[Federal Register Volume 81, Number 186 (Monday, September 26, 2016)]
[Notices]
[Pages 66111-66113]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-23047]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78888; File Nos. SR-NYSEARCA-2016-109; SR-NYSEMKT-2016-
73]
Self-Regulatory Organizations; NYSE Arca, Inc.; NYSE MKT LLC;
Order Approving Proposed Rule Changes To Provide for the Rejection of
Certain Electronic Complex Orders
September 20, 2016.
I. Introduction
On August 3, 2016, NYSE Arca, Inc. (``NYSE Arca'') and NYSE MKT LLC
(``NYSE MKT'') (each an ``Exchange'' and, together, the ``Exchanges'')
filed with the Securities and Exchange Commission (the ``Commission''),
pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 1934
(the ``Act''),\2\ and Rule 19b-4 thereunder,\3\ proposed rule changes
to amend NYSE Arca Rule 6.91(b) and NYSE MKT Rule 980(d), respectively,
to allow the Exchanges to reject certain Electronic Complex Orders.\4\
The proposed rule changes were published for comment in the in the
Federal Register on August 17, 2016.\5\ The Commission received no
comments regarding the proposals. This order approves the proposed rule
changes.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
\4\ NYSE Arca Rule 6.91 defines ``Electronic Complex Order'' to
mean, for purposes of that rule, ``any Complex Order as defined in
Rule 6.62(e) or any Stock/Option Order or Stock/Complex Order as
defined in Rule 6.62(h) that is entered into the NYSE Arca System.''
NYSE MKT Rule 980 defines ``Electronic Complex Order'' to mean, for
purposes of that rule, ``any Complex Order as defined in Rule
900.3NY(e) that is entered into the System.''
\5\ See Securities Exchange Act Release Nos. 78546 (August 11,
2016), 81 FR 54867 (``NYSE Arca Notice''); and 78544 (August 11,
2016), 81 FR 54893 (``NYSE MKT Notice'').
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II. Description of the Proposals
NYSE Arca and NYSE MKT each require market makers to use risk
limitation mechanisms that automatically remove a market maker's quotes
in all series of an options class when the market maker's risk settings
are triggered.\6\ The Exchanges state that the risk settings are
designed to mitigate the risk of multiple executions against a market
maker's quotes occurring simultaneously across multiple series and
multiple options classes.\7\ According to the Exchanges, the risk
settings allow market makers to provide liquidity across potentially
thousands of options series without being at risk of executing the full
cumulative size of all of their quotes before being given adequate
opportunity to adjust their quotes.\8\
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\6\ See NYSE Arca Notice, 81 FR at 54868; and NYSE MKT Notice,
81 FR at 54893. Pursuant to NYSE Arca Rule 6.40(b)(3), (c)(3), and
(d)(3), and NYSE MKT Rule 928(b)(3), (c)(3), and (d)(3), the
Exchanges establish a time period during which their respective
Systems calculate: (1) The number of trades executed by a market
maker in a specified options class; (2) the volume of contracts
executed by a market maker in a specified options class; or (3) the
percentage of a market maker's quoted size in specified options
class (the ``risk settings''). When a market maker has breached its
risk settings (i.e., has traded more than the contract or volume
limit or cumulative percentage limit of a class during the specified
measurement interval), each Exchange's System cancels all of the
market maker's quotes in that class until the market maker notifies
the Exchange that it will resume submitting quotes. See id. See also
NYSE Arca Rule 6.40, Commentary .02; and NYSE MKT Rule 980NY,
Commentary .02.
\7\ See NYSE Arca Notice, 81 FR at 54868; and NYSE MKT Notice,
81 FR at 54894.
\8\ See id.
