Self-Regulatory Organizations; NYSE Alternext US LLC; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of the Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Establish Rules for the Trading of Listed Options, 9843-9853 [E9-4778]

Download as PDF Federal Register / Vol. 74, No. 43 / Friday, March 6, 2009 / Notices Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule changes that are filed with the Commission, and all written communications relating to the proposed rule changes 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 on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filings also will be available for inspection and copying at the principal offices 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 Nos. SR–NASDAQ–2009–010, SR–BX– 2009–009, and SR–Phlx–2009–14, and should be submitted on or before March 27, 2009. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.9 Florence E. Harmon, Deputy Secretary. [FR Doc. E9–4756 Filed 3–5–09; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–59472; File No. SR– NYSEALTR–2008–14] Self-Regulatory Organizations; NYSE Alternext US LLC; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of the Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Establish Rules for the Trading of Listed Options mstockstill on PROD1PC66 with NOTICES February 27, 2009. I. Introduction On December 19, 2008, NYSE Alternext US LLC (‘‘Alternext’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend the rules governing the trading of options on the Exchange. The proposed 9 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Nov<24>2008 16:20 Mar 05, 2009 Jkt 217001 rule change was published for comment in the Federal Register on December 31, 2008.3 The Exchange filed Amendment No. 1 to the proposed rule change on February 27, 2009.4 The Commission received one comment on the proposal.5 This notice and order provides notice of Amendment No. 1 and grants accelerated approval to the proposed rule change, as modified by Amendment No. 1. II. Description of the Proposal On October 1, 2008, NYSE Euronext— the parent company of the New York Stock Exchange (‘‘NYSE’’)—through a series of mergers and related transactions (‘‘Mergers’’), acquired the American Stock Exchange LLC (‘‘Amex’’). Amex was renamed NYSE Alternext US LLC and became a subsidiary of NYSE Euronext and an affiliate of NYSE.6 After the Mergers, all physical and electronic access to Alternext’s trading facilities was made available to the former Amex’s members through temporary trading permits offered by Alternext. As Amex’s principal place of business at the time of the Mergers was 86 Trinity Place, New York, New York, these temporary trading permits are known as ‘‘86 Trinity Permits.’’ Subsequently, Amex’s cash equities trading floor was moved from 86 Trinity Place to NYSE’s principal place of business at 11 Wall Street, New York, New York, and co-located with the NYSE’s cash equities trading floor (‘‘Equities Relocation’’). The system that supports Alternext’s cash equities trading is now the same system that supports NYSE’s cash equities trading and is operated by the NYSE on behalf of the Exchange. In connection with the Equities Relocation, the Exchange adopted new trading and membership rules and offered each of its members an Alternext cash equities trading license in exchange for a valid 86 Trinity Permit.7 Alternext now proposes to move its options trading business from 86 Trinity Place to 11 Wall Street (‘‘Options Relocation’’). In connection with the Options Relocation, the Exchange 3 See Securities Exchange Act Release No. 59142 (December 22, 2008), 73 FR 80494. 4 For a discussion of Amendment No. 1, see infra Section III.H. 5 See letter from Jennifer M. Lamie, Assistant General Counsel, Chicago Board Options Exchange (‘‘CBOE’’), to Florence E. Harmon, Deputy Secretary, Commission, dated February 4, 2009. 6 See Securities Exchange Act Release No. 58673 (September 29, 2008), 73 FR 57707 (October 3, 2008) (order approving proposed rule change relating to the acquisition). 7 See Securities Exchange Act Release No. 58705 (October 1, 2008), 73 FR 58995 (October 8, 2008). PO 00000 Frm 00065 Fmt 4703 Sfmt 4703 9843 proposes to issue Amex Trading Permits (‘‘ATPs’’) that will permit holders to effect options transactions on the Exchange’s trading facilities.8 A holder of an 86 Trinity Permit under the current rules will be issued an ATP upon submission of the appropriate form to the Exchange. Trading on the Exchange’s relocated facilities at 11 Wall Street will continue to occur on a hybrid system, involving both a physical floor and an electronic system, the NYSE Amex System (‘‘System’’). Although the options trading floor will be physically separated from the NYSE and Alternext cash equity trading floor, the options trading floor will be managed and overseen by NYSE Euronext employees. Only ATP Holders that have been approved to perform a floor function— Floor Brokers and Floor Market Makers (including Specialists)—will be authorized to enter into transactions on the trading floor. Alternext has proposed to update and reorganize its rules for trading options in open outcry and to establish a new set of rules that will govern trading on the System.9 The Exchange has submitted a separate proposed rule change to delete certain existing Exchange rules.10 Alternext will retain many of its existing member rules, including those relating to capital, margin, recordkeeping, customer protection, and account maintenance. The Exchange also has proposed to keep certain existing options-related rules, including rules on position and exercise limits and listing standards. With respect to transactions in Flexible Exchange Options (‘‘FLEX Options’’) conducted on the Trading Floor, the Exchange stated that current NYSE Alternext Rules 900G through 909G will remain operative.11 8 In addition, the Exchange would allow access to the System by ‘‘Sponsored Participants.’’ A Sponsored Participant is a person that has entered into an agreement with a Sponsoring ATP Holder through which it may execute transactions on the System. See proposed Rule 902.1NY(c). This proposed rule is substantially similar to Rule 6.2A of the Rules of NYSE Arca, Inc. (‘‘NYSE Arca’’). 9 In a separate filing, the Exchange described the relationship between the Exchange and its routing broker and the conditions related to its operation. The Commission is approving that proposed rule change in a separate action today. See Securities Exchange Act Release No. 59473 (February 27, 2009) (SR–NYSEALTR–2009–18). 10 See Securities Exchange Act Release No. 59454 (February 25, 2009) (SR–NYSEALTR–2009–17). The deletions effected by SR–NYSEALTR–2009–17 will become operative simultaneously with the operativeness of the rules proposed in this filing. 11 The Exchange noted that certain terms in existing NYSE Alternext Rules 900G–909G will become outdated upon approval of the rules E:\FR\FM\06MRN1.SGM Continued 06MRN1 9844 Federal Register / Vol. 74, No. 43 / Friday, March 6, 2009 / Notices III. Discussion After careful review, the Commission finds that the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange.12 In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,13 which requires that the rules of an exchange be 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; and is not designed to permit unfair discrimination between customers, issuers, brokers, or dealers. The Commission also finds that the proposed rule change is consistent with Section 6(b)(8) of the Act 14 in that it does not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. Discussed below are the most salient features of the proposal. A. Market Participants 1. Floor Brokers mstockstill on PROD1PC66 with NOTICES A Floor Broker as defined in the proposed rules is an ATP Holder who is registered with the Exchange for the purpose, while on the floor, of accepting and executing options orders received from ATP Holders and, in certain circumstances, orders from others.15 The proposed rules governing Floor Brokers include general responsibilities to exercise due diligence in representing an order and specific responsibilities with respect to the handling of various order types. These rules are substantially similar to those of NYSE Arca 16 and do not raise any novel or significant issues, and the Commission finds that they are consistent with the Act. proposed herein. The Exchange represented that it will review these rules and will submit a separate filing to revise any outdated references. See Amendment No. 1 at 6. 12 In approving this proposal, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 13 15 U.S.C. 78f(b)(5). 14 15 U.S.C. 78f(b)(8). 15 See generally proposed Rules 930NY–933NY. 16 See NYSE Arca Rules 6.43–6.46. VerDate Nov<24>2008 16:20 Mar 05, 2009 Jkt 217001 2. Market Makers Currently, the Exchange has four general classifications of Market Maker: Specialist, Registered Options Trader (‘‘ROT’’), Supplemental Registered Options Trader (‘‘SROT’’), and Remote Registered Options Trader (‘‘RROT’’). The Exchange states that these classifications will remain essentially the same under the proposal, although ROTs and SROTs would be combined into one classification as Floor Market Makers (‘‘FMMs’’), and RROTs would become Remote Market Makers (‘‘RMMs’’). The general term Market Maker in the proposed rules includes Specialists, eSpecialists, FMMs, and RMMs.17 The Exchange is permitted to appoint one Specialist on the floor per option class, additional e-Specialists, and any number of Market Makers in each class, unless limited by quotation system capacity.18 The proposed rules governing Market Maker appointments and obligations generally—including rules concerning evaluation of Market Maker performance, suspension or termination of Market Maker appointments, and appeal for review of Exchange actions adversely affecting a Market Maker—are closely modeled on similar rules of NYSE Arca.19 The Exchange represented that NYSE Alternext U.S. Rule 3(j), which governs the use of material, non-public information, applies to ATP Holders trading on the System. The Exchange also represented that Rule 3(j) requires a Market Maker to maintain information barriers—reasonably designed to prevent the misuse of material, nonpublic information by such Market 17 See proposed Rule 920NY (as modified by Amendment No. 1). 18 The proposed rules provide, however, that the Exchange will not restrict access in any particular option class until the Commission approves objective standards for restricting such access. See proposed Rule 923NY(b). 19 Regarding Market Maker appointments, see proposed Rule 923NY (based on NYSE Arca Rule 6.35). Regarding Market Maker obligations, see proposed Rule 925NY (based on NYSE Arca Rule 6.37), which outlines such obligations (i) generally, (ii) within a Market Maker’s appointed classes, and (iii) outside of a Market Maker’s appointed classes. See also proposed Rule 925.1NY (based on NYSE Arca Rule 6.37B); proposed Rule 925.2NY (based on NYSE Arca Rule 6.37C). The proposed rules also provide a mechanism for limiting Market Maker risk during periods of increased and significant trading activity on the System in a Market Maker’s appointment. See proposed Rule 928NY. The Exchange would activate the mechanism in a Market Maker’s appointed class whenever a designated number of executions (ranging between five and 100 executions) occurs within one second. Orders and quotations received by the Exchange after the mechanism is activated would not be executed against the Market Maker. The proposed rule is similar to NYSE Arca Rule 6.40. PO 00000 Frm 00066 Fmt 4703 Sfmt 4703 Maker—between the 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 the Exchange.20 The Exchange stated that it believes that requiring information barriers between the Market Maker and its affiliates with respect to transactions in the option and the underlying security is important to reduce the opportunity for unfair trading advantages or misuse of material, non-public information. The Commission believes that the proposed rules relating to the duties and obligations of Market Makers generally, and in particular the rules that govern the use of material, non-public information, are consistent with the Act.21 a. FMMs and RMMs FMMs and RMMs are required to apply and be approved for an appointment in one or more options classes. The number of options issues that an FMM or RMM may select is based on the number of ATPs the FMM or RMM holds.22 In addition, an FMM is required to select an appointment to a Trading Zone on the floor. FMMs and RMMs are required to provide continuous, two-sided quotes in their appointed issues, in accordance with maximum prescribed width requirements, for 60% of the time the Exchange is open for trading in each issue, and to trade at least 75% of their contract volume per quarter in classes within their appointments.23 All transactions effected by an FMM in open outcry in the FMM’s designated Trading Zone will be considered as transactions towards satisfying the rule requiring that an FMM trade at least 75% of its contract volume per quarter in classes within its appointments. The Commission believes that the proposed rules governing Market Maker activity on the Exchange are consistent with the Act.24 b. Specialists and E-Specialists The proposed rules include provisions governing the appointment and activities of Specialists, who are assigned a location on the floor where their issues will trade, and e-Specialists, 20 See Amendment No. 1 at 5. Securities Exchange Act Release No. 47838 (May 13, 2003), 68 FR 27129, 27137 (May 19, 2003) (SR–PCX–2002–36). 22 See proposed Rule 923NY(d). 23 See proposed Rule 923NY(i). 24 See supra note 19. See also Securities Exchange Act Release No. 54236 (July 28, 2006), 71 FR 44758 (August 7, 2006) (order approving similar rules on OX, NYSE Arca’s automated options trading system) (‘‘OX Approval Order’’). 21 See E:\FR\FM\06MRN1.SGM 06MRN1 Federal Register / Vol. 74, No. 43 / Friday, March 6, 2009 / Notices who are RMMs appointed to fulfill certain obligations required of Specialists. Under the proposal, the Exchange is permitted to appoint one Specialist and an unlimited number of other Market Makers per class.25 Any ATP Holder registered as a Market Maker with the Exchange is eligible to be qualified as a Specialist 26 and may be allocated any one or more of the option issues opened for trading. The allocation of issues among qualified applicants will be determined by the Exchange, which will select the candidate that appears best able to perform the functions of a Specialist in a particular option issue. Each Specialist will be appointed to the Trading Zone designated for its options classes. A Specialist is required, among other things, to provide continuous two-sided quotations throughout the trading day in its appointed issues for 90% of the time the Exchange is open for trading 27 and otherwise fulfill the obligations of Market Makers generally. A Specialist’s quotations must meet the legal quote requirements specified in proposed Rule 925NY.28 In addition, the Exchange is permitted to designate e-Specialists in an options class to fulfill certain obligations required of Specialists.29 Factors to be considered in approving e-Specialists include adequacy of resources; history of stability, superior electronic capacity and superior operational capability; market making and/or specialist experience in a broad array of securities; ability to interact with order flow in all types of markets; existence of order flow commitments; willingness to accept allocation as an e-Specialist in options in at least 400 underlying securities; and willingness and ability to make competitive markets on the Exchange and to promote the Exchange in a manner that is likely to enhance the ability of the Exchange to compete successfully for order flow in the options it trades. Option classes that have been allocated to a Specialist may be concurrently allocated to one or more eSpecialists,30 with the Exchange to 25 See proposed Rule 923NY(b). provisions regarding Specialists are set forth primarily in proposed Rules 925.1NY(b) and 927–927.3NY. 27 These obligations will apply to all of the Specialist’s appointed issues collectively, rather than on an issue-by-issue basis. 28 There are exceptions to these quoting requirements for systems failures and limitations and other mitigating circumstances. 29 See generally proposed Rules 927.4–927.6NY. 30 Each e-Specialist organization is required to maintain a sufficient number of ATPs to include mstockstill on PROD1PC66 with NOTICES 26 The VerDate Nov<24>2008 16:20 Mar 05, 2009 Jkt 217001 determine the appropriate number.31 Each e-Specialist will be required to fulfill all the obligations set forth in proposed Rules 925NY and 925.1NY. ESpecialists have the same 90% quoting obligation as Specialists.32 The Commission believes that the proposed rules regarding Specialists and e-Specialists raise no novel or significant issues and are substantially similar to rules that it has previously approved for other exchanges.33 The Exchange has based its proposed rules regarding e-Specialists on rules the Commission has approved for CBOE,34 and the Commission believes that they are consistent with the Act. c. Directed Order Market Makers As discussed in more detail below,35 the System will permit Order Flow Providers 36 to direct orders to ‘‘Directed Order Market Makers.’’ A Directed Order Market Maker, who may be a Specialist or other Market Maker, must provide continuous two-sided quotations throughout the trading day, meeting legal width requirements,37 in issues for which it receives Directed Orders for 90% of the time the Exchange is open for trading in each issue.38 B. Ranking and Execution of Orders As noted above, Alternext will trade options on an electronic trading system and in open outcry on the floor. appointments in classes where the organization is acting as an e-Specialist. 31 The Exchange will grant e-Specialists allocations in option classes based on factors including performance, capacity, performance commitments, efficiency, competitiveness, and operational factors. See proposed Rule 927.4(b). 32 See proposed Rule 927.5NY(a) (as modified by Amendment No. 1), which specifies that an eSpecialist is required to meet the 90% quoting obligations of Specialists set forth in Rule 925.1NY(b). 33 See, e.g., NYSE Arca Rules 6.82–6.83 (regarding Lead Market Makers); Securities Exchange Act Release No. 47838 (May 13, 2003), 68 FR 27129 (May 19, 2003) (order approving rules for the PCX Plus options trading platform). 34 See CBOE Rules 8.92–8.94. See also Securities Exchange Act Release No. 49643 (April 30, 2004), 69 FR 25647 (May 7, 2004) (order approving rules adding the category of e-DPMs to the types of market makers trading on CBOE). 35 See infra Section III.B.1.c. 36 An Order Flow Provider is defined in proposed Rule 900.2NY(57) to mean any ATP Holder that submits, as agent, orders to the Exchange. 37 See proposed Rule 925NY (as modified by Amendment No. 1). 38 See proposed Rule 964.1NY (as modified by Amendment No. 1). The above obligations will apply to all of the Directed Order Market Maker’s issues collectively for which it receives Directed Orders, rather than on an issue-by-issue basis. Compliance with this obligation will be determined on a monthly basis. PO 00000 Frm 00067 Fmt 4703 Sfmt 4703 9845 1. Electronic Trading a. Display Order Process The System will display all quotations and non-marketable limit orders (unless an order type indicates otherwise) in the ‘‘Display Order Process’’ of its book, at all price levels on an anonymous basis.39 Bids and offers, including the displayed portion of Reserve Orders,40 will be ranked and maintained in the Display Order Process according to account type (e.g., Customer or non-Customer) 41 and the following priority rules: The highest bid will have priority over all other bids, and the lowest offer will have priority over all other offers. Bids and offers for Customer accounts, including the displayed portion of Customer Reserve Orders, will have priority over other bids or offers at the same price. If there is more than one highest bid or lowest offer for a Customer account then such bid or offer will be ranked based on time priority. A bid or offer for the account of a Directed Order Market Maker— discussed below—will have second priority for a Directed Order if the Directed Order Market Maker is eligible to receive a guaranteed participation in such bid or offer.42 If there is no Directed Order Market Maker guarantee, then bids or offers in the book for the accounts of participants in the Specialist Pool 43—also discussed below—will have priority if the Specialist Pool is eligible to receive a guaranteed participation in such bids or offers.44 Orders and Quotes with Size 45 in the book for the accounts of all other non39 The System also will disseminate consolidated quotations and last-sale information, and such other market information as may be made available from time to time pursuant to agreement between the Exchange and other Market Centers, consistent with the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information. 