Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of a Proposed Rule Change as Modified by Amendment No. 1 Thereto To Adopt Rules Implementing the Options Order Protection and Locked/Crossed Market Plan, 43178-43182 [E9-20537]
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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Notices
to such bids in the sequence in which
they are made. Rule 963NY also
contains certain provisions for related to
split-price priority and priority of
complex orders. Violators of any part of
Rule 6.63NY are subject to a sanction
pursuant to the MRP, specifically Rule
476A Part 1C(iii)(i)29. Suggested fines
for violations of Rule 963NY are
presently $500 for the first violation in
a rolling twenty-four month period,
$1,000 for a second violation within the
same period fine and a third violation
is subject to a $2,000 fine.
At this time the Exchange believes the
current monetary fine levels contained
in the MRP, for the three above
mentioned violations, are inadequate,
given the serious nature of these rules.
In order to act as an effective deterrent
against future violations, while also
serving as a just penalty for those who
commit these violations, the Exchange
feels an increase in the fine levels for
these three violations is warranted.
NYSE Amex now proposes fine levels of
$1,000 for the first violation in a rolling
twenty-four month period, $2,500 for a
second violation within the same period
fine and $5,000 for a third violation
within the same period fine. These fine
levels will apply to all three types of
violations mentioned above.
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2. Statutory Basis
The proposed rule change is
consistent with Section 6(b) 4 of the
Securities Exchange Act of 1934 (the
‘‘Act’’), in general, and furthers the
objectives of Section 6(b)(5) 5 in
particular in that it is designed 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 facilitating
transactions in securities, and to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system.
The proposal is also consistent with
Section 6(b)(6) 6 and 6(b)(7),7 which
requires that members and persons
associated with members are
appropriately disciplined for violations
of Exchange rules and are provided a
fair procedure for disciplinary
procedures.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
4 15
U.S.C. 78f(b).
5 15 U.S.C. 78f(b)(5).
6 15 U.S.C. 78f(b)(6).
7 15 U.S.C. 78f(b)(7).
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necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve such proposed
rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–NYSEAmex–2009–45 on
the subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
Station Place, 100 F Street, NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSEAmex–2009–45. 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
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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, 100 F Street, NE., Washington,
DC 20549, 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 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 publicly available. All
submissions should refer to File
Number SR–NYSEAmex–2009–45 and
should be submitted on or before
September 16, 2009.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.8
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–20533 Filed 8–25–09; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–60527; File No. SR–
NYSEArca–2009–45]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Granting Approval of
a Proposed Rule Change as Modified
by Amendment No. 1 Thereto To Adopt
Rules Implementing the Options Order
Protection and Locked/Crossed Market
Plan
August 18, 2009.
I. Introduction
On May 20, 2009, NYSE Arca, Inc.
(‘‘NYSE Arca’’ or ‘‘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 and adopt rules to
implement the Options Order Protection
and Locked/Crossed Market Plan. The
proposed rule change was published for
comment in the Federal Register on
June 12, 2009.3 On July 12, 2009, the
Exchange filed Amendment No. 1 to the
8 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 60054
(June 5, 2009), 74 FR 28078 (‘‘Notice’’).
1 15
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proposed rule change.4 The Commission
received no comments on the proposal.
This order approves the proposed rule
change, as modified by Amendment No.
1.
II. Description of the Proposal
The Exchange proposes to amend and
adopt new NYSE Arca rules to
implement the Options Order Protection
and Locked/Crossed Market Plan
(‘‘Plan’’).5 Specifically, the Exchange
proposes to amend and/or replace NYSE
Arca Rules 6.92 through 6.96 with new
rules implementing the Plan, amend
other Exchange rules to reflect the Plan,
and delete rules rendered unnecessary
by the Plan.
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The Old Plan
Each of the Participating Options
Exchanges are signatories to the Plan for
the Purpose of Creating and Operating
an Intermarket Option Linkage (‘‘Old
Plan’’).6 In pertinent part, the Old Plan
4 Amendment No. 1 clarified that this proposed
rule change will become effective upon the
Exchange’s withdrawal from the Plan for the
Purpose of Creating and Operating an Intermarket
Option Linkage and the effectiveness of the Options
Order Protection and Locked/Crossed Market Plan.
In addition, Amendment No. 1 revised Proposed
NYSE Arca Rule 6.95(b) to delete the last sentence
which stated, in reference to the proposed locked/
crossed market exception for non-customer quotes,
that the ‘‘exemption is operative as long as the
Exchange identifies the presence of Customer
orders in its disseminated bid or offer’’ because the
sentence was not included in similar rules of other
exchanges. Because the amendment provided
clarification and revised the Exchange’s proposed
locked and crossed market rule in a non-substantive
manner to conform with similar proposed rules of
other exchanges, the amendment did not require
notice and comment.
5 The Plan is a national market system plan
proposed by the seven existing options exchanges
and approved by the Commission. See Securities
Exchange Act Release No. 59647 (March 30, 2009),
74 FR 15010 (April 2, 2009) (File No. 4–546) (‘‘Plan
Notice’’) and 60405 (July 30, 2009), 74 FR 39362
(August 6, 2009) (File No. 4–546) (‘‘Plan
Approval’’). The seven options exchanges are:
Chicago Board Options Exchange, Incorporated
(‘‘CBOE’’); International Securities Exchange, LLC
(‘‘ISE’’); The NASDAQ Stock Market LLC
(‘‘Nasdaq’’); NASDAQ OMX BX, Inc. (‘‘BOX’’);
NASDAQ OMX PHLX, Inc. (‘‘Phlx’’); NYSE Amex
LLC (‘‘NYSE Amex’’); and NYSE Arca (each
exchange individually a ‘‘Participant’’ and,
together, the ‘‘Participating Options Exchanges’’).
6 On July 28, 2000, the Commission approved the
Old Plan as a national market system plan for the
purpose of creating and operating an intermarket
options market linkage proposed by the American
Stock Exchange LLC (n/k/a NYSE Amex), CBOE,
and ISE. See Securities Exchange Act Release No.
43086 (July 28, 2000), 65 FR 48023 (August 4,
2000). Subsequently, Philadelphia Stock Exchange,
Inc. (n/k/a Phlx), Pacific Exchange, Inc. (n/k/a
NYSE Arca), Boston Stock Exchange, Inc. (n/k/a
BOX), and Nasdaq joined the Linkage Plan. See
Securities Exchange Act Release Nos. 43573
(November 16, 2000), 65 FR 70851 (November 28,
2000); 43574 (November 16, 2000), 65 FR 70850
(November 28, 2000); 49198 (February 5, 2004), 69
FR 7029 (February 12, 2004); and 57545 (March 21,
2008), 73 FR 16394 (March 27, 2008).