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An Electronic Complex Order may execute against quotes or
individual orders comprising the Complex Order (the ``leg markets''),
or against Electronic Complex Orders resting in the Consolidated
Book.\9\ An incoming Electronic Complex Order will execute against
customer interest in the leg markets before executing against resting
Electronic Complex Orders at the same price (i.e., at the same total
net debit or credit), provided that the leg market interest can execute
the Electronic Complex Order in full or in a permissible ratio.\10\
When an Electronic
[[Page 66112]]
Complex Order executes against leg market interest, the execution of
the individual legs is processed as a single transaction package, not
as a series of individual transactions, because the execution of each
leg of the Electronic Complex Order is contingent on the execution of
the other legs of the order.\11\ Because the market maker risk settings
are calculated after the execution of all of the legs of the
transaction, rather than after the execution of each individual leg of
the transaction, an Electronic Complex Order that executes against leg
market interest may execute before triggering a market maker's risk
settings, essentially bypassing the risk settings.\12\ The Exchanges
note that if the same legs were sent as individual orders, rather than
as components of a complex order, the risk settings might be
triggered.\13\
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\9\ See id. See also NYSE Arca Rule 6.91(a)(2)(ii); and NYSE MKT
Rule 980NY(c)(ii).
\10\ See id.
\11\ See NYSE Arca Notice, 81 FR at 54868; and NYSE MKT Notice,
81 FR at 54894.
\12\ See id.
\13\ See id.
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According to the Exchanges, Electronic Complex Order where two or
more legs are buying (selling) calls (puts) raise particular concerns
because these ``directional'' complex orders are aggressively buying or
selling volatility.\14\ The Exchanges state that they have seen a
recent increase in the use of directional complex orders as a way to
trade against multiple series on the same side of the market without
triggering Market Maker risk settings, thereby undermining the purpose
of the risk settings.\15\ To address this concern, the Exchanges
propose to adopt NYSE Arca Rule 6.91(b)(4) and NYSE MKT Rule
980NY(d)(4), which provide that an Electronic Complex Order will be
rejected if it is:
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\14\ See id. The Exchanges note that the majority of electronic
complex orders are calendar and vertical spreads, butterflies and
straddles, which are designed to hedge a potential move of the
underlying security or to capture premium from an anticipated market
event. See id.
\15\ See id.
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(i) Composed of two legs that are (a) both buy orders or both sell
orders, and (b) both legs are calls or both legs are puts; \16\ or
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\16\ The Exchanges states that the following types of orders
would be rejected under NYSE Arca Rule 6.91(b)(4)(i) and NYSE MKT
Rule 980NY(d)(4)(i): Buy Call 1, Buy Call 2; Sell Call 1, Sell Call
2; Buy Put 1, Buy Put 2; and Sell Put 1, Sell Put 2. See NYSE Arca
Notice, 81 FR at 54869; and NYSE MKT Notice, 81 FR at 54894.
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(ii) composed of three or more legs and (a) all legs are buy
orders; or (b) all legs are sell orders.\17\
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\17\ The Exchanges state that the following types of orders
would be rejected under NYSE Arca Rule 6.91(b)(4)(ii) and NYSE MKT
Rule 980NY(d)(4)(ii): Buy Call 1, Buy Call 2, Buy Put 1; Buy Put 1,
Buy Put 2, Buy Put 3; Buy Call 1, Buy Call 2, Buy Call 3; Buy Put 1,
Buy Put 2, Buy Call 3; and Sell Put 1, Sell Put 2, Sell Call 1. See
id.
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The Exchanges believe that the potential risk of the specified
directional Electronic Complex Orders undermining the efficacy of
market makers' risk settings outweighs any potential benefit to market
participants submitting such orders packaged as Electronic Complex
Orders.\18\ The Exchanges also believe that the proposal will help to
eliminate a degree of unnecessary risk borne by market makers when
fulfilling their quoting obligations and encourage them to provide
tighter and deeper markets, to the benefit of all market
participants.\19\ The Exchanges note that market participants will
continue to be able to enter each leg of these directional complex
orders as separate orders.\20\ The Exchanges state that other exchanges
have adopted rules designed to prevent complex orders from effectively
bypassing market maker risk parameters.\21\ Because of the non-
traditional nature of directional complex orders, the Exchanges believe
that it is unlikely that directional complex orders would execute
against complex order interest.\22\ Accordingly, the Exchanges believe
that rejecting directional Electronic Complex Orders outright, rather
than simply preventing them from executing against leg market interest,
would have the same practical impact for order sending firms and would
be the most effective and transparent means of handling these
orders.\23\ The Exchanges also believe that rejecting, and therefore
preventing the execution of, directional Electronic Complex Orders
provides clarity with respect to the disposition of the orders and
assures that the market maker risk settings will operate as
intended.\24\
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\18\ See NYSE Arca Notice, 81 FR at 54869; and NYSE MKT Notice,
81 FR at 54894.
\19\ See NYSE Arca Notice, 81 FR at 54869; and NYSE MKT Notice,
81 FR at 54895.
\20\ See id.