40 A ‘‘Reserve Order’’ is defined in proposed Rule 900.3NY(d)(3) as a limit order with a portion of the size displayed and with a reserve portion of the size that is not displayed on the Exchange. Upon entry into the System, a marketable Reserve Order will be executed in whole or in part up to its full size, regardless of the reserve size. See Amendment No. 1 at 3. 41 An order for the account of a ‘‘Customer’’— defined in proposed Rule 900.2NY(18) as an individual or organization that is not a brokerdealer—has priority over the bid or offer of a nonCustomer at the same price. 42 See proposed Rule 964.1NY. 43 The ‘‘Specialist Pool’’ is defined in proposed Rule 900.2NY(75) as the aggregated size of the best bid and best offer, in a given series, among the Specialist and e-Specialists that match in price. 44 See proposed Rule 964.2NY. 45 The term ‘‘Quote with Size’’ is defined in proposed Rule 900.2NY(65) to mean a quotation to buy or sell a specific number of option contracts at E:\FR\FM\06MRN1.SGM Continued 06MRN1 9846 Federal Register / Vol. 74, No. 43 / Friday, March 6, 2009 / Notices Customers have next priority. If there is more than one highest bid or lowest offer for the account of a non-Customer, then such bids or offers will be afforded priority on a ‘‘size pro rata’’ basis and will comprise the ‘‘size pro rata pool.’’ mstockstill on PROD1PC66 with NOTICES A Tracking Order is defined as an undisplayed limit order that is eligible for execution after the Display Order Process against orders equal to or less than the size of the Tracking Order.54 A Tracking Order is ranked according to its limit price, but is executable only at b. Working Orders a price matching the NBBO. It will not In addition to bids and offers that are trade through the NBBO. If a Tracking displayed in the Display Order Process, Order is executed but not exhausted, the the System will accept ‘‘Contingency remaining portion of the order will be Orders’’ and ‘‘Working Orders,’’ which canceled, without routing the order to are orders that are contingent upon a another Market Center 55 or market condition being satisfied or orders with participant.56 Tracking Orders have last a conditional or undisplayed price and/ priority and never become part of the or size. Contingency Orders and Display Order Process.57 They have Working Orders are maintained in the standing only if contra-side interest in ‘‘Working Order File’’ of the book until the System would otherwise be routed eligible for execution and/or display.46 to another market center at the NBBO.58 Such orders include Reserve Orders, Tracking Orders will not execute against Stop Orders,47 Stop Limit Orders,48 All- incoming Linkage Orders. or-None Orders, and Tracking Orders.49 The proposed rules provide that, prior After displayed interest at a particular to or after submitting an order to the price has been executed, orders in the System, an ATP Holder is not permitted Working Order File have next priority. to inform another ATP Holder or any However, such orders do not have any other third party of any of the terms of priority or standing until they are the order.59 In addition, it will be a eligible for execution and/or display.50 violation of Rule 935NY when an ATP For example, when the displayed Holder enters a Tracking Order for the portion of a Reserve Order has been purpose of executing as principal an fully executed,51 the display is refreshed order it also represents as agent.60 from the reserve portion of the order c. Participation Entitlements (which had been maintained in the The System will include participation Working Order File) up to the size of the guarantees that, when the requisite original display with a new time conditions are fulfilled, will entitle stamp.52 Stop Orders and Stop Limit Orders are not eligible to execute against certain participants—Specialists, eincoming orders, and become eligible to Specialists, and Directed Order Market Makers—to a certain percentage of each execute via the Display Order Process incoming order, after Customer Orders only after the incoming order is are satisfied. executed in full or rests in the book, or the Stop or Stop Limit Order is sent to 54 See proposed Rule 900.3NY(d)(5) (as modified the Display Order Process at the end of by Amendment No. 1). a triggering event.53 a specific price that a Market Maker has submitted to the System. 46 See Amendment No. 1 at 3. 47 A Stop Order is defined as an order that becomes a market order when the market for a particular option contract reaches a specified price (‘‘triggering event’’). A Stop Order to buy (sell) becomes a market order when the option contract trades at or above (below) the stop price on the Exchange or another Market Center or when the Exchange bid (offer) is quoted at or above (below) the stop price. See proposed Rule 900.3NY(d)(1). 48 A Stop Limit Order is defined as an order that becomes a limit order when the market for a particular option contract reaches a specified price. A Stop Limit Order to buy (sell) becomes a Limit Order when the option contract trades at or above (below) the stop price on the Exchange or another Market Center or when the Exchange bid (offer) is quoted at or above (below) the stop price. See proposed Rule 900.3NY(d)(2). 49 See infra notes 54–58 and accompanying text. 50 See proposed Rule 964NY(b)(2)(E) (as modified by Amendment No. 1). 51 See supra note 40. 52 See proposed Rule 900.3NY(d)(3) (as modified by Amendment No. 1). 53 See proposed Rule 900.3NY(d)(1) (as modified by Amendment No. 1). VerDate Nov<24>2008 16:20 Mar 05, 2009 Jkt 217001 55 A ‘‘Market Center’’ is defined in proposed Rule 900.2NY(36) as a national securities exchange that has qualified for participation in the Options Clearing Corporation (‘‘OCC’’) pursuant to the provisions of the rules of the OCC. 56 The Exchange provided two examples: (1) The NBBO market in a series is 2.05–2.15. The Exchange’s displayed bid is 2.00, but there is a Tracking Order in the Working Order File bidding 2.10 for 10 contracts. An order is received on the Exchange to sell six contracts at 2.05. This order would be matched against the 2.10-buy Tracking Order at a price of 2.05, matching the NBBO. (2) After the same initial scenario, a second Tracking Order to buy 20 contracts paying 2.05 is placed in the book. An order is received to sell 15 contracts at 2.05. The incoming sell order, being larger in size than the first Tracking Order, cannot be executed against it. The incoming order is therefore matched against the second Tracking Order, and will be executed at 2.05, the NBBO price. 57 See proposed Rule 964NY(b)(2)(F) (as modified by Amendment No. 1). 58 As stated by the Exchange, Tracking Orders are intended only to provide liquidity in the event a marketable order would otherwise route to another exchange. See Amendment No. 1 at 7. 59 See proposed Rule 935NY, Commentary .04 (as added by Amendment No. 1). 60 See proposed Rule 935NY, Commentary .05 (as added by Amendment No. 1). PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 Directed Order Market Makers. The System will permit Specialists and Market Makers to receive ‘‘Directed Orders.’’ 61 A Directed Order is a marketable order that has been directed to a particular Market Maker by an Order Flow Provider.62 If an incoming marketable order is so directed, the Directed Order Market Maker will be entitled to receive 40% (or such lower percentage as may be determined by the Exchange) of the portion of an order remaining after Customer Orders in the book have been satisfied, provided the Directed Order Market Maker is quoting at the NBBO at the time the order is received by the Exchange for at least that size.63 To be eligible to receive Directed Orders, a Directed Order Market Maker must provide continuous two-sided quotations throughout the trading day in issues for which it receives Directed Orders for 90% of the time the Exchange is open for trading in each issue.64 Specialists and e-Specialists. In the System, the proposed rules permit the Exchange to establish from time to time a participation entitlement for Specialists and e-Specialists, known collectively as the ‘‘Specialist Pool.’’ The Specialist Pool participation entitlement will not apply when a Directed Order Market Maker receives a guaranteed participation. To receive a participation entitlement, a Specialist (on the trading floor) or e-Specialist must be quoting at the NBBO and may not be allocated a total quantity greater than the quantity than it is quoting at the NBBO. The Specialist Pool will be entitled to up to 40% of the size of an incoming order (or such lower percentage as may be determined by the Exchange) that remains after all Customer Orders in the book at the best bid or offer have been satisfied. Within the Specialist Pool participation entitlement, the Specialist and e-Specialists quoting at the NBBO will participate on a size pro rata basis. However, the Specialist’s size pro-rata participation in the Specialist Pool will receive additional weighting, as 61 See proposed Rule 964.1NY. proposed Rule 900.3NY(s). 63 The Directed Order Market Maker will be allocated a number of contracts equal to the greater of the guaranteed participation or its ‘‘size pro rata’’ allocation, but in either case, no greater than the size of the Directed Order Market Maker’s disseminated size. 64 Such quotations must meet the legal quote width requirements of Rule 925NY. These quoting obligations will apply collectively to all series in all of the issues for which the Directed Order Market Maker receives Directed Orders, rather than on an issue-by-issue basis. Compliance will be determined on a monthly basis. See proposed Rule 964.1NY(iv) (as added by Amendment No. 1). 62 See E:\FR\FM\06MRN1.SGM 06MRN1 Federal Register / Vol. 74, No. 43 / Friday, March 6, 2009 / Notices determined by the Exchange and announced via Regulatory Bulletin, but in no case greater than 662⁄3% if there is only one e-Specialist, and no more than 50% if there are two or more eSpecialists. For all orders of five contracts or fewer, the Specialist Pool will be allocated any balance of the order after any Customer Orders on the book have been satisfied, provided the Specialist Pool is quoting at the NBBO and a Directed Order Market Maker did not receive a guaranteed allocation. These orders of five contracts or fewer, or any balances thereof after Customer Orders in the book have been satisfied, will be allocated to each participant in the Specialist Pool on a rotating basis, provided the recipient Specialist’s quoted size is equal to or greater than the size of the allocation.65 mstockstill on PROD1PC66 with NOTICES d. Additional Provisions If an incoming limit order is not entirely filled after trading against any eligible interest in the Working Order File, the balance of the order will be executed at the next available price level or, if the limit order locks or crosses the NBBO, matched against any available Tracking Order (prior to being routed) or routed to the away market(s) displaying the NBBO.66 If the above conditions do not apply, and the order is no longer marketable, or if the order has been designated as an order type that is not eligible to be routed away, the order would be placed in the book or, if it would lock or cross the NBBO, canceled.67 The proposed rules also include a provision providing that ATP Holders may not execute as principal orders they represent as agent on the System unless (i) agency orders are first exposed on the Exchange for at least three seconds; or (ii) the user has been bidding or offering on the Exchange for at least three seconds prior to receiving an agency 65 Commentary .01 to proposed Rule 964NY provides that, on a quarterly basis, the Exchange will evaluate what percentage of the volume executed on the Exchange is composed of orders for five contracts or fewer that is allocated to the Specialist Pool, and will reduce the size of the orders included in this entitlement if such percentage is over 40%. 66 If an incoming market order is not entirely filled after trading against any eligible interest in the Working Order File, the balance of the order will be executed at the next available price level based on split-price execution or, if such order is marketable against the NBBO, the order would be executed against any eligible Tracking Order or routed away. E-mail from Andrew Stevens, Chief Counsel—U.S. Equities & Derivatives, NYSE Euronext, Inc., to Michael Gaw, Assistant Director, Division of Trading and Markets, Commission, on February 26, 2009. 67 See proposed Rule 964NY(c)(2) (as modified by Amendment No. 1). VerDate Nov<24>2008 16:20 Mar 05, 2009 Jkt 217001 order that is executable against such bid or offer.68 The Commission believes that the Exchange’s proposed priority and allocation rules are consistent with the Act. The Commission has previously approved participation guarantees for Market Makers, to which orders are directed by other exchange members, of up to 40% of the size of such directed orders (after any Customer Orders have been satisfied), provided such Market Maker is quoting at the NBBO when the order is received by the Exchange and meets specified, higher quoting obligations.69 In its comment letter, CBOE stated that the proposed Directed Order Market Maker program is similar to other options exchanges’ programs, but noted that the Alternext proposal, unlike the rules of other exchanges, appeared not to require Directed Order Market Makers to be subject to a heightened quoting requirement to qualify as Directed Order Market Makers. In Amendment No. 1, the Exchange added a provision that establishes such a heightened standard.70 The Commission has also previously approved Specialist Pool participations of up to 40% of the size of incoming orders (after any Customer Orders have been satisfied and only when the Directed Order guarantee has not been applied), provided that the Specialist Pool is quoting at the NBBO when the order is received by the Exchange. The Commission believes that these guarantees strike a reasonable balance between rewarding certain participants for making markets (in the case of Specialists and e-Specialists) or bringing liquidity to the exchange (in the case of Directed Order Market Makers), with providing other market participants an incentive to quote aggressively. The Commission also believes that the proposed rules providing for the allocation of orders of five contracts or fewer to the Specialist Pool are consistent with the Act.71 68 See proposed Rule 935NY. The Exchange stated that attempts to use a Tracking Order to execute a cross transaction is considered a violation of Rule 935NY, as that rule requires an order to be exposed (displayed) if it is part of a cross transaction. See Amendment 1 at 7. See also supra note 60 and accompanying text. 69 See Securities Exchange Act Release No. 57844 (May 21, 2008), 73 FR 30988 (May 29, 2008) (directed orders on NASDAQ OMX PHLX). Other exchanges have similar directed order or ‘‘preferred market maker’’ programs. See, e.g., CBOE Rule 8.13; International Securities Exchange (‘‘ISE’’) Rule 713; current Exchange Rule 997–ANTE. 70 See proposed Rule 964.1NY(iv) (as added by Amendment No. 1). 71 Other exchanges have similar rules. See, e.g., ISE Rule 713; NASDAQ OMX PHLX Rule 1014(g). PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 9847 With regard to Working Orders and their conditions of execution, the Commission has previously approved most of the order types that the Exchange proposes to implement. Although the Commission has not previously approved an order type in the options markets with exactly the same features as the Tracking Order,72 the Commission also finds the proposed rules relating to Tracking Orders to be consistent with the Act. As set forth in the proposed rules, an incoming order will never be executed against a Tracking Order at a price that is inferior to the NBBO. Thus, an execution against a Tracking Order would never trade through the best price available on another market. An incoming order also will never be executed at a price better than the NBBO. Thus, Tracking Orders do not constitute hidden interest at a better price than the publicly disseminated market. Tracking Orders are intended only to provide liquidity in the event a marketable order would otherwise route to another exchange. Tracking Orders provide participants on the System the ability to pre-set orders to automatically ‘‘step up’’ to the NBBO to trade against an incoming order when no other interest at that price is available on the Exchange, before the order is routed to another exchange. In this regard, the use of Tracking Orders is similar to automatic step-up features on other exchanges that the Commission has approved.73 In its comment letter on the proposed rule change,74 CBOE expressed its understanding that, because Tracking Orders are not exposed in the System, they should not be eligible for crossing pursuant to proposed Rule 935NY.75 In Amendment No. 1, the Exchange responded to this comment by adding a new Commentary .05 to proposed Rule 935NY stating explicitly that it will be a violation of Rule 935NY when an ATP Holder enters a Tracking Order for the purpose of executing as principal an order it also represents as agent. The Commission believes that this provision 72 Similar orders have previously been approved in the equities markets. See Securities Exchange Act Release No. 53117 (January 13, 2006), 71 FR 3910 (January 24, 2006) (SR–PCX–2005–87). 73 See, e.g., CBOE Rule 6.8, Interpretations and Policies .02(b). 74 See supra note 5. 75 Proposed Rule 935NY provides that, with respect to orders routed to the System, users may not execute as principal orders they represent as agent unless (i) agency orders are first exposed on the Exchange for at least three seconds or (ii) 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. E:\FR\FM\06MRN1.SGM 06MRN1 9848 Federal Register / Vol. 74, No. 43 / Friday, March 6, 2009 / Notices mstockstill on PROD1PC66 with NOTICES is reasonably designed to prevent use of Tracking Orders to circumvent the general requirement to expose agency orders before executing against them as principal, and is therefore consistent with the Act. The Exchange also added a new Commentary .04 to proposed Rule 935NY to provide that, prior to or after submitting an order to the System, an ATP Holder is not permitted to inform another ATP Holder or any other third party of any of the terms of the order. The Commission believes that this provision is consistent with the Act because it is reasonably designed to prevent ATP Holders from providing material, non-public information to third parties and to promote compliance with the Commission’s Quote Rule.76 CBOE also argued that, prior to effecting any transactions in open outcry, Exchange members should be required to electronically ‘‘sweep’’ the book for any Tracking Order interest in the System, so as not to violate the priority of such orders. CBOE pointed to rules at other exchanges that require members seeking to trade in open outcry to electronically sweep the book for any penny interest from ‘‘penny price improvement orders’’ 77 before executing an order. The Exchange responded that a Tracking Order does not have any standing with regard to open-outcry trading, as it is not displayed and, unlike price-improving orders and quotations, is not represented by a displayed bid or offer at an indicative price. The Commission agrees with the distinction made by the Exchange. As set forth in the proposed rules, a Tracking Order has standing only if contra-side interest in the System 76 17 CFR 242.602. The Quote Rule, in relevant part, requires a national securities exchange to collect, process, and make available to vendors the best bid, the best offer, and aggregate quotation sizes for each subject security that is communicated on any national securities exchange by a responsible broker or dealer. A ‘‘bid’’ or ‘‘offer’’ is defined as ‘‘the bid price or the offer price communicated by a member of a national securities exchange or member of a national securities association to any broker or dealer, or to any customer.* * *’’ 17 CFR 242.600(b)(8). Because Tracking Orders and the non-displayed size of Reserve Orders are sent only to the Exchange systems and not ‘‘communicated * * * to any broker, dealer, or customer,’’ such orders are not ‘‘bids’’ or ‘‘offers.’’ Thus, the Quote Rule does not require the Exchange to disseminate information about Tracking Orders and the non-displayed size of Reserve Orders. However, if an ATP Holder were to inform a third party of the terms of a Tracking Order or the non-displayed size of a Reserve Order, such Orders would become ‘‘bids’’ or ‘‘offers’’ subject to the Quote Rule. 77 ‘‘Penny price improvement’’ rules permit members of an exchange to submit bids and offers that provide price improvement in one cent increments that are not displayed in the book, in options in which the standard increment is more than one cent. Such bids and offers are displayed by rounding to the nearest standard increment. VerDate Nov<24>2008 16:20 Mar 05, 2009 Jkt 217001 would otherwise be routed to another market center at the NBBO.78 The Commission also notes that Tracking Orders can be entered in the System only at standard trading increments, and thus cannot be used to gain priority over displayed interest by a sub-increment amount. CBOE further questioned the proposed provision that, when a Tracking Order in the System is at a better price than another Tracking Order, but cannot be executed due to insufficient size, it does not have priority. CBOE also questioned in general why an incoming order does not trade against a Tracking Order at a price better than the NBBO when the Tracking Order is submitted at such a price. In Amendment No. 1, the Exchange responded that the order handling instruction on a Tracking Order is that it is to be executed only at a price that matches the NBBO on the same side of the market, and only against lesser or equal-sized contra-side interest. The limit price on a Tracking Order serves only to provide a boundary on the order’s possible execution price and to establish its ranking. The Commission believes that the Exchange’s response adequately addresses CBOE’s question, and that it is consistent with the Act for the Exchange to offer an order type with these conditions. e. Open-Outcry Trading Proposed Rule 963NY describes priority and order allocation for openoutcry trading, including procedures to be followed when there is interest at the same price in the book as on the trading floor. The proposed rules governing open-outcry trading on the Exchange floor are similar to those at other exchanges with trading floors, and the Commission finds that they are consistent with the Act. When a Floor Broker or Market Maker makes a bid or offer or calls for a market and more than one ATP Holder responds at the same best price, the Floor Broker or Market Maker must designate the sequence in which responses are vocalized. As between two bids or offers at the same best price, priority is afforded in the sequence they are made.79 If they were made simultaneously or it is impossible to determine clearly the order in which 78 See proposed Rule 900.3NY(d)(5). for example, the bid or offer of a nonCustomer in the trading crowd that was made before that of a Customer represented by a Floor Broker in the trading crowd would take priority over the Customer Order (provided the requirements of Section 11(a) of the Act and the rules thereunder are met). 79 Thus, PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 they were made, such orders would be deemed to be on parity, and priority will be afforded, insofar as practicable, on an equal basis. However, a Customer Order displayed in the book at the same price as the best price in the crowd will have priority over any bid or offer at the post. After any Customer Orders displayed in the book at the best bid or offer in the crowd are satisfied, the Specialist is entitled to trade with 40% of the order, provided the Specialist has vocally responded to the Floor Broker’s call for a market and has responded with a price that is the best bid or offer. Bids and offers of broker-dealers (including Quotes with Size and orders of Market Makers displayed on the book) would have priority after all trading crowd interest is exhausted. Customer-to-Customer Crosses. The proposed rules include procedures by which a Floor Broker who holds a Customer Order to buy and a Customer Order to sell may cross such orders on the floor.80 After providing an opportunity for bids and offers to be made by members of the trading crowd, the Floor Broker must bid above the highest bid in the crowd and offer below the lowest offer in the crowd. After satisfying all better priced bids or offers on the book and any Customer Orders on the book at the same price, the Floor Broker is permitted to cross the orders at such higher bid or lower offer by announcing by open outcry that he is crossing orders on behalf of Customers, and giving the quantity and price. The Floor Broker is permitted to cross the orders at split prices if the rules governing split price transactions are met.81 Non-Facilitation (Regular Way) Crosses. The proposed rules also include procedures by which a Floor Broker who holds a Customer Order and a non-Customer order may cross such orders.82 After providing an opportunity for bids and offers to be made by members of the trading crowd, the Floor Broker must expose the Customer Order by bidding above the highest bid in the crowd or offering below the lowest offer in the crowd, by at least one minimum price variation (‘‘MPV’’). After satisfying all better priced bids or offers on the book, any Customer Orders on the book at the same price, and any interest by members of the trading crowd at such higher bid or lower offer, the Floor Broker is permitted to cross the orders (or any part remaining unexecuted) at such higher bid or lower offer by announcing by open outcry that he is 80 See proposed Rule 934NY(a). proposed Rule 963NY(f). 82 See proposed Rule 934NY(b). 81 See E:\FR\FM\06MRN1.SGM 06MRN1 Federal Register / Vol. 74, No. 43 / Friday, March 6, 2009 / Notices mstockstill on PROD1PC66 with NOTICES crossing the orders, and giving the quantity and price. Facilitation Crosses. The proposed rules further include procedures by which a Floor Broker who holds a Customer Order and a Facilitation Order may cross such orders.83 After providing an opportunity for bids and offers to be made by crowd members, the Floor Broker, on behalf of the Customer whose order is subject to facilitation, must disclose any contingencies with respect to the order, identify the order as being subject to facilitation, and establish priority by either bidding or offering at or between the best bid or offer in the market. After all other crowd members are given an opportunity to accept the bid or offer made on behalf of the Customer, the Floor Broker is permitted to cross all or any remaining part of such order and the Facilitation Order at the price of the Customer’s bid or offer by announcing by open outcry that he is crossing such orders, and stating the quantity and price. Notwithstanding the above, if the proposed cross transaction meets the eligible size requirement of 50 contracts or larger, a Facilitation Order can trade with up to 40% of the Customer Order, after satisfying all better-priced bids or offers on the book or in the trading crowd and any Customer Orders at the same price.84 ‘‘At-Risk’’ Crosses. The proposed rules establish an alternative to the Facilitation Cross procedures for a Floor Broker that seeks to cross a Customer Order with an order from the ATP Holder from which the Customer Order originated.85 After providing an opportunity for bids and offers to be made by members of the trading crowd, the Floor Broker must represent the Customer Order to the trading crowd, indicating that it is a Customer Order and providing the order’s size, side of the market, and a price. After giving the trading crowd an opportunity to 83 See proposed Rule 934.1NY. A ‘‘Facilitation Order’’ is an order represented on behalf of an ATP Holder that may be executed in whole or in part in a cross transaction with the ATP Holder’s Customer Order and that is clearly designated as a Facilitation Order. 84 If a trade pursuant to proposed Rule 934.1NY occurs at the Specialist’s vocalized bid or offer in its appointed class, the Specialist’s guaranteed participation will apply only to the number of contracts remaining after all Customer Orders that trade ahead of the cross transaction and the number of contracts crossed have been satisfied. The Specialist’s guaranteed participation will be a percentage that, when combined with the percentage the originating firm crossed, does not exceed 40% of the order. See proposed Rule 934.1NY(4)(C). 85 The proposed rule for At-Risk Crosses applies only to equity options. The minimum eligible order size for an At-Risk Cross is 50 contracts. See proposed Rule 934.2NY. VerDate Nov<24>2008 16:20 Mar 05, 2009 Jkt 217001 improve its quote, the Floor Broker may improve the crowd’s market on behalf of the ATP Holder to one MPV away from the Customer Order and thereby establish priority over the crowd at this new price. The crowd may trade with the Customer Order at that order’s price, or trade with the ATP Holder’s order at its proposed price. To the extent the crowd does not trade with the Customer Order, the Floor Broker may effect the cross. The Commission finds that the Exchange’s proposed crossing rules are consistent with the Act. They are similar to other crossing rules that the Commission has previously approved for Amex and other exchanges 86 and do not appear to raise any novel or significant issues. Solicited Orders. The proposed rules include procedures by which a Floor Broker representing an order (‘‘originating order’’) may cross it with an order solicited from another ATP Holder or non-member broker-dealer outside the trading crowd (‘‘solicited party’’).87 The Floor Broker must announce to the trading crowd the same terms and conditions about the originating order as disclosed to the solicited party. The Floor Broker would also announce the price at which he is prepared to buy from or sell to the solicited party. After all other market participants are given a reasonable opportunity to accept the bid or offer, the solicited party may trade with any remaining part of the originating order. Generally, non-solicited market participants and Floor Brokers holding non-solicited discretionary orders in the crowd have priority over the solicited party or the solicited order to trade with the original order at the best bid or offer price. However, if the solicited order improved the crowd’s quoted market, the Floor Broker would be permitted to cross the solicited order against the Customer Order to the extent of 40% of the contracts remaining after any Customer Orders have been filled. The eligible order size for this guarantee to apply is a minimum of 50 contracts.88 The Exchange’s proposed rules for solicited orders, which are similar to rules the Commission has previously approved,89 do not appear to raise any novel or substantive issues, and the 86 See, e.g., Amex Rule 950–ANTE(d), Commentaries .02–.04; CBOE Rule 6.74; NYSE Arca Rule 6.47. 87 See proposed Rule 934.3NY. 88 See proposed Rule 934.3 (as modified by Amendment No. 1). 89 See, e.g., Amex Rule 950–ANTE(d), Commentaries .02 and .04. PO 00000 Frm 00071 Fmt 4703 Sfmt 4703 9849 Commission believes they are consistent with the Act. C. Section 11(a) Compliance Section 11(a)(1) of the Act 90 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 discretion (each, a ‘‘covered account,’’ and collectively, ‘‘covered accounts’’), unless an exemption applies. Sections 11(a)(1)(A)–(I) of the Act 91 and the rules thereunder provide certain exemptions from the general prohibition, including the exemptions set forth in Rules 11a2– 2(T) and 11a1–1(T) under the Act.92 With respect to the general prohibition and exemptions of Section 11(a)(1) and the rules thereunder, the Exchange proposes to adopt new Rule 910NY. The proposed rule states that an ATP Holder must ensure that each of its transactions complies with Section 11(a) of the Act, which generally prohibits an ATP Holder from effecting a transaction trading for a covered account unless a valid exemption in the statute or the rules thereunder applies. The proposed rule further states that, when relying on the exemption set forth in Rule 11a2– 2(T) under the Act, a Floor Broker may not enter into the System any order for a covered account, including an order sent to it by an affiliated ATP Holder from off the floor, if the order is for such affiliated ATP Holder’s own account, the account of an associated person, or an account over which it or its associated person exercises discretion. In addition, the proposed rule provides that, in cases where a Floor Broker’s transaction would occur at the same price as one or more orders on the book, the Floor Broker, if it can rely on no exception other than the exemption in Section 11(a)(1)(G) of the Act and Rule 11a1–1(T) thereunder (as discussed in more detail below) must, in addition to complying with the other requirements of such exemption, yield to all orders in the book at the same price if the Floor Broker has no ability to determine that an order in the book is not the order of a non-ATP Holder. Proposed Rule 910NY also states that, where an ATP Holder submits an order to the book (or an order is submitted on its behalf) and such ATP Holder is relying on the G Exemption, the order must be entered as immediate-or-cancel. The Exchange has represented that it has analyzed its rules proposed 90 15 U.S.C. 78k(a)(1). U.S.C. 78k(a)(1)(A)–(I). 92 17 CFR 240.11a2–2(T) and 240.11a1–1(T). 91 15 E:\FR\FM\06MRN1.SGM 06MRN1 9850 Federal Register / Vol. 74, No. 43 / Friday, March 6, 2009 / Notices hereunder, which include proposed Rule 910NY, and has determined that they are consistent with Section 11(a) of the Act and rules thereunder.93 For the reasons set forth below, the Commission believes that the proposed rules are consistent with the requirements of Section 11(a) of the Act and the rules thereunder. 1. Rule 11a2–2(T) Rule 11a2–2(T) under the Act,94 known as the ‘‘effect versus execute’’ rule, provides exchange members with an exemption from the 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 the conditions of Rule 11a2–2(T), a member: (i) Must transmit the order from off the exchange floor; (ii) may not participate in the execution of the transaction once it has been transmitted to the member performing the execution; 95 (iii) may 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 connection with effecting the transaction except as provided in the rule. The Exchange has requested that the Commission concur with its conclusion that orders for covered accounts entered into the System satisfy the conditions of Rule 11a2–2(T). Rule 11a2–2(T)’s first condition is that orders for covered accounts be transmitted from off the exchange floor. The Exchange represents that orders sent to the System will be transmitted from remote terminals directly to the System by electronic means. In the context of other automated trading systems, the Commission has found that the off-floor transmission requirement is met if a covered account order is transmitted from a remote location directly to an exchange’s floor by electronic means.96 93 See Amendment No. 1 at 7. CFR 240.11a2–2(T). 95 The member may, however, participate in clearing and settling the transaction. 96 See, e.g., Securities Exchange Act Release Nos. 59154 (December 23, 2008), 73 FR 80468 (December 31, 2008) (SR–BSE–2008–48) (approving, among other things, the equity rules of the Boston Stock Exchange (‘‘BSE’’)); 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR–NASDAQ–2007–004 and SR–NASDAQ–2007–080) (approving rules governing the trading of options on The NASDAQ Options Market); 49068 (January 13, 2004), 69 FR 2775 (January 20, 2004) (SR–BSE–2002–15) (approving the Boston Options Exchange as an options trading facility of BSE); 15533 (January 29, 1979), 44 FR 6084 (January 31, 1979) (approving the mstockstill on PROD1PC66 with NOTICES 94 17 VerDate Nov<24>2008 16:20 Mar 05, 2009 Jkt 217001 With respect to such orders transmitted electronically from remote terminals directly to the System, the Commission believes that the System satisfies the offfloor transmission requirement. The Exchange further represents that there may be instances where an ATP Holder on the physical floor of the Exchange may electronically submit an order for a covered account to the System. The Exchange states that, to rely on the exemption set forth in Rule 11a2–2(T), an ATP Holder must ensure that it sends its orders from off the floor to an unaffiliated ATP Holder on the floor for execution, in addition to meeting the rule’s other requirements. If an ATP Holder sends its order from off the floor to an affiliated member that is on the floor, who then directs the order into the System for execution, the offfloor ATP Holder may not rely on the exemption set forth in Rule 11a2–2(T). The Commission believes that, based on the foregoing, those orders for covered accounts sent by ATP Holders to the System for execution from off the Exchange floor satisfy the off-floor transmission requirement for the purposes of the ‘‘effect versus execute’’ rule. The Commission notes that an ATP Holder that submits an order for a covered account for execution on the physical floor of the Exchange and who wishes to rely on the exemption in Rule 11a2–2(T) also must submit the order from off the floor. Second, Rule 11a2–2(T) requires that the member not participate in the execution of its order once the order is transmitted to the floor for execution. The Exchange represents that, upon submission to the System, an order will enter the queue and be executed against another order or quote in the book based on an established matching algorithm. The Exchange states that execution depends not on whether an order is for the account of an ATP Holder, but rather upon what other orders are entered into the System at or around the same time as the subject order, what orders are resident in the book, and where the order is ranked based on, among other criteria, a price-time priority ranking algorithm. As such, the Exchange represents that at no time following the submission of an order to the System is an ATP Holder able to acquire control or influence over the Amex Post Execution Reporting System, the Amex Switching System, the Intermarket Trading System, the Multiple Dealer Trading Facility of the Cincinnati Stock Exchange, the PCX Communications and Execution System, and the Philadelphia Stock Exchange Automated Communications and Execution System) (‘‘1979 Release’’); and 14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) (approving NYSE’s Designated Order Turnaround System) (‘‘1978 Release’’). PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 result or timing of an order’s execution.97 Accordingly, the Commission believes that an Exchange member does not participate in the execution of an order submitted into the System. The Commission notes that an ATP Holder that submits an order for a covered account for execution on the physical floor of the Exchange and that wishes to rely on the exemption in Rule 11a2–2(T) is similarly restricted from participating in the execution of such order after the order has been transmitted to the System. Third, Rule 11a2–2(T) requires that the order be executed by an exchange member who is unaffiliated with the member initiating the order. The Commission has stated that the requirement is satisfied when automated exchange facilities, such as the System, are used, as long as 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.98 The Exchange has represented that the design of the System ensures that ATP Holders do not have any special or unique trading advantages in the handling of their orders after transmission.99 Based on the Exchange’s representations, the Commission believes that the System satisfies this requirement. The Commission notes that, if an ATP Holder submits an order for a covered account for execution on the physical floor of the Exchange, to comply with this requirement of Rule 11a2–2(T), such order would have to be sent to an 97 See Amendment No. 1 at 9. The Commission notes that an ATP Holder may cancel or modify the order, or modify the instructions for executing the order. The Commission has stated that the nonparticipation requirement is satisfied under such circumstances so long as such modifications or cancellations are also transmitted from off the floor. See 1978 Release, id. (stating that the ‘‘nonparticipation requirement does not prevent initiating members from canceling or modifying orders (or the instructions pursuant to which the initiating member wishes orders to be executed) after the orders have been transmitted to the executing member, provided that any such instructions are also transmitted from off the floor’’). 98 In considering the operation of automated execution systems operated by an exchange, 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. 