Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending NYSE Arca Options Rule 6.40 To Expand the Existing Market Maker Risk Limitation Mechanism Making It Available for Orders From Market Makers as Well as Non-Market Maker OTP Firms and OTP Holders, and To Provide for Two Additional Risk Limitation Mechanisms, 52098-52104 [2012-21111]
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52098
Federal Register / Vol. 77, No. 167 / Tuesday, August 28, 2012 / Notices
srobinson on DSK4SPTVN1PROD with NOTICES
III. Discussion and Commission’s
Findings
After careful review, the Commission
finds that the proposed rule change, as
modified by Amendment No. 1 thereto,
is consistent with the requirements of
the Act and the rules and regulations
thereunder applicable to a national
securities exchange.21 In particular, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act,22 which requires,
among other things, that the rules of a
national securities exchange be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
The Commission finds that the instant
proposed rule change is consistent with
the Act. The Commission notes that the
Exchange believes the proposal should
serve to eliminate potential confusion
regarding the obligations of Sponsoring
Members and Sponsored Participants
under Exchange rules. In addition, the
Commission notes that the Exchange
proposes to require Sponsoring
Members to comply with Rule 15c3–5
under the Act 23 with regard to market
access arrangements with Sponsored
Participants.24 In this regard, the
Commission notes that although the
proposal relates to obligations of
Sponsoring Members and Sponsored
Participants under the Exchange’s rules,
the financial and regulatory risk
management controls and supervisory
procedures required by Rule 15c3–5
under the Act 25 apply broadly to all
forms of market access by broker-dealers
that are exchange members or
alternative trading system (‘‘ATS’’)
subscribers, including sponsored access,
direct market access, and more
traditional agency brokerage
arrangements with customers, as well as
proprietary trading.26 The application of
appropriate risk management controls
and supervisory procedures required by
Rule 15c3–5 under the Act 27 is
critically important to maintaining a
robust market infrastructure supporting
the protection of investors, investor
21 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
22 15 U.S.C. 78f(b)(5).
23 17 CFR 240.15c3–5.
24 See EDGA Rule 11.3(b)(3).
25 17 CFR 240.15c3–5.
26 See Market Access Rule Adopting Release,
supra note 19, 75 FR at 69798.
27 17 CFR 240.15c3–5.
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confidence, and fair, orderly, and
efficient markets for all participants.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,28 that the
proposed rule change (SR–EDGA–2012–
27), as modified by Amendment No. 1
thereto, is approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.29
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–21109 Filed 8–27–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–67714; File No. SR–
NYSEArca–2012–87]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Amending NYSE Arca
Options Rule 6.40 To Expand the
Existing Market Maker Risk Limitation
Mechanism Making It Available for
Orders From Market Makers as Well as
Non-Market Maker OTP Firms and OTP
Holders, and To Provide for Two
Additional Risk Limitation Mechanisms
August 22, 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 August
10, 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 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
NYSE Arca Options Rule 6.40 to expand
the existing Market Maker Risk
Limitation Mechanism to make it
available for orders from Market Makers
as well as non-Market Maker OTP Firms
and OTP Holders, and to provide for
two additional risk limitation
28 15
U.S.C. 78s(b)(2).
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.
29 17
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mechanisms. The text of the proposed
rule change is available on the
Exchange’s Web site at www.nyse.com,
at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange adopted the existing
Market Maker Risk Limitation
Mechanism to provide a transactionbased mechanism for limiting a Market
Maker’s risk during periods of increased
and significant trading activity on the
Exchange in the Market Maker’s
appointment.4 The Exchange now
proposes to expand the existing Market
Maker Risk Limitation Mechanism to
make it available for orders from Market
Makers as well as orders from nonMarket Maker OTP Firms and OTP
Holders (‘‘non-Market Makers’’),5 and to
provide for two additional risk
limitation mechanisms (collectively, the
‘‘Risk Limitation Mechanisms’’). The
Exchange is proposing these changes to
permit Market Makers and non-Market
Makers to better manage the risk of
multiple, nearly simultaneous
executions against their proprietary
interest that, in today’s highly
automated and electronic trading
environment, can occur across multiple
series of different option classes.
