[Federal Register Volume 79, Number 246 (Tuesday, December 23, 2014)]
[Notices]
[Pages 77075-77077]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-29970]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73858; File No. SR-NYSEMKT-2014-14]
Self-Regulatory Organizations; NYSE MKT LLC; Order Approving a
Proposed Rule Change Amending Exchange Rule 967NY To Enhance the
Functionality of the Trade Collar Protection Mechanism
December 17, 2014.
I. Introduction
On October 24, 2014, NYSE MKT LLC (the ``Exchange'' or ``NYSE
MKT'') 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 amend Exchange Rule 967NY relating to the
Exchange's ``Trade Collar Protection'' mechanism for options. The
[[Page 77076]]
proposed rule change was published for comment in the Federal Register
on November 13, 2014.\3\ The Commission received no comments on the
proposal. This order approves the proposed rule change.
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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. 73544 (November 6,
2014), 79 FR 67485 (``Notice'').
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II. Description of the Proposal
The Exchange applies Trade Collar Protection to prevent the
immediate execution of certain orders at prices outside of a specified
parameter (referred to as a ``Trading Collar'').\4\ This Trade Collar
Protection mechanism is set forth in Exchange Rule 967NY(a), but the
Exchange has proposed to amend Exchange Rule 967NY(a) so that the rule
accurately reflects how the mechanism operates.\5\
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\4\ See id. 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 Exchange Rule 925NY(b)(4). See id. The
Exchange also notes that that the Trade Collar Protection mechanism
is not available for quotes or for orders with execution conditions
immediate-or-cancel (``IOC''), all-or-none (``AON''), fill-or-kill
(``FOK'') and NOW. See id.; see also Exchange Rule 967NY(a)(3).
\5\ See id.
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The Trade Collar Protection mechanism applies in two scenarios: (1)
The mechanism prevents the execution of certain orders when the
difference between the National Best Offer (``NBO'') and the National
Best Bid (``NBB'') is greater than one Trading Collar; \6\ and (2) the
mechanism prevents the execution of the balance of a 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
order).\7\ In the first scenario, 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'').\8\ 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.\9\ After a period of one second, if the collared order has not
been executed or its price has not been recalculated due to changes in
the market, the Trade Collar Protection mechanism will improve the
collared order's displayed price by an amount equal to an additional
Trading Collar.\10\ The Exchange notes that the collared order will re-
price before the expiration of one second as a result of certain
changes in the market; specifically, an update to the NBBO 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.\11\ 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).\12\
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\6\ See Exchange Rule 967NY(a)(1)(i).
\7\ See Exchange Rule 967NY(a)(1)(ii).
\8\ See Exchange Rule 967NY(a)(4)(A).
\9\ See Exchange Rule 967NY(a)(4)(B).
\10\ See Exchange Rule 967NY(a)(4)(C)(iii).
\11\ See Notice, supra note 3, at 67485.
\12\ See id.
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The second scenario arises when the difference between the NBB and
NBO is within the bid-ask differential guidelines and an incoming
market order or marketable limit order is partially executed upon entry
but execution of the balance of the order would be at a price that is
more than a Trading Collar away from the NBBO at entry.\13\ Pursuant to
Exchange Rule 967NY(a)(5), the balance of the partially executed order
will be subject to Trade Collar Protection and displayed at the last
sale price,\14\ and thereafter handled the same way as an order
collared in the first scenario.\15\
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\13\ See Notice, supra note 3, at 67486.
\14\ See id.; see also Exchange Rule 967NY(a)(5). However, if
there is an opportunity for trading within one Trading Collar of the
last sale price, the buy (sell) order will be displayed at the NBB
(NBO) established at the time of the initial execution. See id.
\15\ See id.
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The Exchange has proposed to amend Exchange Rule 967NY(a) so that
the description of the Trade Collar Protection mechanism conforms to
its function. First, Exchange Rule 967NY(a)(1)(i) provides that the
Exchange will prevent the immediate execution of market orders and
marketable limit orders if the width of the bid-ask differential of the
NBBO is greater than one Trading Collar. However, the Exchange states
that it only prevents the immediate execution of market orders (and not
marketable limit orders) when the width of the bid-ask differential of
the NBBO is greater than one Trading Collar.\16\ According to the
Exchange, marketable limit orders (i.e., orders with limit prices that
are executable against the NBB or NBO), execute immediately regardless
of the width of the bid-ask differential of the NBBO.\17\ Accordingly,
the Exchange proposes to delete the reference to marketable limit
orders in Exchange Rule 967NY(a)(1)(i).
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\16\ See Notice, supra note 3, at 67486.
\17\ The Exchange states that it believes that an order with a
limit price evidences specific interest at which the submitting
market participant is willing to trade and, therefore, does not need
the protection of the Trade Collar Protection mechanism. See id. The
Exchange notes that marketable limit orders remain subject to the
protections of the Exchange's ``Limit Order Filter'' as provided in
in Exchange 967NY(b). See id.
