Self-Regulatory Organizations; New York Stock Exchange LLC; NYSE Amex LLC; Order Disapproving Proposed Rule Changes To Codify Certain Traditional Trading Floor Functions That May Be Performed by Designated Market Makers and To Permit Designated Market Makers and Floor Brokers Access to Disaggregated Order Information, 42525-42529 [2012-17551]
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Federal Register / Vol. 77, No. 139 / Thursday, July 19, 2012 / Notices
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
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 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 Exchange consents,
the Commission shall:
A. By order approve or disapprove
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:
emcdonald on DSK67QTVN1PROD with NOTICES
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–Phlx–2012–95 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–Phlx-2012–95. This file
number should be included on the
subject line if email 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
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Commission and any person, other than
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–17548 Filed 7–18–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–67437; File Nos. SR–NYSE–
2011–56; SR–NYSEAmex–2011–86]
Self-Regulatory Organizations; New
York Stock Exchange LLC; NYSE
Amex LLC; Order Disapproving
Proposed Rule Changes To Codify
Certain Traditional Trading Floor
Functions That May Be Performed by
Designated Market Makers and To
Permit Designated Market Makers and
Floor Brokers Access to
Disaggregated Order Information
July 13, 2012.
On October 31, 2011, the New York
Stock Exchange LLC (‘‘NYSE’’) and
NYSE Amex LLC (‘‘NYSE Amex’’)
(collectively, the ‘‘SROs’’) each 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 proposed rule
changes (‘‘SRO Proposals’’) to amend
certain of their respective rules relating
to Designated Market Makers
(‘‘DMMs’’) 3 and Floor brokers. The SRO
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See NYSE Rule 98(b)(2). ‘‘DMM unit’’ means
any member organization, aggregation unit within
a member organization, or division or department
within an integrated proprietary aggregation unit of
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6 17
1 15
Frm 00044
Fmt 4703
Sfmt 4703
42525
Proposals were published for comment
in the Federal Register on November 17,
2011.4 The Commission received no
comment letters on the proposals. On
December 22, 2011, the Commission
extended the time period in which to
either approve the SRO Proposals,
disapprove the SRO Proposals, or to
institute proceedings to determine
whether to disapprove the SRO
Proposals, to February 15, 2012.5
On February 15, 2012, the
Commission instituted proceedings to
determine whether to disapprove the
proposed rule changes.6 The
Commission thereafter received five
comment letters on the proposals.7
NYSE Euronext, on behalf of the SROs,
submitted a response letter on March
28, 2012.8 On May 14, 2012, the
Commission issued a notice of
designation of longer period for
Commission action on proceedings to
determine whether to disapprove the
proposed rule changes.9 This order
disapproves the proposed rule changes.
I. Description of the Proposals
The SRO Proposals seek to amend the
SROs’ rules in several ways. First, the
a member organization that (i) Has been approved
by NYSE Regulation pursuant to section (c) of
NYSE Rule 98, (ii) is eligible for allocations under
NYSE Rule 103B as a DMM unit in a security listed
on the Exchange, and (iii) has met all registration
and qualification requirements for DMM units
assigned to such unit. The term ‘‘DMM’’ means any
individual qualified to act as a DMM on the floor
of the Exchange under NYSE Rule 103. See also
NYSE Amex Equities Rule 2(i). Rule 2(i) defines the
term ‘‘DMM’’ to mean an individual member,
officer, partner, employee or associated person of a
DMM unit who is approved by the Exchange to act
in the capacity of a DMM. NYSE Amex Equities
Rule 2(j) defines the term ‘‘DMM unit’’ as a member
organization or unit within a member organization
that has been approved to act as a DMM unit under
NYSE Amex Equities Rule 98.
4 See Securities Exchange Act Release Nos. 65735
(November 10, 2011), 76 FR 71405 (SR–
NYSEAmex-2011–86) (‘‘NYSE Amex Notice’’) and
65736 (November 10, 2011), 76 FR 71399 (SR–
NYSE–2011–56) (‘‘NYSE Notice’’).
5 See Securities Exchange Act Release No. 66036,
76 FR 82011 (December 29, 2011).
6 See Securities Exchange Act Release No. 66397,
77 FR 10586 (February 22, 2012) (‘‘Order Instituting
Proceedings’’).
7 See Letters to Elizabeth M. Murphy, Secretary,
Commission, from Kenneth Polcari, dated March
12, 2012 (‘‘Polcari Letter’’); Patrick Armstrong and
Daniel Tandy, Co-Presidents, Alliance of Floor
Brokers (‘‘AFB’’), dated March 13, 2012 (‘‘AFB
Letter’’); Jonathan Corpina, President, and Jennifer
Lee, Vice President, Organization of Independent
Floor Brokers (‘‘OIFB’’), dated March 13, 2012
(‘‘OIFB Letter’’); James J. Angel, Ph.D., CFA, dated
March 15, 2012 (‘‘Angel Letter’’); and John
Petschauer, CEO, EZX, Inc., dated March 14, 2012
(‘‘EZX Letter’’).
8 See Letter to Elizabeth M. Murphy, Secretary,
Commission, from Janet McGinness, Executive Vice
President and Corporate Secretary, NYSE Euronext,
dated March 28, 2012 (‘‘SRO Response Letter’’).
9 See Securities Exchange Act Release No. 66981,
77 FR 29730 (May 18, 2012).
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Federal Register / Vol. 77, No. 139 / Thursday, July 19, 2012 / Notices
SROs propose to codify certain trading
floor functions that may be performed
by DMMs. Second, the SROs propose to
allow DMMs to access Exchange
systems that would provide DMMs with
additional order information about the
securities in which they are registered.
Third, the SROs propose to make certain
conforming amendments to their rules
to reflect the additional order
information that would be available to
DMMs through Exchange systems, and
to specify what information about Floor
broker agency interest file (‘‘e-Quotes’’)
is available to the DMM. Finally, the
SROs propose to modify the terms
under which DMMs would be permitted
to provide market information to Floor
brokers and others.
emcdonald on DSK67QTVN1PROD with NOTICES
A. Trading Floor Functions
The SROs propose to codify certain
trading floor functions formerly
performed by specialists that are now
performed by DMMs, and were
described in each SRO’s respective
Floor Official Manual.10
The proposed rules would specify
four categories of trading floor functions
that DMMs could perform: (1)
Maintaining order among Floor brokers
manually trading at the DMM’s assigned
panel;11 (2) bringing Floor brokers
together to facilitate trading;12 (3)
assisting Floor brokers with respect to
their orders by providing information
regarding the status of a Floor broker’s
orders, helping to resolve errors or
questioned trades, adjusting errors, and
cancelling or inputting Floor broker
agency interest on behalf of a Floor
broker;13 and (4) researching the status
of orders or questioned trades.14
10 See, e.g., NYSE 2004 Floor Official Manual,
Market Surveillance June 2004 Edition, Chapter
Two, Section I.
11 See id. at Section I.A. at 7 (‘‘specialist helps
ensure that such markets are fair, orderly,
operationally efficient and competitive with all
other markets in those securities’’).
12 See id. at Section I.B.3. at 10–11 (‘‘[i]n opening
and reopening trading in a listed security, a
specialist should * * * [s]erve as the market
coordinator for the securities in which the specialist
is registered by exercising leadership and managing
trading crowd activity and promptly identifying
unusual market conditions that may affect orderly
trading in those securities, seeking the advice and
assistance of Floor Officials when appropriate’’ and
‘‘[a]ct as a catalyst in the markets for the securities
in which the specialist is registered, making all
reasonable efforts to bring buyers and sellers
together to facilitate the public pricing of orders,
without acting as principal unless reasonably
necessary’’).