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generally requires its participants to
avoid trading at a price inferior to the
national best bid or offer (‘‘tradethrough’’), although it provides for a
number of exceptions to trade-through
liability.7 The Participating Options
Exchanges comply with this
requirement of the Old Plan by utilizing
a stand alone system (‘‘Linkage Hub’’) to
send and receive specific order types,8
namely Principal Acting as Agent
Orders (‘‘P/A Orders’’), Principal
Orders, and Satisfaction Orders.9 The
Old Plan also provided that
dissemination of ‘‘locked’’ or ‘‘crossed’’
markets should be avoided, and
remedial actions that should be taken to
unlock or uncross such market.10 Each
of the Participating Options Exchanges,
including the Exchange, has submitted
an amendment to the Old Plan to
withdraw from such Plan.11 The
withdrawals will be effective upon
approval by the Commission of such
amendments pursuant to Rule 608 of
Regulation NMS under the Act
(‘‘Regulation NMS’’).12
The Plan
The Plan does not require a central
linkage mechanism akin to the Old
Plan’s Linkage Hub. Instead, the Plan
includes the framework for routing
orders via private linkages that exist for
NMS stocks under Regulation NMS.13
The Plan requires the Participating
Options Exchanges to adopt rules
‘‘reasonably designed to prevent TradeThroughs.’’ 14 Participating Options
Exchanges are also required to conduct
7 Section
8(c) of the Old Plan.
Linkage Hub is a centralized data
communications network that electronically links
the Participating Options Exchanges to one another.
The Options Clearing Corporation (‘‘OCC’’) operates
the Linkage Hub.
9 Section 2(16) of the Old Plan.
10 Section 7(a)(i)(C) of the Old Plan.
11 See Securities Exchange Act Release No. 60360
(July 21, 2009) 74 FR 37265 (July 28, 2009) (File No.
4–429).
12 17 CFR 242.608.
13 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496 (June 29, 2005) (File
No. S7–10–04); 17 CFR 242.600 et seq. For
discussions of the similarities between the
provisions of Regulation NMS and the provisions in
the Plan, see the Plan Notice and Plan Approval,
supra note 5.
14 Under the Plan, a ‘‘Trade-Through’’ is generally
defined as a transaction in an option series, either
as principal or agent, at a price that is lower than
a Protected Bid or higher than a Protected Offer.’’
See Section 2(21) of the Plan. A ‘‘Protected Bid’’
and ‘‘Protected Offer’’ generally means a bid or offer
in an option series, respectively, that is displayed
by a Participant, is disseminated pursuant to the
Options Price Reporting Authority (‘‘OPRA’’) Plan,
and is the Best Bid or Best Offer. See Section 2(17)
of the Plan. A ‘‘Best Bid’’ or ‘‘Best Offer’’ means the
highest bid price and the lowest offer price. Section
(2)(1) of the Plan. ‘‘Protected Bid’’ and ‘‘Protected
Offer,’’ together are referred to herein as ‘‘Protected
Quotation.’’ See Section 2(18) of the Plan.
8 The
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43179
surveillance of their respective markets
on a regular basis to ascertain the
effectiveness of the policies and
procedures to prevent Trade-Throughs
and to take prompt action to remedy
deficiencies in such policies and
procedures.15 As further described
below, the Plan incorporates a number
of exceptions to trade-through
liability.16 Some of these exceptions are
carried over from the Old Plan,
including exceptions for trading
rotations, non-firm quotes, and complex
trades.17 Others are substantially similar
to exceptions available for NMS stocks
under Regulation NMS, such as
exceptions for systems issues, crossed
markets, quote flickering, customer
stopped orders, benchmark trades and,
notably, intermarket sweep orders
(‘‘ISOs’’).18 In addition, the Plan
contains a new exception for stopped
orders and price improvement.19
The Plan also requires each
Participant to establish, maintain, and
enforce written rules that: require its
members reasonably to avoid displaying
locked and crossed markets; assure the
reconciliation of locked and crossed
markets; and prohibit its members from
engaging in a pattern or practice of
displaying locked and crossed markets;
subject to exceptions as may be
contained in the rules of the Participant,
as approved by the Commission.20
The Exchange’s Proposal
To implement the Plan, the Exchange
proposes to replace its current rules
relating to the Old Plan with new rules
relating to the Plan, and makes
amendments to other rules as necessary
to conform to the requirements of the
Plan.21 As such, the Exchange proposes
to adopt all applicable definitions from
the Plan into the Exchange’s rules.22
In addition, the Exchange proposes to
prohibit its members from effecting
Trade-Throughs, unless an exception
applies.23 Consistent with the Plan, the
Exchange also proposes exceptions to
the prohibition on trade throughs
relating to: System issues; trading
15 Section
5(a)(ii) of the Plan.
5(b) of the Plan.
17 Subparagraphs (ii), (vii), and (viii),
respectively, of Section 5(b) of the Plan.
18 Subparagraphs (i), (iii), (vi), (ix), (xi), and (iv)–
(v), respectively, of Section 5(b) of the Plan.
19 Subparagraph (x) of Section 5(b) of the Plan.
20 Section 6 of the Plan. The Plan also contains
provisions relating to the operation of the Plan
including, for example, provisions relating to the
entry of new parties to the Plan; withdrawal from
the Plan; and amendments to the Plan.
21 A more detailed description of the Exchange’s
proposed rule change may be found in the Notice,
supra, note 3.
22 Proposed NYSE Arca Rule 6.92.
23 Proposed NYSE Arca Rule 6.94(a).
16 Section
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rotations; crossed markets; intermarket
sweep orders; quote flickering; non-firm
quotes; complex trades; customer
stopped orders; stopped orders and
price improvement; and benchmark
trades.24
The Exchange also proposes a rule to
address locked and crossed markets, as
required by the Plan.25 Specifically, the
Exchange proposes that, except for
quotations that fall within a stated
exception, members shall reasonably
avoid displaying, and shall not engage
in a pattern or practice of displaying,
any quotations that lock or cross a
Protected Quote.26
The Exchange proposes four
exceptions to the prohibition against
locked and crossed markets: When the
Exchange is experiencing a failure,
material delay, or malfunction of its
systems or equipment; when the locking
or crossing quotation was displayed at
a time where there is a crossed market;
when an Exchange member
simultaneously routes an ISO to execute
against the full displayed size of any
locked or crossed Protected Bid or
Protected Offer; and, with respect to a
locking quotation, when the order
entered on the Exchange that will lock
a Protected Bid or Protected Offer, is (i)
not a customer order, and the Exchange
can determine via identification
available pursuant to the OPRA Plan
that such Protected Bid or Protected
Offer does not represent, in whole or in
part, a customer order; or (ii) a customer
order, and the Exchange can determine
via identification available pursuant to
the OPRA Plan that such Protected Bid
or Protected Offer does not represent, in
whole or in part, a customer order, and,
on a case-by-case basis, the customer
specifically authorizes the member to
lock such Protected Bid or Protected
Offer.27 The Exchange believes that, in
most cases, locked market maker quotes
are good for the investing public, but
recognizes that the benefits of a locked
market become more complicated when
one or both of the locking quotations
represent a customer order. Where there
is market interest willing to trade with
a customer, the Exchange believes that
the customer order should be filled.