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Second, the Exchange proposes to delete Exchange Rule
967NY(a)(4)(C)(iv), which provides that a market order that arrives on
the same side of the market as a collared order will also be subject to
Trade Collar Protection and will be displayed at the same price as the
collared order. The Exchange has not yet deployed this functionality
and, as such, Exchange Rule 967NY(a)(4)(C)(iv) is not an accurate
reflection of the Trade Collar Protection mechanism's current operation
in this regard.\18\ Instead of joining the resting collared order at
its displayed price, an incoming market order to buy (sell) on the same
side of the market as a resting collared order actually results in both
orders being displayed at a price equal to one Trading Collar above
(below) the resting collared order's displayed price.\19\ The Exchange
notes that this is what occurs when a marketable limit order to buy
(sell) is received on the same side of the market as a resting collared
order and priced more than one Trading Collar above (below) the resting
collared order's displayed price.\20\ This handling of later-arriving
marketable limit orders is currently set forth in Exchange Rule
967NY(a)(4)(C)(ii). Since market orders are actually handled the same
way, in connection with the proposed deletion of Exchange Rule
967NY(a)(4)(C)(iv), the Exchange also proposes to amend Exchange Rule
967NY(a)(4)(C)(ii) to broaden its applicability to all marketable
orders, which include both marketable limit orders and market
orders.\21\
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\18\ See id. The Exchange states that it intends to incorporate
this functionality in the near future as it believes that the
functionality would be beneficial to the market. See id.
\19\ See id.
\20\ See Notice, supra note 3, at 67486.
\21\ See proposed Exchange Rule 967NY(a)(4)(C)(ii); see also
Notice, supra note 3, at 67486.
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Third, the Exchange proposes to delete a cross reference to
Exchange Rule 967NY(b)(1) in Exchange Rule 967NY(a)(2), which provides
the bid-ask differentials used to determine the applicable value of the
Trading Collar. Exchange Rule 925NY(b)(4) provides that the bid price
for an option contract be used as the reference price for the bid-ask
differential applicable to both buy and sell orders, but the Trade
Collar
[[Page 77077]]
Protection mechanism instead uses the NBO as the reference price for
the value of the Trade Collar applicable to sell orders (and uses the
NBB as the reference price for the Trade Collar applicable to buy
orders).\22\ Accordingly, in place of the current cross reference to
Exchange Rule 925NY(b)(4) in Exchange Rule 967NY(a)(2), the Exchange
proposes to adopt new subparagraphs (a)(2)(A) and (a)(2)(B), which
codify the same numerical values as provided currently in Exchange Rule
925NY(b)(4) but make clear that the reference price for the applicable
Trading Collar is the NBB for buy orders and the NBO for sell orders
(rather than both values being keyed off of the NBB as Exchange Rule
925NY(b)(4) provides).\23\
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\22\ See Notice, supra note 3, at 67486. The Exchange states
that it bases the value of the Trade Collar on the NBB for buy
orders because it believes that a market participant that is looking
to buy would derive its price off of what other market participants
are willing to pay (i.e., the prevailing bid), and similarly bases
the value of the Trade Collar on the NBO for sell orders because it
believes that a market participant that is looking to sell would
derive its price off of what other market participants are willing
to sell (i.e., the prevailing offer). See id.
\23\ See id.
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The Exchange also proposes some additional clarifying changes. The
Exchange proposes to amend Exchange Rule 967NY(a) to delete the terms
``inbound'' and ``incoming'' where currently used in the rule because
Trade Collar Protection applies to resting orders as well as inbound or
incoming orders.\24\ The Exchange also proposes to delete the reference
in Exchange Rule 967NY(a)(3) to the cancellation of IOC Orders, AON
Orders, FOK Orders and NOW Orders if not immediately executed, as AON
orders do not cancel if they are not immediately executed.\25\
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\24\ See id.; see also proposed Exchange Rule 967NY(a).
\25\ See proposed Exchange Rule 967NY(a)(3); see also Notice,
supra note 3, at 67486. The Exchange also proposes to capitalize the
term ``limit order'' as used in Exchange Rule 967NY(a)(4)(D) to
conform with the use of that term in the rest of the rule. See id.
at 67487.
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III. Discussion and Commission Findings
After careful review, 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.\26\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\27\ which
requires, among other things, that the rules of a national securities
exchange be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest.
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\26\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\27\ 15 U.S.C. 78f(b)(5).
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The Commission notes that the Exchange believes that the proposal
assists with the maintenance of fair and orderly markets and protects
investors by correcting inaccurate language in Exchange Rule 967NY(a)
and clarifying the existing Trade Collar Protection functionality so
that market participants can better understand how the Exchange handles
certain orders in times of market dislocation. In addition, the
Commission notes that the Exchange believes that the proposed
functionality of the Trade Collar Protection components is consistent
with the Act. In particular, the Exchange believes that its proposal to
base Trading Collar values on the NBB for buy orders and the NBO for
sell orders could remove impediments to and perfect the mechanism of a
free and open market by using a benchmark from which a market
participant would most likely derive its price.\28\
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\28\ See Notice, supra note 3, at 67487; see also supra note 22.
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The Commission believes that the operation of the Trade Collar
Protection mechanism set forth in the proposal is consistent with the
Act. In addition, the Commission believes that the revised description
of this mechanism should increase transparency with respect to how the
mechanism operates and enhance investors' understanding of how the
mechanism may affect their orders in certain market conditions.
Accordingly, the Commission believes that the proposal is reasonably
designed to help prevent fraudulent and manipulative acts and
practices, promote just and equitable principles of trade, remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, protect investors and the
public interest.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\29\ that the proposed rule change (SR-NYSEMKT-2014-14) be, and it
hereby is, approved.
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\29\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-29970 Filed 12-22-14; 8:45 am]
BILLING CODE 8011-01-P