Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving Proposed Rule Change and Amendments No. 1 and 2 and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 3 Thereto Relating to the Establishment of the OX Trading Platform, 44758-44766 [E6-12705]
Download as PDF
<![CDATA[
44758
Federal Register / Vol. 71, No. 151 / Monday, August 7, 2006 / Notices
Station Place, 100 F Street, NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSEArca–2006–41. This
file number should be included on the
subject line if e-mail 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 (https://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 inspection and copying in
the Commission’s Public Reference
Room. Copies of the 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–2006–41 and
should be submitted on or before
August 28, 2006.
IV. Commission’s Findings and Order
Granting Accelerated Approval of the
Proposed Rule Change
sroberts on PROD1PC70 with NOTICES
After careful consideration, 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,6 and, in
particular, the requirements of Section
6(b) of the Act 7 and the rules and
regulations thereunder. The
Commission finds that the proposed
rule change is consistent with Section
6(b)(4) of the Act,8 which requires that
the rules of the Exchange provide for the
equitable allocation of reasonable dues,
fees and other charges among its
members and other persons using its
facilities. The Commission believes that
the extension of the Linkage fee pilot
until July 31, 2007 will give the
Exchange and the Commission further
6 In approving this proposal, the Commission has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
7 15 U.S.C. 78f(b).
8 15 U.S.C. 78f(b)(4).
VerDate Aug<31>2005
18:28 Aug 04, 2006
Jkt 208001
opportunity to evaluate whether such
fees are appropriate.
The Commission finds good cause,
pursuant to Section 19(b)(2) of the Act,9
for approving the proposed rule change
prior to the thirtieth day after
publication of notice thereof in the
Federal Register. The Commission
believes that granting accelerated
approval of the proposed rule change
will preserve the Exchange’s existing
pilot program for Linkage fees without
interruption as the Exchange and the
Commission further consider the
appropriateness of Linkage fees.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,10 that the
proposed rule change (SR–NYSEArca–
2006–41) is hereby approved on an
accelerated basis for a pilot period to
expire on July 31, 2007.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.11
Nancy M. Morris,
Secretary.
[FR Doc. E6–12701 Filed 8–4–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54238; File No. SR–
NYSEArca–2006–13]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Approving Proposed
Rule Change and Amendments No. 1
and 2 and Notice of Filing and Order
Granting Accelerated Approval of
Amendment No. 3 Thereto Relating to
the Establishment of the OX Trading
Platform
July 28, 2006.
I. Introduction
On May 2, 2006, NYSE Arca, Inc.
(‘‘NYSE Arca’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) a
proposed rule change pursuant to
Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 to establish the OX
trading platform. The Exchange filed
Amendments No. 1 and 2 to the
proposed rule change on June 9, 2006
and June 15, 2006, respectively. The
proposed rule change was published for
comment in the Federal Register on
9 15
U.S.C. 78s(b)(2).
10 Id.
11 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
PO 00000
Frm 00154
Fmt 4703
Sfmt 4703
June 23, 2006.3 The Commission
received one comment on the proposal.4
On July 27, 2006, the Exchange filed
Amendment No. 3 to the proposal.5 This
order approves the proposed rule
change, as amended by Amendment
Nos. 1 and 2, grants accelerated
approval to Amendment No. 3, and
solicits comments from interested
persons on Amendment No. 3.
II. Description of the Proposal
NYSE Arca proposes to establish rules
for OX, a fully automated trading system
for standardized equity options
intended to replace NYSE Arca’s current
options trading platform, PCX Plus.6 OX
would provide an electronic order
delivery, execution and reporting
system for designated options listed and
traded on NYSE Arca through which
orders and quotes of Users 7 are
consolidated for execution and display.
Market Makers would be able to stream
quotes to OX either from on the trading
floor or remotely.
OX would be available for the entry
and execution of quotes and orders to
OTP Holders,8 OTP Firms 9 and,
through Sponsoring OTP Firms,10
certain non-OTP Firms and Holders,
known as Sponsored Participants 11
(collectively, ‘‘Users’’). In general, Users
would be able to enter market orders,
marketable limit orders and limit orders.
Only Market Makers would be
permitted to enter quotes on OX. As
Users enter bids and offers (i.e., orders
and quotes) into the system, any nonmarketable limit orders and quotes
3 See Securities Exchange Act Release No. 53995
(June 15, 2006), 71 FR 36145 (‘‘OX Notice’’).
4 See letter dated July 20, 2006 from Bryan Rule
(‘‘Rule Letter’’).
5 In Amendment No. 3, the Exchange: (i) Made
certain representations about entering into a
agreement with the NASD pursuant to Rule 17d–
2 under the Act following approval of this proposed
rule change; (ii) offered further analysis of why the
proposal is not inconsistent with Section 11(a) of
the Act; (iii) clarified that Satisfaction Orders would
be handled in the same manner as they are handled
on PCX Plus; (iv) submitted a rule that would
require a three second exposure period before
certain orders could be crossed; (v) represented that
NYSE Arca Rule 11.3 would require an OX Market
Maker to maintain information barriers that are
reasonably designed to prevent the misuse of
material, non-public barriers between ‘‘side-byside’’ market makers; (vi) removed a reference to an
‘‘Opening Only’’ order type; (vii) clarified the price
at which certain orders would be executed in the
Working Order Process and made other technical
corrections to the proposal. The complete text of
Amendment No. 3 is available on the Commission’s
Web site (https://www.sec.gov/rules/sro.shtml), at
the Commission’s Public Reference Room, and at
the Exchange.
6 See NYSE Arca Rule 6.90.
7 See proposed NYSE Arca Rule 6.1A(a)(19).
8 See NYSE Arca Rule 1.1(q).
9 See NYSE Arca Rule 1.1(r).
10 See proposed NYSE Arca Rule 6.1A(a)(17).
11 See proposed NYSE Arca Rule 6.1A(a)(16).
E:\FR\FM\07AUN1.SGM
07AUN1
Federal Register / Vol. 71, No. 151 / Monday, August 7, 2006 / Notices
sroberts on PROD1PC70 with NOTICES
would be ranked in an electronic limit
order file (the ‘‘OX Book’’) 12 according
to price-time priority, such that within
each price level, all bids and offers are
organized by the time of entry. The OX
Book (except for certain Working
Orders13 with conditional prices or
sizes) would be displayed to all Users.
For market orders or marketable limit
orders, like-priced bids and offers
would be matched by OX for execution
at prices equal to or better than the
NBBO pursuant to the following
algorithm, which is based on price-time
priority:
Step 1: All market orders and
marketable limit orders would be
matched against the displayed top of the
OX Book.
Step 2: If an order has not been
executed in its entirety pursuant to Step
1, then OX would match the order
against any Working Orders, which are
orders with a conditional or
undisplayed size. Examples of Working
Orders include a reserve order, an order
with a portion of the size displayed, and
a reserve portion of the size that is not
displayed.
Step 3: If an order has not been
executed in its entirety pursuant to
Steps 1 and 2, the order would be
routed to another Market Center 14 for
execution (either through the
intermarket options linkage (‘‘Linkage’’)
or via a broker-dealer affiliated with
NYSE Arca, Archipelago Securities)
unless the User has designated that the
order may not be routed to another
Market Center. If an order that is routed
to another Market Center is not executed
in its entirety, the order would be
ranked and displayed in the OX Book in
accordance with the terms of such order
and such order would be eligible for
execution.
The OX rules also would permit the
crossing of orders on the trading floor
via open outcry. Specifically, the
Exchange would provide rules
governing regular-way, facilitation, and
solicitation crosses and introduce the
ability for OTP Holders and OTP Firms
to execute Mid-Point Crosses 15 in
accordance with one of the three
crossing rules.
OTP Holders and OTP Firms meeting
certain qualifications would be
permitted to register as either Lead
Market Makers (‘‘LMMs’’) or Market
Makers in one or more option classes
traded on OX.16 In addition, LMMs
12 See
proposed NYSE Arca Rule 6.1A(a)(14).
proposed NYSE Arca Rule 6.62A(e).
14 See proposed NYSE Arca Rule 6.1A(a)(6).
15 See proposed NYSE Arca Rule 6.47(d).
16 Unless specified, or unless the context requires
otherwise, the term ‘‘Market Maker’’ as used herein
refers to both Market Makers and LMMs.
13 See
VerDate Aug<31>2005
17:19 Aug 04, 2006
Jkt 208001
would continue to be responsible for
handling orders under the Plan for the
Purpose of Creating and Operating an
Intermarket Option Linkage (‘‘Linkage
Plan’’).17
III. Discussion
After careful review, the Commission
finds that the proposed rule change, as
amended, is consistent with the Act and
the rules and regulations promulgated
thereunder applicable to a national
securities exchange 18 and, in particular,
with the requirements of Section 6(b) of
the Act.19 Specifically, the Commission
finds that approval of the proposed rule
change is consistent with Section 6(b)(5)
of the Act 20 in that it is designed to
facilitate transactions in securities; to
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.
A. Access to OX
As noted briefly above, the Exchange
proposes to expand the types of market
participants eligible to trade on its
options trading facility. OTP Holders
and OTP Firms with access to PCX Plus
at the time of this proposal would
continue to have access to the Exchange
through the OX platform. In addition,
the Exchange proposes to permit entities
that are neither OTP Holders nor OTP
Firms to access the OX platform as
‘‘Sponsored Participants.’’ The
Exchange proposes to define a
Sponsored Participant as a person, such
as an institutional investor, who has
entered into a sponsorship agreement
with a Sponsoring OTP Firm, that has
been designated to execute, clear, and
settle transactions on the Exchange for
the Sponsored Participant.
17 See Securities Exchange Act Release No. 43086
(July 28, 2000), 65 FR 48023 (August 4, 2000).
Subsequently, upon separate requests by the
Philadelphia Stock Exchange, Inc. (‘‘Phlx’’), the
Pacific Exchange, Inc. (‘‘PCX’’), and the Boston
Stock Exchange, Inc., the Commission issued orders
to permit these exchanges to participate in the
Linkage Plan. See Securities Exchange Act Release
Nos. 43573 (November 16, 2000), 65 FR 70850
(November 28, 2000), 43574 (November 16, 2000),
65 FR 70851 (November 28, 2000) and 49198
(February 5, 2004), 69 FR 7029 (February 12, 2004).
18 In approving this proposal, the Commission has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
19 15 U.S.C. 78f(b).
20 15 U.S.C. 78f(b)(5).
PO 00000
Frm 00155
Fmt 4703
Sfmt 4703
44759
The Sponsored Participant and its
Sponsoring OTP Firm would be
required to enter into a written
agreement incorporating the provisions
required by proposed NYSE Arca Rule
6.2(c). Specifically, the Sponsoring OTP
Firm would acknowledge, among other
things, that all orders entered by the
Sponsored Participant and any
executions occurring as a result of such
orders are binding in all respects on the
Sponsoring OTP Firm and that it is
responsible for any and all actions taken
by its Sponsored Participant. The
Sponsoring OTP Firm also would be
required to provide the Exchange notice
that it is responsible for the actions of
its Sponsored Participant(s). The
Sponsored Participant, in turn, would
agree, among other things, to comply
with applicable NYSE Arca rules and
procedures as if it were an OTP Firm
and agree to take precautions to prevent
unauthorized access to the Exchange.
The Sponsored Participants would be
required to establish and maintain an
up-to-date list of persons permitted to
obtain access to OX on behalf of the
Sponsored Participant (i.e., ‘‘Authorized
Traders’’) 21 and to provide that list to
the Sponsoring OTP Firm.
The Commission approved a
substantially similar arrangement for
trading on NYSE Arca’s predecessor
entity, the Pacific Exchange, when the
Commission approved the
establishment of the Archipelago
Exchange (‘‘ArcaEx’’) 22 as the equities
trading facility of PCX Equities, Inc.23
The Commission believes that, like the
arrangement that the Commission
previously approved for ArcaEx, the
proposed sponsorship arrangement is
consistent with the Act.
B. Display Order and Working Order
Processes
Users of OX would be able to submit
orders to an electronic file of orders in
the OX Book. The OX Book would
feature two trading processes—the
‘‘Display Order Process’’ and the—
Working Order Process.’’ Bids and offers
would be ranked, maintained, and
executed generally according to pricetime priority.24
21 See
proposed NYSE Arca Rule 6.1A(a)(1).
Arca LLC is the successor entity to
ArcaEx. See Securities Exchange Act Release No.
53382 (February 27, 2006), 71 FR 11251 (March 6,
2006).
23 See Securities Exchange Act Release No. 44983
(October 25, 2001), 66 FR 55225 (November 1, 2001)
(SR–PCX–00–25).
24 Under certain circumstances, an LMM would
be guaranteed participation, after all customer
orders ranked ahead of the LMM have been
executed, in an order when the LMM is quoting the
NBBO, but lacks time priority among Users bidding
22 NYSE
E:\FR\FM\07AUN1.SGM
Continued
07AUN1
44760
Federal Register / Vol. 71, No. 151 / Monday, August 7, 2006 / Notices
sroberts on PROD1PC70 with NOTICES
1. Display and Rank of Orders in the
Displayed and Working Order Processes
The Exchange would display all nonmarketable Limit Orders in the Display
Order Process of the OX Book. Limit
Orders, with no other conditions, and
quotes would be ranked based on the
specified price and the time of original
order or quote entry. The displayed
portion of Reserve Orders 25 would be
ranked in the Display Order Process at
the specified limit price and the time of
order entry. When the displayed portion
of the Reserve Order is decremented
completely, the displayed portion of the
Reserve Order would be refreshed from
the reserve amount for (1) The displayed
amount or (2) the entire reserve amount,
if the remaining reserve amount is
smaller than the displayed amount. The
refreshed quote would be submitted and
ranked at the specified limit price and
the new time that the displayed portion
of the order was refreshed.