13 See id. at Section I.B.4. at 11 (‘‘In view of the
specialist’s central position in the Exchange’s
continuous two-way agency auction market, a
specialist should proceed as follows * * * [e]qually
and impartially provide accurate and timely market
information to all inquiring members in a
professional and courteous manner.’’).
14 See id. at Section I.B.5. at 12 (A specialist
should ‘‘[p]romptly provide information when
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B. DMM Access to Additional Order
Information
Each SRO proposes to make Exchange
systems available to a DMM at the post
that display the following types of
information about securities in which
the DMM is registered: (A) Aggregated
information about buying and selling
interest;15 (B) disaggregated information
about the price and size of any
individual order or e-Quotes and the
entering and clearing firm information
for such orders, except that Exchange
systems would not make available to
DMMs information about any order or eQuote, or portion thereof, that a market
participant has elected not to display to
a DMM; and (C) post-trade
information.16 The proposals would
make available to DMMs disaggregated
information about the following interest
in securities in which the DMM is
registered: (a) the price and size of all
displayable interest submitted by offFloor participants (off-Floor participants
may submit non-displayable interest
that is hidden from the DMM);17 and (b)
all e-Quotes, including reserve e-Quotes,
that the Floor broker has not elected to
exclude from availability to the DMM.18
C. Conforming Amendments and Floor
Broker e-Quote Information
The SROs also propose to make
conforming amendments to their rules
to reflect the additional order
information that would be available to
DMMs through Exchange systems, and
to specify what information about eQuotes is available to the DMM.
Specifically, the SROs propose to revise
NYSE Rule 70 and NYSE Amex Rule 70
necessary to research the status of an order or a
questioned trade and cooperate with other members
in resolving and adjusting errors.’’).
15 Exchange systems currently make available to
DMMs aggregate information about the following
interest in securities in which the DMM is
registered: (a) All displayable interest submitted by
off-floor participants; (b) all Minimum Display
Reserve orders, including the reserve portion; (c) all
displayable floor broker agency interest files (‘‘eQuotes’’); (d) all Minimum Display Reserve eQuotes, including the reserve portion; and (e) the
reserve quantity of Non-Display Reserve e-Quotes,
unless the floor broker elects to exclude that reserve
quantity from availability to the DMM.
16 For the latter two categories, the DMM also
would have access to entering and clearing firm
information for each order and, as applicable, the
badge number of the floor broker representing the
order. According to the SROs, the systems would
not contain any information about the ultimate
customer (i.e., the name of the member or member
organization’s customer) in a transaction.
17 See NYSE and NYSE Amex Rule 13, defining
non-displayed order types.
18 The SROs previously permitted DMMs to have
access to Exchange systems that contained the
disaggregated order information described above.
The SROs stopped making such information
available to DMMs on January 19, 2011. See NYSE
and NYSE Amex Information Memo 11–03.
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Frm 00045
Fmt 4703
Sfmt 4703
governing e-Quotes to reflect that
disaggregated order information would
be available to the DMM except as
elected otherwise. The SROs would
allow a Floor broker to enter e-Quotes
with reserve interest (‘‘Reserve eQuote’’) with or without a displayable
portion.
A Reserve e-Quote with a displayable
portion would participate in manual
and automatic executions. Order
information at each price point,
including the reserve portion, would be
included in the aggregate interest
available to the DMM. Order
information at each price point would
be available to the DMM on a
disaggregated basis as well. If the Floor
broker chooses to exclude the Reserve eQuote with a displayable portion from
the DMM, then the DMM would have
access to the entire portion on an
aggregated basis but would not have
access to any of that interest on a
disaggregated basis.
A Reserve e-Quote with an
undisplayable portion would also
participate in manual and automatic
executions. Like the Reserve e-Quote
with a displayable portion, order
information at each price point would
be included in the aggregate interest
available to the DMM. Again, like the
Reserve e-Quote with a displayable
portion, order information at each price
point would be available to the DMM on
a disaggregated basis as well. If the
Floor broker chooses to exclude the
Reserve e-Quote with an undisplayable
portion from the DMM, however, then
the DMM would not have access to such
interest on either an aggregated basis or
a disaggregated basis. Such interest
would not participate in manual
executions.
In addition, the SROs propose to
delete rules which currently prohibit
DMMs from using the Display Book
system to access information about eQuotes excluded from the aggregated
agency interest and Minimum Display
Reserve Order information, other than
for the purpose of effecting transactions
that are reasonably imminent where
such Floor broker agency and Minimum
Display Reserve Order interest
information is necessary to effect such
transaction.19
D. Ability of DMMs to Provide Market
Information on the Trading Floor
The SROs also propose to modify the
manner under which DMMs would be
permitted to provide market information
to Floor brokers and visitors on the
trading floor. Specifically, the proposed
19 See proposed deletions to NYSE Rule 104(a)(6)
and NYSE Amex Rule 104(a)(b).
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Federal Register / Vol. 77, No. 139 / Thursday, July 19, 2012 / Notices
rules would permit a DMM to provide
the market information to which he or
she has access to a: (1) Floor broker in
response to an inquiry in the normal
course of business; or (2) visitor to the
trading floor for the purpose of
demonstrating methods of trading. As
such, Floor brokers would be able to
access disaggregated order information
that market participants have not
otherwise elected to be hidden from the
DMM. A Floor broker would not be able
to submit such an inquiry for market
information by electronic means, and
the DMM’s response containing market
information could not be delivered
through electronic means.
Because the proposed rule expands on
and incorporates the current SRO rules
regarding disclosure of order
information by DMMs, the SROs are
proposing to delete these rules.20 The
current rules provide that a DMM may
disclose market information for three
purposes. First, a DMM may disclose
market information for the purpose of
demonstrating the methods of trading to
visitors to the trading floor. This aspect
of the current rule is replicated in the
proposed rules. Second, a DMM may
disclose market information to other
market centers in order to facilitate the
operation of the Intermarket Trading
System (‘‘ITS’’). According to the SROs,
this text is obsolete as the ITS Plan has
been eliminated and therefore the SROs
are proposing to delete it. Third, a DMM
may, while acting in a market making
capacity, provide information about
buying or selling interest in the market,
including (a) Aggregated buying or
selling interest contained in Floor
broker agency interest files other than
interest the broker has chosen to
exclude from the aggregated buying and
selling interest, (b) aggregated interest of
Minimum Display Reserve Orders and
(c) the interest included in DMM
interest files, excluding Capital
Commitment Schedule (‘‘CCS’’) interest
as described in Rule 1000(c), in
response to an inquiry from a member
conducting a market probe in the
normal course of business. The
proposed rules would permit DMMs to
provide Floor brokers not only with the
same aggregated order information that
DMMs currently are permitted to
provide under current rules, but also
with the disaggregated and post-trade
order information described above.21
20 The SROs are also proposing conforming
amendments to correct cross-references to the
former rule.
21 Because DMMs on the trading floor do not have
access to CCS interest information, the proposed
rule does not specify that DMMs would not be
disseminating such information.
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The proposed rules would permit a
DMM to provide market information to
a Floor broker in response to a specific
request by the Floor broker to the DMM
at the post, rather than specifying that
the information must be provided ‘‘in
response to an inquiry from a member
conducting a market probe in the
normal course of business,’’ as currently
provided in the SRO rules. Under the
proposed rule change, Floor brokers
would not have access to Exchange
systems that provide disaggregated
order information, and Floor brokers
would only be able to access such
market information through a direct
manual interaction with a DMM at the
post.