Thus, the Exchange proposes that it
24 Proposed NYSE Arca Rule 6.94(b)(1)–(10). In
addition, the Exchange proposes to add ISOs as a
new type of order under proposed NYSE Arca Rule
6.62(z).
25 A ‘‘locked market’’ is defined as a quoted
market in which a Protected Bid is equal to a
Protected Offer. Proposed NYSE Arca Rule
6.92(a)(9). A ‘‘crossed market’’ is defined as a
quoted market in which a Protected Bid is higher
than a Protected Offer. Proposed NYSE Arca Rule
6.92(a)(5).
26 Proposed NYSE Arca Rule 6.95(a).
27 Proposed NYSE Arca Rule 6.95(b)(1)–(4).
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would not exempt from the locked
market prohibition situations involving
customer orders unless the customer
entering the locking order specifically
authorizes the lock on a case-by-case
basis.28 As a result, its members would
not be permitted to lock another
Participant’s quotation unless the
Exchange can establish that the
quotation on the other Participant’s
market is not for the account of a
customer.
The Exchange also proposes rules to
permit it to continue to accept P/A
Orders and Principal Orders from
Participating Options Exchanges that are
not able to send ISOs in order to avoid
Trade-Throughs.29 The Exchange noted
that, even upon the approvals of the
Plan and the implementing rules of the
various Participating Options
Exchanges, it is possible that not all the
Participants will be functionally able to
operate pursuant to the Plan. Thus, the
Exchange has proposed to retain certain
rules governing the receipt of P/A
Orders and Principal Orders until such
time that all Participating Options
Exchanges are operating pursuant to the
Plan.
The Exchange also proposes to delete
certain provisions of NYSE Arca rules to
reflect the Exchange’s withdrawal from
the Old Plan.30 Finally, the Exchange
proposes to amend NYSE Arca Rule
10.12, the Exchange’s Minor Rule Plan,
to replace references to the Old Plan
with references to the Plan.
II. Discussion and Commission’s
Findings
After careful review, the Commission
finds that the proposed rule change, as
amended, is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
a national securities exchange.31 In
particular, the Commission finds that
the proposal is consistent with Section
6(b)(5) of the Act 32 which requires,
among other things, that the rules of a
national securities exchange be
designed to promote just and equitable
principles of trade, to remove
impediments to and perfect the
28 NYSE Arca noted that it can envision a
customer authorizing a lock when the fees
associating with trading against the locked market
make the execution price uneconomical to the
customer. See Notice, supra note 3 at 28080.
29 Proposed NYSE Arca Temporary Rule 6.96.
30 See Notice, supra note 3 at 28080–81,
discussing proposed changes to NYSE Arca Rule
6.33, Commentaries .02–.04 to NYSE Arca Rule
6.35, and NYSE Arca Rule 6.76A.
31 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
32 15 U.S.C. 78f(b)(5).
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mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest. The Commission also
finds that the proposal is consistent
with Rule 608(c) of Regulation NMS
under the Act, which requires that each
exchange comply with the terms of any
effective national market system plan of
which it is a participant.33 Finally, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Plan.34
Proposed NYSE Arca Rule 6.92 would
define applicable terms in a manner that
are substantively identical to the
defined terms of the Plan. As such, the
Commission finds that proposed
amendments to NYSE Arca Rule 6.92
are consistent with the Act and the Plan.
Proposed NYSE Arca Rule 6.94(a)
would prohibit members from effecting
Trade-Throughs unless an exception
applies. Proposed NYSE Arca Rule
6.94(b) would provide for ten
exceptions to the general Trade-Through
prohibition, relating to systems issues,
trading rotations, crossed markets, ISOs,
quote flickering, non-firm quotes,
complex trades, customer stopped
orders, stopped orders and price
improvement, and benchmark trades.35
Aside from the proposed exception
relating to systems issues, each
proposed exception would be
substantively identical to the parallel
exception under Section 5(b) of the
Plan.
The systems issues exception under
proposed NYSE Arca Rule 6.94(b)(1)
would implement the parallel exception
available under Section 5(b)(i) of the
Plan and would permit the Exchange to
bypass the Protected Quotation of
another Participant if such other
Participant repeatedly fails to respond
within one second to incoming orders
attempting to access its Protected
Quotations. The Exchange’s rule would
require the Exchange to notify such nonresponding Participant immediately
after (or at the same time as) electing
self-help, and assess whether the cause
of the problem lies with the Exchange’s
own systems and, if so, take immediate
steps to resolve the problem. Finally,
the Exchange would be required to
promptly document its reasons
supporting any such determination to
bypass a Protected Quotation. The
Commission believes that this exception
should provide the Exchange with the
33 17 CFR 242.608(c). Section 1 of the Plan
provides in pertinent part that, ‘‘The Participants
will submit to the [Commission] for approval their
respective rules that will implement the framework
of the Plan.’’
34 See supra note 5.
35 Proposed NYSE Arca Rule 6.94(b)(1)–(10).
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necessary flexibility for dealing with
problems that occur on an away market
during the trading day. At the same
time, the exception’s requirements to
immediately notify such away market of
its determination and also assess its
own system should help prevent the use
of this exception when there in fact is
a problem with the Exchange’s own
systems, rather than those of an away
market.
The Commission notes that included
among the exception in proposed NYSE
Arca Rule 6.94(b) would be an
exception for certain transactions
involving ISOs.36 An order identified as
an ISO would be immediately
executable by the Exchange (or any
other Plan Participant that received
such an order) based on the premise that
the market participant sending the ISO
has already attempted to access all
better-priced Protected Quotations up to
their displayed size. The Commission
believes that this exception should help
ensure more efficient and faster
executions in the options markets.
The Commission notes that, in
addition to these rules regarding TradeThroughs, the Plan requires that each
Participant establish, maintain and
enforce written policies and procedures
that are reasonably designed to prevent
Trade-Throughs in that Participant’s
market that do not fall within an
applicable exception and, if relying on
such exception, that are reasonably
designed to assure compliance with the
terms of the exception. In addition, the
Commission notes that the Plan requires
each Participant to conduct surveillance
of its market on a regular basis to
ascertain the effectiveness of such
policies and procedures and to take
prompt action to remedy any
deficiencies in such policies and
procedures.
Accordingly, the Commission finds
that proposed NYSE Arca Rule 6.94 is
consistent with Section 5 of the Plan
and Section 6(b)(5) of the Act 37 which
requires, among other things, that the
rules of a national securities exchange
be designed to promote just and
equitable principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
Proposed NYSE Arca Rule 6.95(a)
would require Exchange members to
reasonably avoid displaying, and not
engage in a pattern or practice of
displaying, any quotation that locks or
crosses a Protected Quotation, subject to
36 Proposed
37 15
NYSE Arca Rule 6.94(b)(4).
