Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of Filing of Proposed Rule Change to Amend EDGX Rule 11.5(c) to add the Edge Market Close SM, 47899-47902 [2012-19611]

Download as PDF mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 77, No. 155 / Friday, August 10, 2012 / Notices include details on the servicer and calculating agent. b. DTC will require that all postpayable adjustment requests include the root cause adjustment code and information identifying issuance date, instrument, issuer, servicer, and calculating agent. DTC will not process any post-payable adjustments missing these key details. 2. Effective July 1, 2013, DTC will begin tracking and making publicly available reports on issuer performance as it relates to post-payable adjustments in the form of a report card. 3. Effective January 1, 2014, DTC will no longer process post-payable adjustment requests through the settlement system beyond 180 calendar days after the initial payment date. 4. Effective July 1, 2014, DTC will no longer process post-payable adjustment requests through the settlement system beyond 120 calendar days after the initial payment date. 5. Effective January 1, 2015, DTC will no longer process post-payable adjustment requests through the settlement system beyond 90 calendar days after the initial payment date.7 Additionally, DTC has agreed to work with the industry to investigate the development and potential operation of an industry proposed adjustment claims repository (‘‘Adjustment Claims Repository’’). The Adjustment Claims Repository would address the collection and redistribution of misapplied and/or misdirected P&I between issuers and/or Paying Agents and the participants holding the affected securities beyond DTC’s proposed post-payable adjustment cut-off periods. The proposed implementation dates set forth in this order for the timeframes within which DTC will process post-payable adjustments may be reevaluated if this process requires significant investment by DTC and the industry. DTC will revise those effective dates in a new proposed rule change filing, if so determined. DTC will continue to service all courtdirected adjustments (with appropriate supporting documentation), regardless of age. DTC will also continue to service other categories of adjustments, which are mutually agreed upon by Task Force members as ‘‘uncontrollable’’ postpayable adjustments, regardless of age. Issuers and/or Paying Agents wishing to modify certain P&I beyond the time period that DTC will process the adjustments may do so by obtaining a ‘‘P&I Allocation Register’’ and making 7 These changes have been reviewed in detail with the Task Force and the Task Force has agreed to the proposed changes. VerDate Mar<15>2010 18:02 Aug 09, 2012 Jkt 226001 adjustments and payment arrangements directly with the affected DTC participants. III. Comment Letters The Commission received three comment letters opposing the proposed rule change.8 In response to the three comment letters, DTC worked with the AGC, the American Bankers Association, and the Commercial Real Estate Finance Council to draft Amendment 1 to the proposed rule change filing. The comment letters mention that the timeframe proposed for shortening the window for DTC to process post-payable adjustments is overly aggressive. DTC has worked with the Task Force to stagger the timeframe for implementation of changes in the processing of post-payable adjustments through the end of 2014. The comment letters also suggested that DTC create an industry working group to review the various causes of adjustments and noted that the vast majority of adjustments are the result of actions outside the control of Paying Agents. In response, DTC created the Task Force, which has reviewed and will continue to review the reasons for post-payable adjustments to determine the root causes of such adjustments. Once the root causes of the adjustments are finally determined, the Task Force will meet to create workable solutions to reduce the number of adjustments, including working with the industry to look to restructure and simplify the legal documentation and post payable adjustments process and including an opinion of ‘‘materiality’’ as defined under Regulation AB. The comment letter from Dan W. Schneider also requested that an industry working group design a plan for DTC to administer an Adjustment Claims Repository. DTC has agreed to work with the industry to investigate the development and potential operation of the proposed Adjustment Claims Repository. The Adjustment Claims Repository would address the collection and redistribution of misapplied and/or misdirected income and principal payments between issuers and/or Paying Agents and the participants holding the affected securities beyond DTC’s proposed post-payable adjustment cut-off periods. DTC will notify the Commission of any additional comments received by DTC. IV. Discussion After careful review of the proposed rule change, as modified by Amendment 8 Letters from Dan W. Schneider, Cristeena G. Nasser, and Stephen M. Renna, supra note 3. PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 47899 No. 1, and consideration of the comment letters and DTC’s response, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable, in