II. Disapproval Proceedings, Summary
of Comment Letters and the SROs’
Response
In the Order Instituting Proceedings,
the Commission expressed concern
about the consistency of the proposals
with Section 6(b)(5) of the Act,
including whether they would permit
unfair discrimination, promote just and
equitable principles of trade, and
protect investors and the public
interest.22 Among other things, the
Commission noted that, while the
proposals may improve the ability of
DMMs and Floor brokers to trade on the
Exchanges, the proposals also would
provide them access to potentially
valuable information about Exchange
orders that is not available to other
members or market participants,
including the identity of the entering
and clearing firm.23 The Commission
stated that, while exchanges may
legitimately confer special benefits on
market participants willing to accept
substantial responsibilities to contribute
to market quality, such benefits must
not be disproportionate to the services
provided.24 The Commission noted that
the Exchanges were not proposing to
require any additional obligations from
DMMs and Floor brokers in exchange
for the additional order information,
and had not clearly explained how the
proposals would materially improve the
quality of the SROs’ markets.25 As a
result, the Commission was concerned
that the proposals unfairly
discriminated in favor of DMMs and
Floor brokers, might not have been
designed to protect the broad group of
investors that trade on the SROs, and
otherwise might be inequitable.26
U.S.C. 78f(b)(5).
Order Instituting Proceedings, supra note 6,
at 10589.
24 See Order Instituting Proceedings, supra note 6,
at 10588.
25 Id. at 10589.
26 See id.
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22 15
23 See
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Fmt 4703
Sfmt 4703
42527
The Commission received five
comment letters in support of the
proposed rule changes,27 along with a
response from the SROs.28 In general,
the commenters believed that the floors
of the Exchanges continued to provide
a valuable service to the markets,
particularly with respect to the
facilitation of block trades, and they
broadly indicated that the proposed
provision of disaggregated order
information to Floor members would
further this important function.29 One
commenter also stated that the access to
this information would enable DMMs to
assist Floor brokers in the event of a
technical failure.30 Some noted that this
type of information had historically
been made available to Floor
members.31
Commenters did not believe the
proposals were unfairly discriminatory
because, in their view, DMMs would be
obligated to provide disaggregated order
information to Floor brokers in a nondiscriminatory fashion, and Floor
brokers would be obligated to do the
same for their customers.32 Commenters
also expressed the view that the
disaggregated order information would
be of limited utility because it could
only be accessed manually,33 and they
noted that Floor brokers were restricted
from trading proprietarily and thus
could not directly benefit from this
information.34
Commenters also emphasized that
market participants that do not wish to
allow their disaggregated order
information to be provided to DMMs
and Floor brokers can use undisplayed
orders or place orders on a competing
exchange.35 One commenter urged the
Commission to allow exchange
experimentation and believed that, if
the proposals resulted in information
leakage or degraded market quality, then
order flow would rapidly shift to other
trading venues.36
27 See
supra note 7.
supra note 8.
29 AFB Letter, supra note 7, at 3; Angel Letter,
supra note 7, at 2; EZX Letter, supra note 7; OIFB
Letter, supra note 7, at 1; and Polcari Letter, supra
note 7, at 2.
30 See OIFB Letter, supra note 7, at 1.
31 See AFB Letter, supra note 7, at 2; Angel Letter,
supra note 7, at 2; and OIFB Letter, supra note 7,
at 1.
32 See AFB Letter, supra note 7, at 3; Angel Letter,
supra note 7, at 3; OIFB Letter, supra note 7, at 1–
2; and Polcari Letter, supra note 7, at 2.
33 See OIFB Letter, supra note 7, at 2.
34 See AFB Letter, supra note 7, at 4; OIFB Letter,
supra note 7, at 2; Polcari Letter; supra note 7, at
3.
35 See AFB Letter, supra note 7, at 2; Angel Letter,
supra note 7, at 3; and OIFB Letter, supra note 7,
at 1.
36 See Angel Letter, supra note 7, at 3–4.
28 See
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Federal Register / Vol. 77, No. 139 / Thursday, July 19, 2012 / Notices
emcdonald on DSK67QTVN1PROD with NOTICES
In their response, the SROs, among
other things, emphasized that ‘‘[t]he
purpose of the Proposals is to help
DMMs facilitate large orders on the
Trading Floor if an investor wishes to
utilize the resources of a Floor
broker,’’ 37 and argued that the proposals
would ‘‘potentially make the Floor more
hospitable to large orders, reduce
transaction costs and produce savings
for long-term investors.’’ 38 In proposing
to provide disaggregated order
information to Floor members, the SROs
‘‘seek to provide improved conditions
for buyers and sellers to interact at
potentially more favorable prices, or in
larger-sized executions, on the Floors of
the Exchanges.’’ 39 The SROs believe
that ‘‘making this information available
to Floor brokers [would make] it easier
for * * * size trades to be arranged, and
for leakage and market impact to be
avoided.’’ 40
At the same time, the SROs take the
position that ‘‘any informational
advantage conveyed is extremely
slight.’’ 41 They note that DMMs and
Floor brokers already have access to
aggregated order information, and that
the proposals would allow them ‘‘to see
the disaggregated form of such
aggregated interest, which means simply
that the components of the aggregated
interest and the entering and clearing
firms that are associated with those
components (but not the ultimate
customers) will be visible.’’ 42 The SROs
also point out that the disaggregated
information ‘‘is only available to a DMM
while on the trading Floor at the trading
post,’’ and take the position that the
‘‘DMM must query the specific
information about a particular security,
a process which limits the number of
securities for which information can be
obtained at any given time,’’ so that
‘‘[a]ny actual informational advantage
resulting from viewing disaggregated
information would be eliminated by the
staleness of the information.’’ 43 In the
view of the SROs, because the proposals
do ‘‘not convey any truly exclusive or
significant benefit to DMMs and Floor
brokers, new, additional obligations are
not necessary.’’44
In addition, the SROs believe that
existing restrictions on trading by
DMMs and Floor brokers address
concerns associated with any potential
informational advantage.45 According to
37 SRO
Response Letter, supra note 7, at 15–16.
at 3.
39 Id. at 4–5.
40 Id. at 11.
41 Id. at 11.
42 Id. at 10–11.
43 Id. at 12.
44 Id. at 13.
45 Id. at 3.
38 Id.
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the SROs, the disaggregated order
information would not be available to a
DMM’s trading algorithm, and Exchange
rules effectively erect an information
barrier between DMM personnel on the
Floor and the DMM’s off-Floor trading
operations.46 With respect to Floor
brokers, the SROs state that, because
‘‘they are prohibited from trading on a
principal basis, any potential benefit
accrues to the investor, not the Floor
broker.’’ 47 The SROs also note that,
prior to the adoption of their ‘‘Hybrid
Market,’’ specialists were permitted to
provide disaggregated order information
to Floor brokers.48 Finally, the SROs
take the position that ‘‘access to the
disaggregated order information is
entirely consensual,’’ 49 because a
market participant that does not want its
interest shown can ‘‘(1) choose to have
the order not display on a disaggregated
basis or (2) place the order with a NYSE
competitor.’’ 50
III. Discussion
Under Section 19(b)(2)(C) of the Act,
the Commission shall approve a
proposed rule change of a selfregulatory organization if the
Commission finds that such proposed
rule change is consistent with the
requirements of the Act, and the rules
and regulations thereunder that are
applicable to such organization.51 The
Commission shall disapprove a
proposed rule change if it does not make
such a finding.52 The Commission’s
Rules of Practice, under Rule 700(b)(3),
state that the ‘‘burden to demonstrate
that a proposed rule change is
consistent with the Exchange Act and
the rules and regulations issued
thereunder * * * is on the selfregulatory organization that proposed
the rule change’’ and that a ‘‘mere
assertion that the proposed rule change
is consistent with those requirements
* * * is not sufficient.’’ 53
at 11–12.
at 12.
