iv) once the functionality
is available.
The Exchange also proposes to amend Rule 6.60(a) to add language
that clarifies the current operation of the trading collar mechanism.
In particular, the Exchange proposes to delete the reference to Rule
6.37(b)(1) and instead codify the values of the Trading Collar directly
in Rule 6.60(a). Rule 6.37(b)(1) sets the bid-ask differentials based
exclusively on the bid price. The trading collar mechanism employs the
same values for determining the Trading Collar. However, while those
values are based upon the NBB for buy orders, the value of the Trading
Collar for sell orders is based upon the NBO. The Exchange uses the NBB
for buy orders because it believes that a market participant who is
looking to buy would derive its price off of what other market
participants are willing to pay (i.e. the prevailing bid). Similarly,
the Exchange uses the NBO for sell orders because it believes that a
market participant who is looking to sell would derive its price off of
what other market participants are willing to sell (i.e. the prevailing
offer). Accordingly, the Exchange proposes new sections (a)(2)(A) and
(a)(2)(B) to Rule 6.60, which specifies the values based upon whether
the order subject to Trade Collar Protection is to buy or sell.
As an example, the NBBO for XYZ is $1.00 bid and $6.00 offer. Based
upon Rule 6.60's reference to Rule 6.37(b)(1), it could be interpreted
that the Trading Collar would be $0.25 regardless of whether the
Exchange received an order to buy or sell (based upon the bid being
less than $2.00). However, collared sell orders currently derive their
Trading Collar and display price from the NBO. Accordingly, a Market
Order to buy would display at $1.25 (i.e., the $1.00 NBB plus the $0.25
Trading Collar (based upon the NBB being less than $2.00)) and would
attempt to execute against any contra interest (on any market) priced
$1.50 or less (i.e., $1.25 bid plus the $0.25 Trading Collar). However,
a Market Order to sell would display at $5.50 (i.e., the $6.00 NBO
minus the $0.50 Trading Collar (based upon the NBO being more than
$5.00 but does not exceed $10.00)) and would attempt to execute against
any contra interest (on any market) priced $5.00 or greater (i.e.,
$5.50 offer minus the $0.50 Trading Collar).
As a further example, the NBBO for XYZ is $1.45 x 200 bid and $2.10
x 200 offer with a $0.05 MPV. If the Exchange receives a market order
to buy 100 contracts, the Trading Collar would be $0.25 (pursuant to
new section (a)(2)(B)(i)). Accordingly, the order will be displayed at
$1.70 (i.e., $1.45 bid plus the $0.25 Trading Collar). For a period of
one second, the Exchange will attempt to execute the buy order against
any contra interest (on any market) priced $1.95 or less (i.e., $1.70
plus the $0.25 Trading Collar). Under Rule 6.60(a)(4)(C)(iii), at the
expiration of one second, the Exchange will attempt to redisplay the
market buy order subject to Trade Collar Protection at $1.95 (i.e.,
$1.70 plus the $0.25 Trading Collar). However, since the $2.10 NBO
represents contra interest priced $2.20 or less (i.e. $1.95 plus the
$0.25 Trading Collar), the market buy order would execute its 100
contracts against the NBO at $2.10. In comparison, in the same market
for XYZ, if the Exchange receives a market order to sell 100 contracts,
the Trading Collar would be $0.40 (pursuant to new section
(a)(2)(B)(ii)). Accordingly, the Exchange will attempt to display the
market sell order at $1.70 (i.e., $2.10 offer minus the $0.40 Trading
Collar). However, since the $1.45 NBB represents contra interest priced
$1.45 or greater, (i.e. $1.70 minus the $0.25 Trading Collar), the
market sell order would execute its 100 contracts against the NBB at
$1.45.
The Exchange also proposes to amend Rule 6.60(a) to strike the
extraneous term ``inbound'' from the rule, which could cause confusion
as to when Trade Collar Protection is available because the trade
collar mechanism continues to apply to resting orders. In addition, the
Exchange proposes to delete the reference in 6.60(a)(3) to the
cancellation of IOC Orders, AON Orders, FOK Orders and NOW Orders if
not immediately executed, as such is not the behavior of AON Orders.