Consistent with the ability to better
manage risk, the Exchange anticipates
that these changes could enhance the
Exchange’s overall market quality as a
result of narrowed quote widths and
4 See Securities Exchange Act Release No. 54238
(July 28, 2006), 71 FR 44758 (August 7, 2006) (SR–
NYSEArca–2006–13).
5 The Exchange proposes to specify within NYSE
Arca Options Rule 6.40(a) that non-Market Maker
OTP Firms and OTP Holders will be referred to as
‘‘non-Market Makers’’ for purposes of NYSE Arca
Options Rule 6.40.
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Federal Register / Vol. 77, No. 167 / Tuesday, August 28, 2012 / Notices
increased liquidity for series traded on
the Exchange.
As noted above, the Exchange is
proposing to make the three Risk
Limitation Mechanisms available to
non-Market Makers. The Exchange is
proposing this change to respond to
requests from non-Market Makers that
engage in rapid, proprietary trading. In
this regard, non-Market Makers can
have risk exposure similar to that of
Market Makers, and have similarly
sought ways to mitigate this risk. The
Exchange believes that making the Risk
Limitation Mechanisms available to
non-Market Makers will assist them in
these efforts.
As is the case today with the Market
Maker Risk Limitation Mechanism, the
trade counters, and therefore the Risk
Limitation Mechanisms themselves,
would be based on trading permit
identification (‘‘TPID’’).6 As is also the
case today with respect to the existing
Market Maker Risk Limitation
Mechanism, Market Makers would be
required to activate one of the three Risk
Limitation Mechanisms at all times for
their quotes for each class in their
appointment. However, the Risk
Limitation Mechanisms would be
entirely voluntary with respect to
orders, both for those of Market Makers
and non-Market Makers. Market Makers
and non-Market Makers would only be
permitted to activate one of the three
Risk Limitation Mechanisms for a
particular class at any given time for
their orders. However, a Market Maker
could activate one Risk Limitation
Mechanism for its quotes and a different
Risk Limitation Mechanism for its
orders, even if both are activated for the
same class.7 The three mechanisms are
described in greater detail below.
(1) Transaction-Based Risk Limitation
Mechanism
srobinson on DSK4SPTVN1PROD with NOTICES
The existing Market Maker Risk
Limitation Mechanism is transactionbased and automatically cancels all
quotes posted by a Market Maker in an
appointed class if the trade counter
determines that ‘‘n’’ executions within
one second have occurred against the
quotes of the Market Maker in the
particular appointed class.
6 TPIDs are assigned to Market Makers and nonMarket Makers to identify them in the Exchange’s
systems.
7 Market Makers on the Exchange are not able to
submit orders on an agency basis. Therefore, a
Market Maker within an OTP Firm that conducts
both an agency and a market making business
would have a unique TPID that could only be used
for that Market Maker’s quotes and orders. The
proposed rule change would not prevent the use of
the Risk Limitation Mechanisms for a non-Market
Maker’s agency order flow.
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The Exchange proposes to amend
NYSE Arca Options Rule 6.40(b) to
apply the existing Market Maker Risk
Limitation Mechanism not only to
Market Maker quotes, but also to nonMarket Maker and Market Maker orders.
As proposed, and similar to the existing
process for Market Maker quotes,8 the
Transaction-Based Risk Limitation
Mechanism would be triggered for a
non-Market Maker whenever a trade
counter has reached ‘‘n’’ executions
within a time period specified by the
Exchange via Regulatory Bulletin, as
discussed further below, against the
non-Market Maker’s orders in a
specified class. For Market Maker
orders, the Transaction-Based Risk
Limitation Mechanism would be
triggered when a trade counter has
reached ‘‘n’’ executions within a time
period specified by the Exchange
against the Market Maker’s orders in a
specified class. Accordingly, ‘‘Market
Maker’’ would be deleted from the title
of NYSE Arca Options Rule 6.40, as
would any other references that would
limit NYSE Arca Options Rule 6.40 only
to Market Makers. Additionally,
references to ‘‘Transaction-Based’’
would be added to NYSE Arca Options
Rule 6.40(b) to differentiate the existing
mechanism from the newly proposed
Risk Limitation Mechanisms, as
discussed in greater detail below.