48 Id. at 5 and 16.
49 Id. at 11.
50 Id. at 16.
51 See 15 U.S.C. 78s(b)(2)(C)(i).
52 See 15 U.S.C. 78s(b)(2)(C)(ii); see also 17 CFR
201.700 (b)(3) and note 56 infra, and accompanying
text.
53 See 17 CFR 201.700. The description of a
proposed rule change, its purpose and operation, its
effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently
detailed and specific to support an affirmative
Commission finding. See id. Any failure of a selfregulatory organization to provide the information
elicited by Form 19b–4 may result in the
Commission not having a sufficient basis to make
an affirmative finding that a proposed rule change
is consistent with the Act and the rules and
regulations issued thereunder that are applicable to
the self-regulatory organization. Id.
PO 00000
46 Id.
47 Id.
Frm 00047
Fmt 4703
Sfmt 4703
After careful consideration, the
Commission does not find that the
proposed rule changes are consistent
with the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange. In particular, the Commission
does not find that the proposals are
consistent with Section 6(b)(5) of the
Act,54 which, among other things,
requires that the rules of a national
securities exchange be designed to
promote just and equitable principles of
trade, to protect investors and the public
interest, and not to permit unfair
discrimination between customers,
issuers, brokers, or dealers.
Specifically, the SROs propose to
provide their Floor members—DMMs
and Floor brokers—special access to
information about individual orders on
the Exchanges. The proposals would
permit DMMs to access information
about the price and size of individual
orders on the Exchange books, as well
as Floor broker e-Quotes, along with the
identity of the broker-dealer that entered
the order and the clearing firm. DMMs
also would be provided post-trade
information with respect to Exchange
orders that, similarly, includes the
identity of the broker-dealer that entered
the order and the clearing firm.
In the Order Instituting Proceedings,
the Commission expressed concern that,
while the proposals may improve the
ability of DMMs and Floor brokers to
trade on the SROs, the proposals also
would provide DMMs and Floor brokers
access to potentially valuable
information about Exchange orders
generated both on and off the Floor that
is not made available to other Exchange
members or market participants, unless
it is acquired through a Floor broker.
The Commission also noted that the
SROs were not proposing to require any
additional obligations from DMMs and
Floor brokers in exchange for the
additional order information, and had
not clearly explained how the proposals
would materially improve the quality of
the SROs’ markets. In response,
commenters and the SROs made general
arguments that the proposals would
facilitate the ability of DMMs and Floor
brokers to perform important trading
floor functions, such as bringing
together market participants seeking to
trade large orders or assisting Floor
members in the event they experience a
technical failure. Neither the SROs nor
the commenters explained, however,
how the particular information
proposed to be provided—disaggregated
information about public orders on the
Exchange books as well as Floor broker
54 15
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emcdonald on DSK67QTVN1PROD with NOTICES
Federal Register / Vol. 77, No. 139 / Thursday, July 19, 2012 / Notices
e-Quotes—would further those
legitimate Floor functions. Although not
articulated by the SROs or commenters,
the Commission could envision an
argument that allowing DMMs to see
information about individual Floor
broker e-Quotes, including the identity
of the responsible Floor broker, and
convey that information to other Floor
brokers, could facilitate the bringing
together of buyers and sellers of large
orders on the Floor more efficiently than
through verbal communications.
However, neither the SROs nor the
commenters have offered any specific
explanation, nor has the Commission
been able to otherwise discern, how the
provision of disaggregated pre-trade and
post-trade information about public
orders on the Exchange books, including
the identity of the entering and clearing
firms, would promote a legitimate Floor
function. Nor have the SROs or the
commenters provided any specific
justification for allowing Floor brokers
to pass on to their customers the
identity of the responsible Floor broker
for e-Quotes, or any disaggregated order
information (pre-trade or post trade)
with respect to orders on the Exchange
books that originate off the Exchange
floors.
Although the SROs and commenters
have taken the position that the
disaggregated order information
proposed to be provided would afford
only a slight benefit to Floor members,
given that it must be accessed manually,
they have not clearly explained why
this is the case, particularly with respect
to less liquid securities where order
information is less likely to become
rapidly stale. In addition, neither the
SROs nor the commenters have
articulated a rationale for providing
disaggregated order information—
particularly that relating to public
orders on the Exchange books—
exclusively to DMMs and Floor brokers
and, by extension, exclusively to Floor
broker customers, and not to all
Exchange members and customers.
While the SROs and commenters
believe that the proposals are not
unfairly discriminatory because DMMs
must provide the information to Floor
brokers in a non-discriminatory fashion,
and Floor brokers must do the same
with respect to their customers, they do
not explain why it is not unfairly
discriminatory to offer this information
only through Floor brokers and not
through other Exchange members.
The SROs and commenters point out
that customers can prevent their
disaggregated order information from
being accessed by DMMs and Floor
brokers by submitting a non-displayable
order or, with respect to Floor broker e-
VerDate Mar<15>2010
15:07 Jul 18, 2012
Jkt 226001
Quotes, instructing that the information
be withheld from the DMM. They also
note that Floor brokers are not permitted
to trade on a proprietary basis, and that
DMMs are subject to restrictions that
limit their ability to benefit directly
from their receipt of disaggregated order
information by trading proprietarily.
Although these are factors that may
mitigate potential harm that may result
from the proposals, they do not in
themselves offer an affirmative
justification as to why the specific
proposals under consideration would
not permit unfair discrimination, or
would promote just and equitable
principles of trade and protect investors
and the public interest, or would
otherwise be consistent with the Act.
Similarly, while the SROs and
commenters note that specialists
historically were permitted to provide
disaggregated order information to Floor
brokers prior to the Exchanges’
conversion to a more automated
‘‘Hybrid Market,’’ they do not articulate
how this former practice is relevant to
whether the proposed provision of
disaggregated order information to Floor
members in the context of the current
market models of the SROs is consistent
with the Act.
When the Commission is engaged in
rulemaking or the review of a rule filed
by a self-regulatory organization, and is
required to consider or determine
whether an action is necessary or
appropriate in the public interest, the
Commission shall also consider, in
addition to the protection of investors,
whether the action will promote
efficiency, competition, and capital
formation.55 Based on the evidence
presented, the Commission notes that
making the information that is proposed
to be provided under this filing
exclusively available to DMMs and
Floor brokers could have a detrimental
effect on competition between on-Floor
and off-Floor members of the
Exchanges. Moreover, while providing
DMMs and Floor brokers with order
information related to Floor broker
interest may promote efficiency, the
SROs have not demonstrated that other
aspects of these proposals—specifically,
providing DMMs and Floor brokers with
order information about public orders
on the Exchange books—would have a
similar effect.
As noted above, Rule 700(b)(3) of the
Commission’s Rules of Practice states
that ‘‘[t]he burden to demonstrate that a
proposed rule change is consistent with
the Exchange Act and the rules and
regulations issued thereunder * * * is
on the self-regulatory organization that
PO 00000
55 See
15 U.S.C. 78c(f).
Frm 00048
Fmt 4703
Sfmt 4703
42529
proposed the rule change’’ and that a
‘‘mere assertion that the proposed rule
change is consistent with those
requirements * * * is not sufficient.’’ 56
For the reasons set forth above, the
Commission does not believe that the
SROs have met their burden to
demonstrate that the proposed rule
changes are consistent with the
requirements of the Act and the rules
and regulations thereunder.