particular Section 17A.9 Section 17A(b)(3)(F) of the Act 10 requires, among other things, that the rules of a clearing agency be designed to remove impediments to and perfect the mechanism of a national system for the prompt and accurate clearance and settlement of securities transactions. The Commission finds that limiting the ambiguity surrounding payment finality will remove impediments to and perfect the mechanism of a national system for the prompt and accurate clearance and settlement of securities transactions. V. Conclusion On the basis of the foregoing, the Commission finds that the proposal is consistent with the requirements of the Act and in particular with the requirements of Section 17A of the Act 11 and the rules and regulations thereunder. It is therefore ordered, pursuant to Section 19(b)(2) of the Act,12 that the proposed rule change (File No. SR–DTC–2012–03) be, and hereby is, approved.13 For the Commission by the Division of Trading and Markets, pursuant to delegated authority.14 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–19579 Filed 8–9–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–67598; File No. SR–EDGX– 2012–33] Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of Filing of Proposed Rule Change to Amend EDGX Rule 11.5(c) to add the Edge Market Close SM Order August 6, 2012. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 9 15 U.S.C. 78q–1. U.S.C. 78q–1(b)(3)(F). 11 15 U.S.C. 78q–1. 12 15 U.S.C. 78s(b)(2). 13 In approving the proposed rule change, the Commission considered the proposal’s impact on efficiency, competition and capital formation. 15 U.S.C. 78c(f). 14 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 10 15 E:\FR\FM\10AUN1.SGM 10AUN1 47900 Federal Register / Vol. 77, No. 155 / Friday, August 10, 2012 / Notices notice is hereby given that, on July 27, 2012, the EDGX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘EDGX’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Rule 11.5(c) to add a new order type, the Edge Market CloseSM (‘‘EMC’’) Order, to the rule. The text of the proposed rule changes is available on the Exchange’s Web site at www.directedge.com, at the Exchange’s principal office and at the Public Reference Room of the Commission. 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 Exchange included statements concerning the purpose of, and basis for, the proposed rule changes and discussed any comments it received on the proposed rule changes. The text of these statements may be examined at the places specified in Item IV below. The self-regulatory organization has prepared summaries, set forth in Sections A, B and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change mstockstill on DSK4VPTVN1PROD with NOTICES 1. Purpose The Exchange is proposing to amend Rule 11.5(c) to add new subparagraph (15), which would describe a new order type, the EMC Order. An EMC Order would be defined as an order to buy or sell on the Exchange a security that is listed on the New York Stock Exchange LLC (the ‘‘NYSE’’) or The NASDAQ Stock Market LLC (‘‘NASDAQ’’) (each, a ‘‘Listing Market’’) at the official closing price of such security published by the corresponding Listing Market.3 Users 4 3 In the event that a particular security were listed on both the NYSE and NASDAQ, the Exchange would select one of such exchanges for purposes of ascertaining the official closing price for the execution of EMC Orders in such security, based on the exchange with the greater market share in the security measured over the previous three (3) calendar months. The Exchange would disclose on its Web site such selection prospectively in advance of offering the EMC Order in such security. 4 As defined in EDGX Rule 1.5(ee). VerDate Mar<15>2010 18:02 Aug 09, 2012 Jkt 226001 would be able to enter, cancel and cancel/replace EMC Orders from prior to the Pre-Opening Session 5 on trade date until five (5) minutes prior to the ‘‘cut-off time’’ for the entry of Market At-the-Close Orders on the NYSE and Market-on-Close Orders on NASDAQ (in each case, the ‘‘EMC Cut-Off Time’’).6 All EMC Orders on the EDGX Book 7 at the EMC Cut-Off Time would be lockedin either for execution on the Exchange or for routing to the applicable Listing Market (to the extent not otherwise matched with a contra-side EMC Order), as described below. Users would not be able to cancel or cancel/replace any EMC Order after the EMC Cut-Off Time, and the Exchange would reject back to the User any EMC Order received after the EMC Cut-Off Time. During the time between the EMC Cut-Off Time and the NYSE Cut-Off Time or the NASDAQ Cut-Off time, as the case may be, the Exchange would calculate, for each security for which EMC Orders were entered, the maximum number of shares underlying such EMC Orders that can be matched, or paired off. Priority on the EDGX Book for EMC Orders would be based strictly on time of entry. EMC Orders would be eligible for partial execution on the Exchange. The unmatched portion of any EMC Orders that could not be paired off on the Exchange pursuant to this process would then be routed as Market At-theClose Orders to the closing process of the NYSE for NYSE-listed stocks, or as Market-on-Close Orders to the closing process of NASDAQ for