Additionally, much of the existing text
of NYSE Arca Options Rule 6.40(b)
through (f) would be relocated as new
Commentary to NYSE Arca Options
8 The existing Market Maker quote aspect of the
mechanism would be renumbered as NYSE Arca
Options Rule 6.40(b)(3) and would be triggered
when a trade counter has reached ‘‘n’’ executions
within a time period specified by the Exchange
against the Market Maker’s quotes in an appointed
class. As proposed under new Commentary .03 to
NYSE Arca Options Rule 6.40, the Exchange would
announce via Regulatory Bulletin the applicable
time period(s) for the Risk Limitation Mechanisms
proposed under NYSE Arca Options Rule 6.40. The
Exchange also proposes to specify under
Commentary .03 that the Exchange will not specify
a time period of less than 100 milliseconds.
Additionally, the Exchange anticipates announcing
via Regulatory Bulletin, as described in proposed
Commentary .03, that the minimum, maximum and
default settings for ‘‘n,’’ as well as the potential
range for such settings, that are in effect at the time
the Exchange implements this proposed change,
will continue to apply to the Transaction-Based
Risk Limitation Mechanism in the future. In this
regard, the Exchange notes that it recently amended
current Rule 6.40(b)(1) to specify that the potential
range for the settings applicable to the existing
Market Maker Risk Limitation Mechanism will be
between one and 100 executions per second, to
eliminate the current reference to the default
setting, and, in the future, to specify the applicable
minimum, maximum and default settings via
Regulatory Bulletin. See Securities Exchange Act
Release No. 67498 (July 25, 2012), 77 FR 45401
(July 31, 2012) (SR–NYSEArca–2012–76).
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52099
Rule 6.40, as discussed in greater detail
below.
(2) Volume-Based Risk Limitation
Mechanism
The Exchange proposes to provide for
a new Volume-Based Risk Limitation
Mechanism under NYSE Arca Options
Rule 6.40(c). The proposed VolumeBased Risk Limitation Mechanism
would be triggered whenever one of the
following conditions is met: (1) For a
non-Market Maker, when a trade
counter has reached ‘‘k’’ contracts
traded within a time period specified by
the Exchange against the non-Market
Maker’s orders in a specified class; (2)
for a Market Maker, when a trade
counter has reached ‘‘k’’ contracts
traded within a time period specified by
the Exchange against the Market
Maker’s orders in a specified class; or
(3) for a Market Maker, when a trade
counter has reached ‘‘k’’ contracts
traded within a time period specified by
the Exchange against the Market
Maker’s quotes in an appointed class.9
(3) Percentage-Based Risk Limitation
Mechanism
The Exchange proposes to provide for
a new Percentage-Based Risk Limitation
Mechanism under NYSE Arca Options
Rule 6.40(d).10 The proposed
Percentage-Based Risk Limitation
Mechanism would be triggered
whenever one of the following
conditions is met: (1) For a non-Market
Maker, when a trade counter has
calculated that the non-Market Maker
has traded ‘‘p’’ percentage within a time
period specified by the Exchange
against the non-Market Maker’s orders
in a specified class; (2) for a Market
Maker, when a trade counter has
calculated that the Market Maker has
traded ‘‘p’’ percentage within a time
period specified by the Exchange
against the Market Maker’s orders in a
specified class; or (3) for a Market
Maker, when a trade counter has
calculated that the Market Maker has
traded ‘‘p’’ percentage within a time
period specified by the Exchange
against the Market Maker’s quotes in an
appointed class.11 The ‘‘p’’ percentage
9 The Exchange anticipates announcing via
Regulatory Bulletin that the applicable minimum
and maximum settings for ‘‘k’’ (as well as the
potential range for the settings applicable to the
Volume-Based Risk Limitation Mechanism) will be
20 and 5,000, respectively.