The Exchange also proposes to capitalize the term ``limit order'' as
used in Rule
[[Page 67490]]
6.60(a)(4)(D) to conform with its use in the rest of the rule. Further,
the Exchange proposes to make non-substantive changes to Rule
6.60(a)(4)(C)(i) and (ii) to better clarify behavior in situations
where there already exists an already collared order.
Finally, the Exchange seeks to amend Rule 6.37(b)(1)(E) to rectify
a typographical error. Specifically, the rule currently states that the
bid-ask differentials should be no more than $1 when the last bid is
$20.10 or more. The rule should instead refer to the last bid being
$20.01 or more.
2. Statutory Basis
The statutory basis for the proposed rule change is Section 6(b)(5)
of the Securities Exchange Act of 1934 (the ``Act''), in general, and
furthers the objectives of Section 6(b)(5) \10\ which requires the
rules of an exchange 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. The proposed rule change also is
designed to support the principles of Section 11A(a)(1) \11\ of the Act
in that it seeks to assure fair competition among brokers and dealers
and among exchange markets. The Exchange believes that the proposed
rule amendments relating to the behavior of Limit Orders in a wide
market and the effect on Market Orders on already collared orders
assist with the maintenance of fair and orderly markets and protects
investors by correcting inaccurate language and clarifying existing
functionality so that market participants better understand how the
Exchange handles certain orders in times of market dislocation. The
Exchange also believes that it promotes just and equitable principles
of trade to allow marketable Limit Orders received in a wide market to
immediately execute against contra-side interest before receiving Trade
Collar Protection because Limit Orders provide evidence of prices for
which market participants are willing to trade. Accordingly, to the
extent contra-side interest exists at the NBBO, the Exchange believes
it is appropriate to permit such executions before providing Trade
Collar Protection for potential subsequent executions at inferior
prices. Furthermore, the Exchange believes that it assists in the fair
and orderly market to have Market Orders advance an already collared
order in the same fashion as marketable Limit Orders as both are
subsequent orders representing executable interest. The Exchange
believes that its proposal to clarify that Trading Collar values are
based upon the NBB for buy orders and the NBO for sell orders removes
impediments to and perfects the mechanism of a free and open market by
basing the Trading Collar upon the benchmark from which a market
participant would most likely derive its price. The Exchange recognizes
that there could be potential market conditions that result in
different Trading Collar values depending on whether the order
submitted is to buy or sell. However, the Exchange believes that any
such differences are outweighed by meeting the expectations of market
participants who submit buy orders based upon the price of the
prevailing NBB and sell orders based upon the price of the prevailing
NBO. Further, the Exchange believes that clearly setting forth these
benchmarks removes impediments to and perfects the mechanism of a free
and open market by ensuring that market participants better understand
the functionality of the trade collar mechanism on the Exchange and the
execution opportunities afforded their orders in certain market
conditions. The Exchange also believes that making non-substantive
wording changes enhances the description of Trade Collar Protection
will add transparency and clarity to the Exchange's rules. Finally, the
Exchange believes that fixing a typographical error found in Rule
6.37(b)(1)(E) will protect investors and the public interest by
reducing confusion that the error would otherwise create.
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\10\ 15 U.S.C. 78f(b)(5).
\11\ 15 U.S.C. 78k-1(a)(1).
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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 not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange believes the
proposal will provide market participants with clarity relating to how
the Exchange systems provides protection from anomalous executions.
Thus, the Exchange does not believe the proposal creates any
significant impact on competition.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
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-2014-14 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2014-14. 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 such
[[Page 67491]]
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 available publicly. All submissions should refer to
File Number SR-NYSEArca-2014-14, and should be submitted on or before
December 4, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-26842 Filed 11-12-14; 8:45 am]
BILLING CODE 8011-01-P