NASDAQ-listed stocks. If there was no contra-side EMC Order on the Exchange to match against a particular EMC Order, then such EMC Order would be routed to the closing process of the applicable Listing Market as described above. The execution price of an EMC Order executed on the Exchange would be the official closing price 8 published by the NYSE for EMC Orders in NYSE-listed stocks, or by 5 As defined in EDGX Rule 1.5(s). the NYSE designates the cut-off time for the entry of Market At-the-Close Orders as 3:45 p.m. Eastern Time (the ‘‘NYSE Cut-off Time’’). See NYSE Rule 123C. NASDAQ in turn, designates the ‘‘end of the order entry period’’ as 3:50 p.m. (the ‘‘NASDAQ Cut-Off Time’’). See NASDAQ Rule 4754. Thus, the EMC Cut-Off Times would be 3:40 p.m. for EMC Orders in NYSE-listed stocks, and 3:45 p.m. for EMC Orders in NASDAQ-listed stocks. 7 As defined in EDGX Rule 1.5(d). 8 For example, NYSE Rule 900(e) defines ‘‘closing price’’ as ‘‘the price established by the last ‘regular way’ sale in a security prior to the official closing of the 9:30 a.m. to 4:00 p.m. trading session, as determined by the Exchange.’’ Further, while the term ‘‘NASDAQ Official Closing Price’’ is not specifically defined in NASDAQ’s rules, it is referenced in NASDAQ IM–5505(b) and NASDAQ Rules 4753 (halt and imbalance crosses) and 4754 (closing cross). 6 Currently, PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 NASDAQ for EMC Orders in NASDAQlisted stocks, and Users would be charged fees, if any, for such executions according to the Exchange’s published fee schedule. The execution prices of the unmatched portion of any EMC Orders that were routed to the applicable Listing Market for execution in such Listing Market’s closing auction would also be the official closing price published by such Listing Market, and the Exchange would pass through to the Member any fees charged by the Listing Market for the execution of orders in its respective closing process. The following examples illustrate how the EMC Order would work. In each case, assume that XYZ stock is listed on the NYSE; therefore, the EMC Cut-Off Time would be 3:40 p.m. Example 1: Member A enters an EMC Order to buy 500 shares of XYZ at 2:00 p.m. Member B enters an EMC Order to sell 300 shares of XYZ at 2:30 p.m. At or shortly after 3:40 p.m. but prior to the NYSE Cut-Off Time of 3:45 p.m., the Exchange would pair off Member B’s EMC Order to sell 300 shares with 300 shares of Member A’s EMC Order to buy 500 shares, leaving a remainder of 200 shares to buy. Before 3:45 p.m., the remaining 200 shares of Member A’s order would be routed to the NYSE via EDGX’s routing broker-dealer, Direct Edge ECN LLC d/b/a DE Route, as a Market At-the-Close Order. After 4:00 p.m., the Exchange would execute Member A’s and Member B’s EMC Orders, for 300 shares each, at the official closing price for XYZ published by the NYSE and report such execution to the responsible Securities Information Processor. The Exchange would also report back to Member A an execution at the official closing price of the remaining 200 shares in the NYSE’s closing auction, and pass through to Member A the fees charged by the NYSE for executions of Market At-the-Close Orders in its closing auction. Example 2: Assume the same facts as above, except now Member C enters an EMC Order to buy 1000 shares of XYZ at 3:40:02 p.m. The Exchange would reject the order back to Member C because it would have been submitted after the EMC Cut-Off Time of 3:40 p.m. Example 3: Assume the same facts as above, except now Member D enters an EMC Order to buy 300 shares of XYZ at 3:15 p.m., and at 3:20 p.m. Member A cancels its EMC Order to buy 500 shares and replaces it with an EMC Order to buy 700 shares. Following the EMC Cut-Off Time at 3:40 p.m., the Exchange would pair off Member D’s EMC Order to buy 300 shares with Member B’s EMC Order to sell 300 shares, as Member A would have lost its time priority on the Book when it cancelled and replaced its original order with greater size. Member A’s order would then be routed via DE Route to the NYSE as a Market At-the-Close Order in accordance with NYSE rules. The Exchange is proposing the EMC Order in order to increase the level of E:\FR\FM\10AUN1.SGM 10AUN1 Federal Register / Vol. 77, No. 155 / Friday, August 10, 2012 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES competition for orders seeking execution at the official closing price.9 No other national securities exchange has offered its members the ability to obtain a closing price execution away from the NYSE and NASDAQ; as a result, the Exchange believes that the fees that the NYSE and NASDAQ charge for executions of Market At-the-Close Orders and Market-on-Close Orders, respectively, are not being sufficiently challenged by competitive forces. While robust competition between and among national securities exchanges and alternative market centers for intraday equities order flow has resulted in a steady decrease in trading fees over the previous decade, the fees charged by the NYSE and NASDAQ for closing price executions have actually increased over the past six years. For example, from August 2006 through July 2009, excluding any tiered discounts offered by NASDAQ, NASDAQ charged $0.0005 per side for closing price executions,10 which increased to $0.0007 per side in 2009 11 and to $0.0010 per side in 2010 12— approximately doubling the rate in 3 years. Thus, currently the ‘‘cost of match’’ 13 for closing price executions on NASDAQ is approximately $0.0020, or ‘‘20 mils’’.14 Similarly, excluding any tiered discounts offered by the NYSE, the NYSE increased its rate from $0.0005 per side to $0.0007 per side in 9 If and to the extent that the Exchange charges any fees for the execution of EMC Orders, it will file such fees with the Commission and post them on its Web site prior to implementation of the EMC Order. 