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, the Commission has stated that executions obtained through these systems satisfy the independent execution requirement of Rule 11a2–2(T). See 1979 Release, supra note 96. 99 See Amendment No. 1 at 9. E:\FR\FM\06MRN1.SGM 06MRN1 Federal Register / Vol. 74, No. 43 / Friday, March 6, 2009 / Notices unaffiliated ATP Holder on the Exchange floor. Fourth, in the case of a transaction effected for an account with respect to which the initiating member or an associated person thereof exercises investment discretion, neither the initiating member nor any associated person thereof may retain any compensation in connection with effecting the transaction, unless the person authorized to transact business for the account has expressly provided otherwise by written contract referring to Section 11(a) of the Act and Rule 11a2–2(T).100 The Exchange recognizes that ATP Holders trading for covered accounts over which they exercise investment discretion must comply with this condition to rely on the rule’s exemption.101 The Exchange represents that it will enforce this requirement pursuant to its obligation under Section 6(b)(1) of the Act to enforce compliance with the federal securities laws.102 mstockstill on PROD1PC66 with NOTICES 2. Section 11(a)(1)(G) and Rule 11a1– 1(T) Section 11(a)(1)(G) of the Act provides an additional exemption from the general prohibition set forth in Section 11(a)(1) for any transaction for a member’s own account, provided that: (i) Such member is primarily engaged in certain underwriting, distribution, and other activities generally associated with broker-dealers and whose gross income is derived principally from such business and related activities; and (ii) the transaction is effected in compliance with the rules of the Commission, which, as a minimum, assure that the transaction is not inconsistent with the maintenance of fair and orderly markets and yields priority, parity, and precedence in execution to orders for the account of persons who are not members or associated with members of the exchange.103 In addition, Rule 11a1– 1(T) under the Act specifies that a transaction effected on a national 100 17 CFR 240.11a2–2(T)(a)(2)(iv). In addition, Rule 11a2–2(T)(d) requires a member or associated person authorized by written contract to retain compensation, in connection with effecting transactions for covered accounts over which such member or associated person thereof exercises investment discretion, to furnish at least annually to the person authorized to transact business for the account a statement setting forth the total amount of compensation retained by the member in connection with effecting transactions for the account during the period covered by the statement. See 17 CFR 240.11a2–2(T)(d). See also 1978 Release, supra note 96 (stating ‘‘[t]he contractual and disclosure requirements are designed to assure that accounts electing to permit transaction-related compensation do so only after deciding that such arrangements are suitable to their interests’’). 101 See Amendment No. 1 at 10. 102 See id. 103 See 15 U.S.C. 78k(a)(1)(G). VerDate Nov<24>2008 16:20 Mar 05, 2009 Jkt 217001 securities exchange for the account of a member which meets the requirements of Section 11(a)(1)(G)(i) of the Act is deemed, in accordance with the requirements of Section 11(a)(1)(G)(ii), to be not inconsistent with the maintenance of fair and orderly markets and to yield priority, parity, and precedence in execution to orders for the account of non-members or persons associated with non-members of the exchange, if such transaction is effected in compliance with certain requirements.104 Proposed Rule 910NY provides that, in cases where the transaction of an ATP Holder on the physical floor would occur at the same price as one or more orders on the book and where such ATP Holder can rely on no exemption other than the exemption set forth in Section 11(a)(1)(G) of the Act and Rule 11a1– 1(T) thereunder, such ATP Holder must, in addition to complying with the other requirements of Section 11(a)(1)(G) of the Act and Rule 11a1–1(T) thereunder, yield to all orders in the book at the same price, if such ATP Holder cannot determine that an order in the book is not the order of a non-ATP Holder.105 The Exchange represents that, in such cases, if an ATP Holder seeks to rely on the exemption set forth in Section 11(a)(1)(G) of the Act and Rule 11a1– 1(T) thereunder for the execution of an order for its own account, such order may be executed only on the physical floor of the Exchange or must be entered into the System as an IOC order.106 The Commission notes that this exemption is available only for orders for the account of an Exchange member.107 104 Rule 11a1–1(T)(a)(1)–(3) provides that each of the following requirements must be met: (1) A member must disclose that a bid or offer for its account is for its account to any member with whom such bid or offer is placed or to whom it is communicated, and any member through whom that bid or offer is communicated must disclose to others participating in effecting the order that it is for the account of a member; (2) immediately before executing the order, a member (other than the specialist in such security) presenting any order for the account of a member on the exchange must clearly announce or otherwise indicate to the specialist and to other members then present for the trading in such security on the exchange that he is presenting an order for the account of a member; and (3) notwithstanding rules of priority, parity, and precedence otherwise applicable, any member presenting for execution a bid or offer for its own account or for the account of another member must grant priority to any bid or offer at the same price for the account of a person who is not, or is not associated with, a member, irrespective of the size of any such bid or offer or the time when entered. See 17 CFR 240.11a1–1(T)(a)(1)–(3). 105 See proposed Rule 910NY. 106 See Amendment No. 1 at 10. 107 See supra notes 103–104 and accompanying text. PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 9851 D. Complex Orders The proposed rules also include provisions governing transactions in Complex Orders, which are defined as orders involving the simultaneous purchase and/or sale of two or more different option series having the same underlying security, for the same account, in a ratio that is equal to or greater than one-to-three (0.333) and less than or equal to three-to-one (3.00), and for the purpose of executing a particular investment strategy.108 These proposed rules are similar to those the Commission has previously approved for NYSE Arca,109 and raise no novel or significant issues. The Commission finds that they are consistent with the Act. The proposed rules also include provisions regarding transactions in NDX or RUT Combination Orders 110 that are virtually identical to current Amex rules governing such transactions that the Commission previously approved.111 The Commission expects the Exchange to monitor compliance with the requirement in these proposed rules that, at time of the execution of an NDX or RUT combination order, no individual leg of the order trades ahead of the corresponding bid or offer in the NDX or RUT limit order book. E. Trading Auctions and Trading Halts The proposed rules on trading auctions and on procedures for halting or suspending trading are closely modeled on similar rules of NYSE Arca that have been previously approved by the Commission,112 and the Commission believes they are consistent with the Act. F. Linkage and Routing The proposed rules relating to the intermarket options linkage (‘‘Linkage’’) operated pursuant to the Plan for the Purpose of Creating and Operating an Intermarket Option Linkage are closely modeled on similar rules of NYSE Arca, which previously have been approved by the Commission.113 In addition, existing NYSE Alternext Rule 940 (Options Intermarket Linkage) will continue to apply. The proposed rules 108 See proposed Rule 900.3NY(e). proposed Rule 963NY(d) (based on NYSE Arca Rule 6.75(e); proposed Rule 963.1NY (based on NYSE Arca Rule 6.75, Commentary 0.1, and NYSE Arca Rule 6.91, Commentaries .01 and .02). 110 See proposed Rule 965NY(b). 111 See Securities Exchange Act Release No. 57384 (February 26, 2008), 73 FR 11688 (March 4, 2008). 112 See proposed Rules 952NY and 953NY (based on NYSE Arca Rules 6.64 and 6.65 respectively). 113 See proposed Rules 990NY–993NY (based on NYSE Arca Rules 6.93–6.96). 109 See E:\FR\FM\06MRN1.SGM 06MRN1 9852 Federal Register / Vol. 74, No. 43 / Friday, March 6, 2009 / Notices relating to a routing broker also are consistent with similar rules of NYSE Arca, which previously have been approved by the Commission.114 If an incoming marketable order has not been executed in its entirety on the Exchange 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) displaying the NBBO, either through the Linkage or through a broker-dealer affiliate of the Exchange that acts as an agent for routing orders entered into the System (‘‘Routing Broker’’),115 according to a proprietary algorithm and subject to Exchange rules. 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 upon its return would be ranked and displayed in the book in accordance with its terms.116 The Exchange’s proposed Linkage and routing rules do not raise any novel or substantive issues, and the Commission finds them to be consistent with the Act. mstockstill on PROD1PC66 with NOTICES G. Disciplinary Proceedings Existing Alternext Rules 475, 476, and 477 will continue to govern the Exchange’s disciplinary proceedings related to the options trading. Alternext Rule 476A (Imposition of Fines for Minor Violation(s) of Rules) will continue to govern imposition of fines. The Exchange proposes to amend Rule 476A to include options rule violations and their applicable fines that will be in effect after the Options Relocation. The Commission finds that the disciplinary procedures, as applied to the options trading on the Exchange, are consistent with the Act, in particular Sections 6(b)(6) and 6(b)(7) of the Act.117 The Commission believes that Rules 475, 476, and 477, as applied to the trading of options on the Exchange, will continue to provide due process for ATP Holders involved in any disciplinary proceeding. The Commission, therefore, believes that these rules will continue to provide the Exchange with the ability to comply, and with the authority to enforce compliance by its members and persons 114 See proposed Rule 923NY (based on NYSE Arca Rule 6.35); proposed Rule 964NY(c) (consistent with NYSE Arca Rule 6.76A). 115 In a separate filing, the Exchange has proposed to use Archipelago Securities LLC as its Routing Broker and described the relationship between the Exchange and the Routing Broker and the conditions related to its operation. The Commission is approving that proposal in a separate action today. See supra note 9. 116 See proposed Rule 964NY(c)(2)(E). See also supra note 66 and accompanying text. 117 15 U.S.C. 78f(b)(6) and 78f(b)(7). VerDate Nov<24>2008 16:20 Mar 05, 2009 Jkt 217001 associated with its members, with the provisions of the Act, the rules and regulations thereunder, and the rules of the Exchange, consistent with Section 6(b)(1) of the Act.118 In addition, because Rule 476A as revised by this filing provides procedural rights to contest the fine and permits disciplinary proceedings on the matter, the Commission believes that this rule provides a fair procedure for the disciplining of ATP Holders and persons associated with ATP Holders, consistent with Sections 6(b)(7) and 6(d)(1) of the Act.119 Finally, the Commission finds that the proposed changes to Rule 476A are consistent with the public interest, the protection of investors, or otherwise in furtherance of the purposes of the Act, as required by Rule 19d–1(c)(2) under the Act,120 which governs minor rule violation plans. The Commission believes that Rule 476A will strengthen the Exchange’s ability to carry out its oversight and enforcement responsibilities as a self-regulatory organization in cases where full disciplinary proceedings are unsuitable in view of the minor nature of the particular violation. H. Amendment No. 1 and Accelerated Approval In Amendment No. 1, the Exchange made certain revisions to the proposed rule text and corresponding changes to the Purpose Section of its Form 19b–4 describing the proposed rule change. In particular, Amendment No. 1: • Revised the definition of Reserve Order in proposed Rule 900.3NY(d)(3) to clarify how the displayed portion of a Reserve Order is refreshed from the reserve size, and to add that, upon entry into the System, a marketable Reserve Order will be executed in whole or in part up to its full size, regardless of the reserve size; • Eliminated Stock Contingency Orders from the proposed rule change; • Revised the definitions of certain Contingency Orders and clarified how such orders are held and processed by the System; • Revised the definition of Tracking Order in proposed Rule 900.3NY(d)(5) to clarify the function of such orders, prohibit an ATP Holder from informing third parties of any terms of such orders, and provide that it is a violation of Rule 935NY for an ATP Holder to enter a Tracking Order for purposes of executing as principal an order it also represents as agent; 118 15 U.S.C. 78f(b)(1). U.S.C. 78f(b)(7) and 78f(d)(1). 120 17 CFR 240.19d–1(c)(2). 119 15 PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 • Revised proposed Rule 902NY concerning an ATP Holder’s conduct on the Options Trading Floor to add restrictions on possession of NYSE Floor Broker Hand Held Terminals while on the Options Trading Floor; • Revised the definition of Market Maker to clarify, among other things, that the definition applies to an eSpecialist; • Revised proposed Rule 934.3NY to add that the eligible order size for the 40% guaranteed participation for solicited orders will be not less than 50 contracts; • Clarified procedures for routing orders to away market centers and for handling the routed orders that are not executed and are returned to the book; • Eliminated references to Exchange Official from Rule 970NY as that term is now obsolete; • Clarified the quoting obligations of a Directed Order Market Maker to state it must provide continuous two-sided quotations throughout the trading day in issues for which it receives Directed Orders for 90% of the time the Exchange is open for trading in each issue; • Added a new proposed Rule 910NY, which obligates all ATP Holders to ensure that each of their transactions complies with Section 11(a) of the Act; • Clarified that existing Exchange rules relating to the trading of FLEX Options would continue to apply; and • Corrected the list of existing Exchange rules that would be superseded by new rules proposed in this filing. In addition to making certain revisions to the proposed rule text as described above, in Amendment No. 1 the Exchange also made certain representations: • The Exchange represented that NYSE Alternext US Rule 3(j), which governs the use of material, non-public information, applies to ATP Holders trading on the System. The Exchange also represented that Rule 3(j) requires a Market Maker to maintain information barriers—reasonably designed to prevent the misuse of material, nonpublic information by such Market Maker—between the 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 the Exchange; and • The Exchange represented that it had analyzed its rules proposed hereunder, which include proposed Rule 910NY, and had determined that they are consistent with Section 11(a) of the Act and rules thereunder. The Commission finds good cause, pursuant to Section 19(b)(2) of the E:\FR\FM\06MRN1.SGM 06MRN1 Federal Register / Vol. 74, No. 43 / Friday, March 6, 2009 / Notices Act,121 for approving the proposal, as modified by Amendment No. 1, prior to the thirtieth day after the date of publication of notice of filing of Amendment No. 1 in the Federal Register. The changes made by Amendment No. 1 are designed to clarify the proposed rules and do not raise any novel or substantive issues. The proposal has otherwise been subject to a full comment period. Therefore, the Commission believes that good cause exists to approve the amended proposal on an accelerated basis. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the filing, as modified by Amendment No. 1, is consistent with the Act. Comments may be submitted by any of the following methods: mstockstill on PROD1PC66 with NOTICES Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NYSEALTR–2008–14 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NYSEALTR–2008–14. 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 on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal 121 15 U.S.C. 78s(b)(2). VerDate Nov<24>2008 16:20 Mar 05, 2009 Jkt 217001 9853 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– NYSEALTR–2008–14 and should be submitted on or before March 27, 2009. Securities LLC (‘‘ArcaSec’’), as its Routing Broker to route options orders 4 to away market centers when that market center is displaying the national best bid and offer, in accordance with Exchange Rules. A copy of this filing is available on the Exchange’s Web site at https://www.nyse.com, at the Exchange’s principal office and at the Commission’s Public Reference Room. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (SR–NYSEALTR– 2008–14), as amended, be, and hereby is, approved on an accelerated basis. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item III below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.122 Florence E. Harmon, Deputy Secretary. [FR Doc. E9–4778 Filed 3–5–09; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–59473; File No. SR– NYSEALTR–2009–18] Self-Regulatory Organizations; NYSE Alternext U.S. LLC; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change To Use Its Broker Dealer Affiliate, Archipelago Securities, LLC, as Its Routing Broker for Options Orders February 27, 2009. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on February 25, 2009, NYSE Alternext U.S. LLC (‘‘NYSE Alternext’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’) the proposed rule change as described in Items I and II below, which Items have been substantially prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons, and is granting accelerated approval to the proposed rule change. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to use its broker dealer affiliate,3 Archipelago 122 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 On September 29, 2008, the Commission approved the Exchange’sbusiness combination with 1 15 PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange is proposing to use ArcaSec as its Routing Broker to route options orders to away market centers when that market center is displaying NYSE Euronext, Inc. (‘‘Merger’’). See Securities Exchange Act Release No. 58673 (September 29, 2008), 73 FR 57707 (October 3, 2008) (order approving SR–NYSE–2008–60 and SR–Amex– 2008–62). Pursuant to the Merger, NYSE Euronext became the overall parent company of the Exchange. NYSE Euronext now operates three selfregulatory entities: The Exchange, the NYSE, and NYSE Arca, Inc. ArcaSec is also a wholly owned subsidiary of NYSE Euronext, and is therefore an affiliate of the Exchange. 4 ArcaSec acts as the outbound order routing facility of the NYSE andNYSE Arca. See Securities Exchange Act Release No. 52497 (September 22, 2005), 70 FR 56949 (September 29, 2005) (SR–PCX– 2005–90). See also Securities Exchange Act Release Nos. 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001) (SR–PCX–00–25); 58681 (September 29, 2008), 73 FR 58285 (October 6, 2008) (order approving SR–NYSEArca-2008–90); 55590 (April 5, 2007), 72 FR 18707 (April 13, 2007) (notice of immediate effectiveness of SR–NYSE– 2007–29); and 58680 (September 29, 2008), 73 FR 58283 (October 6, 2008) (order approving SR– NYSE–2008–76). On November 24, 2008, the Commission also approved ArcaSec to act as the outbound order routing facility for NYSE Alternext for the purpose of routing equities orders to away market centers. Securities Exchange Act Release No. 59009 (November 24, 2008), 73 FR 73363 (December 2, 2008) (SR–NYSEALTR–2008–07). Currently, FINRA is the examining authority for the Routing Broker designated by the Commission pursuant to Rule 17d–1 of the Act. As such, FINRA is responsible for the oversight and enforcement of the Routing Broker for compliance with the applicable financial responsibility rules. E:\FR\FM\06MRN1.SGM 06MRN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 74, Number 43 (Friday, March 6, 2009)]
[Notices]
[Pages 9843-9853]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-4778]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59472; File No. SR-NYSEALTR-2008-14]