U.S.C. 78f(b)(5).
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certain exceptions delineated in
proposed NYSE Arca Rule 6.95(b). The
Commission recognizes that locked and
crossed markets may occur accidentally
and cannot always be avoided.
However, the Commission believes that
giving priority to the first-displayed
Protected Bid or Protected Offer,
particularly when it includes a public
customer’s order, will encourage price
discovery and contribute to fair and
orderly markets. Therefore, the
Commission believes that the proposed
rule, which corresponds to the Plan’s
language, to require members to
reasonably avoid displaying, and not
engaging in a pattern or practice of,
locks and crosses is appropriate.
Proposed NYSE Arca Rule 6.95(b)
would permit four exceptions to the
Exchange’s general rule relating to
locked and crossed markets.38 The first
three would be similar to analogous
certain trade-through exceptions under
proposed NYSE Arca Rule 6.94(b), and
relate to when the Exchange is
experiencing systems issues, when there
is exists a crossed market, and when a
member simultaneously routes ISOs
against the full displayed size of any
locked or crossed Protected Bid or
Protected Offer.
The fourth exception would permit an
order entered onto the Exchange to lock
a Protected Bid or Protected Offer when
such order is: (1) not a customer order,
and the Exchange can determine that
such Protected Bid or Protected Offer
does not represent, in whole or in part,
a customer order; or (2) a customer
order, and the Exchange can determine
that such Protected Bid or Protected
Offer does not represent, in whole or in
part, a customer order and, on a caseby-case basis, the customer specifically
authorizes the Exchange’s member to
lock such Protected Bid or Protected
Offer. This exception would not protect
a market maker quote or broker-dealer
order from being locked.
The Commission believes that the
Exchange’s proposed rules relating to
locked and crossed markets are
consistent with the Plan and the Act
and should help ensure that the display
of locked or crossed markets will be
limited and that any such display will
be promptly reconciled. The
Commission also believes that each of
the proposed exceptions to locked and
crossed markets relate to circumstances
when it is appropriate to permit a
limited, narrow exception to the general
locked and crossed market rule.
38 Section 6 of the Plan permits exceptions to the
Plan’s locked and crossed market rules as may be
contained in the rules of a Participant approved by
the Commission.
PO 00000
Frm 00088
Fmt 4703
Sfmt 4703
43181
In particular, the Commission
believes that the fourth exception is
appropriate because it would protect
customer orders that are Protected Bids
or Protected Offers from being locked,
and would only permit a customer order
entered on to the Exchange to lock a
Protected Bid or Protected Offer when a
customer specifically authorizes an
Exchange member, and only when such
Protected Bid or Protected Offer itself
does not represent, in whole or in part,
a customer order. Because of the
rapidity with which options quotes are
often updated today, particularly in
response to changes in the underlying,
there is an increasing likelihood that
market maker quotations will lock each
other. The proposed exception accounts
for this dynamic by not prohibiting such
locking instances. Importantly, the
proposed exception in the Exchange’s
rules that the Commission is approving
would allow non-customer orders to
lock an away market’s Protected
Quotation only if the Exchange is able
to affirmatively determine that the
Protected Quotation on the away market
is not, in whole or in part, for the
account of a customer. If any portion of
such away market’s Protected Quotation
is for the account of a customer, such
Protected Quotation may not be locked.
In addition, the Commission notes that
the rule requires that such
determination be made via
identification available pursuant to the
OPRA Plan, which is working with the
participating options exchanges on a
method to so identify customer
quotations through OPRA. The
Exchange has represented that, absent
the ability to identify a customer quote
as part of an exchange’s BBO, the
Exchange would assume that the quote
represents, in whole or in part, a
customer order. As such, the Exchange
has represented that it would not permit
its members to avail themselves of this
exemption unless the away market has
informed the Exchange that it would
designate all customer orders as such in
OPRA and such exchange’s quotation
does not contain such designation.
Finally, the Exchange has represented
that if an exchange chooses not to
identify its customer quotations, the
Exchange would treat all of such
exchange’s quotations as customer
orders and, absent application of
another exception, would not permit
locks of such quotations.
Therefore, the Commission finds that
Exchange’s rule regarding locked and
crossed markets appropriately
implements Section 6 of the Plan, and
is consistent with Section 6(b)(5) of the
E:\FR\FM\26AUN1.SGM
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43182
Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Notices
Act 39 which requires, among other
things, that the rules of a national
securities exchange be designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
The Commission also finds that
proposed NYSE Arca Temporary Rule
6.96, which facilitates the participation
of certain Participating Options
Exchanges who may require the use of
P/A Orders and Principal Orders after
implementation of the Plan, is
consistent with the Act. Although the
Commission has already approved the
Plan,40 the Commission also recognizes
that there may be one or more
Participating Options Exchanges that
may require a temporary transition
period during which they may want to
continue to utilize these order types that
exist currently under the Old Plan.41
The Exchange and each of the other
Participating Options Exchanges have
proposed substantially identical
temporary provisions to accommodate
this possibility.42 Thus, the Commission
finds that the proposed rule relating to
the Exchange’s receipt and handling of
P/A Orders and Principal Orders, and
imposing certain obligations on the
Exchange with respect to such orders
that are similar to those that exist under
the Old Plan, is appropriate and
consistent with Section 6(b)(5) of the
Act 43 which requires, among other
things, that the rules of a national
securities exchange be designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
Finally, the Commission finds that
NYSE Arca’s other proposed changes,
including the proposed modifications to
NYSE Arca Rule 6.33, Commentary .02–
.04 to NYSE Arca Rule 6.35, NYSE Arca
Rule 6.76.A, and NYSE Arca Rule 10.12
are appropriate and consistent with the
Act.
39 15
U.S.C. 78f(b)(5).
Plan Approval, supra, note 5.
41 The Commission notes that any Participating
Options Exchange that wishes to utilize such order
types in a manner that would result in a TradeThrough would need to separately request an
exemption from the Plan for such use.
42 The Commission notes that the rules contained
in NYSE Arca Temporary Rule 6.96 are not required
by the Plan, but rather are rules proposed by the
Exchange in order to facilitate the participation in
the Plan of certain exchanges during an initial
transition period.
43 15 U.S.C. 78f(b)(5).
jlentini on DSKJ8SOYB1PROD with NOTICES
40 See
VerDate Nov<24>2008
17:05 Aug 25, 2009
Jkt 217001
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,44 that the
proposed rule change (SR–NYSEArca–
2009–45), as modified by Amendment
No. 1, be, and it hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.45
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–20537 Filed 8–25–09; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–60535; File No. SR–
NYSEAmex–2009–55]
Self-Regulatory Organizations; NYSE
Amex LLC; Notice of Filing and Order
Granting Accelerated Approval of
Proposed Rule Change Amending
Section 107(H) of the NYSE Amex
Company Guide
August 19, 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 August
10, 2009, NYSE Amex LLC (‘‘NYSE
Amex’’ or the ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons and is
approving the proposed rule change on
an accelerated basis.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Section 107(H) of the NYSE Amex
Company Guide in order to add the
CBOE Volatility Index® (VIX®) Futures
(‘‘VIX Futures’’) to the definition of
Futures Reference Asset. The text of the
proposed rule change is attached as
Exhibit 5 to the 19b–4 form. 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.