The reserve portion of Reserve Orders
would be ranked in the Working Order
Process based on the specified limit
price and the time of original order
entry. After the displayed portion of a
Reserve Order is refreshed from the
reserve portion, the reserve portion
would remain ranked based on the
original time of order entry while the
displayed portion would be sent to the
Directed Order Process with a new time
stamp.
2. Execution of Orders in the Display
and Working Order Processes
Once a booked order becomes
marketable or upon a User’s entry of a
marketable order, all orders in OX
would be matched generally based upon
price-time priority, as described more
fully below. OX first would attempt to
match incoming marketable bids and
offers against bids or offers in the
Display Order Process at the display
price of the resident bids or offers for
the total amount of option contracts
available at that price or for the size of
the incoming order, whichever is
smaller. NYSE Arca proposes to allocate
incoming marketable bids and offers as
follows:
If an LMM is quoting in the option
series at the NBBO, an incoming
marketable bid or offer would be
matched against all Customer 26 orders
at the NBBO ranked ahead of the LMM.
The remaining balance of the incoming
marketable bid or offer would be
matched against the quote of the LMM
for either: (1) An amount equal to 40%
or offering the same price. See proposed NYSE Arca
Rule 6.76B.
25 See proposed NYSE Arca Rule 6.62A(e)(1).
26 See proposed NYSE Arca Rule 6.1A(a)(4).
VerDate Aug<31>2005
17:19 Aug 04, 2006
Jkt 208001
of the remaining balance of the
incoming bid or offer up to the LMM’s
disseminated quote size or (2) the
LMM’s share in the order of ranking in
the OX Book, whichever is greater. Any
remaining balance of the incoming
marketable bid or offer would be
matched against remaining marketable
orders and quotes in the Display Order
Process in the order of their ranking. If
the incoming marketable bid or offer has
not been executed in its entirety, the
remaining part of the order would be
directed to the Working Order Process.
An incoming marketable bid or offer
or portion thereof that fails to be
executed in the Display Order Process,
would be matched against orders within
the Working Order Process in the order
of their ranking.
3. Routing Away
If an incoming marketable order has
not been executed in its entirety on OX
and has been designated as an order
type that is eligible to be routed away,
the order would be routed either in its
entirety or as component orders for
execution to other Market Center(s)
disseminating the NBBO, either through
the Linkage or through the use of the OX
Routing Broker, as described below.
Where an order or portion of an order
is routed away and is not executed
either in whole or in part at the other
Market Center, the order would be
ranked and displayed in the OX Book in
accordance with the terms of the order,
and the order would be eligible for
execution. If an order has been
designated as an order type that is not
eligible to be routed away, the order
either would be placed in the OX Book
or cancelled if the order would lock or
cross the NBBO.
Further, the Working Order Process
would provide a method for handling
contingency orders as well as other
order types, such as Reserve Orders. The
Commission believes that the proposal
is designed to avoid executions at prices
inferior to the NBBO and is consistent
with the Linkage Plan, NYSE Arca Rule
6.94 (Order Protection), and the Act.
C. New Order Types
The proposal would introduce several
order types to NYSE Arca. In addition
to the Reserve Order, described above,
among the most significant order types
that NYSE Arca is proposing to
introduce are order types related to the
routing away function. These new order
types are designed to provide greater
flexibility to Users to better control the
execution of their orders.
PO 00000
Frm 00156
Fmt 4703
Sfmt 4703
1. Inside Limit Order
An ‘‘Inside Limit Order’’ is defined as
a limit order, which, if routed away,
would be routed to the market
participant or participants with the best
displayed price. Any unfilled portion of
the order would not be routed to the
next best price level until all quotes at
the current best bid or offer are
exhausted. If the order is no longer
marketable, the order would be ranked
in the OX Book pursuant to the ranking
and display provisions described above.
2. NOW Order
A ‘‘NOW Order’’ is defined as a limit
order that is to be executed in whole or
in part on OX, with any remainder
routed away only to one or more ‘‘NOW
Recipients’’ for immediate execution.
‘‘NOW Recipients’’ would include any
Market Center with which the Exchange
maintains an electronic linkage and that
provides instantaneous responses to
NOW Orders routed from OX. Any
portion of a NOW Order that is not
immediately executed by the NOW
Recipient would be cancelled. If a NOW
Order is not marketable when it is
submitted to OX, it would be cancelled.
3. PNP Order
A ‘‘PNP (Post No Preference) Order’’
is defined as a limit order to buy or sell
that is to be executed in whole or in part
on the Exchange, and the portion not so
executed would be ranked in the OX
Book, without routing any portion of the
order to another Market Center. The
Exchange would cancel any PNP Order
that would lock or cross the NBBO.
D. Routing Broker and Linkage
1. Routing Broker
As described above, in the event that
an order is not marketable on OX, but
is marketable on another exchange, the
Exchange would route the order to
another Market Center for execution.
Orders could be routed either through
Linkage or through a broker-dealer
affiliate of NYSE Arca that acts as an
agent for routing orders entered into OX
by Users (‘‘Routing Broker’’),27 based on
preset parameters in its automated
routing algorithm, subject to NYSE Arca
rules. Accordingly, orders that would be
eligible for routing over Linkage (e.g.,
public customer orders) could be routed
to other Market Centers either as
Principal Acting as Agent Orders (‘‘P/A
Orders’’) 28 via Linkage or as customer
27 NYSE Arca proposes to use Archipelago
Securities LLC (‘‘Archipelago Securities’’), a
wholly-owned subsidiary of Archipelago Holdings
Inc. and a registered broker-dealer, as the Routing
Broker.
28 See NYSE Arca Rule 6.92(a)(12)(i).
E:\FR\FM\07AUN1.SGM
07AUN1
Federal Register / Vol. 71, No. 151 / Monday, August 7, 2006 / Notices
sroberts on PROD1PC70 with NOTICES
orders via Archipelago Securities, based
on the automated routing algorithm
parameters. Generally, non-customer
orders and NOW Orders 29 would be
routed to other Market Centers via
Archipelago Securities. As described
above, certain order types, including
Immediate or Cancel and PNP Orders,
would not be eligible for routing away
to other exchanges.
The OX order routing function of
Archipelago Securities is an exchange
‘‘facility.’’ 30 As such, any proposed rule
change relating to Archipelago
Securities’ order-routing function must
be filed with the Commission, and must
operate in a manner that is consistent
with the provisions of the Act
applicable to exchanges with NYSE
Arca rules. In Amendment No. 3, the
Exchange proposes to clarify that the
NASD, a self-regulatory organization
(‘‘SRO’’) unaffiliated with NYSE Arca or
any of its affiliates, would continue to
carry out oversight and enforcement
responsibilities as the Designated
Examining Authority designated by the
Commission pursuant to Rule 17d–1
under the Act 31 with the responsibility
for examining Archipelago Securities for
compliance with the applicable
financial responsibility rules.
Furthermore, in Amendment No. 3,
the Exchange represents that it will
enter into a new agreement with the
NASD pursuant to Rule 17d–2 under the
Act 32 (the ‘‘NYSE Arca Agreement’’) to
expand the allocation to the NASD of
regulatory responsibility to encompass
all of the regulatory oversight and
enforcement responsibilities with
respect to Archipelago Securities,
except for ‘‘real-time market
surveillance.’’ NYSE Arca will submit
the NYSE Arca Agreement to the
Commission under Rule 17d–2 within
90 days of the Commission’s approval of
this proposed rule change.
The Commission notes that this
representation is substantially similar to
a representation the Exchange made
when it amended the certificate of
incorporation of PCX Holdings, Inc.,
certain rules of the Pacific Exchange,
and the bylaws of Archipelago
Holdings, Inc. (‘‘Archipelago’’) to
facilitate the consummation of the
merger between PCX Holdings, Inc. and
its subsidiaries, and Archipelago (the
‘‘Merger’’).33 The Commission believes
that delegating the regulatory function
for the oversight of its wholly-owned
29 See
proposed NYSE Arca Rule 6.62A(i).
15 U.S.C. 78c(a)(2).
31 17 CFR 240.17d–1.
32 17 CFR 240.17d–2.
33 See Securities Exchange Act Release No. 52497
(September 22, 2005), 70 FR 56949 (September 29,
2005) (SR–PCX–2005–90).
30 See
VerDate Aug<31>2005
17:19 Aug 04, 2006
Jkt 208001
subsidiary should help to ensure
independence in the regulatory
oversight of Archipelago Securities.
2. Linkage Routing and Obligations
The OX system would facilitate the
routing of P/A Orders to other Market
Centers via Linkage using the account of
the LMM assigned to the option class
being routed. The OX system, however,
would not automatically generate
Principal Orders 34 on behalf of Market
Makers; rather, Eligible Market
Makers 35 would be required to route
their own Principal Orders if they want
their proprietary orders sent to other
Market Centers via Linkage. Satisfaction
Orders 36 would be handled in the same
manner on OX as they are handled on
PCX Plus.37
The existing NYSE Arca rules that
apply to Linkage obligations, NYSE
Arca Rules 6.92 through 6.96, would
apply to OTP Holders and OTP Firms
accessing the OX system. For example,
those rules, in conjunction with the
Linkage Plan, would continue to
require: (1) OTP Holders and OTP Firms
to avoid Trade-throughs and to adjust
their quotes in the event of a locked or
crossed market; and (2) for LMMs to
handle inbound Linkage Orders. The
Commission believes that the
Exchange’s proposed automated routing
of certain Linkage Orders is consistent
with the Linkage Plan.
E. Market Makers
1. Market Maker Obligations
The OX proposal provides for two
types of market makers: LMMs and
Market Makers. A Market Maker on OX
would be an OTP Holder or OTP Firm
registered with NYSE Arca for the
purpose of submitting quotes
electronically and effecting transactions
as a dealer-specialist through the OX
trading platform either from the trading
floor or from off the trading floor.
Market Makers would be designated as
specialists on NYSE Arca for all
purposes under the Act and rules and
regulations thereunder. No more than
one LMM would be appointed in each
option class, and the Exchange would
be required to appoint at least one LMM
in each option class. The Exchange may
appoint any number of Market Makers
in each class, unless limited by
quotation system capacity. However, the
Exchange will not restrict access to any
34 See
NYSE Arca Rule 6.92(a)(12)(ii).
Amendment No. 3, NYSE Arca proposed a
technical change to its Rule 6.92(a)(7)(ii) to include
certain OX Market Makers within the definition of
‘‘Eligible Market Maker.’’
36 See NYSE Arca Rule 6.92(a)(12)(iii).
37 See Amendment No. 3, supra note 5.
35 In
PO 00000
Frm 00157
Fmt 4703
Sfmt 4703
44761
particular option class until the
Commission approves objective
standards for restricting such access.
A Market Maker would be required to,
among other things, compete with other
Market Makers to improve the market in
all series of options classes to which the
Market Maker is appointed, update
market quotations in response to
changed market conditions in all series
of options classes within its appointed
classes, honor its quotations, and submit
quotations in accordance with
maximum Exchange prescribed width
requirements. In addition, LMMs and
Market Makers would be required to
provide continuous, two-sided quotes in
their appointed issues for 99% and
60%, respectively, of the time the
Exchange is open for trading in each
issue. LMMs and Market Makers also
would be required to trade at least 75%
of their contract volume per quarter in
classes within their appointment.
Market Maker quotes would be ‘‘firm’’
for all orders that are routed to OX. The
Exchange would evaluate Market
Makers periodically to determine
whether they have fulfilled performance
standards relating to, among other
things, quality of markets, competition
among Market Makers, and ethical
standards.
In transitioning to the OX platform
from PCX Plus, the Exchange proposes
to eliminate provisions for the
appointment of ‘‘Remote Market
Makers’’ and ‘‘Supplemental Market
Makers.’’ Accordingly, the proposed
rules for the OX platform do not direct
where Market Makers must be
physically located when effecting
transactions on NYSE Arca and would
eliminate ‘‘in-person’’ trading
requirements applicable to Market
Makers that trade on the floor.
Market Makers receive certain
benefits for carrying out their duties. For
example, a lender may extend credit to
a broker-dealer without regard to the
restrictions in Regulation T of the Board
of Governors of the Federal Reserve
system if the credit is to be used to
finance the broker-dealer’s activities as
a specialist or market maker on a
national securities exchange.38 The
Commission believes that a Market
Maker must have an affirmative
obligation to hold itself out as willing to
buy and sell options for its own account
on a regular or continuous basis to
justify this favorable treatment. In this
regard, the Commission believes that
OX rules are reasonably designed to
impose such affirmative obligations on
OX Market Makers.
38 See
E:\FR\FM\07AUN1.SGM
12 CFR 221.5(c)(6).
07AUN1
44762
Federal Register / Vol. 71, No. 151 / Monday, August 7, 2006 / Notices
2. Market Maker Authorized Traders
The Exchange is proposing to limit
Market Maker access to OX to those
OTP Holders or officers, partners,
employees or associated persons of OTP
Firms that are registered with the
Exchange as Market Makers (‘‘Market
Maker Authorized Traders’’ or
‘‘MMATs’’). MMAT candidates will be
required to pass an examination to
demonstrate knowledge of NYSE Arca
rules prior to being approved by the
Exchange as a Market Maker Authorized
Trader. The proposal would also
establish standards and procedures
governing the suspension of registration
of an MMAT. The Commission believes
these requirements are reasonably
designed to ensure that the Exchange is
informed of the identities and
qualifications of individuals accessing
OX on behalf of Market Makers and are
consistent with the Act.