IV. Conclusion
For the foregoing reasons, the
Commission does not find that the
proposed rule changes are consistent
with the Act and the rules and
regulations thereunder applicable to a
national securities exchange, and, in
particular, with Section 6(b)(5) of the
Act.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,57 that the
proposed rule changes (SR–NYSE–
2011–56 and SR–NYSEAmex–2011–86)
be, and hereby are, disapproved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.58
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–17551 Filed 7–18–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–67436; File No. SR–
NYSEArca–2012–73]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Establishing a Fee for
Television Distribution of the NYSE
Arca Trades Data Product
July 13, 2012.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b-4 thereunder,3
notice is hereby given that, on July 3,
2012, NYSE Arca, Inc. (the ‘‘Exchange’’
or ‘‘NYSE Arca’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
56 17
CFR 201.700(b)(3).
U.S.C. 78s(b)(2).
58 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
57 15
E:\FR\FM\19JYN1.SGM
19JYN1
]]>Agencies
[Federal Register Volume 77, Number 139 (Thursday, July 19, 2012)]
[Notices]
[Pages 42525-42529]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-17551]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67437; File Nos. SR-NYSE-2011-56; SR-NYSEAmex-2011-86]
Self-Regulatory Organizations; New York Stock Exchange LLC; NYSE
Amex LLC; Order Disapproving Proposed Rule Changes To Codify Certain
Traditional Trading Floor Functions That May Be Performed by Designated
Market Makers and To Permit Designated Market Makers and Floor Brokers
Access to Disaggregated Order Information
July 13, 2012.
On October 31, 2011, the New York Stock Exchange LLC (``NYSE'') and
NYSE Amex LLC (``NYSE Amex'') (collectively, the ``SROs'') each 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\ proposed rule changes (``SRO Proposals'')
to amend certain of their respective rules relating to Designated
Market Makers (``DMMs'') \3\ and Floor brokers. The SRO Proposals were
published for comment in the Federal Register on November 17, 2011.\4\
The Commission received no comment letters on the proposals. On
December 22, 2011, the Commission extended the time period in which to
either approve the SRO Proposals, disapprove the SRO Proposals, or to
institute proceedings to determine whether to disapprove the SRO
Proposals, to February 15, 2012.\5\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See NYSE Rule 98(b)(2). ``DMM unit'' means any member
organization, aggregation unit within a member organization, or
division or department within an integrated proprietary aggregation
unit of a member organization that (i) Has been approved by NYSE
Regulation pursuant to section (c) of NYSE Rule 98, (ii) is eligible
for allocations under NYSE Rule 103B as a DMM unit in a security
listed on the Exchange, and (iii) has met all registration and
qualification requirements for DMM units assigned to such unit. The
term ``DMM'' means any individual qualified to act as a DMM on the
floor of the Exchange under NYSE Rule 103. See also NYSE Amex
Equities Rule 2(i). Rule 2(i) defines the term ``DMM'' to mean an
individual member, officer, partner, employee or associated person
of a DMM unit who is approved by the Exchange to act in the capacity
of a DMM. NYSE Amex Equities Rule 2(j) defines the term ``DMM unit''
as a member organization or unit within a member organization that
has been approved to act as a DMM unit under NYSE Amex Equities Rule
98.
\4\ See Securities Exchange Act Release Nos. 65735 (November 10,
2011), 76 FR 71405 (SR-NYSEAmex-2011-86) (``NYSE Amex Notice'') and
65736 (November 10, 2011), 76 FR 71399 (SR-NYSE-2011-56) (``NYSE
Notice'').
\5\ See Securities Exchange Act Release No. 66036, 76 FR 82011
(December 29, 2011).
---------------------------------------------------------------------------
On February 15, 2012, the Commission instituted proceedings to
determine whether to disapprove the proposed rule changes.\6\ The
Commission thereafter received five comment letters on the
proposals.\7\ NYSE Euronext, on behalf of the SROs, submitted a
response letter on March 28, 2012.\8\ On May 14, 2012, the Commission
issued a notice of designation of longer period for Commission action
on proceedings to determine whether to disapprove the proposed rule
changes.\9\ This order disapproves the proposed rule changes.
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 66397, 77 FR 10586
(February 22, 2012) (``Order Instituting Proceedings'').
\7\ See Letters to Elizabeth M. Murphy, Secretary, Commission,
from Kenneth Polcari, dated March 12, 2012 (``Polcari Letter'');
Patrick Armstrong and Daniel Tandy, Co-Presidents, Alliance of Floor
Brokers (``AFB''), dated March 13, 2012 (``AFB Letter''); Jonathan
Corpina, President, and Jennifer Lee, Vice President, Organization
of Independent Floor Brokers (``OIFB''), dated March 13, 2012
(``OIFB Letter''); James J. Angel, Ph.D., CFA, dated March 15, 2012
(``Angel Letter''); and John Petschauer, CEO, EZX, Inc., dated March
14, 2012 (``EZX Letter'').
\8\ See Letter to Elizabeth M. Murphy, Secretary, Commission,
from Janet McGinness, Executive Vice President and Corporate
Secretary, NYSE Euronext, dated March 28, 2012 (``SRO Response
Letter'').
\9\ See Securities Exchange Act Release No. 66981, 77 FR 29730
(May 18, 2012).
---------------------------------------------------------------------------
I. Description of the Proposals
The SRO Proposals seek to amend the SROs' rules in several ways.
First, the
[[Page 42526]]
SROs propose to codify certain trading floor functions that may be
performed by DMMs. Second, the SROs propose to allow DMMs to access
Exchange systems that would provide DMMs with additional order
information about the securities in which they are registered. Third,
the SROs propose to make certain conforming amendments to their rules
to reflect the additional order information that would be available to
DMMs through Exchange systems, and to specify what information about
Floor broker agency interest file (``e-Quotes'') is available to the
DMM. Finally, the SROs propose to modify the terms under which DMMs
would be permitted to provide market information to Floor brokers and
others.
A. Trading Floor Functions
The SROs propose to codify certain trading floor functions formerly
performed by specialists that are now performed by DMMs, and were
described in each SRO's respective Floor Official Manual.\10\
---------------------------------------------------------------------------
\10\ See, e.g., NYSE 2004 Floor Official Manual, Market
Surveillance June 2004 Edition, Chapter Two, Section I.
---------------------------------------------------------------------------
The proposed rules would specify four categories of trading floor
functions that DMMs could perform: (1) Maintaining order among Floor
brokers manually trading at the DMM's assigned panel;\11\ (2) bringing
Floor brokers together to facilitate trading;\12\ (3) assisting Floor
brokers with respect to their orders by providing information regarding
the status of a Floor broker's orders, helping to resolve errors or
questioned trades, adjusting errors, and cancelling or inputting Floor
broker agency interest on behalf of a Floor broker;\13\ and (4)
researching the status of orders or questioned trades.\14\
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\11\ See id. at Section I.A. at 7 (``specialist helps ensure
that such markets are fair, orderly, operationally efficient and
competitive with all other markets in those securities'').
\12\ See id. at Section I.B.3. at 10-11 (``[i]n opening and
reopening trading in a listed security, a specialist should * * *
[s]erve as the market coordinator for the securities in which the
specialist is registered by exercising leadership and managing
trading crowd activity and promptly identifying unusual market
conditions that may affect orderly trading in those securities,
seeking the advice and assistance of Floor Officials when
appropriate'' and ``[a]ct as a catalyst in the markets for the
securities in which the specialist is registered, making all
reasonable efforts to bring buyers and sellers together to
facilitate the public pricing of orders, without acting as principal
unless reasonably necessary'').