44 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
45 17
PO 00000
Frm 00089
Fmt 4703
Sfmt 4703
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.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Rule 19b–4(e) 3 under the Securities
Exchange Act of 1934 (‘‘Act’’) 4 provides
that the listing and trading of a new
derivative securities product by a selfregulatory organization (‘‘SRO’’) shall
not be deemed a proposed rule change,
pursuant to section (c)(1) of Rule 19b–
4,5 if the Commission has approved,
pursuant to Section 19(b) of the Act,6
the SRO’s trading rules, procedures, and
listing standards for the product class
that would include the new derivative
securities product,7 and the SRO has a
surveillance program for the product
class.8 This proposal is substantially
similar to the previously approved
NYSE Arca Equities Rule 5.2(j)(6)(v).9
The Commission has approved the
listing pursuant to Section 107(H) of the
Amex Company Guide, including listing
pursuant to Rule 19b–4(e), of FuturesLinked Securities.10
The Exchange is proposing to amend
its generic listing standards under
Section 107(H) of the NYSE Amex
Company Guide 11 for Futures-Linked
Securities pursuant to which it will be
able to trade securities linked to VIX
Futures without Commission approval
of each individual product pursuant to
3 17
CFR 240.19b–4(e).
U.S.C. 78a.
5 17 CFR 240.19b–4(c)(1).
6 15 U.S.C. 78s(b).
7 E-mail from Timothy Malinowski, Director,
NYSE Euronext, to Edward Cho, Special Counsel,
Division of Trading and Markets, Commission,
dated August 11, 2009 (‘‘Exchange Confirmation’’).
8 See Securities Exchange Act Release No. 40761
(December 8, 1998), 63 FR 70952 (December 22,
1998) [sic].
9 See Securities Exchange Act Release No. 34–
58968 (November 17, 2008), 73 FR 64647 [sic] (SR–
NYSEArca–2008–111).
10 See Securities Exchange Act Release No. 34–
57739 (April 30, 2008), 73 FR 25061 [sic] (SR–
Amex–2008–17).
11 See Exchange Confirmation, supra note 7.
4 17
E:\FR\FM\26AUN1.SGM
26AUN1
]]>Agencies
[Federal Register Volume 74, Number 164 (Wednesday, August 26, 2009)]
[Notices]
[Pages 43178-43182]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-20537]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-60527; File No. SR-NYSEArca-2009-45]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval of a Proposed Rule Change as Modified by Amendment No. 1
Thereto To Adopt Rules Implementing the Options Order Protection and
Locked/Crossed Market Plan
August 18, 2009.
I. Introduction
On May 20, 2009, NYSE Arca, Inc. (``NYSE Arca'' or ``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 and adopt rules to implement the Options Order Protection and
Locked/Crossed Market Plan. The proposed rule change was published for
comment in the Federal Register on June 12, 2009.\3\ On July 12, 2009,
the Exchange filed Amendment No. 1 to the
[[Page 43179]]
proposed rule change.\4\ The Commission received no comments on the
proposal. This order approves the proposed rule change, as modified by
Amendment No. 1.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 60054 (June 5,
2009), 74 FR 28078 (``Notice'').
\4\ Amendment No. 1 clarified that this proposed rule change
will become effective upon the Exchange's withdrawal from the Plan
for the Purpose of Creating and Operating an Intermarket Option
Linkage and the effectiveness of the Options Order Protection and
Locked/Crossed Market Plan. In addition, Amendment No. 1 revised
Proposed NYSE Arca Rule 6.95(b) to delete the last sentence which
stated, in reference to the proposed locked/crossed market exception
for non-customer quotes, that the ``exemption is operative as long
as the Exchange identifies the presence of Customer orders in its
disseminated bid or offer'' because the sentence was not included in
similar rules of other exchanges. Because the amendment provided
clarification and revised the Exchange's proposed locked and crossed
market rule in a non-substantive manner to conform with similar
proposed rules of other exchanges, the amendment did not require
notice and comment.
---------------------------------------------------------------------------
II. Description of the Proposal
The Exchange proposes to amend and adopt new NYSE Arca rules to
implement the Options Order Protection and Locked/Crossed Market Plan
(``Plan'').\5\ Specifically, the Exchange proposes to amend and/or
replace NYSE Arca Rules 6.92 through 6.96 with new rules implementing
the Plan, amend other Exchange rules to reflect the Plan, and delete
rules rendered unnecessary by the Plan.
---------------------------------------------------------------------------
\5\ The Plan is a national market system plan proposed by the
seven existing options exchanges and approved by the Commission. See
Securities Exchange Act Release No. 59647 (March 30, 2009), 74 FR
15010 (April 2, 2009) (File No. 4-546) (``Plan Notice'') and 60405
(July 30, 2009), 74 FR 39362 (August 6, 2009) (File No. 4-546)
(``Plan Approval''). The seven options exchanges are: Chicago Board
Options Exchange, Incorporated (``CBOE''); International Securities
Exchange, LLC (``ISE''); The NASDAQ Stock Market LLC (``Nasdaq'');
NASDAQ OMX BX, Inc. (``BOX''); NASDAQ OMX PHLX, Inc. (``Phlx'');
NYSE Amex LLC (``NYSE Amex''); and NYSE Arca (each exchange
individually a ``Participant'' and, together, the ``Participating
Options Exchanges'').
---------------------------------------------------------------------------
The Old Plan
Each of the Participating Options Exchanges are signatories to the
Plan for the Purpose of Creating and Operating an Intermarket Option
Linkage (``Old Plan'').\6\ In pertinent part, the Old Plan generally
requires its participants to avoid trading at a price inferior to the
national best bid or offer (``trade-through''), although it provides
for a number of exceptions to trade-through liability.\7\ The
Participating Options Exchanges comply with this requirement of the Old
Plan by utilizing a stand alone system (``Linkage Hub'') to send and
receive specific order types,\8\ namely Principal Acting as Agent
Orders (``P/A Orders''), Principal Orders, and Satisfaction Orders.\9\
The Old Plan also provided that dissemination of ``locked'' or
``crossed'' markets should be avoided, and remedial actions that should
be taken to unlock or uncross such market.\10\ Each of the
Participating Options Exchanges, including the Exchange, has submitted
an amendment to the Old Plan to withdraw from such Plan.\11\ The
withdrawals will be effective upon approval by the Commission of such
amendments pursuant to Rule 608 of Regulation NMS under the Act
(``Regulation NMS'').\12\
---------------------------------------------------------------------------
\6\ On July 28, 2000, the Commission approved the Old Plan as a
national market system plan for the purpose of creating and
operating an intermarket options market linkage proposed by the
American Stock Exchange LLC (n/k/a NYSE Amex), CBOE, and ISE. See
Securities Exchange Act Release No. 43086 (July 28, 2000), 65 FR
48023 (August 4, 2000). Subsequently, Philadelphia Stock Exchange,
Inc. (n/k/a Phlx), Pacific Exchange, Inc. (n/k/a NYSE Arca), Boston
Stock Exchange, Inc. (n/k/a BOX), and Nasdaq joined the Linkage
Plan. See Securities Exchange Act Release Nos. 43573 (November 16,
2000), 65 FR 70851 (November 28, 2000); 43574 (November 16, 2000),
65 FR 70850 (November 28, 2000); 49198 (February 5, 2004), 69 FR
7029 (February 12, 2004); and 57545 (March 21, 2008), 73 FR 16394
(March 27, 2008).