4. Integrated Market Making
F. Trading Auctions (Opening and
Trading Halt)
The Exchange is proposing new
procedures for initiating trading in a
given options class (‘‘Trading Auction’’).
The new procedures will apply to
orders designated for inclusion in the
opening auction process (‘‘Auction
Process’’) and upon re-opening of
trading after a trading halt. In particular,
the OX system will accept Market
Orders and Limit Orders and quotes for
inclusion in the Trading Auction, up
until the time the Trading Auction is
initiated in that options series. NonMarket Makers would be able to submit
orders for inclusion in the Trading
Auction, and Market Makers would be
able to submit two-sided quotes and
orders. Contingency orders would not
participate in the Auction Process. Any
eligible open orders residing in the OX
Book from the previous trading session
would be included in the Auction
Process.
After the primary market for the
underlying security disseminates the
opening trade or the opening quote, the
related option series would be opened
automatically at a single price. Among
the most significant principles in the
Trading Auction is that orders will have
priority over Market Maker quotes. In
addition, orders in the OX Book that are
not executed during the Auction Process
will be eligible for execution during the
Core Trading Hours 40 immediately after
the conclusion of the Opening Auction.
The opening price of a series would
be the price, as determined by the OX
system, at which the greatest number of
contracts would trade at or nearest to
the mid-point of the initial NBBO
In Amendment No. 3, the Exchange
represents that NYSE Arca Rule 11.3,
which governs the use of material, nonpublic information, would apply to OTP
39 See Securities Exchange Act Release No. 47838
(May 13, 2003), 68 FR 27129, 27137 (May 19, 2003)
(SR–PCX–2002–36).
40 See proposed NYSE Arca Rule 6.1A(a)(3).
3. Market Maker Risk Limitation
NYSE Arca is proposing to provide a
mechanism for limiting Market Maker
risk during periods of increased and
significant trading activity. OX would
activate the Market Maker Risk
Limitation Mechanism in a Market
Maker’s appointed class whenever a
designated number of executions
(ranging between 5 and 100 executions)
occurs within one second. Orders and
quotes received by OX after the
Mechanism is activated would not be
executed against the Market Maker. The
Commission believes that establishing a
uniform one second standard in place of
the existing variable ‘‘n’’ seconds
standard on PCX Plus is consistent with
the Act.
On the PCX Plus system, the
Exchange disseminates a market on
behalf of an LMM when there are no
Market Makers quoting in a series and
volume parameters are exceeded. The
Exchange proposes that if the
mechanism were activated under the
OX system and there were no Market
Makers quoting in a series, the Exchange
would no longer generate two-sided
quotes on behalf of the LMM. Instead,
on OX, the best bids and offers residing
in the OX Book would be disseminated
as the BBO. If there were no orders in
the OX Book in the issue at that time,
OX would disseminate a bid of zero and
an offer of zero. The Commission
believes that the proposed approach is
consistent with the Act.
sroberts on PROD1PC70 with NOTICES
Holders and OTP Firms trading on OX.
The Exchange represents that this rule
would require an OX Market Maker to
maintain information barriers—
reasonably designed to prevent the
misuse of material, non-public
information by such member—between
the OX Market Maker and any of its
affiliates that may act as specialist or
market maker in any security
underlying the options in which the
Market Maker makes a market on OX.
The Commission believes that requiring
information barriers between the OX
Market Maker and its affiliates with
respect to transactions in the option and
the underlying security are important to
reduce the opportunity for unfair
trading advantages or misuse of
material, non-public information.39
VerDate Aug<31>2005
17:19 Aug 04, 2006
Jkt 208001
PO 00000
Frm 00158
Fmt 4703
Sfmt 4703
calculated by the Exchange from the
quotes disseminated by Options Price
Reporting Authority, if any, or the midpoint of the best quote bids and quote
offers in the OX Book. Mid-point pricing
would not occur if that price would
result in an order or part of an order
being traded through. Instead, the
opening would occur at that limit price,
or, if the limit price is superior to the
quoted market, within the range of 75%
of the best quote bid and 125% of the
best quote offer. Orders and Marker
Maker quotes that do not trade during
the Trading Auction, but are marketable
against the initial NBBO following the
Trading Auction, would ‘‘sweep’’
through the OX Book and be executed
in price/time priority. If the best price
is at an away Market Center, orders
would be routed away to the
appropriate Market Center, pursuant to
NYSE Arca rules.
The Commission believes that the
proposed Trading Auction is reasonably
designed to facilitate executions at the
opening and following trading halts.
The Commission further believes that
the proposal is designed to avoid
executions at prices inferior to the
NBBO.
G. Crossing Rules
Under the proposal, OTP Holders and
OTP Firms would be permitted to
conduct crossing transactions on the
floor of the Exchange. The Exchange is
proposing to replace its existing
crossing rule with a new NYSE Arca
Rule 6.47, which would govern crosses
effected on the trading floor. Consistent
with the existing version of NYSE Arca
Rule 6.47, the proposed amendment
provides for non-facilitation (or ‘‘regular
way’’) crosses, facilitation crosses, and
solicitation crosses. In all cases, orders
must be announced to the trading crowd
in open outcry, and trading crowd
participants would be given a
reasonable time to respond with the
prices and sizes at which they would be
willing to participate in the cross. With
respect to all crosses, a Trading Official
would be available at each post on the
trading floor to assist in the
determination of what is a ‘‘reasonable
time,’’ when necessary. Trading crowd
participants who make bids or offers
equal to or better than the proposed
cross price would be permitted to
participate in a cross. In addition, in no
event would a cross occur that would
trade through the NBBO or any bids or
offers on the Book priced equal to or
better than the proposed execution
price.
Floor Brokers holding orders to buy
and sell the same option contract may
cross such orders after following the
E:\FR\FM\07AUN1.SGM
07AUN1
Federal Register / Vol. 71, No. 151 / Monday, August 7, 2006 / Notices
non-facilitation (regular way) cross
procedures. After requesting bids and
offers in the option series from the
trading crowd, the Floor Broker must
bid above the highest bid in the crowd,
or offer below the lowest offer in the
crowd, by at least the MPV. The Floor
Broker may then cross the orders at that
price provided that the execution price
is equal to or better than the NBBO and
that the Floor Broker satisfies any bids
or offers on the Book that are priced
equal to or better than the proposed
execution price.
With respect to facilitation crosses,
which involve a Floor Broker holding a
customer order and an order for the
account of an OTP Holder, OTP Firm, or
entity under the common control of a
Market Maker representing the customer
(‘‘Facilitation Order’’), the Floor Broker
must be willing to facilitate the entire
size of the customer order in order to
utilize the mechanism, and the size of
the customer order must be at least 50
contracts. After the Floor Broker
exposes the customer order to the
trading crowd for a reasonable period of
time, if at the time of execution there is
sufficient size to execute the entire
customer order at an improved price (or
prices), the customer order would be
executed at the improved price, so long
as such execution price is equal to or
better than the NBBO.
If at the time of execution there is
insufficient size to execute the entire
customer order at an improved price (or
prices), a Floor Broker would be
permitted to participate in up to 40% of
the balance of the order to be facilitated
once bids or offers in the Book equal to
or better than the proposed execution
price, non-member bids and offers in
the trading crowd at or better than the
proposed execution price, and member
bids and offers in the trading crowd
priced better than the proposed
execution price, have been satisfied.41
Thereafter, Market Makers in the trading
crowd who are bidding or offering the
proposed execution price may
participate in the balance of the
customer order based upon price-time
priority.42 The balance of the
sroberts on PROD1PC70 with NOTICES
41 When
executing the customer order to be
facilitated against such bids and offers, bids and
offers representing customer orders would be
required to be executed first. See proposed NYSE
Arca Rule 6.47(b)(7). The Commission notes that
NYSE Arca’s facilitation cross procedures would
allow all NYSE Arca members to avail themselves
of the exception to Section 11(a) of the Act set forth
in Section 11(a)(1)(G) of the Act and Rule 11a–1(T).
42 The Floor Broker is responsible for determining
the sequence in which Market Makers’ bids or offers
are vocalized. See NYSE Arca Rule 6.75(f)(1). In the
event that the bids or offers of two or more Market
Makers are made simultaneously, such bids or
offers will be deemed to be on parity and priority
VerDate Aug<31>2005
17:19 Aug 04, 2006
Jkt 208001
unexecuted agency order, if any, would
be executed against the remaining Floor
Broker proprietary interest.
The proposal would also permit the
crossing of solicited orders, which
involve a Floor Broker holding an order
for a customer of an OTP Holder or OTP
Firm for which the Floor Broker solicits
contra side interest in the trading
crowd. Crosses involving Solicited
Orders would be handled in a manner
whereby superior priced and equal
priced orders in the book and interest in
the crowd which collectively is of
sufficient size to execute against the
original customer order would be
executed before the Solicited Order.
Customer orders, at a given price, would
be executed before non-Customer orders
at the same price.43
The Exchange also proposes to add a
new category of cross order, the MidPoint Crossing Order. A Floor Broker
who holds a Mid-Point Crossing Order
to buy and sell an option contract at the
mid-point between the electronically
disseminated BBO or better in the
subject option series would be
permitted to cross such an order in
accordance with the procedures for
regular way, facilitation or solicitation
crosses, as applicable. The Mid-Point
Cross will not occur if the price of the
midpoint of the NYSE Arca BBO is
inferior to the NBBO or if the mid-point
does not fall on a standard increment.
In reviewing proposed crossing
mechanisms, the Commission considers
the potential that crosses will lock up
large portions of order flow from
intramarket price competition by
granting certain market participants
extensive participation guarantees, such
as the guarantee granted to Floor
Brokers in the proposed OX Facilitation
cross. To that end, the Commission
notes that the 40% participation
guarantee that Floor Brokers would
receive pursuant to the proposed
Facilitation Procedure, as described
above, is consistent with similar
guarantees accorded to members
effecting facilitation crosses on other
exchanges.44 The Commission believes
that the proposed crossing procedures
will be afforded to them, insofar as practicable, on
an equal basis. See NYSE Arca Rule 6.75(c).
43 In Amendment No. 3, the Exchange clarified
the Solicited Cross rule. Specifically, the Exchange
represented that only orders that are represented by
a Floor Broker as agent are eligible for crossing via
the Solicited Order procedures. If the Floor Broker
represents an order for a covered account, the
member order must satisfy the requirements of
Section 11(a) of the Act and the rules thereunder.
The Commission further notes that the Exchange
has represented that a member may not rely on the
exception found in Section 11(a)(1)(G) of the Act
when utilizing the solicited order procedures.
44 See, e.g, International Securities Exchange
(‘‘ISE’’) Rule 716(d).
PO 00000
Frm 00159
Fmt 4703
Sfmt 4703
44763
are reasonably designed to ensure that
interest in the crowd and on the book
is protected, in that all Customer
interest at the same price (whether
residing in the trading crowd or on the
book) must be satisfied before other
interest may be executed. The
Commission also believes that these
procedures should promote intramarket
price competition by providing market
makers and other market participants
with a reasonable opportunity to
compete for the proposed cross.
The Commission further notes that
the proposed OX rules would not permit
electronic crosses. In Amendment No. 3,
the Exchanges proposes to clarify that
Users seeking to effect certain orders as
agent against their own principal
account must ensure that either the
agency order or the User’s quote must be
displayed on OX for three second
seconds prior to execution. Specifically
the proposed rule would provide,
among other things, that Users may not
execute as principal orders they
represent as agent unless agency orders
are first exposed on the Exchange for at
least three seconds or the User has been
bidding or offering on the Exchange for
at least three seconds prior to receiving
an agency order that is executable
against such bid or offer. The
Commission believes this proposed
order exposure provision is
substantially similar to the rules of other
SRO rules that require members to wait
three seconds before executing principal
orders against an order they represent as
agent.45 In addition, the Commission
expects that the Exchange will closely
surveil to ensure that all crossing
transactions are not effected without
first being exposed to intramarket
competition.
H. Section 11(a) of the Act
Section 11(a)(1) of the Act 46 prohibits
a member of a national securities
exchange from effecting transactions on
that exchange for its own account, the
account of an associated person, or an
account over which it or its associated
person exercises investment discretion
(collectively, ‘‘covered accounts’’)
unless an exception applies.
Among the transactions excepted
under Section 11(a)(1) are those by a
dealer acting in the capacity of a market
maker, bona fide arbitrage or hedge
transactions, and transactions made to
offset errors. In the proposed rule
change, the Exchange has set forth its
analysis of how the proposed rule
change is consistent with Section 11(a)
of the Act and the rules thereunder.
45 See,
46 15
E:\FR\FM\07AUN1.SGM
e.g., ISE Rule 717.
U.S.C. 78k(a)(1).