\13\ See id. at Section I.B.4. at 11 (``In view of the
specialist's central position in the Exchange's continuous two-way
agency auction market, a specialist should proceed as follows * * *
[e]qually and impartially provide accurate and timely market
information to all inquiring members in a professional and courteous
manner.'').
\14\ See id. at Section I.B.5. at 12 (A specialist should
``[p]romptly provide information when necessary to research the
status of an order or a questioned trade and cooperate with other
members in resolving and adjusting errors.'').
---------------------------------------------------------------------------
B. DMM Access to Additional Order Information
Each SRO proposes to make Exchange systems available to a DMM at
the post that display the following types of information about
securities in which the DMM is registered: (A) Aggregated information
about buying and selling interest;\15\ (B) disaggregated information
about the price and size of any individual order or e-Quotes and the
entering and clearing firm information for such orders, except that
Exchange systems would not make available to DMMs information about any
order or e-Quote, or portion thereof, that a market participant has
elected not to display to a DMM; and (C) post-trade information.\16\
The proposals would make available to DMMs disaggregated information
about the following interest in securities in which the DMM is
registered: (a) the price and size of all displayable interest
submitted by off-Floor participants (off-Floor participants may submit
non-displayable interest that is hidden from the DMM);\17\ and (b) all
e-Quotes, including reserve e-Quotes, that the Floor broker has not
elected to exclude from availability to the DMM.\18\
---------------------------------------------------------------------------
\15\ Exchange systems currently make available to DMMs aggregate
information about the following interest in securities in which the
DMM is registered: (a) All displayable interest submitted by off-
floor participants; (b) all Minimum Display Reserve orders,
including the reserve portion; (c) all displayable floor broker
agency interest files (``e-Quotes''); (d) all Minimum Display
Reserve e-Quotes, including the reserve portion; and (e) the reserve
quantity of Non-Display Reserve e-Quotes, unless the floor broker
elects to exclude that reserve quantity from availability to the
DMM.
\16\ For the latter two categories, the DMM also would have
access to entering and clearing firm information for each order and,
as applicable, the badge number of the floor broker representing the
order. According to the SROs, the systems would not contain any
information about the ultimate customer (i.e., the name of the
member or member organization's customer) in a transaction.
\17\ See NYSE and NYSE Amex Rule 13, defining non-displayed
order types.
\18\ The SROs previously permitted DMMs to have access to
Exchange systems that contained the disaggregated order information
described above. The SROs stopped making such information available
to DMMs on January 19, 2011. See NYSE and NYSE Amex Information Memo
11-03.
---------------------------------------------------------------------------
C. Conforming Amendments and Floor Broker e-Quote Information
The SROs also propose to make conforming amendments to their rules
to reflect the additional order information that would be available to
DMMs through Exchange systems, and to specify what information about e-
Quotes is available to the DMM. Specifically, the SROs propose to
revise NYSE Rule 70 and NYSE Amex Rule 70 governing e-Quotes to reflect
that disaggregated order information would be available to the DMM
except as elected otherwise. The SROs would allow a Floor broker to
enter e-Quotes with reserve interest (``Reserve e-Quote'') with or
without a displayable portion.
A Reserve e-Quote with a displayable portion would participate in
manual and automatic executions. Order information at each price point,
including the reserve portion, would be included in the aggregate
interest available to the DMM. Order information at each price point
would be available to the DMM on a disaggregated basis as well. If the
Floor broker chooses to exclude the Reserve e-Quote with a displayable
portion from the DMM, then the DMM would have access to the entire
portion on an aggregated basis but would not have access to any of that
interest on a disaggregated basis.
A Reserve e-Quote with an undisplayable portion would also
participate in manual and automatic executions. Like the Reserve e-
Quote with a displayable portion, order information at each price point
would be included in the aggregate interest available to the DMM.
Again, like the Reserve e-Quote with a displayable portion, order
information at each price point would be available to the DMM on a
disaggregated basis as well. If the Floor broker chooses to exclude the
Reserve e-Quote with an undisplayable portion from the DMM, however,
then the DMM would not have access to such interest on either an
aggregated basis or a disaggregated basis. Such interest would not
participate in manual executions.
In addition, the SROs propose to delete rules which currently
prohibit DMMs from using the Display Book system to access information
about e-Quotes excluded from the aggregated agency interest and Minimum
Display Reserve Order information, other than for the purpose of
effecting transactions that are reasonably imminent where such Floor
broker agency and Minimum Display Reserve Order interest information is
necessary to effect such transaction.\19\
---------------------------------------------------------------------------
\19\ See proposed deletions to NYSE Rule 104(a)(6) and NYSE Amex
Rule 104(a)(b).
---------------------------------------------------------------------------
D. Ability of DMMs to Provide Market Information on the Trading Floor
The SROs also propose to modify the manner under which DMMs would
be permitted to provide market information to Floor brokers and
visitors on the trading floor. Specifically, the proposed
[[Page 42527]]
rules would permit a DMM to provide the market information to which he
or she has access to a: (1) Floor broker in response to an inquiry in
the normal course of business; or (2) visitor to the trading floor for
the purpose of demonstrating methods of trading. As such, Floor brokers
would be able to access disaggregated order information that market
participants have not otherwise elected to be hidden from the DMM. A
Floor broker would not be able to submit such an inquiry for market
information by electronic means, and the DMM's response containing
market information could not be delivered through electronic means.
Because the proposed rule expands on and incorporates the current
SRO rules regarding disclosure of order information by DMMs, the SROs
are proposing to delete these rules.\20\ The current rules provide that
a DMM may disclose market information for three purposes. First, a DMM
may disclose market information for the purpose of demonstrating the
methods of trading to visitors to the trading floor. This aspect of the
current rule is replicated in the proposed rules. Second, a DMM may
disclose market information to other market centers in order to
facilitate the operation of the Intermarket Trading System (``ITS'').
According to the SROs, this text is obsolete as the ITS Plan has been
eliminated and therefore the SROs are proposing to delete it. Third, a
DMM may, while acting in a market making capacity, provide information
about buying or selling interest in the market, including (a)
Aggregated buying or selling interest contained in Floor broker agency
interest files other than interest the broker has chosen to exclude
from the aggregated buying and selling interest, (b) aggregated
interest of Minimum Display Reserve Orders and (c) the interest
included in DMM interest files, excluding Capital Commitment Schedule
(``CCS'') interest as described in Rule 1000(c), in response to an
inquiry from a member conducting a market probe in the normal course of
business. The proposed rules would permit DMMs to provide Floor brokers
not only with the same aggregated order information that DMMs currently
are permitted to provide under current rules, but also with the
disaggregated and post-trade order information described above.\21\
---------------------------------------------------------------------------
\20\ The SROs are also proposing conforming amendments to
correct cross-references to the former rule.
\21\ Because DMMs on the trading floor do not have access to CCS
interest information, the proposed rule does not specify that DMMs
would not be disseminating such information.
---------------------------------------------------------------------------
The proposed rules would permit a DMM to provide market information
to a Floor broker in response to a specific request by the Floor broker
to the DMM at the post, rather than specifying that the information
must be provided ``in response to an inquiry from a member conducting a
market probe in the normal course of business,'' as currently provided
in the SRO rules. Under the proposed rule change, Floor brokers would
not have access to Exchange systems that provide disaggregated order
information, and Floor brokers would only be able to access such market
information through a direct manual interaction with a DMM at the post.