\7\ Section 8(c) of the Old Plan.
\8\ The Linkage Hub is a centralized data communications network
that electronically links the Participating Options Exchanges to one
another. The Options Clearing Corporation (``OCC'') operates the
Linkage Hub.
\9\ Section 2(16) of the Old Plan.
\10\ Section 7(a)(i)(C) of the Old Plan.
\11\ See Securities Exchange Act Release No. 60360 (July 21,
2009) 74 FR 37265 (July 28, 2009) (File No. 4-429).
\12\ 17 CFR 242.608.
---------------------------------------------------------------------------
The Plan
The Plan does not require a central linkage mechanism akin to the
Old Plan's Linkage Hub. Instead, the Plan includes the framework for
routing orders via private linkages that exist for NMS stocks under
Regulation NMS.\13\ The Plan requires the Participating Options
Exchanges to adopt rules ``reasonably designed to prevent Trade-
Throughs.'' \14\ Participating Options Exchanges are also required to
conduct surveillance of their respective markets on a regular basis to
ascertain the effectiveness of the policies and procedures to prevent
Trade-Throughs and to take prompt action to remedy deficiencies in such
policies and procedures.\15\ As further described below, the Plan
incorporates a number of exceptions to trade-through liability.\16\
Some of these exceptions are carried over from the Old Plan, including
exceptions for trading rotations, non-firm quotes, and complex
trades.\17\ Others are substantially similar to exceptions available
for NMS stocks under Regulation NMS, such as exceptions for systems
issues, crossed markets, quote flickering, customer stopped orders,
benchmark trades and, notably, intermarket sweep orders (``ISOs'').\18\
In addition, the Plan contains a new exception for stopped orders and
price improvement.\19\
---------------------------------------------------------------------------
\13\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005) (File No. S7-10-04); 17 CFR
242.600 et seq. For discussions of the similarities between the
provisions of Regulation NMS and the provisions in the Plan, see the
Plan Notice and Plan Approval, supra note 5.
\14\ Under the Plan, a ``Trade-Through'' is generally defined as
a transaction in an option series, either as principal or agent, at
a price that is lower than a Protected Bid or higher than a
Protected Offer.'' See Section 2(21) of the Plan. A ``Protected
Bid'' and ``Protected Offer'' generally means a bid or offer in an
option series, respectively, that is displayed by a Participant, is
disseminated pursuant to the Options Price Reporting Authority
(``OPRA'') Plan, and is the Best Bid or Best Offer. See Section
2(17) of the Plan. A ``Best Bid'' or ``Best Offer'' means the
highest bid price and the lowest offer price. Section (2)(1) of the
Plan. ``Protected Bid'' and ``Protected Offer,'' together are
referred to herein as ``Protected Quotation.'' See Section 2(18) of
the Plan.
\15\ Section 5(a)(ii) of the Plan.
\16\ Section 5(b) of the Plan.
\17\ Subparagraphs (ii), (vii), and (viii), respectively, of
Section 5(b) of the Plan.
\18\ Subparagraphs (i), (iii), (vi), (ix), (xi), and (iv)-(v),
respectively, of Section 5(b) of the Plan.
\19\ Subparagraph (x) of Section 5(b) of the Plan.
---------------------------------------------------------------------------
The Plan also requires each Participant to establish, maintain, and
enforce written rules that: require its members reasonably to avoid
displaying locked and crossed markets; assure the reconciliation of
locked and crossed markets; and prohibit its members from engaging in a
pattern or practice of displaying locked and crossed markets; subject
to exceptions as may be contained in the rules of the Participant, as
approved by the Commission.\20\
---------------------------------------------------------------------------
\20\ Section 6 of the Plan. The Plan also contains provisions
relating to the operation of the Plan including, for example,
provisions relating to the entry of new parties to the Plan;
withdrawal from the Plan; and amendments to the Plan.
---------------------------------------------------------------------------
The Exchange's Proposal
To implement the Plan, the Exchange proposes to replace its current
rules relating to the Old Plan with new rules relating to the Plan, and
makes amendments to other rules as necessary to conform to the
requirements of the Plan.\21\ As such, the Exchange proposes to adopt
all applicable definitions from the Plan into the Exchange's rules.\22\
---------------------------------------------------------------------------
\21\ A more detailed description of the Exchange's proposed rule
change may be found in the Notice, supra, note 3.
\22\ Proposed NYSE Arca Rule 6.92.
---------------------------------------------------------------------------
In addition, the Exchange proposes to prohibit its members from
effecting Trade-Throughs, unless an exception applies.\23\ Consistent
with the Plan, the Exchange also proposes exceptions to the prohibition
on trade throughs relating to: System issues; trading
[[Page 43180]]
rotations; crossed markets; intermarket sweep orders; quote flickering;
non-firm quotes; complex trades; customer stopped orders; stopped
orders and price improvement; and benchmark trades.\24\
---------------------------------------------------------------------------
\23\ Proposed NYSE Arca Rule 6.94(a).
\24\ Proposed NYSE Arca Rule 6.94(b)(1)-(10). In addition, the
Exchange proposes to add ISOs as a new type of order under proposed
NYSE Arca Rule 6.62(z).
---------------------------------------------------------------------------
The Exchange also proposes a rule to address locked and crossed
markets, as required by the Plan.\25\ Specifically, the Exchange
proposes that, except for quotations that fall within a stated
exception, members shall reasonably avoid displaying, and shall not
engage in a pattern or practice of displaying, any quotations that lock
or cross a Protected Quote.\26\
---------------------------------------------------------------------------
\25\ A ``locked market'' is defined as a quoted market in which
a Protected Bid is equal to a Protected Offer. Proposed NYSE Arca
Rule 6.92(a)(9). A ``crossed market'' is defined as a quoted market
in which a Protected Bid is higher than a Protected Offer. Proposed
NYSE Arca Rule 6.92(a)(5).
\26\ Proposed NYSE Arca Rule 6.95(a).