07AUN1
44764
Federal Register / Vol. 71, No. 151 / Monday, August 7, 2006 / Notices
Rule 11a2–2(T) Interpretive Request
Rule 11a2–2(T) under the Act,47
known as the ‘‘effect versus execute’’
rule, provides exchange members with
another exception from the general
Section 11(a)(1) prohibition. Rule 11a2–
2(T) permits an exchange member,
subject to certain conditions, to effect
transactions for covered accounts by
arranging for an unaffiliated member to
execute the transactions on the
exchange. To comply with Rule 11a2–
2(T)’s conditions, a member (i) Must
transmit the order from off the exchange
floor; (ii) must not participate in the
execution of the transaction once it has
been transmitted to the member
performing the execution; 48 (iii) must
not be affiliated with the executing
member; and (iv) with respect to an
account over which the member has
investment discretion, neither the
member nor its associated person may
retain any compensation in the
connection with effecting the
transaction except as provided in the
rule. As described by the Commission,
these four requirements—off-floor
transmission, non-participation in order
execution, execution through an
unaffiliated member and non-retention
of compensation for discretionary
accounts—were ‘‘designed to put
members and non-members on the same
footing, to the extent practicable, in
light of the purposes of Section
11(a).’’ 49 If a transaction meets the
requirements of the ‘‘effect versus
execute’’ rule, it will be deemed to be
‘‘consistent with the purpose of Section
11(a)(1) of the Act, the protection of
investors, and the maintenance of fair
and orderly markets.’’ 50 The Exchange
stated that given OX’s automated
47 17
CFR 240.11a2–2(T).
member may, however, participate in
clearing and settling the transaction. The
commenter raises concerns about whether the
proposed OX system satisfies this prong of the
‘‘effect versus execute’’ rule. According to the
commenter, the notice of the proposal states that
‘‘NYSE Arca ‘may not participate in the execution
of the transaction once the order has been
transmitted’ ’’ and that ‘‘[t]he NYSE Arca plan does
interfere with the transmission and execution of
options orders.’’ To support this assertion, the
commenter states that orders may be routed away
to different exchanges for execution in certain
circumstances. See Rule Letter, supra note 4. The
Commission believes that the commenter
mischaracterizes the discussion of this prong of the
‘‘effect versus execute’’ rule set forth in the notice
of the proposal. The OX Notice states that the
exchange member and its associated person (not
NYSE Arca, as stated by the commenter) may not
participate in the execution of the transaction once
the order has been transmitted. The Commission
believes that OX satisfies this prong, as discussed
above.
49 See Securities Exchange Act Release No. 14713
(April 27, 1978), 43 FR 18557, 18560 (May 1, 1978)
(‘‘1978 Release’’).
50 See Rule 11a2–2(T)(e) under the Act.
sroberts on PROD1PC70 with NOTICES
48 The
VerDate Aug<31>2005
17:19 Aug 04, 2006
Jkt 208001
matching and execution services, no
Exchange member will enjoy any
special control over the timing of
execution or special order handling
advantages for orders executed via OX,
as all orders will be centrally processed
for execution by computer, rather than
being handled by a member through
bids or offers made on the trading floor.
The Exchange further stated that it
believes that due to OX’s open,
electronic structure that is designed to
prevent any Exchange members from
gaining any time and place advantages,
the Exchange believes that OX satisfies
the four requirements of the ‘‘effect
versus execute’’ rule as well as the
general policy objectives of Section
11(a) of the Act.
matching algorithm. The execution
depends not on whether an order is for
the account of an Exchange member, but
rather, upon what other orders are
entered into OX at or around the same
time as the subject order, what orders
are resident in the OX Book and where
the order is ranked based on the pricetime priority ranking algorithm.
Therefore, the Exchange stated that at
no time following the submission of an
order is an Exchange member able to
acquire control or influence over the
result or timing of its order’s execution.
As a result, the Commission believes
that the non-participation requirement
is met because OTP Holder or OTP Firm
orders are matched and executed
automatically in OX.
1. Off-Floor Transmission
Rule 11a2–2(T) requires an order for
a covered account to be transmitted
from off the exchange floor. In
considering the application of this
requirement to a number of automated
trading and electronic order-handling
facilities operated by national securities
exchanges, the Commission has deemed
the off-floor requirement to be met if the
order is transmitted from off the floor
directly to the electronic order handling
facility that compromises the exchange
floor by electronic means.51 Like these
other automated systems, the Exchange
has represented that orders sent to OX
will be transmitted from remote
terminals directly to the system by
electronic means and that most member
orders, except as described below, will
be submitted to OX from off of the floor.
Therefore, those members’ orders sent to
the OX system electronically from off
the Exchange floor satisfy the off-floor
transmission requirement for the
purposes of the ‘‘effect versus execute’’
rule.
3. Execution Through Unaffiliated
Member
The third requirement of Rule 11a2–
2(T) is that the exchange member who
executes the order be unaffiliated with
the member initiating the order. The
Commission has recognized, however,
that this requirement may be met where
automated exchange facilities are used.
For example, in considering the
operation of COMEX and PACE, among
other systems, the Commission noted
that while there is no independent
executing exchange member, the
execution of an order is automatic once
it has been transmitted into the
systems.52 Because the design of these
systems ensures that members do not
possess any special or unique trading
advantages in handling their orders after
transmitting them to the exchange
floors, the Commission has stated or not
objected to the Exchange’s conclusion
that executions obtained through these
systems satisfy the independent
execution requirement of Rule 11a2–
2(T) that the member not be affiliated
with the executing broker.53 The
Exchange stated that this requirement is
satisfied by the OX system because the
design of OX ensures that members do
not have any special or unique trading
advantages in handling their orders after
transmission. Accordingly, a transaction
for a covered account that submitted
directly by a member into OX, from off
of the Exchange floor, for execution
satisfies the unaffiliated member
requirement.
2. Non-Participation in Order Execution
The ‘‘effect versus execute’’ rule
further provides that the exchange
member and its associated person may
not participate in the execution of the
transaction once the order has been
transmitted. The Exchange has
represented that upon submission to
OX, an order will enter the queue and
be executed against another order in the
OX Book based on an established
51 See letter from Larry E. Bergmann, Senior
Associate Director, Division of Market Regulation
(‘‘Division’’), Commission, to Edith Hallahan,
Associate General Counsel, Phlx (March 24, 1999)
(‘‘VWAP Letter’’); letter from Catherine McGuire,
Chief Counsel, Division, Commission, to David E.
Rosedahl, PCX (November 30, 1998) (‘‘OptiMark
Letter’’); and letter from Brandon Becker, Director,
Division, Commission, to George T. Simon, Partner,
Foley & Lardner (November 30, 1994) (‘‘Chicago
Match Letter’’).
PO 00000
Frm 00160
Fmt 4703
Sfmt 4703
4. Non-Retention of Compensation
Finally, Rule 11a2–2(T) requires that,
in the case of a transaction effected for
an account with respect to which an
52 See Securities Exchange Act Release No. 15533
(January 29, 1979), 44 FR 6084 (January 31, 1979)
(‘‘1979 Release’’). See also VWAP Letter, OptiMark
Letter and Chicago Match Letter.
53 Id.
E:\FR\FM\07AUN1.SGM
07AUN1
Federal Register / Vol. 71, No. 151 / Monday, August 7, 2006 / Notices
exchange member or associated person
thereof exercises investment discretion,
neither the member or its associated
persons may retain compensation in
connection with effecting the
transaction without the express written
consent of the person authorized to
transact business for the account, given
in accordance with the rule. Exchange
members relying on Rule 11a2–2(T) for
transactions effected through OX must
comply with this condition of the rule.
The Commission notes that NYSE Arca
would enforce this requirement
pursuant to its obligation under Section
6(b)(1) of the Act 54 to enforce
compliance with the federal securities
laws.
In Amendment No. 3, the Exchange
clarified its discussion regarding the
application of Rule 11a2–2(T) found in
Amendment No. 1. Specifically, the
discussion in Amendment 1 was limited
to the application of Rule 11a2–2(T) to
orders for covered accounts sent
electronically to the OX system directly
by the member from off of the exchange
for execution. The Commission notes
that the Exchange’s discussion in
Amendment No. 1 did not address
instances where a member on the
physical floor of the Exchange submits
an order for a covered account into the
OX system from the physical floor by
electronic means. Accordingly, to rely
on the exception set forth in Rule 11a2–
2(T), the Exchange clarified that
members must ensure that they send
their orders from off the floor to an
unaffiliated member for execution, in
addition to meeting the rules’ other
requirements. If a member sends its
order from off of the floor to an affiliated
member that is on the floor who then
directs the order into the OX system for
execution, the member may not rely on
Rule 11a2–2(T) for an exception from
Section 11(a) of the Act. If a member
wishes to rely on the exception found in
paragraph (G) of Section 11(a)(1) of the
Act, its order may only be executed on
the physical floor of the Exchange.
Member proprietary orders that rely on
the exception found in Section
11(a)(1)(G) of the Act may not be
entered into the OX system for
execution.55
54 15
U.S.C. 78f(b)(1).
Exchange represented to the Commission’s
staff that it will submit to the Commission promptly
a proposed rule change pursuant to Rule 19b–4
under the Act to prohibit the entry of member
orders that must rely on the exception found in
Section 11(a)(1)(G) of the Act into the OX system.
Telephone conversation among Janet Angstedt,
Acting General Counsel, NYSE Arca, Kelly Riley,
Assistant Director, Commission, Hong-Anh Tran,
Special Counsel, Commission, Raymond Lombardo,
Special Counsel, Commission, and Tim Fox,
Special Counsel, Commission on July 25, 2006.
sroberts on PROD1PC70 with NOTICES
55 The
VerDate Aug<31>2005
17:19 Aug 04, 2006
Jkt 208001
I. Accelerated Approval of Amendment
No. 3
The Commission finds good cause for
approving Amendment No. 3 to the
proposed rule change prior to the
thirtieth day after publishing notice of
Amendment No. 3 in the Federal
Register pursuant to Section 19(b)(2) of
the Act.56
In Amendment No. 3, the Exchange
represents that the NASD would
continue to carry out oversight and
enforcement responsibilities as the
Designated Examining Authority
designated by the Commission pursuant
to Rule 17d–1 under the Act 57 with the
responsibility for examining
Archipelago Securities for compliance
with the applicable financial
responsibility rules. The Exchange also
represented that it will enter into an
agreement with the NASD pursuant to
Rule 17d–2 under the Act 58 to provide
that NYSE Arca will delegate to the
NASD all regulatory oversight and
enforcement responsibilities with
respect to Archipelago Securities
pursuant to applicable laws, except for
real-time market surveillance, within 90
days of the Commission’s approval of
this proposed rule change. As discussed
above, the Commission believes that
these representations raise no new
issues of regulatory concern.
As described in greater detail above,
the Exchange also clarifies in
Amendment No. 3 how the proposed
OX trading platform and crossing
procedures will comply with Section
11(a) of the Act and with the Linkage
Plan. In the amendment, the Exchange
also proposes to clarify its rules to
incorporate an order exposure
requirement comparable to similar rules
adopted by the other options exchanges.
The Exchange represents in Amendment
No. 3 that NYSE Arca Rule 11.3 would
require an OX Market Maker to maintain
information barriers, that are reasonably
designed to prevent the misuse of
material, non-public information, with
any affiliates that may act as specialist
or market maker in any security
underlying the options for which the
OTP Holder/Firm acts as an OX Market
Maker. In addition, the Exchange
proposes to remove a reference to an
‘‘opening only’’ order type that the
Exchange did not specifically propose.
In Amendment No. 3, NYSE Arca also
proposed to clarify that incoming
marketable orders would be matched
against all Working Orders in the
Working Order Process at the price of
the displayed portion (for Reserve
56 15
U.S.C. 78s(b)(2).
CFR 240.17d–1.
58 17 CFR 240.17d–2.
Orders) or at the limit price (for all other
Working Order types).
The Commission notes that
Amendment No. 3 is intended to
reconcile apparent inconsistencies in
other parts of the Exchange’s proposed
rules. The Commission believes that
Amendment No. 3 raises no novel issues
of regulatory concern, and is consistent
with the Act. Therefore, the
Commission finds good cause exists to
accelerate approval of Amendment No.
3, pursuant to Section 19(b)(2) of the
Act.59
IV. Solicitation of Comment
Interested persons are invited to
submit written data, views and
arguments concerning Amendment No.
3, including whether Amendment No. 3
is consistent with the Act. Comments
may be submitted by any of the
following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulescomments@sec.gov. Please include File
No. SR–NYSEArca–2006–13 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to
Amendment No. 3 to File No. SR–
NYSEArca–2006–13. This file number
should be included on the subject line
if e-mail 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 (https://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 inspection and copying in
the Commission’s Public Reference
Room. Copies of such filing will also be
available for inspection and copying at
the principal office of NYSE Arca. All
comments received will be posted
57 17
PO 00000
Frm 00161
Fmt 4703
59 15
Sfmt 4703
44765
E:\FR\FM\07AUN1.SGM
U.S.C. 78s(b)(2).
07AUN1
44766
Federal Register / Vol. 71, No. 151 / Monday, August 7, 2006 / Notices
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 Amendment
No. 3 to File No. SR–NYSEArca–2006–
13 and should be submitted on or before
August 28, 2006.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,60 that the
proposed rule change (SR–NYSEArca–
2006–13), as amended, be, and it hereby
is, approved and Amendment No. 3 is
approved on an accelerated basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.61
Nancy M. Morris,
Secretary.
[FR Doc. E6–12705 Filed 8–4–06; 8:45 am]
Small Business Administration.
Notice.
AGENCY:
SUMMARY: This is a notice of an
Economic Injury Disaster Loan (EIDL)
declaration for the State of New York ,
dated 07/30/2006.
Incident: Power Outage Precipitated
by Extreme Heat and Rising
Temperatures.
Incident Period: 07/17/2006 and
continuing.
Effective Date: 07/31/2006.
EIDL Loan Application Deadline Date:
05/01/2007
ADDRESSES: Submit completed loan
applications to: U.S. Small Business
Administration, National Processing
And Disbursement Center, 14925
Kingsport Road, Fort Worth, TX 76155.