II. Disapproval Proceedings, Summary of Comment Letters and the SROs'
Response
In the Order Instituting Proceedings, the Commission expressed
concern about the consistency of the proposals with Section 6(b)(5) of
the Act, including whether they would permit unfair discrimination,
promote just and equitable principles of trade, and protect investors
and the public interest.\22\ Among other things, the Commission noted
that, while the proposals may improve the ability of DMMs and Floor
brokers to trade on the Exchanges, the proposals also would provide
them access to potentially valuable information about Exchange orders
that is not available to other members or market participants,
including the identity of the entering and clearing firm.\23\ The
Commission stated that, while exchanges may legitimately confer special
benefits on market participants willing to accept substantial
responsibilities to contribute to market quality, such benefits must
not be disproportionate to the services provided.\24\ The Commission
noted that the Exchanges were not proposing to require any additional
obligations from DMMs and Floor brokers in exchange for the additional
order information, and had not clearly explained how the proposals
would materially improve the quality of the SROs' markets.\25\ As a
result, the Commission was concerned that the proposals unfairly
discriminated in favor of DMMs and Floor brokers, might not have been
designed to protect the broad group of investors that trade on the
SROs, and otherwise might be inequitable.\26\
---------------------------------------------------------------------------
\22\ 15 U.S.C. 78f(b)(5).
\23\ See Order Instituting Proceedings, supra note 6, at 10589.
\24\ See Order Instituting Proceedings, supra note 6, at 10588.
\25\ Id. at 10589.
\26\ See id.
---------------------------------------------------------------------------
The Commission received five comment letters in support of the
proposed rule changes,\27\ along with a response from the SROs.\28\ In
general, the commenters believed that the floors of the Exchanges
continued to provide a valuable service to the markets, particularly
with respect to the facilitation of block trades, and they broadly
indicated that the proposed provision of disaggregated order
information to Floor members would further this important function.\29\
One commenter also stated that the access to this information would
enable DMMs to assist Floor brokers in the event of a technical
failure.\30\ Some noted that this type of information had historically
been made available to Floor members.\31\
---------------------------------------------------------------------------
\27\ See supra note 7.
\28\ See supra note 8.
\29\ AFB Letter, supra note 7, at 3; Angel Letter, supra note 7,
at 2; EZX Letter, supra note 7; OIFB Letter, supra note 7, at 1; and
Polcari Letter, supra note 7, at 2.
\30\ See OIFB Letter, supra note 7, at 1.
\31\ See AFB Letter, supra note 7, at 2; Angel Letter, supra
note 7, at 2; and OIFB Letter, supra note 7, at 1.
---------------------------------------------------------------------------
Commenters did not believe the proposals were unfairly
discriminatory because, in their view, DMMs would be obligated to
provide disaggregated order information to Floor brokers in a non-
discriminatory fashion, and Floor brokers would be obligated to do the
same for their customers.\32\ Commenters also expressed the view that
the disaggregated order information would be of limited utility because
it could only be accessed manually,\33\ and they noted that Floor
brokers were restricted from trading proprietarily and thus could not
directly benefit from this information.\34\
---------------------------------------------------------------------------
\32\ See AFB Letter, supra note 7, at 3; Angel Letter, supra
note 7, at 3; OIFB Letter, supra note 7, at 1-2; and Polcari Letter,
supra note 7, at 2.
\33\ See OIFB Letter, supra note 7, at 2.
\34\ See AFB Letter, supra note 7, at 4; OIFB Letter, supra note
7, at 2; Polcari Letter; supra note 7, at 3.
---------------------------------------------------------------------------
Commenters also emphasized that market participants that do not
wish to allow their disaggregated order information to be provided to
DMMs and Floor brokers can use undisplayed orders or place orders on a
competing exchange.\35\ One commenter urged the Commission to allow
exchange experimentation and believed that, if the proposals resulted
in information leakage or degraded market quality, then order flow
would rapidly shift to other trading venues.\36\
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\35\ See AFB Letter, supra note 7, at 2; Angel Letter, supra
note 7, at 3; and OIFB Letter, supra note 7, at 1.
\36\ See Angel Letter, supra note 7, at 3-4.
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[[Page 42528]]
In their response, the SROs, among other things, emphasized that
``[t]he purpose of the Proposals is to help DMMs facilitate large
orders on the Trading Floor if an investor wishes to utilize the
resources of a Floor broker,'' \37\ and argued that the proposals would
``potentially make the Floor more hospitable to large orders, reduce
transaction costs and produce savings for long-term investors.'' \38\
In proposing to provide disaggregated order information to Floor
members, the SROs ``seek to provide improved conditions for buyers and
sellers to interact at potentially more favorable prices, or in larger-
sized executions, on the Floors of the Exchanges.'' \39\ The SROs
believe that ``making this information available to Floor brokers
[would make] it easier for * * * size trades to be arranged, and for
leakage and market impact to be avoided.'' \40\
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\37\ SRO Response Letter, supra note 7, at 15-16.
\38\ Id. at 3.
\39\ Id. at 4-5.
\40\ Id. at 11.
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At the same time, the SROs take the position that ``any
informational advantage conveyed is extremely slight.'' \41\ They note
that DMMs and Floor brokers already have access to aggregated order
information, and that the proposals would allow them ``to see the
disaggregated form of such aggregated interest, which means simply that
the components of the aggregated interest and the entering and clearing
firms that are associated with those components (but not the ultimate
customers) will be visible.'' \42\ The SROs also point out that the
disaggregated information ``is only available to a DMM while on the
trading Floor at the trading post,'' and take the position that the
``DMM must query the specific information about a particular security,
a process which limits the number of securities for which information
can be obtained at any given time,'' so that ``[a]ny actual
informational advantage resulting from viewing disaggregated
information would be eliminated by the staleness of the information.''
\43\ In the view of the SROs, because the proposals do ``not convey any
truly exclusive or significant benefit to DMMs and Floor brokers, new,
additional obligations are not necessary.''\44\
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\41\ Id. at 11.
\42\ Id. at 10-11.
\43\ Id. at 12.
\44\ Id. at 13.
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In addition, the SROs believe that existing restrictions on trading
by DMMs and Floor brokers address concerns associated with any
potential informational advantage.\45\ According to the SROs, the
disaggregated order information would not be available to a DMM's
trading algorithm, and Exchange rules effectively erect an information
barrier between DMM personnel on the Floor and the DMM's off-Floor
trading operations.\46\ With respect to Floor brokers, the SROs state
that, because ``they are prohibited from trading on a principal basis,
any potential benefit accrues to the investor, not the Floor broker.''
\47\ The SROs also note that, prior to the adoption of their ``Hybrid
Market,'' specialists were permitted to provide disaggregated order
information to Floor brokers.\48\ Finally, the SROs take the position
that ``access to the disaggregated order information is entirely
consensual,'' \49\ because a market participant that does not want its
interest shown can ``(1) choose to have the order not display on a
disaggregated basis or (2) place the order with a NYSE competitor.''
\50\
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\45\ Id. at 3.
\46\ Id. at 11-12.
\47\ Id. at 12.
\48\ Id. at 5 and 16.
\49\ Id. at 11.
\50\ Id. at 16.
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III. Discussion
Under Section 19(b)(2)(C) of the Act, the Commission shall approve
a proposed rule change of a self-regulatory organization if the
Commission finds that such proposed rule change is consistent with the
requirements of the Act, and the rules and regulations thereunder that
are applicable to such organization.\51\ The Commission shall
disapprove a proposed rule change if it does not make such a
finding.\52\ The Commission's Rules of Practice, under Rule 700(b)(3),
state that the ``burden to demonstrate that a proposed rule change is
consistent with the Exchange Act and the rules and regulations issued
thereunder * * * is on the self-regulatory organization that proposed
the rule change'' and that a ``mere assertion that the proposed rule
change is consistent with those requirements * * * is not sufficient.''