Self-Regulatory Organizations; NYSE Alternext US LLC; Notice of 
Filing of Amendment No. 1 and Order Granting Accelerated Approval of 
the Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To 
Establish Rules for the Trading of Listed Options

February 27, 2009.

I. Introduction

    On December 19, 2008, NYSE Alternext US LLC (``Alternext'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend the rules governing the trading of 
options on the Exchange. The proposed rule change was published for 
comment in the Federal Register on December 31, 2008.\3\ The Exchange 
filed Amendment No. 1 to the proposed rule change on February 27, 
2009.\4\ The Commission received one comment on the proposal.\5\ This 
notice and order provides notice of Amendment No. 1 and grants 
accelerated approval to the proposed rule change, as modified by 
Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 59142 (December 22, 
2008), 73 FR 80494.
    \4\ For a discussion of Amendment No. 1, see infra Section 
III.H.
    \5\ See letter from Jennifer M. Lamie, Assistant General 
Counsel, Chicago Board Options Exchange (``CBOE''), to Florence E. 
Harmon, Deputy Secretary, Commission, dated February 4, 2009.
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II. Description of the Proposal

    On October 1, 2008, NYSE Euronext--the parent company of the New 
York Stock Exchange (``NYSE'')--through a series of mergers and related 
transactions (``Mergers''), acquired the American Stock Exchange LLC 
(``Amex''). Amex was renamed NYSE Alternext US LLC and became a 
subsidiary of NYSE Euronext and an affiliate of NYSE.\6\ After the 
Mergers, all physical and electronic access to Alternext's trading 
facilities was made available to the former Amex's members through 
temporary trading permits offered by Alternext. As Amex's principal 
place of business at the time of the Mergers was 86 Trinity Place, New 
York, New York, these temporary trading permits are known as ``86 
Trinity Permits.''
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    \6\ See Securities Exchange Act Release No. 58673 (September 29, 
2008), 73 FR 57707 (October 3, 2008) (order approving proposed rule 
change relating to the acquisition).
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    Subsequently, Amex's cash equities trading floor was moved from 86 
Trinity Place to NYSE's principal place of business at 11 Wall Street, 
New York, New York, and co-located with the NYSE's cash equities 
trading floor (``Equities Relocation''). The system that supports 
Alternext's cash equities trading is now the same system that supports 
NYSE's cash equities trading and is operated by the NYSE on behalf of 
the Exchange. In connection with the Equities Relocation, the Exchange 
adopted new trading and membership rules and offered each of its 
members an Alternext cash equities trading license in exchange for a 
valid 86 Trinity Permit.\7\
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    \7\ See Securities Exchange Act Release No. 58705 (October 1, 
2008), 73 FR 58995 (October 8, 2008).
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    Alternext now proposes to move its options trading business from 86 
Trinity Place to 11 Wall Street (``Options Relocation''). In connection 
with the Options Relocation, the Exchange proposes to issue Amex 
Trading Permits (``ATPs'') that will permit holders to effect options 
transactions on the Exchange's trading facilities.\8\ A holder of an 86 
Trinity Permit under the current rules will be issued an ATP upon 
submission of the appropriate form to the Exchange.
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    \8\ In addition, the Exchange would allow access to the System 
by ``Sponsored Participants.'' A Sponsored Participant is a person 
that has entered into an agreement with a Sponsoring ATP Holder 
through which it may execute transactions on the System. See 
proposed Rule 902.1NY(c). This proposed rule is substantially 
similar to Rule 6.2A of the Rules of NYSE Arca, Inc. (``NYSE 
Arca'').
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    Trading on the Exchange's relocated facilities at 11 Wall Street 
will continue to occur on a hybrid system, involving both a physical 
floor and an electronic system, the NYSE Amex System (``System''). 
Although the options trading floor will be physically separated from 
the NYSE and Alternext cash equity trading floor, the options trading 
floor will be managed and overseen by NYSE Euronext employees. Only ATP 
Holders that have been approved to perform a floor function--Floor 
Brokers and Floor Market Makers (including Specialists)--will be 
authorized to enter into transactions on the trading floor.
    Alternext has proposed to update and reorganize its rules for 
trading options in open outcry and to establish a new set of rules that 
will govern trading on the System.\9\ The Exchange has submitted a 
separate proposed rule change to delete certain existing Exchange 
rules.\10\
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    \9\ In a separate filing, the Exchange described the 
relationship between the Exchange and its routing broker and the 
conditions related to its operation. The Commission is approving 
that proposed rule change in a separate action today. See Securities 
Exchange Act Release No. 59473 (February 27, 2009) (SR-NYSEALTR-
2009-18).
    \10\ See Securities Exchange Act Release No. 59454 (February 25, 
2009) (SR-NYSEALTR-2009-17). The deletions effected by SR-NYSEALTR-
2009-17 will become operative simultaneously with the operativeness 
of the rules proposed in this filing.
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    Alternext will retain many of its existing member rules, including 
those relating to capital, margin, recordkeeping, customer protection, 
and account maintenance. The Exchange also has proposed to keep certain 
existing options-related rules, including rules on position and 
exercise limits and listing standards. With respect to transactions in 
Flexible Exchange Options (``FLEX Options'') conducted on the Trading 
Floor, the Exchange stated that current NYSE Alternext Rules 900G 
through 909G will remain operative.\11\
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    \11\ The Exchange noted that certain terms in existing NYSE 
Alternext Rules 900G-909G will become outdated upon approval of the 
rules proposed herein. The Exchange represented that it will review 
these rules and will submit a separate filing to revise any outdated 
references. See Amendment No. 1 at 6.