10 See Securities Exchange Act Release No. 60323 (July 16, 2009), 74 FR 36543 (July 23, 2009) (SR– NASDAQ–2009–67) (citing to the proposition that NASDAQ did not modify its fee for MOC orders since it began to operate as a national securities exchange in 2006). 11 Id. 12 See Securities Exchange Act Release No. 62592 (July 29, 2010), 75 FR 47053 (August 4, 2010) (SR– NASDAQ–2010–95). 13 For purposes of this rule filing, the ‘‘cost of match’’ refers to the total or net cost of a single execution to both sides of the transaction. For closing price executions on NASDAQ and the NYSE, for example, it is currently measured by the explicit fee charged to both sides of the cross (although under certain narrow circumstances, on one or both sides, they are subject to reduction, as described infra at footnotes 14 and 18). For most exchanges, however, the ‘‘cost of match’’ for intraday matches or executions is generally calculated by netting rebate credits against take or removal fees. 14 The rate per share can be reduced to $0.0001 only in the case of internalized shares (meaning, those shares executed in the NASDAQ Closing Cross that execute against other ‘‘on close’’ orders submitted by the same Market Participant Identifier (‘‘MPID’’)) of MPIDs that execute more than 100 million Market-on-Close or Limit-on-Close Orders in the NASDAQ Closing Cross per month, and that add liquidity meeting the thresholds equivalent to NASDAQ’s $0.00295 pricing tier. VerDate Mar<15>2010 18:02 Aug 09, 2012 Jkt 226001 August 2009,15 then to $0.00085 per side from September 2010 16 to March 2012, when it was increased to $0.00095 per side,17 nearly doubling its rates in approximately three years. Thus, the cost of match for closing price executions on the NYSE is approximately $0.0019, or ‘‘19 mils’’.18 Relative to intraday matches or executions the fees charged by the NYSE and NASDAQ for closing price executions are significantly more expensive. For example, large order flow providers that reach certain of NASDAQ’s top tiers have a typical cost of match that varies from $0.00005 to $0.0005 (or ‘‘1/2 a mil’’ to ‘‘5 mils’’).19 Moreover, a typical cost of match for market participants that are not Designated Market Makers (‘‘DMMs’’) or Supplemental Liquidity Providers (‘‘SLPs’’) on the NYSE is approximately $0.0008 (or ‘‘8 mils’’).20 The Exchange has designed the EMC Order to provide an alternative means to obtain a closing price execution, without any impact on the price discovery function of the NYSE’s and NASDAQ’s respective closing processes. The existence of an alternative venue to obtain closing price executions introduces competition, and, consequently, a potential decrease in the fees charged to market participants for such executions.21 Moreover, the EMC Order would not impact the price discovery function of the NYSE’s and NASDAQ’s respective closing processes by replicating only market-on-close type 15 See Securities Exchange Act Release No. 60436 (August 5, 2009), 74 FR 40252 (August 11, 2009) (SR–NYSE–2009–77). 16 See Securities Exchange Act Release No. 62826 (September 1, 2010), 75 FR 54928 (September 9, 2010) (SR–NYSE–2010–63). 17 See Securities Exchange Act Release No. 66600 (March 20, 2012) [sic], 77 FR 16298 (March 20, 2012) (SR–NYSE–2012–07). 18 The rate per share can be reduced to $0.00055 for market participants whose average daily volume of ‘‘on close’’ orders is 14 million shares or more. 19 For example, NASDAQ’s cost of match at two of its top tiers can be approximated by subtracting the rebate credit (0.00295 or 0.0025) from the take or removal fee (0.0030) to equal 0.00005 or 0.0005/ share, respectively. See https:// www.nasdaqtrader.com/ Trader.aspx?id=PriceListTrading2. 20 Non-DMM and non-SLP liquidity providers earn a rebate of 0.0015 per share. Non-floor based liquidity removers are charged 0.0023 per share. Thus, the approximate cost of match on the NYSE (for non-DMM and non-SLPs) is 0.0008 per share. See https://usequities.nyx.com/markets/nyseequities/trading-fees. 21 It is the Exchange’s intention, upon the Commission approval of the EMC Order, to offer executions of EMC Orders, to the extent matched on the Exchange, at zero cost for at least some period of time. It is further the Exchange’s intention that, if and when it determines to charge a fee for the execution on the Exchange of an EMC Order, such fee would be less than the fee charged by the applicable Listing Market. PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 47901 orders, as opposed to limit-on-close orders, and the Exchange would only execute those EMC Orders that naturally paired off and effectively cancelled each other out. Any unmatched EMC Orders would be routed to the applicable Listing Market for execution in that Listing Market’s closing process. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act 22 and furthers the objectives of Section 6(b)(5) of the Act,23 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 mechanisms of a free and open market and a national market system, and, in general, to protect investors and the public interest. In particular, the proposed rule change would remove impediments to and perfect the mechanisms of a free and open market and a national market system, and foster cooperation and coordination with persons engaged in facilitating transactions in securities, by promoting competition among national securities exchanges in the execution of matching closing price orders without disrupting the price discovery process of NYSE’s and NASDAQ’s respective closing processes. The EMC Order would be neutral to price discovery, as it would only execute on the Exchange against a matching contra-side EMC Order. Any imbalance resulting from unmatched EMC Orders to the buy or sell side would be routed to the applicable Listing Market for execution in their respective closing processes. The proposed rule change would protect investors and the public interest by encouraging the NYSE and NASDAQ to compete for market orders in their closing processes. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule changes will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. 22 15 23 15 E:\FR\FM\10AUN1.SGM U.S.C. 78f(b). U.S.C. 78f(b)(5). 10AUN1 47902 Federal Register / Vol. 77, No. 155 / Friday, August 10, 2012 / Notices C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange has neither solicited nor received written comments on the proposed rule changes. 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 self-regulatory organization consents, the Commission will: (A) By order approve or disapprove the proposed rule change, or (B) Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments 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 Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–EDGX– 2012–33 and should be submitted on or before August 31, 2012. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.24 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–19611 Filed 8–9–12; 8:45 am] 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: BILLING CODE 8011–01–P Electronic Comments Self-Regulatory Organizations; C2 Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to the Options Regulatory Fee • 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–EDGX–2012–33 on the subject line. mstockstill on DSK4VPTVN1PROD with NOTICES 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–EDGX–2012–33. 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 VerDate Mar<15>2010 18:02 Aug 09, 2012 Jkt 226001 [Release No. 34–67596; File No. SR–C2– 2012–023] August 6, 2012. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on July 31, 2012, C2 Options Exchange, Incorporated (the ‘‘Exchange’’ or ‘‘C2’’) 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 Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to institute a new transaction-based ‘‘Options 24 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 Frm 00103 Fmt 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 Exchange 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 these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose SECURITIES AND EXCHANGE COMMISSION PO 00000 Regulatory Fee’’. The text of the proposed rule change is available on the Exchange’s Web site (https:// www.c2exchange.com/Legal/), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. Sfmt 4703 In order to offset more fully the cost of the Exchange’s regulatory programs, the Exchange proposes to adopt a transaction-based Options Regulatory Fee (‘‘ORF’’) of $0.0015 per contract. The Exchange is adopting an ORF due to substantial increases in resources devoted to regulatory services, including the recent hiring of many new employees, increased office space and regulatory systems enhancements. The proposed fee would be operative on August 1, 2012. The ORF would be assessed by the Exchange to each Permit Holder for all options transactions executed or cleared by the Permit Holder that are cleared by The Options Clearing Corporation (‘‘OCC’’) in the customer range, i.e., transactions that clear in a customer account at OCC, regardless of the marketplace of execution. In other words, the Exchange would impose the ORF on all customer-range transactions executed by a Permit Holder, even if the transactions do not take place on the Exchange.3 The ORF would also be charged for transactions that are not 3 Exchange rules require each Permit Holder to record the appropriate account origin code on all orders at the time of entry in order to allow the Exchange to properly prioritize and route orders and assess transaction fees pursuant to the rules of the Exchange and report resulting transactions to the OCC. C2 order origin codes are defined in C2 Regulatory Circular RG10–4. The Exchange represents that it has surveillances in place to verify that Permit Holders mark orders with the correct account origin code. E:\FR\FM\10AUN1.SGM 10AUN1