\53\
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\51\ See 15 U.S.C. 78s(b)(2)(C)(i).
\52\ See 15 U.S.C. 78s(b)(2)(C)(ii); see also 17 CFR 201.700
(b)(3) and note 56 infra, and accompanying text.
\53\ See 17 CFR 201.700. The description of a proposed rule
change, its purpose and operation, its effect, and a legal analysis
of its consistency with applicable requirements must all be
sufficiently detailed and specific to support an affirmative
Commission finding. See id. Any failure of a self-regulatory
organization to provide the information elicited by Form 19b-4 may
result in the Commission not having a sufficient basis to make an
affirmative finding that a proposed rule change is consistent with
the Act and the rules and regulations issued thereunder that are
applicable to the self-regulatory organization. Id.
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After careful consideration, the Commission does not find that the
proposed rule changes are consistent with the requirements of the Act
and the rules and regulations thereunder applicable to a national
securities exchange. In particular, the Commission does not find that
the proposals are consistent with Section 6(b)(5) of the Act,\54\
which, among other things, requires that the rules of a national
securities exchange be designed to promote just and equitable
principles of trade, to protect investors and the public interest, and
not to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\54\ 15 U.S.C. 78f(b)(5).
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Specifically, the SROs propose to provide their Floor members--DMMs
and Floor brokers--special access to information about individual
orders on the Exchanges. The proposals would permit DMMs to access
information about the price and size of individual orders on the
Exchange books, as well as Floor broker e-Quotes, along with the
identity of the broker-dealer that entered the order and the clearing
firm. DMMs also would be provided post-trade information with respect
to Exchange orders that, similarly, includes the identity of the
broker-dealer that entered the order and the clearing firm.
In the Order Instituting Proceedings, the Commission expressed
concern that, while the proposals may improve the ability of DMMs and
Floor brokers to trade on the SROs, the proposals also would provide
DMMs and Floor brokers access to potentially valuable information about
Exchange orders generated both on and off the Floor that is not made
available to other Exchange members or market participants, unless it
is acquired through a Floor broker. The Commission also noted that the
SROs were not proposing to require any additional obligations from DMMs
and Floor brokers in exchange for the additional order information, and
had not clearly explained how the proposals would materially improve
the quality of the SROs' markets. In response, commenters and the SROs
made general arguments that the proposals would facilitate the ability
of DMMs and Floor brokers to perform important trading floor functions,
such as bringing together market participants seeking to trade large
orders or assisting Floor members in the event they experience a
technical failure. Neither the SROs nor the commenters explained,
however, how the particular information proposed to be provided--
disaggregated information about public orders on the Exchange books as
well as Floor broker
[[Page 42529]]
e-Quotes--would further those legitimate Floor functions. Although not
articulated by the SROs or commenters, the Commission could envision an
argument that allowing DMMs to see information about individual Floor
broker e-Quotes, including the identity of the responsible Floor
broker, and convey that information to other Floor brokers, could
facilitate the bringing together of buyers and sellers of large orders
on the Floor more efficiently than through verbal communications.
However, neither the SROs nor the commenters have offered any specific
explanation, nor has the Commission been able to otherwise discern, how
the provision of disaggregated pre-trade and post-trade information
about public orders on the Exchange books, including the identity of
the entering and clearing firms, would promote a legitimate Floor
function. Nor have the SROs or the commenters provided any specific
justification for allowing Floor brokers to pass on to their customers
the identity of the responsible Floor broker for e-Quotes, or any
disaggregated order information (pre-trade or post trade) with respect
to orders on the Exchange books that originate off the Exchange floors.
Although the SROs and commenters have taken the position that the
disaggregated order information proposed to be provided would afford
only a slight benefit to Floor members, given that it must be accessed
manually, they have not clearly explained why this is the case,
particularly with respect to less liquid securities where order
information is less likely to become rapidly stale. In addition,
neither the SROs nor the commenters have articulated a rationale for
providing disaggregated order information--particularly that relating
to public orders on the Exchange books--exclusively to DMMs and Floor
brokers and, by extension, exclusively to Floor broker customers, and
not to all Exchange members and customers. While the SROs and
commenters believe that the proposals are not unfairly discriminatory
because DMMs must provide the information to Floor brokers in a non-
discriminatory fashion, and Floor brokers must do the same with respect
to their customers, they do not explain why it is not unfairly
discriminatory to offer this information only through Floor brokers and
not through other Exchange members.
The SROs and commenters point out that customers can prevent their
disaggregated order information from being accessed by DMMs and Floor
brokers by submitting a non-displayable order or, with respect to Floor
broker e-Quotes, instructing that the information be withheld from the
DMM. They also note that Floor brokers are not permitted to trade on a
proprietary basis, and that DMMs are subject to restrictions that limit
their ability to benefit directly from their receipt of disaggregated
order information by trading proprietarily. Although these are factors
that may mitigate potential harm that may result from the proposals,
they do not in themselves offer an affirmative justification as to why
the specific proposals under consideration would not permit unfair
discrimination, or would promote just and equitable principles of trade
and protect investors and the public interest, or would otherwise be
consistent with the Act. Similarly, while the SROs and commenters note
that specialists historically were permitted to provide disaggregated
order information to Floor brokers prior to the Exchanges' conversion
to a more automated ``Hybrid Market,'' they do not articulate how this
former practice is relevant to whether the proposed provision of
disaggregated order information to Floor members in the context of the
current market models of the SROs is consistent with the Act.
When the Commission is engaged in rulemaking or the review of a
rule filed by a self-regulatory organization, and is required to
consider or determine whether an action is necessary or appropriate in
the public interest, the Commission shall also consider, in addition to
the protection of investors, whether the action will promote
efficiency, competition, and capital formation.\55\ Based on the
evidence presented, the Commission notes that making the information
that is proposed to be provided under this filing exclusively available
to DMMs and Floor brokers could have a detrimental effect on
competition between on-Floor and off-Floor members of the Exchanges.
Moreover, while providing DMMs and Floor brokers with order information
related to Floor broker interest may promote efficiency, the SROs have
not demonstrated that other aspects of these proposals--specifically,
providing DMMs and Floor brokers with order information about public
orders on the Exchange books--would have a similar effect.
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\55\ See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
As noted above, Rule 700(b)(3) of the Commission's Rules of
Practice states that ``[t]he burden to demonstrate that a proposed rule
change is consistent with the Exchange Act and the rules and
regulations issued thereunder * * * is on the self-regulatory
organization that proposed the rule change'' and that a ``mere
assertion that the proposed rule change is consistent with those
requirements * * * is not sufficient.'' \56\ For the reasons set forth
above, the Commission does not believe that the SROs have met their
burden to demonstrate that the proposed rule changes are consistent
with the requirements of the Act and the rules and regulations
thereunder.
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\56\ 17 CFR 201.700(b)(3).
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IV. Conclusion
For the foregoing reasons, the Commission does not find that the
proposed rule changes are consistent with the Act and the rules and
regulations thereunder applicable to a national securities exchange,
and, in particular, with Section 6(b)(5) of the Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\57\ that the proposed rule changes (SR-NYSE-2011-56 and SR-
NYSEAmex-2011-86) be, and hereby are, disapproved.
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\57\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\58\
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\58\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-17551 Filed 7-18-12; 8:45 am]
BILLING CODE 8011-01-P