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[[Page 9844]]

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\12\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\13\ which requires that the 
rules of an exchange be 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; 
and is not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers. The Commission also finds that the 
proposed rule change is consistent with Section 6(b)(8) of the Act \14\ 
in that it does not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.
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    \12\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 15 U.S.C. 78f(b)(8).
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    Discussed below are the most salient features of the proposal.

A. Market Participants

1. Floor Brokers
    A Floor Broker as defined in the proposed rules is an ATP Holder 
who is registered with the Exchange for the purpose, while on the 
floor, of accepting and executing options orders received from ATP 
Holders and, in certain circumstances, orders from others.\15\ The 
proposed rules governing Floor Brokers include general responsibilities 
to exercise due diligence in representing an order and specific 
responsibilities with respect to the handling of various order types. 
These rules are substantially similar to those of NYSE Arca \16\ and do 
not raise any novel or significant issues, and the Commission finds 
that they are consistent with the Act.
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    \15\ See generally proposed Rules 930NY-933NY.
    \16\ See NYSE Arca Rules 6.43-6.46.
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2. Market Makers
    Currently, the Exchange has four general classifications of Market 
Maker: Specialist, Registered Options Trader (``ROT''), Supplemental 
Registered Options Trader (``SROT''), and Remote Registered Options 
Trader (``RROT''). The Exchange states that these classifications will 
remain essentially the same under the proposal, although ROTs and SROTs 
would be combined into one classification as Floor Market Makers 
(``FMMs''), and RROTs would become Remote Market Makers (``RMMs'').
    The general term Market Maker in the proposed rules includes 
Specialists, e-Specialists, FMMs, and RMMs.\17\ The Exchange is 
permitted to appoint one Specialist on the floor per option class, 
additional e-Specialists, and any number of Market Makers in each 
class, unless limited by quotation system capacity.\18\
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    \17\ See proposed Rule 920NY (as modified by Amendment No. 1).
    \18\ The proposed rules provide, however, that the Exchange will 
not restrict access in any particular option class until the 
Commission approves objective standards for restricting such access. 
See proposed Rule 923NY(b).
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    The proposed rules governing Market Maker appointments and 
obligations generally--including rules concerning evaluation of Market 
Maker performance, suspension or termination of Market Maker 
appointments, and appeal for review of Exchange actions adversely 
affecting a Market Maker--are closely modeled on similar rules of NYSE 
Arca.\19\
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    \19\ Regarding Market Maker appointments, see proposed Rule 
923NY (based on NYSE Arca Rule 6.35). Regarding Market Maker 
obligations, see proposed Rule 925NY (based on NYSE Arca Rule 6.37), 
which outlines such obligations (i) generally, (ii) within a Market 
Maker's appointed classes, and (iii) outside of a Market Maker's 
appointed classes. See also proposed Rule 925.1NY (based on NYSE 
Arca Rule 6.37B); proposed Rule 925.2NY (based on NYSE Arca Rule 
6.37C). The proposed rules also provide a mechanism for limiting 
Market Maker risk during periods of increased and significant 
trading activity on the System in a Market Maker's appointment. See 
proposed Rule 928NY. The Exchange would activate the mechanism in a 
Market Maker's appointed class whenever a designated number of 
executions (ranging between five and 100 executions) occurs within 
one second. Orders and quotations received by the Exchange after the 
mechanism is activated would not be executed against the Market 
Maker. The proposed rule is similar to NYSE Arca Rule 6.40.
---------------------------------------------------------------------------

    The Exchange represented that NYSE Alternext U.S. Rule 3(j), which 
governs the use of material, non-public information, applies to ATP 
Holders trading on the System. The Exchange also represented that Rule 
3(j) requires a Market Maker to maintain information barriers--
reasonably designed to prevent the misuse of material, non-public 
information by such Market Maker--between the 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 the Exchange.\20\ The Exchange stated that it believes that 
requiring information barriers between the Market Maker and its 
affiliates with respect to transactions in the option and the 
underlying security is important to reduce the opportunity for unfair 
trading advantages or misuse of material, non-public information. The 
Commission believes that the proposed rules relating to the duties and 
obligations of Market Makers generally, and in particular the rules 
that govern the use of material, non-public information, are consistent 
with the Act.\21\
---------------------------------------------------------------------------

    \20\ See Amendment No. 1 at 5.
    \21\ See Securities Exchange Act Release No. 47838 (May 13, 
2003), 68 FR 27129, 27137 (May 19, 2003) (SR-PCX-2002-36).
---------------------------------------------------------------------------

a. FMMs and RMMs
    FMMs and RMMs are required to apply and be approved for an 
appointment in one or more options classes. The number of options 
issues that an FMM or RMM may select is based on the number of ATPs the 
FMM or RMM holds.\22\ In addition, an FMM is required to select an 
appointment to a Trading Zone on the floor. FMMs and RMMs are required 
to provide continuous, two-sided quotes in their appointed issues, in 
accordance with maximum prescribed width requirements, for 60% of the 
time the Exchange is open for trading in each issue, and to trade at 
least 75% of their contract volume per quarter in classes within their 
appointments.\23\ All transactions effected by an FMM in open outcry in 
the FMM's designated Trading Zone will be considered as transactions 
towards satisfying the rule requiring that an FMM trade at least 75% of 
its contract volume per quarter in classes within its appointments.
---------------------------------------------------------------------------

    \22\ See proposed Rule 923NY(d).
    \23\ See proposed Rule 923NY(i).
---------------------------------------------------------------------------

    The Commission believes that the proposed rules governing Market 
Maker activity on the Exchange are consistent with the Act.\24\
---------------------------------------------------------------------------

    \24\ See supra note 19. See also Securities Exchange Act Release 
No. 54236 (July 28, 2006), 71 FR 44758 (August 7, 2006) (order 
approving similar rules on OX, NYSE Arca's automated options trading 
system) (``OX Approval Order'').
---------------------------------------------------------------------------

b. Specialists and E-Specialists
    The proposed rules include provisions governing the appointment and 
activities of Specialists, who are assigned a location on the floor 
where their issues will trade, and e-Specialists,

[[Page 9845]]

who are RMMs appointed to fulfill certain obligations required of 
Specialists. Under the proposal, the Exchange is permitted to appoint 
one Specialist and an unlimited number of other Market Makers per 
class.\25\
---------------------------------------------------------------------------

    \25\ See proposed Rule 923NY(b).
---------------------------------------------------------------------------

    Any ATP Holder registered as a Market Maker with the Exchange is 
eligible to be qualified as a Specialist \26\ and may be allocated any 
one or more of the option issues opened for trading. The allocation of 
issues among qualified applicants will be determined by the Exchange, 
which will select the candidate that appears best able to perform the 
functions of a Specialist in a particular option issue.
---------------------------------------------------------------------------

    \26\ The provisions regarding Specialists are set forth 
primarily in proposed Rules 925.1NY(b) and 927-927.3NY.
---------------------------------------------------------------------------

    Each Specialist will be appointed to the Trading Zone designated 
for its options classes. A Specialist is required, among other things, 
to provide continuous two-sided quotations throughout the trading day 
in its appointed issues for 90% of the time the Exchange is open for 
trading \27\ and otherwise fulfill the obligations of Market Makers 
generally. A Specialist's quotations must meet the legal quote 
requirements specified in proposed Rule 925NY.\28\
---------------------------------------------------------------------------

    \27\ These obligations will apply to all of the Specialist's 
appointed issues collectively, rather than on an issue-by-issue 
basis.
    \28\ There are exceptions to these quoting requirements for 
systems failures and limitations and other mitigating circumstances.
---------------------------------------------------------------------------

    In addition, the Exchange is permitted to designate e-Specialists 
in an options class to fulfill certain obligations required of 
Specialists.\29\ Factors to be considered in approving e-Specialists 
include adequacy of resources; history of stability, superior 
electronic capacity and superior operational capability; market making 
and/or specialist experience in a broad array of securities; ability to 
interact with order flow in all types of markets; existence of order 
flow commitments; willingness to accept allocation as an e-Specialist 
in options in at least 400 underlying securities; and willingness and 
ability to make competitive markets on the Exchange and to promote the 
Exchange in a manner that is likely to enhance the ability of the 
Exchange to compete successfully for order flow in the options it 
trades.
---------------------------------------------------------------------------

    \29\ See generally proposed Rules 927.4-927.6NY.
---------------------------------------------------------------------------

    Option classes that have been allocated to a Specialist may be 
concurrently allocated to one or more e-Specialists,\30\ with the 
Exchange to determine the appropriate number.\31\ Each e-Specialist 
will be required to fulfill all the obligations set forth in proposed 
Rules 925NY and 925.1NY. E-Specialists have the same 90% quoting 
obligation as Specialists.\32\
---------------------------------------------------------------------------

    \30\ Each e-Specialist organization is required to maintain a 
sufficient number of ATPs to include appointments in classes where 
the organization is acting as an e-Specialist.
    \31\ The Exchange will grant e-Specialists allocations in option 
classes based on factors including performance, capacity, 
performance commitments, efficiency, competitiveness, and 
operational factors. See proposed Rule 927.4(b).
    \32\ See proposed Rule 927.5NY(a) (as modified by Amendment No. 
1), which specifies that an e-Specialist is required to meet the 90% 
quoting obligations of Specialists set forth in Rule 925.1NY(b).
---------------------------------------------------------------------------

    The Commission believes that the proposed rules regarding 
Specialists and e-Specialists raise no novel or significant issues and 
are substantially similar to rules that it has previously approved for 
other exchanges.\33\ The Exchange has based its proposed rules 
regarding e-Specialists on rules the Commission has approved for 
CBOE,\34\ and the Commission believes that they are consistent with the 
Act.
---------------------------------------------------------------------------

    \33\ See, e.g., NYSE Arca Rules 6.82-6.83 (regarding Lead Market 
Makers); Securities Exchange Act Release No. 47838 (May 13, 2003), 
68 FR 27129 (May 19, 2003) (order approving rules for the PCX Plus 
options trading platform).
    \34\ See CBOE Rules 8.92-8.94. See also Securities Exchange Act 
Release No. 49643 (April 30, 2004), 69 FR 25647 (May 7, 2004) (order 
approving rules adding the category of e-DPMs to the types of market 
makers trading on CBOE).
---------------------------------------------------------------------------

c. Directed Order Market Makers
    As discussed in more detail below,\35\ the System will permit Order 
Flow Providers \36\ to direct orders to ``Directed Order Market 
Makers.'' A Directed Order Market Maker, who may be a Specialist or 
other Market Maker, must provide continuous two-sided quotations 
throughout the trading day, meeting legal width requirements,\37\ in 
issues for which it receives Directed Orders for 90% of the time the 
Exchange is open for trading in each issue.\38\
---------------------------------------------------------------------------

    \35\ See infra Section III.B.1.c.
    \36\ An Order Flow Provider is defined in proposed Rule 
900.2NY(57) to mean any ATP Holder that submits, as agent, orders to 
the Exchange.
    \37\ See proposed Rule 925NY (as modified by Amendment No. 1).
    \38\ See proposed Rule 964.1NY (as modified by Amendment No. 1). 
The above obligations will apply to all of the Directed Order Market 
Maker's issues collectively for which it receives Directed Orders, 
rather than on an issue-by-issue basis. Compliance with this 
obligation will be determined on a monthly basis.
---------------------------------------------------------------------------

B. Ranking and Execution of Orders

    As noted above, Alternext will trade options on an electronic 
trading system and in open outcry on the floor.
1. Electronic Trading
a. Display Order Process
    The System will display all quotations and non-marketable limit 
orders (unless an order type indicates otherwise) in the ``Display 
Order Process'' of its book, at all price levels on an anonymous 
basis.\39\ Bids and offers, including the displayed portion of Reserve 
Orders,\40\ will be ranked and maintained in the Display Order Process 
according to account type (e.g., Customer or non-Customer) \41\ and the 
following priority rules:
---------------------------------------------------------------------------

    \39\ The System also will disseminate consolidated quotations 
and last-sale information, and such other market information as may 
be made available from time to time pursuant to agreement between 
the Exchange and other Market Centers, consistent with the Plan for 
Reporting of Consolidated Options Last Sale Reports and Quotation 
Information.
    \40\ A ``Reserve Order'' is defined in proposed Rule 
900.3NY(d)(3) as a limit order with a portion of the size displayed 
and with a reserve portion of the size that is not displayed on the 
Exchange. Upon entry into the System, a marketable Reserve Order 
will be executed in whole or in part up to its full size, regardless 
of the reserve size. See Amendment No. 1 at 3.
    \41\ An order for the account of a ``Customer''--defined in 
proposed Rule 900.2NY(18) as an individual or organization that is 
not a broker-dealer--has priority over the bid or offer of a non-
Customer at the same price.
---------------------------------------------------------------------------

    The highest bid will have priority over all other bids, and the 
lowest offer will have priority over all other offers. Bids and offers 
for Customer accounts, including the displayed portion of Customer 
Reserve Orders, will have priority over other bids or offers at the 
same price. If there is more than one highest bid or lowest offer for a 
Customer account then such bid or offer will be ranked based on time 
priority.
    A bid or offer for the account of a Directed Order Market Maker--
discussed below--will have second priority for a Directed Order if the 
Directed Order Market Maker is eligible to receive a guaranteed 
participation in such bid or offer.\42\ If there is no Directed Order 
Market Maker guarantee, then bids or offers in the book for the 
accounts of participants in the Specialist Pool \43\--also discussed 
below--will have priority if the Specialist Pool is eligible to receive 
a guaranteed participation in such bids or offers.\44\
---------------------------------------------------------------------------

    \42\ See proposed Rule 964.1NY.
    \43\ The ``Specialist Pool'' is defined in proposed Rule 
900.2NY(75) as the aggregated size of the best bid and best offer, 
in a given series, among the Specialist and e-Specialists that match 
in price.
    \44\ See proposed Rule 964.2NY.
---------------------------------------------------------------------------

    Orders and Quotes with Size \45\ in the book for the accounts of 
all other non-

[[Page 9846]]

Customers have next priority. If there is more than one highest bid or 
lowest offer for the account of a non-Customer, then such bids or 
offers will be afforded priority on a ``size pro rata'' basis and will 
comprise the ``size pro rata pool.''
---------------------------------------------------------------------------

    \45\ The term ``Quote with Size'' is defined in proposed Rule 
900.2NY(65) to mean a quotation to buy or sell a specific number of 
option contracts at a specific price that a Market Maker has 
submitted to the System.
---------------------------------------------------------------------------

b. Working Orders
    In addition to bids and offers that are displayed in the Display 
Order Process, the System will accept ``Contingency Orders'' and 
``Working Orders,'' which are orders that are contingent upon a 
condition being satisfied or orders with a conditional or undisplayed 
price and/or size. Contingency Orders and Working Orders are maintained 
in the ``Working Order File'' of the book until eligible for execution 
and/or display.\46\ Such orders include Reserve Orders, Stop 
Orders,\47\ Stop Limit Orders,\48\ All-or-None Orders, and Tracking 
Orders.\49\
---------------------------------------------------------------------------