Agencies

[Federal Register Volume 77, Number 155 (Friday, August 10, 2012)]
[Notices]
[Pages 47899-47902]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-19611]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67598; File No. SR-EDGX-2012-33]


Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of 
Filing of Proposed Rule Change to Amend EDGX Rule 11.5(c) to add the 
Edge Market Close \SM\ Order

August 6, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\

[[Page 47900]]

notice is hereby given that, on July 27, 2012, the EDGX Exchange, Inc. 
(the ``Exchange'' or ``EDGX'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I and II below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 11.5(c) to add a new order 
type, the Edge Market CloseSM (``EMC'') Order, to the rule. 
The text of the proposed rule changes is available on the Exchange's 
Web site at www.directedge.com, at the Exchange's principal office and 
at the Public Reference Room of the Commission.

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 Exchange included statements 
concerning the purpose of, and basis for, the proposed rule changes and 
discussed any comments it received on the proposed rule changes. The 
text of these statements may be examined at the places specified in 
Item IV below. The self-regulatory organization has prepared summaries, 
set forth in Sections A, B and C below, of the most significant aspects 
of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing to amend Rule 11.5(c) to add new 
subparagraph (15), which would describe a new order type, the EMC 
Order. An EMC Order would be defined as an order to buy or sell on the 
Exchange a security that is listed on the New York Stock Exchange LLC 
(the ``NYSE'') or The NASDAQ Stock Market LLC (``NASDAQ'') (each, a 
``Listing Market'') at the official closing price of such security 
published by the corresponding Listing Market.\3\ Users \4\ would be 
able to enter, cancel and cancel/replace EMC Orders from prior to the 
Pre-Opening Session \5\ on trade date until five (5) minutes prior to 
the ``cut-off time'' for the entry of Market At-the-Close Orders on the 
NYSE and Market-on-Close Orders on NASDAQ (in each case, the ``EMC Cut-
Off Time'').\6\ All EMC Orders on the EDGX Book \7\ at the EMC Cut-Off 
Time would be locked-in either for execution on the Exchange or for 
routing to the applicable Listing Market (to the extent not otherwise 
matched with a contra-side EMC Order), as described below. Users would 
not be able to cancel or cancel/replace any EMC Order after the EMC 
Cut-Off Time, and the Exchange would reject back to the User any EMC 
Order received after the EMC Cut-Off Time. During the time between the 
EMC Cut-Off Time and the NYSE Cut-Off Time or the NASDAQ Cut-Off time, 
as the case may be, the Exchange would calculate, for each security for 
which EMC Orders were entered, the maximum number of shares underlying 
such EMC Orders that can be matched, or paired off. Priority on the 
EDGX Book for EMC Orders would be based strictly on time of entry. EMC 
Orders would be eligible for partial execution on the Exchange. The 
unmatched portion of any EMC Orders that could not be paired off on the 
Exchange pursuant to this process would then be routed as Market At-
the-Close Orders to the closing process of the NYSE for NYSE-listed 
stocks, or as Market-on-Close Orders to the closing process of NASDAQ 
for NASDAQ-listed stocks. If there was no contra-side EMC Order on the 
Exchange to match against a particular EMC Order, then such EMC Order 
would be routed to the closing process of the applicable Listing Market 
as described above. The execution price of an EMC Order executed on the 
Exchange would be the official closing price \8\ published by the NYSE 
for EMC Orders in NYSE-listed stocks, or by NASDAQ for EMC Orders in 
NASDAQ-listed stocks, and Users would be charged fees, if any, for such 
executions according to the Exchange's published fee schedule. The 
execution prices of the unmatched portion of any EMC Orders that were 
routed to the applicable Listing Market for execution in such Listing 
Market's closing auction would also be the official closing price 
published by such Listing Market, and the Exchange would pass through 
to the Member any fees charged by the Listing Market for the execution 
of orders in its respective closing process.
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    \3\ In the event that a particular security were listed on both 
the NYSE and NASDAQ, the Exchange would select one of such exchanges 
for purposes of ascertaining the official closing price for the 
execution of EMC Orders in such security, based on the exchange with 
the greater market share in the security measured over the previous 
three (3) calendar months. The Exchange would disclose on its Web 
site such selection prospectively in advance of offering the EMC 
Order in such security.
    \4\ As defined in EDGX Rule 1.5(ee).
    \5\ As defined in EDGX Rule 1.5(s).
    \6\ Currently, the NYSE designates the cut-off time for the 
entry of Market At-the-Close Orders as 3:45 p.m. Eastern Time (the 
``NYSE Cut-off Time''). See NYSE Rule 123C. NASDAQ in turn, 
designates the ``end of the order entry period'' as 3:50 p.m. (the 
``NASDAQ Cut-Off Time''). See NASDAQ Rule 4754. Thus, the EMC Cut-
Off Times would be 3:40 p.m. for EMC Orders in NYSE-listed stocks, 
and 3:45 p.m. for EMC Orders in NASDAQ-listed stocks.
    \7\ As defined in EDGX Rule 1.5(d).
    \8\ For example, NYSE Rule 900(e) defines ``closing price'' as 
``the price established by the last `regular way' sale in a security 
prior to the official closing of the 9:30 a.m. to 4:00 p.m. trading 
session, as determined by the Exchange.'' Further, while the term 
``NASDAQ Official Closing Price'' is not specifically defined in 
NASDAQ's rules, it is referenced in NASDAQ IM-5505(b) and NASDAQ 
Rules 4753 (halt and imbalance crosses) and 4754 (closing cross).
---------------------------------------------------------------------------

    The following examples illustrate how the EMC Order would work. In 
each case, assume that XYZ stock is listed on the NYSE; therefore, the 
EMC Cut-Off Time would be 3:40 p.m.