\21\ See NYSE Arca Notice, 81 FR at 54869; NYSE MKT Notice, 81
FR at 54894. See also CBOE Rule 6.53C(d)(ii)(A)(2)(B) and ISE Rule
722(b)(3)(ii)(A) and (B) and Securities Exchange Act Release Nos.
73023 (September 9, 2014), 79 FR 55033 (order approving File No. SR-
ISE-2014-10); 72986 (September 4, 2010), 79 FR 53798 (September 10,
2014) (order approving File No. SR-CBOE-2014-017); 77297 (March 4,
2016), 81 FR 12764 (March 10, 2016) (notice of filing and immediate
effectiveness of File No. SR-CBOE-2016-014); and 76106 (October 8,
2015), 80 FR 62125 (October 15, 2015) (notice of filing and
immediate effectiveness of File No. SR-CBOE-2014-081). The Exchanges
acknowledge that CBOE and ISE do not reject the complex orders
identified as presenting a risk to market makers. See NYSE Arca
Notice, 81 FR at 54869; NYSE MKT Notice, 81 FR at 54894.
\22\ See NYSE Arca Notice, 81 FR at 54869; and NYSE MKT Notice,
81 FR at 54895.
\23\ See id.
\24\ See id.
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Finally, the Exchanges propose to delete the words ``Types of''
from NYSE Arca Rule 6.91(b) and NYSE MKT Rule 980NY(d) because the
subsequent paragraphs in the rules describe certain requirements for
Electronic Complex Orders, rather than types of Electronic Complex
Orders.\25\
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\25\ See NYSE Arca Notice, 81 FR at 54868; and NYSE MKT Notice,
81 FR at 54894.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
changes are consistent with the Act and the rules and regulations
thereunder applicable to a national securities exchange.\26\ In
particular, the Commission finds that the proposed rule changes are
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. The proposals are designed to prevent the Electronic Complex
Orders specified in NYSE Arca Rule 6.91(b)(4) and NYSE MKT Rule
980NY(d)(4) from undermining the efficacy of market makers' risk
settings. The Exchanges believe that preserving the efficacy of market
makers' risk settings could reduce risks to market makers, thereby
encouraging them to provide additional liquidity and narrower quote
spreads.\28\ The Commission notes that other options exchanges have
adopted similar rules.\29\ In addition, the Commission notes that
market participants will be able to submit the individual component
legs of the orders specified in NYSE Arca Rule 6.91(b)(4) and NYSE MKT
Rule 980NY(d)(4) as separate orders for execution against leg market
interest. Finally, the Commission believes that the deletion from NYSE
Arca Rule 6.91(b) and NYSE MKT Rule 980NY(d) of references to ``Types
of'' Electronic Complex Orders will help to assure that the Exchanges'
rules clearly
[[Page 66113]]
present the requirements applicable to Electronic Complex Orders.
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\26\ In approving this proposed rule change, the Commission
notes that it 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. 78(b)(5).
\28\ See NYSE Arca Notice, 81 FR at 54869; NYSE MKT Notice, 81
FR at 54895.
\29\ See CBOE Rule 6.53C(d)(ii)(A)(2)(B) and ISE Rule
722(b)(3)(ii)(A) and (B). However, as noted above, CBOE and ISE do
not reject the orders identified as presenting a risk to market
makers.
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\30\ that the proposed rule changes (File Nos. SR-NYSEARCA-2016-109
and SR-NYSEMKT-2016-73) are approved.
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\30\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
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\31\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-23047 Filed 9-23-16; 8:45 am]
BILLING CODE 8011-01-P