    \46\ See Amendment No. 1 at 3.
    \47\ A Stop Order is defined as an order that becomes a market 
order when the market for a particular option contract reaches a 
specified price (``triggering event''). A Stop Order to buy (sell) 
becomes a market order when the option contract trades at or above 
(below) the stop price on the Exchange or another Market Center or 
when the Exchange bid (offer) is quoted at or above (below) the stop 
price. See proposed Rule 900.3NY(d)(1).
    \48\ A Stop Limit Order is defined as an order that becomes a 
limit order when the market for a particular option contract reaches 
a specified price. A Stop Limit Order to buy (sell) becomes a Limit 
Order when the option contract trades at or above (below) the stop 
price on the Exchange or another Market Center or when the Exchange 
bid (offer) is quoted at or above (below) the stop price. See 
proposed Rule 900.3NY(d)(2).
    \49\ See infra notes 54-58 and accompanying text.
---------------------------------------------------------------------------

    After displayed interest at a particular price has been executed, 
orders in the Working Order File have next priority. However, such 
orders do not have any priority or standing until they are eligible for 
execution and/or display.\50\ For example, when the displayed portion 
of a Reserve Order has been fully executed,\51\ the display is 
refreshed from the reserve portion of the order (which had been 
maintained in the Working Order File) up to the size of the original 
display with a new time stamp.\52\ Stop Orders and Stop Limit Orders 
are not eligible to execute against incoming orders, and become 
eligible to execute via the Display Order Process only after the 
incoming order is executed in full or rests in the book, or the Stop or 
Stop Limit Order is sent to the Display Order Process at the end of a 
triggering event.\53\
---------------------------------------------------------------------------

    \50\ See proposed Rule 964NY(b)(2)(E) (as modified by Amendment 
No. 1).
    \51\ See supra note 40.
    \52\ See proposed Rule 900.3NY(d)(3) (as modified by Amendment 
No. 1).
    \53\ See proposed Rule 900.3NY(d)(1) (as modified by Amendment 
No. 1).
---------------------------------------------------------------------------

    A Tracking Order is defined as an undisplayed limit order that is 
eligible for execution after the Display Order Process against orders 
equal to or less than the size of the Tracking Order.\54\ A Tracking 
Order is ranked according to its limit price, but is executable only at 
a price matching the NBBO. It will not trade through the NBBO. If a 
Tracking Order is executed but not exhausted, the remaining portion of 
the order will be canceled, without routing the order to another Market 
Center \55\ or market participant.\56\ Tracking Orders have last 
priority and never become part of the Display Order Process.\57\ They 
have standing only if contra-side interest in the System would 
otherwise be routed to another market center at the NBBO.\58\ Tracking 
Orders will not execute against incoming Linkage Orders.
---------------------------------------------------------------------------

    \54\ See proposed Rule 900.3NY(d)(5) (as modified by Amendment 
No. 1).
    \55\ A ``Market Center'' is defined in proposed Rule 900.2NY(36) 
as a national securities exchange that has qualified for 
participation in the Options Clearing Corporation (``OCC'') pursuant 
to the provisions of the rules of the OCC.
    \56\ The Exchange provided two examples: (1) The NBBO market in 
a series is 2.05-2.15. The Exchange's displayed bid is 2.00, but 
there is a Tracking Order in the Working Order File bidding 2.10 for 
10 contracts. An order is received on the Exchange to sell six 
contracts at 2.05. This order would be matched against the 2.10-buy 
Tracking Order at a price of 2.05, matching the NBBO. (2) After the 
same initial scenario, a second Tracking Order to buy 20 contracts 
paying 2.05 is placed in the book. An order is received to sell 15 
contracts at 2.05. The incoming sell order, being larger in size 
than the first Tracking Order, cannot be executed against it. The 
incoming order is therefore matched against the second Tracking 
Order, and will be executed at 2.05, the NBBO price.
    \57\ See proposed Rule 964NY(b)(2)(F) (as modified by Amendment 
No. 1).
    \58\ As stated by the Exchange, Tracking Orders are intended 
only to provide liquidity in the event a marketable order would 
otherwise route to another exchange. See Amendment No. 1 at 7.
---------------------------------------------------------------------------

    The proposed rules provide that, prior to or after submitting an 
order to the System, an ATP Holder is not permitted to inform another 
ATP Holder or any other third party of any of the terms of the 
order.\59\ In addition, it will be a violation of Rule 935NY when an 
ATP Holder enters a Tracking Order for the purpose of executing as 
principal an order it also represents as agent.\60\
---------------------------------------------------------------------------

    \59\ See proposed Rule 935NY, Commentary .04 (as added by 
Amendment No. 1).
    \60\ See proposed Rule 935NY, Commentary .05 (as added by 
Amendment No. 1).
---------------------------------------------------------------------------

c. Participation Entitlements
    The System will include participation guarantees that, when the 
requisite conditions are fulfilled, will entitle certain participants--
Specialists, e-Specialists, and Directed Order Market Makers--to a 
certain percentage of each incoming order, after Customer Orders are 
satisfied.
    Directed Order Market Makers. The System will permit Specialists 
and Market Makers to receive ``Directed Orders.'' \61\ A Directed Order 
is a marketable order that has been directed to a particular Market 
Maker by an Order Flow Provider.\62\ If an incoming marketable order is 
so directed, the Directed Order Market Maker will be entitled to 
receive 40% (or such lower percentage as may be determined by the 
Exchange) of the portion of an order remaining after Customer Orders in 
the book have been satisfied, provided the Directed Order Market Maker 
is quoting at the NBBO at the time the order is received by the 
Exchange for at least that size.\63\
---------------------------------------------------------------------------

    \61\ See proposed Rule 964.1NY.
    \62\ See proposed Rule 900.3NY(s).
    \63\ The Directed Order Market Maker will be allocated a number 
of contracts equal to the greater of the guaranteed participation or 
its ``size pro rata'' allocation, but in either case, no greater 
than the size of the Directed Order Market Maker's disseminated 
size.
---------------------------------------------------------------------------

    To be eligible to receive Directed Orders, a Directed Order Market 
Maker must provide continuous two-sided quotations throughout the 
trading day in issues for which it receives Directed Orders for 90% of 
the time the Exchange is open for trading in each issue.\64\
---------------------------------------------------------------------------

    \64\ Such quotations must meet the legal quote width 
requirements of Rule 925NY. These quoting obligations will apply 
collectively to all series in all of the issues for which the 
Directed Order Market Maker receives Directed Orders, rather than on 
an issue-by-issue basis. Compliance will be determined on a monthly 
basis. See proposed Rule 964.1NY(iv) (as added by Amendment No. 1).
---------------------------------------------------------------------------

    Specialists and e-Specialists. In the System, the proposed rules 
permit the Exchange to establish from time to time a participation 
entitlement for Specialists and e-Specialists, known collectively as 
the ``Specialist Pool.'' The Specialist Pool participation entitlement 
will not apply when a Directed Order Market Maker receives a guaranteed 
participation. To receive a participation entitlement, a Specialist (on 
the trading floor) or e-Specialist must be quoting at the NBBO and may 
not be allocated a total quantity greater than the quantity than it is 
quoting at the NBBO. The Specialist Pool will be entitled to up to 40% 
of the size of an incoming order (or such lower percentage as may be 
determined by the Exchange) that remains after all Customer Orders in 
the book at the best bid or offer have been satisfied.
    Within the Specialist Pool participation entitlement, the 
Specialist and e-Specialists quoting at the NBBO will participate on a 
size pro rata basis. However, the Specialist's size pro-rata 
participation in the Specialist Pool will receive additional weighting, 
as

[[Page 9847]]

determined by the Exchange and announced via Regulatory Bulletin, but 
in no case greater than 66\2/3%\ if there is only one e-Specialist, and 
no more than 50% if there are two or more e-Specialists.
    For all orders of five contracts or fewer, the Specialist Pool will 
be allocated any balance of the order after any Customer Orders on the 
book have been satisfied, provided the Specialist Pool is quoting at 
the NBBO and a Directed Order Market Maker did not receive a guaranteed 
allocation. These orders of five contracts or fewer, or any balances 
thereof after Customer Orders in the book have been satisfied, will be 
allocated to each participant in the Specialist Pool on a rotating 
basis, provided the recipient Specialist's quoted size is equal to or 
greater than the size of the allocation.\65\
---------------------------------------------------------------------------

    \65\ Commentary .01 to proposed Rule 964NY provides that, on a 
quarterly basis, the Exchange will evaluate what percentage of the 
volume executed on the Exchange is composed of orders for five 
contracts or fewer that is allocated to the Specialist Pool, and 
will reduce the size of the orders included in this entitlement if 
such percentage is over 40%.
---------------------------------------------------------------------------

d. Additional Provisions
    If an incoming limit order is not entirely filled after trading 
against any eligible interest in the Working Order File, the balance of 
the order will be executed at the next available price level or, if the 
limit order locks or crosses the NBBO, matched against any available 
Tracking Order (prior to being routed) or routed to the away market(s) 
displaying the NBBO.\66\ If the above conditions do not apply, and the 
order is no longer marketable, or if the order has been designated as 
an order type that is not eligible to be routed away, the order would 
be placed in the book or, if it would lock or cross the NBBO, 
canceled.\67\
---------------------------------------------------------------------------

    \66\ If an incoming market order is not entirely filled after 
trading against any eligible interest in the Working Order File, the 
balance of the order will be executed at the next available price 
level based on split-price execution or, if such order is marketable 
against the NBBO, the order would be executed against any eligible 
Tracking Order or routed away. E-mail from Andrew Stevens, Chief 
Counsel--U.S. Equities & Derivatives, NYSE Euronext, Inc., to 
Michael Gaw, Assistant Director, Division of Trading and Markets, 
Commission, on February 26, 2009.
    \67\ See proposed Rule 964NY(c)(2) (as modified by Amendment No. 
1).
---------------------------------------------------------------------------

    The proposed rules also include a provision providing that ATP 
Holders may not execute as principal orders they represent as agent on 
the System unless (i) agency orders are first exposed on the Exchange 
for at least three seconds; or (ii) 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.\68\
---------------------------------------------------------------------------

    \68\ See proposed Rule 935NY. The Exchange stated that attempts 
to use a Tracking Order to execute a cross transaction is considered 
a violation of Rule 935NY, as that rule requires an order to be 
exposed (displayed) if it is part of a cross transaction. See 
Amendment 1 at 7. See also supra note 60 and accompanying text.
---------------------------------------------------------------------------

    The Commission believes that the Exchange's proposed priority and 
allocation rules are consistent with the Act. The Commission has 
previously approved participation guarantees for Market Makers, to 
which orders are directed by other exchange members, of up to 40% of 
the size of such directed orders (after any Customer Orders have been 
satisfied), provided such Market Maker is quoting at the NBBO when the 
order is received by the Exchange and meets specified, higher quoting 
obligations.\69\ In its comment letter, CBOE stated that the proposed 
Directed Order Market Maker program is similar to other options 
exchanges' programs, but noted that the Alternext proposal, unlike the 
rules of other exchanges, appeared not to require Directed Order Market 
Makers to be subject to a heightened quoting requirement to qualify as 
Directed Order Market Makers. In Amendment No. 1, the Exchange added a 
provision that establishes such a heightened standard.\70\
---------------------------------------------------------------------------

    \69\ See Securities Exchange Act Release No. 57844 (May 21, 
2008), 73 FR 30988 (May 29, 2008) (directed orders on NASDAQ OMX 
PHLX). Other exchanges have similar directed order or ``preferred 
market maker'' programs. See, e.g., CBOE Rule 8.13; International 
Securities Exchange (``ISE'') Rule 713; current Exchange Rule 997-
ANTE.
    \70\ See proposed Rule 964.1NY(iv) (as added by Amendment No. 
1).
---------------------------------------------------------------------------

    The Commission has also previously approved Specialist Pool 
participations of up to 40% of the size of incoming orders (after any 
Customer Orders have been satisfied and only when the Directed Order 
guarantee has not been applied), provided that the Specialist Pool is 
quoting at the NBBO when the order is received by the Exchange. The 
Commission believes that these guarantees strike a reasonable balance 
between rewarding certain participants for making markets (in the case 
of Specialists and e-Specialists) or bringing liquidity to the exchange 
(in the case of Directed Order Market Makers), with providing other 
market participants an incentive to quote aggressively.
    The Commission also believes that the proposed rules providing for 
the allocation of orders of five contracts or fewer to the Specialist 
Pool are consistent with the Act.\71\
---------------------------------------------------------------------------

    \71\ Other exchanges have similar rules. See, e.g., ISE Rule 
713; NASDAQ OMX PHLX Rule 1014(g).
---------------------------------------------------------------------------

    With regard to Working Orders and their conditions of execution, 
the Commission has previously approved most of the order types that the 
Exchange proposes to implement. Although the Commission has not 
previously approved an order type in the options markets with exactly 
the same features as the Tracking Order,\72\ the Commission also finds 
the proposed rules relating to Tracking Orders to be consistent with 
the Act. As set forth in the proposed rules, an incoming order will 
never be executed against a Tracking Order at a price that is inferior 
to the NBBO. Thus, an execution against a Tracking Order would never 
trade through the best price available on another market. An incoming 
order also will never be executed at a price better than the NBBO. 
Thus, Tracking Orders do not constitute hidden interest at a better 
price than the publicly disseminated market.
---------------------------------------------------------------------------

    \72\ Similar orders have previously been approved in the 
equities markets. See Securities Exchange Act Release No. 53117 
(January 13, 2006), 71 FR 3910 (January 24, 2006) (SR-PCX-2005-87).
---------------------------------------------------------------------------

    Tracking Orders are intended only to provide liquidity in the event 
a marketable order would otherwise route to another exchange. Tracking 
Orders provide participants on the System the ability to pre-set orders 
to automatically ``step up'' to the NBBO to trade against an incoming 
order when no other interest at that price is available on the 
Exchange, before the order is routed to another exchange. In this 
regard, the use of Tracking Orders is similar to automatic step-up 
features on other exchanges that the Commission has approved.\73\
---------------------------------------------------------------------------

    \73\ See, e.g., CBOE Rule 6.8, Interpretations and Policies 
.02(b).
---------------------------------------------------------------------------

    In its comment letter on the proposed rule change,\74\ CBOE 
expressed its understanding that, because Tracking Orders are not 
exposed in the System, they should not be eligible for crossing 
pursuant to proposed Rule 935NY.\75\ In Amendment No. 1, the Exchange 
responded to this comment by adding a new Commentary .05 to proposed 
Rule 935NY stating explicitly that it will be a violation of Rule 935NY 
when an ATP Holder enters a Tracking Order for the purpose of executing 
as principal an order it also represents as agent. The Commission 
believes that this provision