    Example 1: Member A enters an EMC Order to buy 500 shares of XYZ 
at 2:00 p.m. Member B enters an EMC Order to sell 300 shares of XYZ 
at 2:30 p.m. At or shortly after 3:40 p.m. but prior to the NYSE 
Cut-Off Time of 3:45 p.m., the Exchange would pair off Member B's 
EMC Order to sell 300 shares with 300 shares of Member A's EMC Order 
to buy 500 shares, leaving a remainder of 200 shares to buy. Before 
3:45 p.m., the remaining 200 shares of Member A's order would be 
routed to the NYSE via EDGX's routing broker-dealer, Direct Edge ECN 
LLC d/b/a DE Route, as a Market At-the-Close Order.
    After 4:00 p.m., the Exchange would execute Member A's and 
Member B's EMC Orders, for 300 shares each, at the official closing 
price for XYZ published by the NYSE and report such execution to the 
responsible Securities Information Processor. The Exchange would 
also report back to Member A an execution at the official closing 
price of the remaining 200 shares in the NYSE's closing auction, and 
pass through to Member A the fees charged by the NYSE for executions 
of Market At-the-Close Orders in its closing auction.
    Example 2: Assume the same facts as above, except now Member C 
enters an EMC Order to buy 1000 shares of XYZ at 3:40:02 p.m. The 
Exchange would reject the order back to Member C because it would 
have been submitted after the EMC Cut-Off Time of 3:40 p.m.
    Example 3: Assume the same facts as above, except now Member D 
enters an EMC Order to buy 300 shares of XYZ at 3:15 p.m., and at 
3:20 p.m. Member A cancels its EMC Order to buy 500 shares and 
replaces it with an EMC Order to buy 700 shares. Following the EMC 
Cut-Off Time at 3:40 p.m., the Exchange would pair off Member D's 
EMC Order to buy 300 shares with Member B's EMC Order to sell 300 
shares, as Member A would have lost its time priority on the Book 
when it cancelled and replaced its original order with greater size. 
Member A's order would then be routed via DE Route to the NYSE as a 
Market At-the-Close Order in accordance with NYSE rules.

    The Exchange is proposing the EMC Order in order to increase the 
level of

[[Page 47901]]

competition for orders seeking execution at the official closing 
price.\9\ No other national securities exchange has offered its members 
the ability to obtain a closing price execution away from the NYSE and 
NASDAQ; as a result, the Exchange believes that the fees that the NYSE 
and NASDAQ charge for executions of Market At-the-Close Orders and 
Market-on-Close Orders, respectively, are not being sufficiently 
challenged by competitive forces. While robust competition between and 
among national securities exchanges and alternative market centers for 
intraday equities order flow has resulted in a steady decrease in 
trading fees over the previous decade, the fees charged by the NYSE and 
NASDAQ for closing price executions have actually increased over the 
past six years.
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    \9\ If and to the extent that the Exchange charges any fees for 
the execution of EMC Orders, it will file such fees with the 
Commission and post them on its Web site prior to implementation of 
the EMC Order.
---------------------------------------------------------------------------

    For example, from August 2006 through July 2009, excluding any 
tiered discounts offered by NASDAQ, NASDAQ charged $0.0005 per side for 
closing price executions,\10\ which increased to $0.0007 per side in 
2009 \11\ and to $0.0010 per side in 2010 \12\--approximately doubling 
the rate in 3 years. Thus, currently the ``cost of match'' \13\ for 
closing price executions on NASDAQ is approximately $0.0020, or ``20 
mils''.\14\ Similarly, excluding any tiered discounts offered by the 
NYSE, the NYSE increased its rate from $0.0005 per side to $0.0007 per 
side in August 2009,\15\ then to $0.00085 per side from September 2010 
\16\ to March 2012, when it was increased to $0.00095 per side,\17\ 
nearly doubling its rates in approximately three years. Thus, the cost 
of match for closing price executions on the NYSE is approximately 
$0.0019, or ``19 mils''.\18\
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release No. 60323 (July 16, 
2009), 74 FR 36543 (July 23, 2009) (SR-NASDAQ-2009-67) (citing to 
the proposition that NASDAQ did not modify its fee for MOC orders 
since it began to operate as a national securities exchange in 
2006).
    \11\ Id.
    \12\ See Securities Exchange Act Release No. 62592 (July 29, 
2010), 75 FR 47053 (August 4, 2010) (SR-NASDAQ-2010-95).
    \13\ For purposes of this rule filing, the ``cost of match'' 
refers to the total or net cost of a single execution to both sides 
of the transaction. For closing price executions on NASDAQ and the 
NYSE, for example, it is currently measured by the explicit fee 
charged to both sides of the cross (although under certain narrow 
circumstances, on one or both sides, they are subject to reduction, 
as described infra at footnotes 14 and 18). For most exchanges, 
however, the ``cost of match'' for intraday matches or executions is 
generally calculated by netting rebate credits against take or 
removal fees.
    \14\ The rate per share can be reduced to $0.0001 only in the 
case of internalized shares (meaning, those shares executed in the 
NASDAQ Closing Cross that execute against other ``on close'' orders 
submitted by the same Market Participant Identifier (``MPID'')) of 
MPIDs that execute more than 100 million Market-on-Close or Limit-
on-Close Orders in the NASDAQ Closing Cross per month, and that add 
liquidity meeting the thresholds equivalent to NASDAQ's $0.00295 
pricing tier.
    \15\ See Securities Exchange Act Release No. 60436 (August 5, 
2009), 74 FR 40252 (August 11, 2009) (SR-NYSE-2009-77).
    \16\ See Securities Exchange Act Release No. 62826 (September 1, 
2010), 75 FR 54928 (September 9, 2010) (SR-NYSE-2010-63).
    \17\ See Securities Exchange Act Release No. 66600 (March 20, 
2012) [sic], 77 FR 16298 (March 20, 2012) (SR-NYSE-2012-07).
    \18\ The rate per share can be reduced to $0.00055 for market 
participants whose average daily volume of ``on close'' orders is 14 
million shares or more.
---------------------------------------------------------------------------