---------------------------------------------------------------------------
The Exchange proposes four exceptions to the prohibition against
locked and crossed markets: When the Exchange is experiencing a
failure, material delay, or malfunction of its systems or equipment;
when the locking or crossing quotation was displayed at a time where
there is a crossed market; when an Exchange member simultaneously
routes an ISO to execute against the full displayed size of any locked
or crossed Protected Bid or Protected Offer; and, with respect to a
locking quotation, when the order entered on the Exchange that will
lock a Protected Bid or Protected Offer, is (i) not a customer order,
and the Exchange can determine via identification available pursuant to
the OPRA Plan that such Protected Bid or Protected Offer does not
represent, in whole or in part, a customer order; or (ii) a customer
order, and the Exchange can determine via identification available
pursuant to the OPRA Plan that such Protected Bid or Protected Offer
does not represent, in whole or in part, a customer order, and, on a
case-by-case basis, the customer specifically authorizes the member to
lock such Protected Bid or Protected Offer.\27\ The Exchange believes
that, in most cases, locked market maker quotes are good for the
investing public, but recognizes that the benefits of a locked market
become more complicated when one or both of the locking quotations
represent a customer order. Where there is market interest willing to
trade with a customer, the Exchange believes that the customer order
should be filled. Thus, the Exchange proposes that it would not exempt
from the locked market prohibition situations involving customer orders
unless the customer entering the locking order specifically authorizes
the lock on a case-by-case basis.\28\ As a result, its members would
not be permitted to lock another Participant's quotation unless the
Exchange can establish that the quotation on the other Participant's
market is not for the account of a customer.
---------------------------------------------------------------------------
\27\ Proposed NYSE Arca Rule 6.95(b)(1)-(4).
\28\ NYSE Arca noted that it can envision a customer authorizing
a lock when the fees associating with trading against the locked
market make the execution price uneconomical to the customer. See
Notice, supra note 3 at 28080.
---------------------------------------------------------------------------
The Exchange also proposes rules to permit it to continue to accept
P/A Orders and Principal Orders from Participating Options Exchanges
that are not able to send ISOs in order to avoid Trade-Throughs.\29\
The Exchange noted that, even upon the approvals of the Plan and the
implementing rules of the various Participating Options Exchanges, it
is possible that not all the Participants will be functionally able to
operate pursuant to the Plan. Thus, the Exchange has proposed to retain
certain rules governing the receipt of P/A Orders and Principal Orders
until such time that all Participating Options Exchanges are operating
pursuant to the Plan.
---------------------------------------------------------------------------
\29\ Proposed NYSE Arca Temporary Rule 6.96.
---------------------------------------------------------------------------
The Exchange also proposes to delete certain provisions of NYSE
Arca rules to reflect the Exchange's withdrawal from the Old Plan.\30\
Finally, the Exchange proposes to amend NYSE Arca Rule 10.12, the
Exchange's Minor Rule Plan, to replace references to the Old Plan with
references to the Plan.
---------------------------------------------------------------------------
\30\ See Notice, supra note 3 at 28080-81, discussing proposed
changes to NYSE Arca Rule 6.33, Commentaries .02-.04 to NYSE Arca
Rule 6.35, and NYSE Arca Rule 6.76A.
---------------------------------------------------------------------------
II. Discussion and Commission's Findings
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\31\ In particular, the Commission finds that the
proposal is consistent with Section 6(b)(5) of the Act \32\ which
requires, among other things, that the rules of a national securities
exchange be designed to promote just and equitable principles of trade,
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general, to protect
investors and the public interest. The Commission also finds that the
proposal is consistent with Rule 608(c) of Regulation NMS under the
Act, which requires that each exchange comply with the terms of any
effective national market system plan of which it is a participant.\33\
Finally, the Commission finds that the proposed rule change is
consistent with the requirements of the Plan.\34\
---------------------------------------------------------------------------
\31\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\32\ 15 U.S.C. 78f(b)(5).
\33\ 17 CFR 242.608(c). Section 1 of the Plan provides in
pertinent part that, ``The Participants will submit to the
[Commission] for approval their respective rules that will implement
the framework of the Plan.''
\34\ See supra note 5.
---------------------------------------------------------------------------
Proposed NYSE Arca Rule 6.92 would define applicable terms in a
manner that are substantively identical to the defined terms of the
Plan. As such, the Commission finds that proposed amendments to NYSE
Arca Rule 6.92 are consistent with the Act and the Plan.
Proposed NYSE Arca Rule 6.94(a) would prohibit members from
effecting Trade-Throughs unless an exception applies. Proposed NYSE
Arca Rule 6.94(b) would provide for ten exceptions to the general
Trade-Through prohibition, relating to systems issues, trading
rotations, crossed markets, ISOs, quote flickering, non-firm quotes,
complex trades, customer stopped orders, stopped orders and price
improvement, and benchmark trades.\35\ Aside from the proposed
exception relating to systems issues, each proposed exception would be
substantively identical to the parallel exception under Section 5(b) of
the Plan.
---------------------------------------------------------------------------
\35\ Proposed NYSE Arca Rule 6.94(b)(1)-(10).
---------------------------------------------------------------------------
The systems issues exception under proposed NYSE Arca Rule
6.94(b)(1) would implement the parallel exception available under
Section 5(b)(i) of the Plan and would permit the Exchange to bypass the
Protected Quotation of another Participant if such other Participant
repeatedly fails to respond within one second to incoming orders
attempting to access its Protected Quotations. The Exchange's rule
would require the Exchange to notify such non-responding Participant
immediately after (or at the same time as) electing self-help, and
assess whether the cause of the problem lies with the Exchange's own
systems and, if so, take immediate steps to resolve the problem.
Finally, the Exchange would be required to promptly document its
reasons supporting any such determination to bypass a Protected
Quotation. The Commission believes that this exception should provide
the Exchange with the
[[Page 43181]]
necessary flexibility for dealing with problems that occur on an away
market during the trading day. At the same time, the exception's
requirements to immediately notify such away market of its
determination and also assess its own system should help prevent the
use of this exception when there in fact is a problem with the
Exchange's own systems, rather than those of an away market.
The Commission notes that included among the exception in proposed
NYSE Arca Rule 6.94(b) would be an exception for certain transactions
involving ISOs.\36\ An order identified as an ISO would be immediately
executable by the Exchange (or any other Plan Participant that received
such an order) based on the premise that the market participant sending
the ISO has already attempted to access all better-priced Protected
Quotations up to their displayed size. The Commission believes that
this exception should help ensure more efficient and faster executions
in the options markets.
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\36\ Proposed NYSE Arca Rule 6.94(b)(4).
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The Commission notes that, in addition to these rules regarding
Trade-Throughs, the Plan requires that each Participant establish,
maintain and enforce written policies and procedures that are
reasonably designed to prevent Trade-Throughs in that Participant's
market that do not fall within an applicable exception and, if relying
on such exception, that are reasonably designed to assure compliance
with the terms of the exception. In addition, the Commission notes that
the Plan requires each Participant to conduct surveillance of its
market on a regular basis to ascertain the effectiveness of such
policies and procedures and to take prompt action to remedy any
deficiencies in such policies and procedures.