FOR FURTHER INFORMATION CONTACT: A.
Escobar, Office of Disaster Assistance,
U.S. Small Business Administration,
409 3rd Street, SW., Suite 6050,
Washington, DC 20416.
SUPPLEMENTARY INFORMATION: Notice is
hereby given that as a result of the
Administrator’s EIDL declaration on 07/
31/2006, applications for economic
injury disaster loans may be filed at the
address listed above or other locally
announced locations.
sroberts on PROD1PC70 with NOTICES
DATE:
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
VerDate Aug<31>2005
17:19 Aug 04, 2006
Financial Management Service;
Proposed Collection of Information:
Electronic Funds Transfer (EFT)
Market Research Study
Dated: July 31, 2006.
Steven C. Preston,
Administrator.
[FR Doc. E6–12730 Filed 8–4–06; 8:45 am]
[Public Notice 5484]
Disaster Declaration #10554; NEW
YORK Disaster # NY–00024 Declaration
of Economic Injury
61 17
(Catalog of Federal Domestic Assistance
Number 59002).
DEPARTMENT OF STATE
SMALL BUSINESS ADMINISTRATION
60 15
Dated: July 31, 2006.
C. Miller Crouch,
Principal Deputy Assistant Secretary for
Educational and Cultural Affairs, Department
of State.
[FR Doc. E6–12765 Filed 8–4–06; 8:45 am]
BILLING CODE 8025–01–P
BILLING CODE 8010–01–P
ACTION:
The following areas have been
determined to be adversely affected by
the disaster:
Primary Counties: Queens.
Contiguous Counties:
New York: Bronx, Kings, Nassau, New
York.
The Interest Rate is: 4.000.
The number assigned to this disaster
for economic injury is 105540.
The State which received an EIDL
Declaration # is New York.
Jkt 208001
Culturally Significant Object Imported
for Exhibition Determinations: ‘‘Avery
Preesman’’
SUMMARY: Notice is hereby given of the
following determinations: Pursuant to
the authority vested in me by the Act of
October 19, 1965 (79 Stat. 985; 22 U.S.C.
2459), Executive Order 12047 of March
27, 1978, the Foreign Affairs Reform and
Restructuring Act of 1998 (112 Stat.
2681, et seq.; 22 U.S.C. 6501 note, et
seq.), Delegation of Authority No. 234 of
October 1, 1999, Delegation of Authority
No. 236 of October 19, 1999, as
amended, and Delegation of Authority
No. 257 of April 15, 2003 [68 FR 19875],
I hereby determine that the object to be
included in the exhibition ‘‘Avery
Preesman’’, imported from abroad for
temporary exhibition within the United
States, is of cultural significance. The
object is imported pursuant to a loan
agreement with the foreign owner or
custodian. I also determine that the
exhibition or display of the exhibit
object at The Renaissance Society at The
University of Chicago, Chicago, Illinois,
from on or about September 17, 2006,
until on or about October 29, 2006, and
at possible additional venues yet to be
determined, is in the national interest.
Public Notice of these Determinations is
ordered to be published in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: For
further information, contact Paul
Manning, Attorney-Adviser, Office of
the Legal Adviser, U.S. Department of
State (telephone: 202/453–8052). The
address is U.S. Department of State, SA–
44, 301 4th Street, SW., Room 700,
Washington, DC 20547–0001.
PO 00000
Frm 00162
Fmt 4703
Sfmt 4703
BILLING CODE 4710–05–P
DEPARTMENT OF THE TREASURY
Fiscal Service
Financial Management Service,
Fiscal Service, Treasury.
ACTION: Notice and request for
comments.
AGENCY:
SUMMARY: The Financial Management
Service, as part of its continuing effort
to reduce paperwork and respondent
burden, invites the general public and
other Federal agencies to take this
opportunity to comment on a
continuing information collection. By
this notice, the Financial Management
Service solicits comments concerning
the ‘‘Electronic Funds Transfer (EFT)
Market Research Study.’’
DATES: Written comments should be
received on or before October 6, 2006.
ADDRESSES: Direct all written comments
to Financial Management Service,
Records and Information Management
Branch, Room 135, 3700 East West
Highway, Hyattsville, Maryland 20782.
FOR FURTHER INFORMATION CONTACT:
Request for additional information
should be directed to Edita Rickard, EFT
Strategy Division, 401 14th Street, SW.,
Room 418D, Washington, DC 20227,
202–874–7165.
SUPPLEMENTARY INFORMATION: Pursuant
to the Paperwork Reduction Act of 1995,
(44 U.S.C. 3506(c)(2)(A)), the Financial
Management Service solicits comments
on the collection of information
described below:
Title: Electronic Funds Transfer (EFT)
Market Research Study.
OMB Number: 1510–0074.
Form Number: None.
Abstract: Study of Federal benefit
recipients to identify barriers to
significant increases in use of EFT for
benefit payments.
Current Action: Extension of currently
approved collection.
Type of Review: Regular.
Affected Public: Individuals or
households.
Estimated Number of Respondents:
2,515.
E:\FR\FM\07AUN1.SGM
07AUN1
]]>Agencies
[Federal Register Volume 71, Number 151 (Monday, August 7, 2006)]
[Notices]
[Pages 44758-44766]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-12705]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54238; File No. SR-NYSEArca-2006-13]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving
Proposed Rule Change and Amendments No. 1 and 2 and Notice of Filing
and Order Granting Accelerated Approval of Amendment No. 3 Thereto
Relating to the Establishment of the OX Trading Platform
July 28, 2006.
I. Introduction
On May 2, 2006, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ to
establish the OX trading platform. The Exchange filed Amendments No. 1
and 2 to the proposed rule change on June 9, 2006 and June 15, 2006,
respectively. The proposed rule change was published for comment in the
Federal Register on June 23, 2006.\3\ The Commission received one
comment on the proposal.\4\ On July 27, 2006, the Exchange filed
Amendment No. 3 to the proposal.\5\ This order approves the proposed
rule change, as amended by Amendment Nos. 1 and 2, grants accelerated
approval to Amendment No. 3, and solicits comments from interested
persons on Amendment No. 3.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 53995 (June 15,
2006), 71 FR 36145 (``OX Notice'').
\4\ See letter dated July 20, 2006 from Bryan Rule (``Rule
Letter'').
\5\ In Amendment No. 3, the Exchange: (i) Made certain
representations about entering into a agreement with the NASD
pursuant to Rule 17d-2 under the Act following approval of this
proposed rule change; (ii) offered further analysis of why the
proposal is not inconsistent with Section 11(a) of the Act; (iii)
clarified that Satisfaction Orders would be handled in the same
manner as they are handled on PCX Plus; (iv) submitted a rule that
would require a three second exposure period before certain orders
could be crossed; (v) represented that NYSE Arca Rule 11.3 would
require an OX Market Maker to maintain information barriers that are
reasonably designed to prevent the misuse of material, non-public
barriers between ``side-by-side'' market makers; (vi) removed a
reference to an ``Opening Only'' order type; (vii) clarified the
price at which certain orders would be executed in the Working Order
Process and made other technical corrections to the proposal. The
complete text of Amendment No. 3 is available on the Commission's
Web site (https://www.sec.gov/rules/sro.shtml), at the Commission's
Public Reference Room, and at the Exchange.
---------------------------------------------------------------------------
II. Description of the Proposal
NYSE Arca proposes to establish rules for OX, a fully automated
trading system for standardized equity options intended to replace NYSE
Arca's current options trading platform, PCX Plus.\6\ OX would provide
an electronic order delivery, execution and reporting system for
designated options listed and traded on NYSE Arca through which orders
and quotes of Users \7\ are consolidated for execution and display.
Market Makers would be able to stream quotes to OX either from on the
trading floor or remotely.
---------------------------------------------------------------------------
\6\ See NYSE Arca Rule 6.90.
\7\ See proposed NYSE Arca Rule 6.1A(a)(19).
---------------------------------------------------------------------------
OX would be available for the entry and execution of quotes and
orders to OTP Holders,\8\ OTP Firms \9\ and, through Sponsoring OTP
Firms,\10\ certain non-OTP Firms and Holders, known as Sponsored
Participants \11\ (collectively, ``Users''). In general, Users would be
able to enter market orders, marketable limit orders and limit orders.
Only Market Makers would be permitted to enter quotes on OX. As Users
enter bids and offers (i.e., orders and quotes) into the system, any
non-marketable limit orders and quotes
[[Page 44759]]
would be ranked in an electronic limit order file (the ``OX Book'')
\12\ according to price-time priority, such that within each price
level, all bids and offers are organized by the time of entry. The OX
Book (except for certain Working Orders\13\ with conditional prices or
sizes) would be displayed to all Users. For market orders or marketable
limit orders, like-priced bids and offers would be matched by OX for
execution at prices equal to or better than the NBBO pursuant to the
following algorithm, which is based on price-time priority:
---------------------------------------------------------------------------
\8\ See NYSE Arca Rule 1.1(q).
\9\ See NYSE Arca Rule 1.1(r).
\10\ See proposed NYSE Arca Rule 6.1A(a)(17).
\11\ See proposed NYSE Arca Rule 6.1A(a)(16).
\12\ See proposed NYSE Arca Rule 6.1A(a)(14).
\13\ See proposed NYSE Arca Rule 6.62A(e).
---------------------------------------------------------------------------
Step 1: All market orders and marketable limit orders would be
matched against the displayed top of the OX Book.
Step 2: If an order has not been executed in its entirety pursuant
to Step 1, then OX would match the order against any Working Orders,
which are orders with a conditional or undisplayed size. Examples of
Working Orders include a reserve order, an order with a portion of the
size displayed, and a reserve portion of the size that is not
displayed.
Step 3: If an order has not been executed in its entirety pursuant
to Steps 1 and 2, the order would be routed to another Market Center
\14\ for execution (either through the intermarket options linkage
(``Linkage'') or via a broker-dealer affiliated with NYSE Arca,
Archipelago Securities) unless the User has designated that the order
may not be routed to another Market Center. If an order that is routed
to another Market Center is not executed in its entirety, the order
would be ranked and displayed in the OX Book in accordance with the
terms of such order and such order would be eligible for execution.
---------------------------------------------------------------------------
\14\ See proposed NYSE Arca Rule 6.1A(a)(6).
---------------------------------------------------------------------------
The OX rules also would permit the crossing of orders on the
trading floor via open outcry. Specifically, the Exchange would provide
rules governing regular-way, facilitation, and solicitation crosses and
introduce the ability for OTP Holders and OTP Firms to execute Mid-
Point Crosses \15\ in accordance with one of the three crossing rules.
---------------------------------------------------------------------------
\15\ See proposed NYSE Arca Rule 6.47(d).
---------------------------------------------------------------------------
OTP Holders and OTP Firms meeting certain qualifications would be
permitted to register as either Lead Market Makers (``LMMs'') or Market
Makers in one or more option classes traded on OX.\16\ In addition,
LMMs would continue to be responsible for handling orders under the
Plan for the Purpose of Creating and Operating an Intermarket Option
Linkage (``Linkage Plan'').\17\
---------------------------------------------------------------------------
\16\ Unless specified, or unless the context requires otherwise,
the term ``Market Maker'' as used herein refers to both Market
Makers and LMMs.
\17\ See Securities Exchange Act Release No. 43086 (July 28,
2000), 65 FR 48023 (August 4, 2000). Subsequently, upon separate
requests by the Philadelphia Stock Exchange, Inc. (``Phlx''), the
Pacific Exchange, Inc. (``PCX''), and the Boston Stock Exchange,
Inc., the Commission issued orders to permit these exchanges to
participate in the Linkage Plan. See Securities Exchange Act Release
Nos. 43573 (November 16, 2000), 65 FR 70850 (November 28, 2000),
43574 (November 16, 2000), 65 FR 70851 (November 28, 2000) and 49198
(February 5, 2004), 69 FR 7029 (February 12, 2004).
---------------------------------------------------------------------------
III. Discussion
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the Act and the rules and
regulations promulgated thereunder applicable to a national securities
exchange \18\ and, in particular, with the requirements of Section 6(b)
of the Act.\19\ Specifically, the Commission finds that approval of the
proposed rule change is consistent with Section 6(b)(5) of the Act \20\
in that it is designed to facilitate transactions in securities; to
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.
---------------------------------------------------------------------------
\18\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\19\ 15 U.S.C. 78f(b).
\20\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
A. Access to OX
As noted briefly above, the Exchange proposes to expand the types
of market participants eligible to trade on its options trading
facility. OTP Holders and OTP Firms with access to PCX Plus at the time
of this proposal would continue to have access to the Exchange through
the OX platform. In addition, the Exchange proposes to permit entities
that are neither OTP Holders nor OTP Firms to access the OX platform as
``Sponsored Participants.'' The Exchange proposes to define a Sponsored
Participant as a person, such as an institutional investor, who has
entered into a sponsorship agreement with a Sponsoring OTP Firm, that
has been designated to execute, clear, and settle transactions on the
Exchange for the Sponsored Participant.