    Relative to intraday matches or executions the fees charged by the 
NYSE and NASDAQ for closing price executions are significantly more 
expensive. For example, large order flow providers that reach certain 
of NASDAQ's top tiers have a typical cost of match that varies from 
$0.00005 to $0.0005 (or ``1/2 a mil'' to ``5 mils'').\19\ Moreover, a 
typical cost of match for market participants that are not Designated 
Market Makers (``DMMs'') or Supplemental Liquidity Providers (``SLPs'') 
on the NYSE is approximately $0.0008 (or ``8 mils'').\20\
---------------------------------------------------------------------------

    \19\ For example, NASDAQ's cost of match at two of its top tiers 
can be approximated by subtracting the rebate credit (0.00295 or 
0.0025) from the take or removal fee (0.0030) to equal 0.00005 or 
0.0005/share, respectively. See https://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2.
    \20\ Non-DMM and non-SLP liquidity providers earn a rebate of 
0.0015 per share. Non-floor based liquidity removers are charged 
0.0023 per share. Thus, the approximate cost of match on the NYSE 
(for non-DMM and non-SLPs) is 0.0008 per share. See https://usequities.nyx.com/markets/nyse-equities/trading-fees.
---------------------------------------------------------------------------

    The Exchange has designed the EMC Order to provide an alternative 
means to obtain a closing price execution, without any impact on the 
price discovery function of the NYSE's and NASDAQ's respective closing 
processes. The existence of an alternative venue to obtain closing 
price executions introduces competition, and, consequently, a potential 
decrease in the fees charged to market participants for such 
executions.\21\ Moreover, the EMC Order would not impact the price 
discovery function of the NYSE's and NASDAQ's respective closing 
processes by replicating only market-on-close type orders, as opposed 
to limit-on-close orders, and the Exchange would only execute those EMC 
Orders that naturally paired off and effectively cancelled each other 
out. Any unmatched EMC Orders would be routed to the applicable Listing 
Market for execution in that Listing Market's closing process.
---------------------------------------------------------------------------

    \21\ It is the Exchange's intention, upon the Commission 
approval of the EMC Order, to offer executions of EMC Orders, to the 
extent matched on the Exchange, at zero cost for at least some 
period of time. It is further the Exchange's intention that, if and 
when it determines to charge a fee for the execution on the Exchange 
of an EMC Order, such fee would be less than the fee charged by the 
applicable Listing Market.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \22\ and furthers the objectives of 
Section 6(b)(5) of the Act,\23\ 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 mechanisms of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78f(b).
    \23\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In particular, the proposed rule change would remove impediments to 
and perfect the mechanisms of a free and open market and a national 
market system, and foster cooperation and coordination with persons 
engaged in facilitating transactions in securities, by promoting 
competition among national securities exchanges in the execution of 
matching closing price orders without disrupting the price discovery 
process of NYSE's and NASDAQ's respective closing processes. The EMC 
Order would be neutral to price discovery, as it would only execute on 
the Exchange against a matching contra-side EMC Order. Any imbalance 
resulting from unmatched EMC Orders to the buy or sell side would be 
routed to the applicable Listing Market for execution in their 
respective closing processes. The proposed rule change would protect 
investors and the public interest by encouraging the NYSE and NASDAQ to 
compete for market orders in their closing processes.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule changes will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

[[Page 47902]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule changes.

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 self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the 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 email to rule-comments@sec.gov. Please include 
File Number SR-EDGX-2012-33 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-EDGX-2012-33. 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 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-EDGX-2012-33 and should be 
submitted on or before August 31, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
---------------------------------------------------------------------------

    \24\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-19611 Filed 8-9-12; 8:45 am]
BILLING CODE 8011-01-P
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