Accordingly, the Commission finds that proposed NYSE Arca Rule 6.94
is consistent with Section 5 of the Plan and Section 6(b)(5) of the Act
\37\ which requires, among other things, that the rules of a national
securities exchange be designed to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and, in
general, to protect investors and the public interest.
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\37\ 15 U.S.C. 78f(b)(5).
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Proposed NYSE Arca Rule 6.95(a) would require Exchange members to
reasonably avoid displaying, and not engage in a pattern or practice of
displaying, any quotation that locks or crosses a Protected Quotation,
subject to certain exceptions delineated in proposed NYSE Arca Rule
6.95(b). The Commission recognizes that locked and crossed markets may
occur accidentally and cannot always be avoided. However, the
Commission believes that giving priority to the first-displayed
Protected Bid or Protected Offer, particularly when it includes a
public customer's order, will encourage price discovery and contribute
to fair and orderly markets. Therefore, the Commission believes that
the proposed rule, which corresponds to the Plan's language, to require
members to reasonably avoid displaying, and not engaging in a pattern
or practice of, locks and crosses is appropriate.
Proposed NYSE Arca Rule 6.95(b) would permit four exceptions to the
Exchange's general rule relating to locked and crossed markets.\38\ The
first three would be similar to analogous certain trade-through
exceptions under proposed NYSE Arca Rule 6.94(b), and relate to when
the Exchange is experiencing systems issues, when there is exists a
crossed market, and when a member simultaneously routes ISOs against
the full displayed size of any locked or crossed Protected Bid or
Protected Offer.
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\38\ Section 6 of the Plan permits exceptions to the Plan's
locked and crossed market rules as may be contained in the rules of
a Participant approved by the Commission.
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The fourth exception would permit an order entered onto the
Exchange to lock a Protected Bid or Protected Offer when such order is:
(1) not a customer order, and the Exchange can determine that such
Protected Bid or Protected Offer does not represent, in whole or in
part, a customer order; or (2) a customer order, and the Exchange can
determine that such Protected Bid or Protected Offer does not
represent, in whole or in part, a customer order and, on a case-by-case
basis, the customer specifically authorizes the Exchange's member to
lock such Protected Bid or Protected Offer. This exception would not
protect a market maker quote or broker-dealer order from being locked.
The Commission believes that the Exchange's proposed rules relating
to locked and crossed markets are consistent with the Plan and the Act
and should help ensure that the display of locked or crossed markets
will be limited and that any such display will be promptly reconciled.
The Commission also believes that each of the proposed exceptions to
locked and crossed markets relate to circumstances when it is
appropriate to permit a limited, narrow exception to the general locked
and crossed market rule.
In particular, the Commission believes that the fourth exception is
appropriate because it would protect customer orders that are Protected
Bids or Protected Offers from being locked, and would only permit a
customer order entered on to the Exchange to lock a Protected Bid or
Protected Offer when a customer specifically authorizes an Exchange
member, and only when such Protected Bid or Protected Offer itself does
not represent, in whole or in part, a customer order. Because of the
rapidity with which options quotes are often updated today,
particularly in response to changes in the underlying, there is an
increasing likelihood that market maker quotations will lock each
other. The proposed exception accounts for this dynamic by not
prohibiting such locking instances. Importantly, the proposed exception
in the Exchange's rules that the Commission is approving would allow
non-customer orders to lock an away market's Protected Quotation only
if the Exchange is able to affirmatively determine that the Protected
Quotation on the away market is not, in whole or in part, for the
account of a customer. If any portion of such away market's Protected
Quotation is for the account of a customer, such Protected Quotation
may not be locked. In addition, the Commission notes that the rule
requires that such determination be made via identification available
pursuant to the OPRA Plan, which is working with the participating
options exchanges on a method to so identify customer quotations
through OPRA. The Exchange has represented that, absent the ability to
identify a customer quote as part of an exchange's BBO, the Exchange
would assume that the quote represents, in whole or in part, a customer
order. As such, the Exchange has represented that it would not permit
its members to avail themselves of this exemption unless the away
market has informed the Exchange that it would designate all customer
orders as such in OPRA and such exchange's quotation does not contain
such designation. Finally, the Exchange has represented that if an
exchange chooses not to identify its customer quotations, the Exchange
would treat all of such exchange's quotations as customer orders and,
absent application of another exception, would not permit locks of such
quotations.
Therefore, the Commission finds that Exchange's rule regarding
locked and crossed markets appropriately implements Section 6 of the
Plan, and is consistent with Section 6(b)(5) of the
[[Page 43182]]
Act \39\ which requires, among other things, that the rules of a
national securities exchange be designed to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and, in
general, to protect investors and the public interest.
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\39\ 15 U.S.C. 78f(b)(5).
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The Commission also finds that proposed NYSE Arca Temporary Rule
6.96, which facilitates the participation of certain Participating
Options Exchanges who may require the use of P/A Orders and Principal
Orders after implementation of the Plan, is consistent with the Act.
Although the Commission has already approved the Plan,\40\ the
Commission also recognizes that there may be one or more Participating
Options Exchanges that may require a temporary transition period during
which they may want to continue to utilize these order types that exist
currently under the Old Plan.\41\ The Exchange and each of the other
Participating Options Exchanges have proposed substantially identical
temporary provisions to accommodate this possibility.\42\ Thus, the
Commission finds that the proposed rule relating to the Exchange's
receipt and handling of P/A Orders and Principal Orders, and imposing
certain obligations on the Exchange with respect to such orders that
are similar to those that exist under the Old Plan, is appropriate and
consistent with Section 6(b)(5) of the Act \43\ which requires, among
other things, that the rules of a national securities exchange be
designed to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest.
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\40\ See Plan Approval, supra, note 5.
\41\ The Commission notes that any Participating Options
Exchange that wishes to utilize such order types in a manner that
would result in a Trade-Through would need to separately request an
exemption from the Plan for such use.
\42\ The Commission notes that the rules contained in NYSE Arca
Temporary Rule 6.96 are not required by the Plan, but rather are
rules proposed by the Exchange in order to facilitate the
participation in the Plan of certain exchanges during an initial
transition period.
\43\ 15 U.S.C. 78f(b)(5).
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Finally, the Commission finds that NYSE Arca's other proposed
changes, including the proposed modifications to NYSE Arca Rule 6.33,
Commentary .02-.04 to NYSE Arca Rule 6.35, NYSE Arca Rule 6.76.A, and
NYSE Arca Rule 10.12 are appropriate and consistent with the Act.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\44\ that the proposed rule change (SR-NYSEArca-2009-45), as
modified by Amendment No. 1, be, and it hereby is, approved.
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\44\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\45\
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\45\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-20537 Filed 8-25-09; 8:45 am]
BILLING CODE 8010-01-P