The Sponsored Participant and its Sponsoring OTP Firm would be
required to enter into a written agreement incorporating the provisions
required by proposed NYSE Arca Rule 6.2(c). Specifically, the
Sponsoring OTP Firm would acknowledge, among other things, that all
orders entered by the Sponsored Participant and any executions
occurring as a result of such orders are binding in all respects on the
Sponsoring OTP Firm and that it is responsible for any and all actions
taken by its Sponsored Participant. The Sponsoring OTP Firm also would
be required to provide the Exchange notice that it is responsible for
the actions of its Sponsored Participant(s). The Sponsored Participant,
in turn, would agree, among other things, to comply with applicable
NYSE Arca rules and procedures as if it were an OTP Firm and agree to
take precautions to prevent unauthorized access to the Exchange. The
Sponsored Participants would be required to establish and maintain an
up-to-date list of persons permitted to obtain access to OX on behalf
of the Sponsored Participant (i.e., ``Authorized Traders'') \21\ and to
provide that list to the Sponsoring OTP Firm.
---------------------------------------------------------------------------
\21\ See proposed NYSE Arca Rule 6.1A(a)(1).
---------------------------------------------------------------------------
The Commission approved a substantially similar arrangement for
trading on NYSE Arca's predecessor entity, the Pacific Exchange, when
the Commission approved the establishment of the Archipelago Exchange
(``ArcaEx'') \22\ as the equities trading facility of PCX Equities,
Inc.\23\ The Commission believes that, like the arrangement that the
Commission previously approved for ArcaEx, the proposed sponsorship
arrangement is consistent with the Act.
---------------------------------------------------------------------------
\22\ NYSE Arca LLC is the successor entity to ArcaEx. See
Securities Exchange Act Release No. 53382 (February 27, 2006), 71 FR
11251 (March 6, 2006).
\23\ See Securities Exchange Act Release No. 44983 (October 25,
2001), 66 FR 55225 (November 1, 2001) (SR-PCX-00-25).
---------------------------------------------------------------------------
B. Display Order and Working Order Processes
Users of OX would be able to submit orders to an electronic file of
orders in the OX Book. The OX Book would feature two trading
processes--the ``Display Order Process'' and the--Working Order
Process.'' Bids and offers would be ranked, maintained, and executed
generally according to price-time priority.\24\
---------------------------------------------------------------------------
\24\ Under certain circumstances, an LMM would be guaranteed
participation, after all customer orders ranked ahead of the LMM
have been executed, in an order when the LMM is quoting the NBBO,
but lacks time priority among Users bidding or offering the same
price. See proposed NYSE Arca Rule 6.76B.
---------------------------------------------------------------------------
[[Page 44760]]
1. Display and Rank of Orders in the Displayed and Working Order
Processes
The Exchange would display all non-marketable Limit Orders in the
Display Order Process of the OX Book. Limit Orders, with no other
conditions, and quotes would be ranked based on the specified price and
the time of original order or quote entry. The displayed portion of
Reserve Orders \25\ would be ranked in the Display Order Process at the
specified limit price and the time of order entry. When the displayed
portion of the Reserve Order is decremented completely, the displayed
portion of the Reserve Order would be refreshed from the reserve amount
for (1) The displayed amount or (2) the entire reserve amount, if the
remaining reserve amount is smaller than the displayed amount. The
refreshed quote would be submitted and ranked at the specified limit
price and the new time that the displayed portion of the order was
refreshed.
---------------------------------------------------------------------------
\25\ See proposed NYSE Arca Rule 6.62A(e)(1).
---------------------------------------------------------------------------
The reserve portion of Reserve Orders would be ranked in the
Working Order Process based on the specified limit price and the time
of original order entry. After the displayed portion of a Reserve Order
is refreshed from the reserve portion, the reserve portion would remain
ranked based on the original time of order entry while the displayed
portion would be sent to the Directed Order Process with a new time
stamp.
2. Execution of Orders in the Display and Working Order Processes
Once a booked order becomes marketable or upon a User's entry of a
marketable order, all orders in OX would be matched generally based
upon price-time priority, as described more fully below. OX first would
attempt to match incoming marketable bids and offers against bids or
offers in the Display Order Process at the display price of the
resident bids or offers for the total amount of option contracts
available at that price or for the size of the incoming order,
whichever is smaller. NYSE Arca proposes to allocate incoming
marketable bids and offers as follows:
If an LMM is quoting in the option series at the NBBO, an incoming
marketable bid or offer would be matched against all Customer \26\
orders at the NBBO ranked ahead of the LMM. The remaining balance of
the incoming marketable bid or offer would be matched against the quote
of the LMM for either: (1) An amount equal to 40% of the remaining
balance of the incoming bid or offer up to the LMM's disseminated quote
size or (2) the LMM's share in the order of ranking in the OX Book,
whichever is greater. Any remaining balance of the incoming marketable
bid or offer would be matched against remaining marketable orders and
quotes in the Display Order Process in the order of their ranking. If
the incoming marketable bid or offer has not been executed in its
entirety, the remaining part of the order would be directed to the
Working Order Process.
---------------------------------------------------------------------------
\26\ See proposed NYSE Arca Rule 6.1A(a)(4).
---------------------------------------------------------------------------
An incoming marketable bid or offer or portion thereof that fails
to be executed in the Display Order Process, would be matched against
orders within the Working Order Process in the order of their ranking.
3. Routing Away
If an incoming marketable order has not been executed in its
entirety on OX and has been designated as an order type that is
eligible to be routed away, the order would be routed either in its
entirety or as component orders for execution to other Market Center(s)
disseminating the NBBO, either through the Linkage or through the use
of the OX Routing Broker, as described below. Where an order or portion
of an order is routed away and is not executed either in whole or in
part at the other Market Center, the order would be ranked and
displayed in the OX Book in accordance with the terms of the order, and
the order would be eligible for execution. If an order has been
designated as an order type that is not eligible to be routed away, the
order either would be placed in the OX Book or cancelled if the order
would lock or cross the NBBO.
Further, the Working Order Process would provide a method for
handling contingency orders as well as other order types, such as
Reserve Orders. The Commission believes that the proposal is designed
to avoid executions at prices inferior to the NBBO and is consistent
with the Linkage Plan, NYSE Arca Rule 6.94 (Order Protection), and the
Act.
C. New Order Types
The proposal would introduce several order types to NYSE Arca. In
addition to the Reserve Order, described above, among the most
significant order types that NYSE Arca is proposing to introduce are
order types related to the routing away function. These new order types
are designed to provide greater flexibility to Users to better control
the execution of their orders.
1. Inside Limit Order
An ``Inside Limit Order'' is defined as a limit order, which, if
routed away, would be routed to the market participant or participants
with the best displayed price. Any unfilled portion of the order would
not be routed to the next best price level until all quotes at the
current best bid or offer are exhausted. If the order is no longer
marketable, the order would be ranked in the OX Book pursuant to the
ranking and display provisions described above.
2. NOW Order
A ``NOW Order'' is defined as a limit order that is to be executed
in whole or in part on OX, with any remainder routed away only to one
or more ``NOW Recipients'' for immediate execution. ``NOW Recipients''
would include any Market Center with which the Exchange maintains an
electronic linkage and that provides instantaneous responses to NOW
Orders routed from OX. Any portion of a NOW Order that is not
immediately executed by the NOW Recipient would be cancelled. If a NOW
Order is not marketable when it is submitted to OX, it would be
cancelled.
3. PNP Order
A ``PNP (Post No Preference) Order'' is defined as a limit order to
buy or sell that is to be executed in whole or in part on the Exchange,
and the portion not so executed would be ranked in the OX Book, without
routing any portion of the order to another Market Center. The Exchange
would cancel any PNP Order that would lock or cross the NBBO.
D. Routing Broker and Linkage
1. Routing Broker
As described above, in the event that an order is not marketable on
OX, but is marketable on another exchange, the Exchange would route the
order to another Market Center for execution. Orders could be routed
either through Linkage or through a broker-dealer affiliate of NYSE
Arca that acts as an agent for routing orders entered into OX by Users
(``Routing Broker''),\27\ based on preset parameters in its automated
routing algorithm, subject to NYSE Arca rules. Accordingly, orders that
would be eligible for routing over Linkage (e.g., public customer
orders) could be routed to other Market Centers either as Principal
Acting as Agent Orders (``P/A Orders'') \28\ via Linkage or as customer
[[Page 44761]]
orders via Archipelago Securities, based on the automated routing
algorithm parameters. Generally, non-customer orders and NOW Orders
\29\ would be routed to other Market Centers via Archipelago
Securities. As described above, certain order types, including
Immediate or Cancel and PNP Orders, would not be eligible for routing
away to other exchanges.
---------------------------------------------------------------------------
\27\ NYSE Arca proposes to use Archipelago Securities LLC
(``Archipelago Securities''), a wholly-owned subsidiary of
Archipelago Holdings Inc. and a registered broker-dealer, as the
Routing Broker.
\28\ See NYSE Arca Rule 6.92(a)(12)(i).
\29\ See proposed NYSE Arca Rule 6.62A(i).
---------------------------------------------------------------------------
The OX order routing function of Archipelago Securities is an
exchange ``facility.'' \30\ As such, any proposed rule change relating
to Archipelago Securities' order-routing function must be filed with
the Commission, and must operate in a manner that is consistent with
the provisions of the Act applicable to exchanges with NYSE Arca rules.
In Amendment No. 3, the Exchange proposes to clarify that the NASD, a
self-regulatory organization (``SRO'') unaffiliated with NYSE Arca or
any of its affiliates, would continue to carry out oversight and
enforcement responsibilities as the Designated Examining Authority
designated by the Commission pursuant to Rule 17d-1 under the Act \31\
with the responsibility for examining Archipelago Securities for
compliance with the applicable financial responsibility rules.
---------------------------------------------------------------------------
\30\ See 15 U.S.C. 78c(a)(2).
\31\ 17 CFR 240.17d-1.
---------------------------------------------------------------------------
Furthermore, in Amendment No. 3, the Exchange represents that it
will enter into a new agreement with the NASD pursuant to Rule 17d-2
under the Act \32\ (the ``NYSE Arca Agreement'') to expand the
allocation to the NASD of regulatory responsibility to encompass all of
the regulatory oversight and enforcement responsibilities with respect
to Archipelago Securities, except for ``real-time market
surveillance.'' NYSE Arca will submit the NYSE Arca Agreement to the
Commission under Rule 17d-2 within 90 days of the Commission's approval
of this proposed rule change.
---------------------------------------------------------------------------
\32\ 17 CFR 240.17d-2.
---------------------------------------------------------------------------
The Commission notes that this representation is substantially
similar to a representation the Exchange made when it amended the
certificate of incorporation of PCX Holdings, Inc., certain rules of
the Pacific Exchange, and the bylaws of Archipelago Holdings, Inc.
(``Archipelago'') to facilitate the consummation of the merger between
PCX Holdings, Inc. and its subsidiaries, and Archipelago (the
``Merger'').\33\ The Commission believes that delegating the regulatory
function for the oversight of its wholly-owned subsidiary should help
to ensure independence in the regulatory oversight of Archipelago
Securities.
---------------------------------------------------------------------------
\33\ See Securities Exchange Act Release No. 52497 (September
22, 2005), 70 FR 56949 (September 29, 2005) (SR-PCX-2005-90).
---------------------------------------------------------------------------
2. Linkage Routing and Obligations
The OX system would facilitate the routing of P/A Orders to other
Market Centers via Linkage using the account of the LMM assigned to the
option class being routed. The OX system, however, would not
automatically generate Principal Orders \34\ on behalf of Market
Makers; rather, Eligible Market Makers \35\ would be required to route
their own Principal Orders if they want their proprietary orders sent
to other Market Centers via Linkage. Satisfaction Orders \36\ would be
handled in the same manner on OX as they are handled on PCX Plus.\37\
---------------------------------------------------------------------------
\34\ See NYSE Arca Rule 6.92(a)(12)(ii).
\35\ In Amendment No. 3, NYSE Arca proposed a technical change
to its Rule 6.92(a)(7)(ii) to include certain OX Market Makers
within the definition of ``Eligible Market Maker.''
\36\ See NYSE Arca Rule 6.92(a)(12)(iii).
\37\ See Amendment No. 3, supra note 5.
---------------------------------------------------------------------------
The existing NYSE Arca rules that apply to Linkage obligations,
NYSE Arca Rules 6.92 through 6.96, would apply to OTP Holders and OTP
Firms accessing the OX system. For example, those rules, in conjunction
with the Linkage Plan, would continue to require: (1) OTP Holders and
OTP Firms to avoid Trade-throughs and to adjust their quotes in the
event of a locked or crossed market; and (2) for LMMs to handle inbound
Linkage Orders. The Commission believes that the Exchange's proposed
automated routing of certain Linkage Orders is consistent with the
Linkage Plan.
E. Market Makers
1. Market Maker Obligations
The OX proposal provides for two types of market makers: LMMs and
Market Makers. A Market Maker on OX would be an OTP Holder or OTP Firm
registered with NYSE Arca for the purpose of submitting quotes
electronically and effecting transactions as a dealer-specialist
through the OX trading platform either from the trading floor or from
off the trading floor. Market Makers would be designated as specialists
on NYSE Arca for all purposes under the Act and rules and regulations
thereunder. No more than one LMM would be appointed in each option
class, and the Exchange would be required to appoint at least one LMM
in each option class. The Exchange may appoint any number of Market
Makers in each class, unless limited by quotation system capacity.
However, the Exchange will not restrict access to any particular option
class until the Commission approves objective standards for restricting
such access.