[[Page 9848]]

is reasonably designed to prevent use of Tracking Orders to circumvent 
the general requirement to expose agency orders before executing 
against them as principal, and is therefore consistent with the Act. 
The Exchange also added a new Commentary .04 to proposed Rule 935NY to 
provide that, prior to or after submitting an order to the System, an 
ATP Holder is not permitted to inform another ATP Holder or any other 
third party of any of the terms of the order. The Commission believes 
that this provision is consistent with the Act because it is reasonably 
designed to prevent ATP Holders from providing material, non-public 
information to third parties and to promote compliance with the 
Commission's Quote Rule.\76\
---------------------------------------------------------------------------

    \74\ See supra note 5.
    \75\ Proposed Rule 935NY provides that, with respect to orders 
routed to the System, users may not execute as principal orders they 
represent as agent unless (i) agency orders are first exposed on the 
Exchange for at least three seconds or (ii) 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.
    \76\ 17 CFR 242.602. The Quote Rule, in relevant part, requires 
a national securities exchange to collect, process, and make 
available to vendors the best bid, the best offer, and aggregate 
quotation sizes for each subject security that is communicated on 
any national securities exchange by a responsible broker or dealer. 
A ``bid'' or ``offer'' is defined as ``the bid price or the offer 
price communicated by a member of a national securities exchange or 
member of a national securities association to any broker or dealer, 
or to any customer.* * *'' 17 CFR 242.600(b)(8). Because Tracking 
Orders and the non-displayed size of Reserve Orders are sent only to 
the Exchange systems and not ``communicated * * * to any broker, 
dealer, or customer,'' such orders are not ``bids'' or ``offers.'' 
Thus, the Quote Rule does not require the Exchange to disseminate 
information about Tracking Orders and the non-displayed size of 
Reserve Orders. However, if an ATP Holder were to inform a third 
party of the terms of a Tracking Order or the non-displayed size of 
a Reserve Order, such Orders would become ``bids'' or ``offers'' 
subject to the Quote Rule.
---------------------------------------------------------------------------

    CBOE also argued that, prior to effecting any transactions in open 
outcry, Exchange members should be required to electronically ``sweep'' 
the book for any Tracking Order interest in the System, so as not to 
violate the priority of such orders. CBOE pointed to rules at other 
exchanges that require members seeking to trade in open outcry to 
electronically sweep the book for any penny interest from ``penny price 
improvement orders'' \77\ before executing an order. The Exchange 
responded that a Tracking Order does not have any standing with regard 
to open-outcry trading, as it is not displayed and, unlike price-
improving orders and quotations, is not represented by a displayed bid 
or offer at an indicative price. The Commission agrees with the 
distinction made by the Exchange. As set forth in the proposed rules, a 
Tracking Order has standing only if contra-side interest in the System 
would otherwise be routed to another market center at the NBBO.\78\ The 
Commission also notes that Tracking Orders can be entered in the System 
only at standard trading increments, and thus cannot be used to gain 
priority over displayed interest by a sub-increment amount.
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    \77\ ``Penny price improvement'' rules permit members of an 
exchange to submit bids and offers that provide price improvement in 
one cent increments that are not displayed in the book, in options 
in which the standard increment is more than one cent. Such bids and 
offers are displayed by rounding to the nearest standard increment.
    \78\ See proposed Rule 900.3NY(d)(5).
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    CBOE further questioned the proposed provision that, when a 
Tracking Order in the System is at a better price than another Tracking 
Order, but cannot be executed due to insufficient size, it does not 
have priority. CBOE also questioned in general why an incoming order 
does not trade against a Tracking Order at a price better than the NBBO 
when the Tracking Order is submitted at such a price. In Amendment No. 
1, the Exchange responded that the order handling instruction on a 
Tracking Order is that it is to be executed only at a price that 
matches the NBBO on the same side of the market, and only against 
lesser or equal-sized contra-side interest. The limit price on a 
Tracking Order serves only to provide a boundary on the order's 
possible execution price and to establish its ranking. The Commission 
believes that the Exchange's response adequately addresses CBOE's 
question, and that it is consistent with the Act for the Exchange to 
offer an order type with these conditions.
e. Open-Outcry Trading
    Proposed Rule 963NY describes priority and order allocation for 
open-outcry trading, including procedures to be followed when there is 
interest at the same price in the book as on the trading floor. The 
proposed rules governing open-outcry trading on the Exchange floor are 
similar to those at other exchanges with trading floors, and the 
Commission finds that they are consistent with the Act.
    When a Floor Broker or Market Maker makes a bid or offer or calls 
for a market and more than one ATP Holder responds at the same best 
price, the Floor Broker or Market Maker must designate the sequence in 
which responses are vocalized. As between two bids or offers at the 
same best price, priority is afforded in the sequence they are 
made.\79\ If they were made simultaneously or it is impossible to 
determine clearly the order in which they were made, such orders would 
be deemed to be on parity, and priority will be afforded, insofar as 
practicable, on an equal basis. However, a Customer Order displayed in 
the book at the same price as the best price in the crowd will have 
priority over any bid or offer at the post. After any Customer Orders 
displayed in the book at the best bid or offer in the crowd are 
satisfied, the Specialist is entitled to trade with 40% of the order, 
provided the Specialist has vocally responded to the Floor Broker's 
call for a market and has responded with a price that is the best bid 
or offer. Bids and offers of broker-dealers (including Quotes with Size 
and orders of Market Makers displayed on the book) would have priority 
after all trading crowd interest is exhausted.
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    \79\ Thus, for example, the bid or offer of a non-Customer in 
the trading crowd that was made before that of a Customer 
represented by a Floor Broker in the trading crowd would take 
priority over the Customer Order (provided the requirements of 
Section 11(a) of the Act and the rules thereunder are met).
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    Customer-to-Customer Crosses. The proposed rules include procedures 
by which a Floor Broker who holds a Customer Order to buy and a 
Customer Order to sell may cross such orders on the floor.\80\ After 
providing an opportunity for bids and offers to be made by members of 
the trading crowd, the Floor Broker must bid above the highest bid in 
the crowd and offer below the lowest offer in the crowd. After 
satisfying all better priced bids or offers on the book and any 
Customer Orders on the book at the same price, the Floor Broker is 
permitted to cross the orders at such higher bid or lower offer by 
announcing by open outcry that he is crossing orders on behalf of 
Customers, and giving the quantity and price. The Floor Broker is 
permitted to cross the orders at split prices if the rules governing 
split price transactions are met.\81\
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    \80\ See proposed Rule 934NY(a).
    \81\ See proposed Rule 963NY(f).
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    Non-Facilitation (Regular Way) Crosses. The proposed rules also 
include procedures by which a Floor Broker who holds a Customer Order 
and a non-Customer order may cross such orders.\82\ After providing an 
opportunity for bids and offers to be made by members of the trading 
crowd, the Floor Broker must expose the Customer Order by bidding above 
the highest bid in the crowd or offering below the lowest offer in the 
crowd, by at least one minimum price variation (``MPV''). After 
satisfying all better priced bids or offers on the book, any Customer 
Orders on the book at the same price, and any interest by members of 
the trading crowd at such higher bid or lower offer, the Floor Broker 
is permitted to cross the orders (or any part remaining unexecuted) at 
such higher bid or lower offer by announcing by open outcry that he is

[[Page 9849]]

crossing the orders, and giving the quantity and price.
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    \82\ See proposed Rule 934NY(b).
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    Facilitation Crosses. The proposed rules further include procedures 
by which a Floor Broker who holds a Customer Order and a Facilitation 
Order may cross such orders.\83\ After providing an opportunity for 
bids and offers to be made by crowd members, the Floor Broker, on 
behalf of the Customer whose order is subject to facilitation, must 
disclose any contingencies with respect to the order, identify the 
order as being subject to facilitation, and establish priority by 
either bidding or offering at or between the best bid or offer in the 
market. After all other crowd members are given an opportunity to 
accept the bid or offer made on behalf of the Customer, the Floor 
Broker is permitted to cross all or any remaining part of such order 
and the Facilitation Order at the price of the Customer's bid or offer 
by announcing by open outcry that he is crossing such orders, and 
stating the quantity and price.
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    \83\ See proposed Rule 934.1NY. A ``Facilitation Order'' is an 
order represented on behalf of an ATP Holder that may be executed in 
whole or in part in a cross transaction with the ATP Holder's 
Customer Order and that is clearly designated as a Facilitation 
Order.
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    Notwithstanding the above, if the proposed cross transaction meets 
the eligible size requirement of 50 contracts or larger, a Facilitation 
Order can trade with up to 40% of the Customer Order, after satisfying 
all better-priced bids or offers on the book or in the trading crowd 
and any Customer Orders at the same price.\84\
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    \84\ If a trade pursuant to proposed Rule 934.1NY occurs at the 
Specialist's vocalized bid or offer in its appointed class, the 
Specialist's guaranteed participation will apply only to the number 
of contracts remaining after all Customer Orders that trade ahead of 
the cross transaction and the number of contracts crossed have been 
satisfied. The Specialist's guaranteed participation will be a 
percentage that, when combined with the percentage the originating 
firm crossed, does not exceed 40% of the order. See proposed Rule 
934.1NY(4)(C).
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    ``At-Risk'' Crosses. The proposed rules establish an alternative to 
the Facilitation Cross procedures for a Floor Broker that seeks to 
cross a Customer Order with an order from the ATP Holder from which the 
Customer Order originated.\85\ After providing an opportunity for bids 
and offers to be made by members of the trading crowd, the Floor Broker 
must represent the Customer Order to the trading crowd, indicating that 
it is a Customer Order and providing the order's size, side of the 
market, and a price. After giving the trading crowd an opportunity to 
improve its quote, the Floor Broker may improve the crowd's market on 
behalf of the ATP Holder to one MPV away from the Customer Order and 
thereby establish priority over the crowd at this new price. The crowd 
may trade with the Customer Order at that order's price, or trade with 
the ATP Holder's order at its proposed price. To the extent the crowd 
does not trade with the Customer Order, the Floor Broker may effect the 
cross.
---------------------------------------------------------------------------

    \85\ The proposed rule for At-Risk Crosses applies only to 
equity options. The minimum eligible order size for an At-Risk Cross 
is 50 contracts. See proposed Rule 934.2NY.
---------------------------------------------------------------------------

    The Commission finds that the Exchange's proposed crossing rules 
are consistent with the Act. They are similar to other crossing rules 
that the Commission has previously approved for Amex and other 
exchanges \86\ and do not appear to raise any novel or significant 
issues.
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    \86\ See, e.g., Amex Rule 950-ANTE(d), Commentaries .02-.04; 
CBOE Rule 6.74; NYSE Arca Rule 6.47.
---------------------------------------------------------------------------

    Solicited Orders. The proposed rules include procedures by which a 
Floor Broker representing an order (``originating order'') may cross it 
with an order solicited from another ATP Holder or non-member broker-
dealer outside the trading crowd (``solicited party'').\87\ The Floor 
Broker must announce to the trading crowd the same terms and conditions 
about the originating order as disclosed to the solicited party. The 
Floor Broker would also announce the price at which he is prepared to 
buy from or sell to the solicited party. After all other market 
participants are given a reasonable opportunity to accept the bid or 
offer, the solicited party may trade with any remaining part of the 
originating order.
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    \87\ See proposed Rule 934.3NY.
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    Generally, non-solicited market participants and Floor Brokers 
holding non-solicited discretionary orders in the crowd have priority 
over the solicited party or the solicited order to trade with the 
original order at the best bid or offer price. However, if the 
solicited order improved the crowd's quoted market, the Floor Broker 
would be permitted to cross the solicited order against the Customer 
Order to the extent of 40% of the contracts remaining after any 
Customer Orders have been filled. The eligible order size for this 
guarantee to apply is a minimum of 50 contracts.\88\
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    \88\ See proposed Rule 934.3 (as modified by Amendment No. 1).
---------------------------------------------------------------------------

    The Exchange's proposed rules for solicited orders, which are 
similar to rules the Commission has previously approved,\89\ do not 
appear to raise any novel or substantive issues, and the Commission 
believes they are consistent with the Act.
---------------------------------------------------------------------------

    \89\ See, e.g., Amex Rule 950-ANTE(d), Commentaries .02 and .04.
---------------------------------------------------------------------------

C. Section 11(a) Compliance

    Section 11(a)(1) of the Act \90\ 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 discretion (each, a 
``covered account,'' and collectively, ``covered accounts''), unless an 
exemption applies. Sections 11(a)(1)(A)-(I) of the Act \91\ and the 
rules thereunder provide certain exemptions from the general 
prohibition, including the exemptions set forth in Rules 11a2-2(T) and 
11a1-1(T) under the Act.\92\
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    \90\ 15 U.S.C. 78k(a)(1).
    \91\ 15 U.S.C. 78k(a)(1)(A)-(I).
    \92\ 17 CFR 240.11a2-2(T) and 240.11a1-1(T).
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    With respect to the general prohibition and exemptions of Section 
11(a)(1) and the rules thereunder, the Exchange proposes to adopt new 
Rule 910NY. The proposed rule states that an ATP Holder must ensure 
that each of its transactions complies with Section 11(a) of the Act, 
which generally prohibits an ATP Holder from effecting a transaction 
trading for a covered account unless a valid exemption in the statute 
or the rules thereunder applies. The proposed rule further states that, 
when relying on the exemption set forth in Rule 11a2-2(T) under the 
Act, a Floor Broker may not enter into the System any order for a 
covered account, including an order sent to it by an affiliated ATP 
Holder from off the floor, if the order is for such affiliated ATP 
Holder's own account, the account of an associated person, or an 
account over which it or its associated person exercises discretion. In 
addition, the proposed rule provides that, in cases where a Floor 
Broker's transaction would occur at the same price as one or more 
orders on the book, the Floor Broker, if it can rely on no exception 
other than the exemption in Section 11(a)(1)(G) of the Act and Rule 
11a1-1(T) thereunder (as discussed in more detail below) must, in 
addition to complying with the other requirements of such exemption, 
yield to all orders in the book at the same price if the Floor Broker 
has no ability to determine that an order in the book is not the order 
of a non-ATP Holder. Proposed Rule 910NY also states that, where an ATP 
Holder submits an order to the book (or an order is submitted on its 
behalf) and such ATP Holder is relying on the G Exemption, the order 
must be entered as immediate-or-cancel.
    The Exchange has represented that it has analyzed its rules 
proposed

[[Page 9850]]

hereunder, which include proposed Rule 910NY, and has determined that 
they are consistent with Section 11(a) of the Act and rules 
thereunder.\93\ For the reasons set forth below, the Commission 
believes that the proposed rules are consistent with the requirements 
of Section 11(a) of the Act and the rules thereunder.
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    \93\ See Amendment No. 1 at 7.
---------------------------------------------------------------------------

1. Rule 11a2-2(T)
    Rule 11a2-2(T) under the Act,\94\ known as the ``effect versus 
execute'' rule, provides exchange members with an exemption from the 
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 the conditions of Rule 
11a2-2(T), a member: (i) Must transmit the order from off the exchange 
floor; (ii) may not participate in the execution of the transaction 
once it has been transmitted to the member performing the execution; 
\95\ (iii) may 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 connection with effecting the transaction except as 
p

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