A Market Maker would be required to, among other things, compete
with other Market Makers to improve the market in all series of options
classes to which the Market Maker is appointed, update market
quotations in response to changed market conditions in all series of
options classes within its appointed classes, honor its quotations, and
submit quotations in accordance with maximum Exchange prescribed width
requirements. In addition, LMMs and Market Makers would be required to
provide continuous, two-sided quotes in their appointed issues for 99%
and 60%, respectively, of the time the Exchange is open for trading in
each issue. LMMs and Market Makers also would be required to trade at
least 75% of their contract volume per quarter in classes within their
appointment. Market Maker quotes would be ``firm'' for all orders that
are routed to OX. The Exchange would evaluate Market Makers
periodically to determine whether they have fulfilled performance
standards relating to, among other things, quality of markets,
competition among Market Makers, and ethical standards.
In transitioning to the OX platform from PCX Plus, the Exchange
proposes to eliminate provisions for the appointment of ``Remote Market
Makers'' and ``Supplemental Market Makers.'' Accordingly, the proposed
rules for the OX platform do not direct where Market Makers must be
physically located when effecting transactions on NYSE Arca and would
eliminate ``in-person'' trading requirements applicable to Market
Makers that trade on the floor.
Market Makers receive certain benefits for carrying out their
duties. For example, a lender may extend credit to a broker-dealer
without regard to the restrictions in Regulation T of the Board of
Governors of the Federal Reserve system if the credit is to be used to
finance the broker-dealer's activities as a specialist or market maker
on a national securities exchange.\38\ The Commission believes that a
Market Maker must have an affirmative obligation to hold itself out as
willing to buy and sell options for its own account on a regular or
continuous basis to justify this favorable treatment. In this regard,
the Commission believes that OX rules are reasonably designed to impose
such affirmative obligations on OX Market Makers.
---------------------------------------------------------------------------
\38\ See 12 CFR 221.5(c)(6).
---------------------------------------------------------------------------
[[Page 44762]]
2. Market Maker Authorized Traders
The Exchange is proposing to limit Market Maker access to OX to
those OTP Holders or officers, partners, employees or associated
persons of OTP Firms that are registered with the Exchange as Market
Makers (``Market Maker Authorized Traders'' or ``MMATs''). MMAT
candidates will be required to pass an examination to demonstrate
knowledge of NYSE Arca rules prior to being approved by the Exchange as
a Market Maker Authorized Trader. The proposal would also establish
standards and procedures governing the suspension of registration of an
MMAT. The Commission believes these requirements are reasonably
designed to ensure that the Exchange is informed of the identities and
qualifications of individuals accessing OX on behalf of Market Makers
and are consistent with the Act.
3. Market Maker Risk Limitation
NYSE Arca is proposing to provide a mechanism for limiting Market
Maker risk during periods of increased and significant trading
activity. OX would activate the Market Maker Risk Limitation Mechanism
in a Market Maker's appointed class whenever a designated number of
executions (ranging between 5 and 100 executions) occurs within one
second. Orders and quotes received by OX after the Mechanism is
activated would not be executed against the Market Maker. The
Commission believes that establishing a uniform one second standard in
place of the existing variable ``n'' seconds standard on PCX Plus is
consistent with the Act.
On the PCX Plus system, the Exchange disseminates a market on
behalf of an LMM when there are no Market Makers quoting in a series
and volume parameters are exceeded. The Exchange proposes that if the
mechanism were activated under the OX system and there were no Market
Makers quoting in a series, the Exchange would no longer generate two-
sided quotes on behalf of the LMM. Instead, on OX, the best bids and
offers residing in the OX Book would be disseminated as the BBO. If
there were no orders in the OX Book in the issue at that time, OX would
disseminate a bid of zero and an offer of zero. The Commission believes
that the proposed approach is consistent with the Act.
4. Integrated Market Making
In Amendment No. 3, the Exchange represents that NYSE Arca Rule
11.3, which governs the use of material, non-public information, would
apply to OTP Holders and OTP Firms trading on OX. The Exchange
represents that this rule would require an OX Market Maker to maintain
information barriers--reasonably designed to prevent the misuse of
material, non-public information by such member--between the OX Market
Maker and any of its affiliates that may act as specialist or market
maker in any security underlying the options in which the Market Maker
makes a market on OX. The Commission believes that requiring
information barriers between the OX Market Maker and its affiliates
with respect to transactions in the option and the underlying security
are important to reduce the opportunity for unfair trading advantages
or misuse of material, non-public information.\39\
---------------------------------------------------------------------------
\39\ See Securities Exchange Act Release No. 47838 (May 13,
2003), 68 FR 27129, 27137 (May 19, 2003) (SR-PCX-2002-36).
---------------------------------------------------------------------------
F. Trading Auctions (Opening and Trading Halt)
The Exchange is proposing new procedures for initiating trading in
a given options class (``Trading Auction''). The new procedures will
apply to orders designated for inclusion in the opening auction process
(``Auction Process'') and upon re-opening of trading after a trading
halt. In particular, the OX system will accept Market Orders and Limit
Orders and quotes for inclusion in the Trading Auction, up until the
time the Trading Auction is initiated in that options series. Non-
Market Makers would be able to submit orders for inclusion in the
Trading Auction, and Market Makers would be able to submit two-sided
quotes and orders. Contingency orders would not participate in the
Auction Process. Any eligible open orders residing in the OX Book from
the previous trading session would be included in the Auction Process.
After the primary market for the underlying security disseminates
the opening trade or the opening quote, the related option series would
be opened automatically at a single price. Among the most significant
principles in the Trading Auction is that orders will have priority
over Market Maker quotes. In addition, orders in the OX Book that are
not executed during the Auction Process will be eligible for execution
during the Core Trading Hours \40\ immediately after the conclusion of
the Opening Auction.
---------------------------------------------------------------------------
\40\ See proposed NYSE Arca Rule 6.1A(a)(3).
---------------------------------------------------------------------------
The opening price of a series would be the price, as determined by
the OX system, at which the greatest number of contracts would trade at
or nearest to the mid-point of the initial NBBO calculated by the
Exchange from the quotes disseminated by Options Price Reporting
Authority, if any, or the mid-point of the best quote bids and quote
offers in the OX Book. Mid-point pricing would not occur if that price
would result in an order or part of an order being traded through.
Instead, the opening would occur at that limit price, or, if the limit
price is superior to the quoted market, within the range of 75% of the
best quote bid and 125% of the best quote offer. Orders and Marker
Maker quotes that do not trade during the Trading Auction, but are
marketable against the initial NBBO following the Trading Auction,
would ``sweep'' through the OX Book and be executed in price/time
priority. If the best price is at an away Market Center, orders would
be routed away to the appropriate Market Center, pursuant to NYSE Arca
rules.
The Commission believes that the proposed Trading Auction is
reasonably designed to facilitate executions at the opening and
following trading halts. The Commission further believes that the
proposal is designed to avoid executions at prices inferior to the
NBBO.
G. Crossing Rules
Under the proposal, OTP Holders and OTP Firms would be permitted to
conduct crossing transactions on the floor of the Exchange. The
Exchange is proposing to replace its existing crossing rule with a new
NYSE Arca Rule 6.47, which would govern crosses effected on the trading
floor. Consistent with the existing version of NYSE Arca Rule 6.47, the
proposed amendment provides for non-facilitation (or ``regular way'')
crosses, facilitation crosses, and solicitation crosses. In all cases,
orders must be announced to the trading crowd in open outcry, and
trading crowd participants would be given a reasonable time to respond
with the prices and sizes at which they would be willing to participate
in the cross. With respect to all crosses, a Trading Official would be
available at each post on the trading floor to assist in the
determination of what is a ``reasonable time,'' when necessary. Trading
crowd participants who make bids or offers equal to or better than the
proposed cross price would be permitted to participate in a cross. In
addition, in no event would a cross occur that would trade through the
NBBO or any bids or offers on the Book priced equal to or better than
the proposed execution price.
Floor Brokers holding orders to buy and sell the same option
contract may cross such orders after following the
[[Page 44763]]
non-facilitation (regular way) cross procedures. After requesting bids
and offers in the option series from the trading crowd, the Floor
Broker must bid above the highest bid in the crowd, or offer below the
lowest offer in the crowd, by at least the MPV. The Floor Broker may
then cross the orders at that price provided that the execution price
is equal to or better than the NBBO and that the Floor Broker satisfies
any bids or offers on the Book that are priced equal to or better than
the proposed execution price.
With respect to facilitation crosses, which involve a Floor Broker
holding a customer order and an order for the account of an OTP Holder,
OTP Firm, or entity under the common control of a Market Maker
representing the customer (``Facilitation Order''), the Floor Broker
must be willing to facilitate the entire size of the customer order in
order to utilize the mechanism, and the size of the customer order must
be at least 50 contracts. After the Floor Broker exposes the customer
order to the trading crowd for a reasonable period of time, if at the
time of execution there is sufficient size to execute the entire
customer order at an improved price (or prices), the customer order
would be executed at the improved price, so long as such execution
price is equal to or better than the NBBO.
If at the time of execution there is insufficient size to execute
the entire customer order at an improved price (or prices), a Floor
Broker would be permitted to participate in up to 40% of the balance of
the order to be facilitated once bids or offers in the Book equal to or
better than the proposed execution price, non-member bids and offers in
the trading crowd at or better than the proposed execution price, and
member bids and offers in the trading crowd priced better than the
proposed execution price, have been satisfied.\41\ Thereafter, Market
Makers in the trading crowd who are bidding or offering the proposed
execution price may participate in the balance of the customer order
based upon price-time priority.\42\ The balance of the unexecuted
agency order, if any, would be executed against the remaining Floor
Broker proprietary interest.
---------------------------------------------------------------------------
\41\ When executing the customer order to be facilitated against
such bids and offers, bids and offers representing customer orders
would be required to be executed first. See proposed NYSE Arca Rule
6.47(b)(7). The Commission notes that NYSE Arca's facilitation cross
procedures would allow all NYSE Arca members to avail themselves of
the exception to Section 11(a) of the Act set forth in Section
11(a)(1)(G) of the Act and Rule 11a-1(T).
\42\ The Floor Broker is responsible for determining the
sequence in which Market Makers' bids or offers are vocalized. See
NYSE Arca Rule 6.75(f)(1). In the event that the bids or offers of
two or more Market Makers are made simultaneously, such bids or
offers will be deemed to be on parity and priority will be afforded
to them, insofar as practicable, on an equal basis. See NYSE Arca
Rule 6.75(c).
---------------------------------------------------------------------------
The proposal would also permit the crossing of solicited orders,
which involve a Floor Broker holding an order for a customer of an OTP
Holder or OTP Firm for which the Floor Broker solicits contra side
interest in the trading crowd. Crosses involving Solicited Orders would
be handled in a manner whereby superior priced and equal priced orders
in the book and interest in the crowd which collectively is of
sufficient size to execute against the original customer order would be
executed before the Solicited Order. Customer orders, at a given price,
would be executed before non-Customer orders at the same price.\43\
---------------------------------------------------------------------------
\43\ In Amendment No. 3, the Exchange clarified the Solicited
Cross rule. Specifically, the Exchange represented that only orders
that are represented by a Floor Broker as agent are eligible for
crossing via the Solicited Order procedures. If the Floor Broker
represents an order for a covered account, the member order must
satisfy the requirements of Section 11(a) of the Act and the rules
thereunder. The Commission further notes that the Exchange has
represented that a member may not rely on the exception found in
Section 11(a)(1)(G) of the Act when utilizing the solicited order
procedures.
---------------------------------------------------------------------------
The Exchange also proposes to add a new category of cross order,
the Mid-Point Crossing Order. A Floor Broker who holds a Mid-Point
Crossing Order to buy and sell an option contract at the mid-point
between the electronically disseminated BBO or better in the subject
option series would be permitted to cross such an order in accordance
with the procedures for regular way, facilitation or solicitation
crosses, as applicable. The Mid-Point Cross will not occur if the price
of the midpoint of the NYSE Arca BBO is inferior to the NBBO or if the
mid-point does not fall on a standard increment.
In reviewing proposed crossing mechanisms, the Commission considers
the potential that crosses will lock up large portions of order flow
from intramarket price competition by granting certain market
participants extensive participation guarantees, such as the guarantee
granted to Floor Brokers in the proposed OX Facilitation cross. To that
end, the Commission notes that the 40% participation guarantee that
Floor Brokers would receive pursuant to the proposed Facilitation
Procedure, as described above, is consistent with similar guarantees
accorded to members effecting facilitation crosses on other
exchanges.\44\ The Commission believes that the proposed crossing
procedures are reasonably designed to ensure that interest in the crowd
and on the book is protected, in that all Customer interest at the same
price (whether residing in the trading crowd or on the book) must be
satisfied before other interest may be executed. The Commission also
believes that these procedures should promote intramarket price
competition by providing market makers and other market participants
with a reasonable opportunity to compete for the proposed cross.
---------------------------------------------------------------------------
\44\ See, e.g, International Securities Exchange (``ISE'') Rule
716(d).
---------------------------------------------------------------------------
The Commission further notes that the proposed OX rules would not
permit electronic crosses. In Amendment No. 3, the Exchanges proposes
to clarify that Users seeking to effect certain orders as agent against
their own principal account must ensure that either the agency order or
the User's quote must be displayed on OX for three second seconds prior
to execution. Specifically the proposed rule would provide, among other
things, that Users may not execute as principal orders they represent
as agent unless agency orders are first exposed on the Exchange for at
least three seconds or the User has been bidding or offering on the
Exchange for at least three seconds prior to receiving an agency order
that is executable against such bid or offer. The Commission believes
this proposed order exposure provision is substantially similar to the
rules of other SRO rules that require members to wait three seconds
before executing principal orders against an order they represent as
agent.\45\ In addition, the Commission expects that the Exchange will
closely surveil to ensure that all crossing transactions are not
effected without first being exposed to intramarket competition.
---------------------------------------------------------------------------
\45\ See, e.g., ISE Rule 717.
---------------------------------------------------------------------------
H. Section 11(a) of the Act
Section 11(a)(1) of the Act \46\ prohibits a member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated person exercises investment discretion
(collectively, ``covered accounts'') unless an exception applies.
---------------------------------------------------------------------------
\46\ 15 U.S.C. 78k(a)(1).
---------------------------------------------------------------------------
Among the transactions excepted under Section 11(a)(1) are those by
a dealer acting in the capacity of a market maker, bona fide arbitrage
or hedge transactions, and transactions made to offset errors. In the
proposed rule change, the Exchange has set forth its analysis of how
the proposed rule change is consistent with Section 11(a) of the Act
and the rules thereunder.
[[Page 44764]]
Rule 11a2-2(T) Interpretive Request
Rule 11a2-2(T) under the Act,\47\ known as the ``effect versus
execute'' rule, provides exchange members with another exception from
the general Section 11(a)(1) prohibition. Rule 11a2-2(T) permits an
exchange member, subject to certain conditions, to effect transactions
for covered accounts by arranging for an unaffiliated member to execute
the transactions on the exchange. To comply with Rule 11a2-2(T)'s
conditions, a member (i) Must transmit the order from off the exchange
floor; (ii) must not participate in the execution of the transaction
once it has been transmitted to the member performing the execution;
\48\ (iii) must not be affiliated with the executing member; and (iv)
with respect to an account over which the member has investment
discretion, neither the member nor its associated person may retain any
compensation in the connection with effecting the transaction except as
provided in the rule. As described by the Commission, these four
requirements--off-floor transmission, non-participation in order
execution, execution through an unaffiliated member and non-retention
of compensation for discretionary accounts--were ``designed to put
members and non-members on the same footing, to the extent practicable,
in light of the purposes of Section 11(a).'' \49\ If a transaction
meets the requirements of the ``effect versus execute'' rule, it will
be deemed to be ``consistent with the purpose of Section 11(a)(1) of
the Act, the protection of investors, and the maintenance of fair and
orderly markets.'' \50\ The Exchange stated that given OX's automated
matching and execution services, no Exchange member will enjoy any
special control over the timing of execution or special order handling
advantages for orders executed via OX, as all orders will be centrally
processed for execution by computer, rather than being handled by a
member through bids or offers made on the trading floor. The Exchange
further stated that it believes that due to OX's open, electronic
structure that is designed to prevent any Exchange members from gaining
any time and place advantages, the Exchange believes that OX satisfies
the four requirements of the ``effect versus execute'' rule as well as
the general policy objectives of Section 11(a) of the Act.
---------------------------------------------------------------------------
\47\ 17 CFR 240.11a2-2(T).
\48\ The member may, however, participate in clearing and
settling the transaction. The commenter raises concerns about
whether the proposed OX system satisfies this prong of the ``effect
versus execute'' rule. According to the commenter, the notice of the
proposal states that ``NYSE Arca `may not participate in the
execution of the transaction once the order has been transmitted' ''
and that ``[t]he NYSE Arca plan does interfere with the transmission
and execution of options orders.'' To support this assertion, the
commenter states that orders may be routed away to different
exchanges for execution in certain circumstances. See Rule Letter,
supra note 4. The Commission believes that the commenter
mischaracterizes the discussion of this prong of the ``effect versus
execute'' rule set forth in the notice of the proposal. The OX
Notice states that the exchange member and its associated person
(not NYSE Arca, as stated by the commenter) may not participate in
the execution of the transaction once the order has been
transmitted. The Commission believes that OX satisfies this prong,
as discussed above.
\49\ See Securities Exchange Act Release No. 14713 (April 27,
1978), 43 FR 18557, 18560 (May 1, 1978) (``1978 Release'').
\50\ See Rule 11a2-2(T)(e) under the Act.
---------------------------------------------------------------------------
1. Off-Floor Transmission
Rule 11a2-2(T) requires an order for a covered account to be
transmitted from off the exchange floor. In considering the application
of this requirement to a number of automated trading and electronic
order-handling facilities operated by national securities exchanges,
the Commission has deemed the off-floor requirement to be met if the
order is transmitted from off the floor directly to the electronic
order handling facility that compromises the exchange floor by
electronic means.\51\ Like these other automated systems, the Exchange
has represented that orders sent to OX will be transmitted from remote
terminals directly to the system by electronic means and that most
member orders, except as described below, will be submitted to OX from
off of the floor. Therefore, those members' orders sent to the OX
system electronically from off the Exchange floor satisfy the off-floor
transmission requirement for the purposes of the ``effect versus
execute'' rule.
---------------------------------------------------------------------------
\51\ See letter from Larry E. Bergmann, Senior Associate
Director, Division of Market Regulation (``Division''), Commission,
to Edith Hallahan, Associate General Counsel, Phlx (March 24, 1999)
(``VWAP Letter''); letter from Catherine McGuire, Chief Counsel,
Division, Commission, to David E. Rosedahl, PCX (November 30, 1998)
(``OptiMark Letter''); and letter from Brandon Becker, Director,
Division, Commission, to George T. Simon, Partner, Foley & Lardner
(November 30, 1994) (``Chicago Match Letter'').
---------------------------------------------------------------------------
2. Non-Participation in Order Execution
The ``effect versus execute'' rule further provides that the
exchange member and its associated person may not participate in the
execution of the transaction once the order has been transmitted. The
Exchange has represented that upon submission to OX, an order will
enter the queue and be executed against another order in the OX Book
based on an established matching algorithm. The execution depends not
on whether an order is for the account of an Exchange member, but
rather, upon what other orders are entered into OX at or around the
same time as the subject order, what orders are resident in the OX Book
and where the order is ranked based on the price-time priority ranking
algorithm. Therefore, the Exchange stated that at no time following the
submission of an order is an Exchange member able to acquire control or
influence over the result or timing of its order's execution. As a
result, the Commission believes that the non-participation requirement
is met because OTP Holder or OTP Firm orders are matched and executed
automatically in OX.
3. Execution Through Unaffiliated Member
The third requirement of Rule 11a2-2(T) is that the exchange member
who executes the order be unaffiliated with the member initiating the
order. The Commission has recognized, however, that this requirement
may be met where automated exchange facilities are used. For example,
in considering the operation of COMEX and PACE, among other systems,
the Commission noted that while there is no independent executing
exchange member, the execution of an order is automatic once it has
been transmitted into the systems.\52\ Because the design of these
systems ensures that members do not possess any special or unique
trading advantages in handling their orders after transmitting them to
the exchange floors, the Commission has stated or not objected to the
Exchange's conclusion that executions obtained through these systems
satisfy the independent execution requirement of Rule 11a2-2(T) that
the member not be affiliated with the executing broker.\53\ The
Exchange stated that this requirement is satisfied by the OX system
because the design of OX ensures that members do not have any special
or unique trading advantages in handling their orders after
transmission. Accordingly, a transaction for a covered account that
submitted directly by a member into OX, from off of the Exchange floor,
for execution satisfies the unaffiliated member requirement.
---------------------------------------------------------------------------
\52\ See Securities Exchange Act Release No. 15533 (January 29,
1979), 44 FR 6084 (January 31, 1979) (``1979 Release''). See also
VWAP Letter, OptiMark Letter and Chicago Match Letter.
\53\ Id.
---------------------------------------------------------------------------
4. Non-Retention of Compensation
Finally, Rule 11a2-2(T) requires that, in the case of a transaction
effected for an account with respect to which an
[[Page 44765]]
exchange member or associated person thereof exercises investment
discretion, neither the member or its associated persons may retain
compensation in connection with effecting the transaction without the
express written consent of the person authorized to transact business
for the account, given in accordance with the rule. Exchange members
relying on Rule 11a2-2(T) for transactions effected through OX must
comply with this condition of the rule. The Commission notes that NYSE
Arca would enforce this requirement pursuant to its obligation under
Section 6(b)(1) of the Act \54\ to enforce compliance with the federal
securities laws.
---------------------------------------------------------------------------
\54\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------
In Amendment No. 3, the Exchange clarified its discussion regarding
the application of Rule 11a2-2(T) found in Amendment No. 1.
Specifically, the discussion in Amendment 1 was limited to the
application of Rule 11a2-2(T) to orders for covered accounts sent
electronically to the OX system directly by the member from off of the
exchange for execution. The Commission notes that the Exchange's
discussion in Amendment No. 1 did not address instances where a member
on the physical floor of the Exchange submits an order for a covered
account into the OX system from the physical floor by electronic means.
Accordingly, to rely on the exception set forth in Rule 11a2-2(T), the
Exchange clarified that members must ensure that they send their orders
from off the floor to an unaffiliated member for execution, in addition
to meeting the rules' other requirements. If a member sends its order
from off of the floor to an affiliated member that is on the floor who
then directs the order into the OX system for execution, the member may
not rely on Rule 11a2-2(T) for an exception from Section 11(a) of the
Act. If a member wishes to rely on the exception found in paragraph (G)
of Section 11(a)(1) of the Act, its order may only be executed on the
physical floor of the Exchange. Member proprietary orders that rely on
the exception found in Section 11(a)(1)(G) of the Act may not be
entered into the OX system for execution.\55\
---------------------------------------------------------------------------
\55\ The Exchange represented to the Commission's staff that it
will submit to the Commission promptly a proposed rule change
pursuant to Rule 19b-4 under the Act to prohibit the entry of member
orders that must rely on the exception found in Section 11(a)(1)(G)
of the Act into the OX system. Telephone conversation among Janet
Angstedt, Acting General Counsel, NYSE Arca, Kelly Riley, Assistant
Director, Commission, Hong-Anh Tran, Special Counsel, Commission,
Raymond Lombardo, Special Counsel, Commission, and Tim Fox, Special
Counsel, Commission on July 25, 2006.
---------------------------------------------------------------------------
I. Accelerated Approval of Amendment No. 3
The Commission finds good cause for approving Amendment No. 3 to
the proposed rule change prior to the thirtieth day after publishing
notice of Amendment No. 3 in the Federal Register pursuant to Section
19(b)(2) of the Act.\56\
---------------------------------------------------------------------------
\56\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
In Amendment No. 3, the Exchange represents that the NASD would
continue to carry out oversight and enforcement responsibilities as the
Designated Examining Authority designated by the Commission pursuant to
Rule 17d-1 under the Act \57\ with the responsibility for examining
Archipelago Securities for compliance with the applicable financial
responsibility rules. The Exchange also represented that it will enter
into an agreement with the NASD pursuant to Rule 17d-2 under the Act
\58\ to provide that NYSE Arca will delegate to the NASD all regulatory
oversight and enforcement responsibilities with respect to Archipelago
Securities pursuant to applicable laws, except for real-time market
surveillance, within 90 days of the Commission's approval of this
proposed rule change. As discussed above, the Commission believes that
these representations raise no new issues of regulatory concern.
---------------------------------------------------------------------------
\57\ 17 CFR 240.17d-1.
\58\ 17 CFR 240.17d-2.
---------------------------------------------------------------------------
As described in greater detail above, the Exchange also clarifies
in Amendment No. 3 how the proposed OX trading platform and crossing
procedures will comply with Section 11(a) of the Act and with the
Linkage Plan. In the amendment, the Exchange also proposes to clarify
its rules to incorporate an order exposure requirement comparable to
similar rules adopted by the other options exchanges. The Exchange
represents in Amendment No. 3 that NYSE Arca Rule 11.3 would require an
OX Market Maker to maintain information barriers, that are reasonably
designed to prevent the misuse of material, non-public information,
with any affiliates that may act as specialist or market maker in any
security underlying the options for which the OTP Holder/Firm acts as
an OX Market Maker. In addition, the Exchange proposes to remove a
reference to an ``opening only'' order type that the Exchange did not
specifically propose.
In Amendment No. 3, NYSE Arca also proposed to clarify that
incoming marketable orders would be matched against all Working Orders
in the Working Order Process at the price of the displayed portion (for
Reserve Orders) or at the limit price (for all other Working Order
types).
The Commission notes that Amendment No. 3 is intended to reconcile
apparent inconsistencies in other parts of the Exchange's proposed
rules. The Commission believes that Amendment No. 3 raises no novel
issues of regulatory concern, and is consistent with the Act.
Therefore, the Commission finds good cause exists to accelerate
approval of Amendment No. 3, pursuant to Section 19(b)(2) of the
Act.\59\
---------------------------------------------------------------------------
\59\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
IV. Solicitation of Comment
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 3, including whether Amendment No. 3
is consistent with the Act. Comments may be submitted by any of the
following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rules-comments@sec.gov. Please include
File No. SR-NYSEArca-2006-13 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to Amendment No. 3 to File No. SR-
NYSEArca-2006-13. This file number should be included on the subject
line if e-mail 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 (https://
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 inspection and copying in the Commission's Public
Reference Room. Copies of such filing will also be available for
inspection and copying at the principal office of NYSE Arca. All
comments received will be posted
[[Page 44766]]
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
Amendment No. 3 to File No. SR-NYSEArca-2006-13 and should be submitted
on or before August 28, 2006.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\60\ that the proposed rule change (SR-NYSEArca-2006-13), as
amended, be, and it hereby is, approved and Amendment No. 3 is approved
on an accelerated basis.
---------------------------------------------------------------------------
\60\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\61\
---------------------------------------------------------------------------
\61\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Nancy M. Morris,
Secretary.
[FR Doc. E6-12705 Filed 8-4-06; 8:45 am]
BILLING CODE 8010-01-P