10 The proposed Percentage-Based Risk
Limitation Mechanism is partially based on
NASDAQ OMX PHLX (‘‘PHLX’’) Rule 1093. See
Securities Exchange Act Release No. 53166 (January
23, 2006), 71 FR 4625 (January 27, 2006) (SR–Phlx–
2006–05).
11 The Exchange anticipates announcing via
Regulatory Bulletin that the applicable minimum
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specified by the non-Market Maker or
Market Maker would be calculated as
follows (and as shown in the examples
below):12 (1) A trade counter would first
calculate, for each series of an option
class, the percentage of a non-Market
Maker’s or Market Maker’s order size or
a Market Maker’s quote size that is
executed on each side of the market,
including both displayed and nondisplayed size, and (2) a trade counter
would then sum the overall series
percentages for the entire option class to
calculate the ‘‘p’’ percentage.
Series
Series
Series
Series
Series
1
2
3
4
Example 1
For Examples 1 and 2, if a Market
Maker is quoting at the National Best
Bid or Offer (‘‘NBBO’’) in four series of
an appointed class, and specifies its ‘‘p’’
percentage at 100%, a trade counter
would calculate such percentage as
follows:
Quote size
Number of
contracts
executed
Series
percentage
........................................................................................................................................
........................................................................................................................................
........................................................................................................................................
........................................................................................................................................
100
50
200
150
40
20
20
15
40
40
10
10
Total ......................................................................................................................................
500
95
100
In Example 1, the aggregate number of
contracts executed among all series
during the time period specified by the
Exchange that equals the specified
percentage of 100% is 95 contracts, at
which point the Percentage-Based Risk
Limitation Mechanism would be
triggered and the Market Maker’s
Series
Series
Series
Series
Series
1
2
3
4
remaining quotes in the appointed class
would be cancelled.
Example 2
Quote size
Number of
contracts
executed
Series
percentage
........................................................................................................................................
........................................................................................................................................
........................................................................................................................................
........................................................................................................................................
100
50
200
150
0
0
0
150
0
0
0
100
Total ......................................................................................................................................
500
150
100
In Example 2, the aggregate number of
contracts executed among all series
during the time period specified by the
Exchange that equals the specified
percentage of 100% is 150 contracts, at
which point the Percentage-Based Risk
Limitation Mechanism would be
triggered and the Market Maker’s
remaining quotes in the appointed class
would be cancelled.
Example 3
For Example 3, if a Market Maker is
quoting at the NBBO in four series of a
Series
1
2
3
4
Quote size
Number of
contracts
executed
Series
percentage
........................................................................................................................................
........................................................................................................................................
........................................................................................................................................
........................................................................................................................................
100
50
200
150
80
40
40
30
80
80
20
20
Total ......................................................................................................................................
srobinson on DSK4SPTVN1PROD with NOTICES
Series
Series
Series
Series
particular option class, and specifies its
‘‘p’’ percentage at 200%, a trade counter
would calculate such percentage as
follows:
500
190
200
In Example 3, the aggregate number of
contracts executed among all series
during the time period specified by the
Exchange that equals the specified
percentage of 200% is 190 contracts, at
which point the Percentage-Based Risk
Limitation Mechanism would be
triggered and the Market Maker’s
remaining quotes in the appointed class
would be cancelled.
and maximum settings for ‘‘p’’ (as well as the
potential range for the settings applicable to the
Percentage-Based Risk Limitation Mechanism) will
be 100 and 2,000, respectively.
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Trade Counter
The trade counters serve as the basis
for determining whether a Risk
Limitation Mechanism is triggered.
NYSE Arca Options Rule 6.40(a)
currently describes the existing trade
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counter, which is incremented every
time a Market Maker executes a trade
against its quote in any series in an
appointed class. The Exchange proposes
to amend NYSE Arca Options Rule
6.40(a) to reflect that the existing trade
counter will be replaced by separate
trade counters that the NYSE Arca
System will maintain for each of the
12 The examples provided below are for Market
Maker quotes, but would similarly apply to nonMarket Maker and Market Maker orders.
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following scenarios: (1) When a nonMarket Maker order is executed in any
series in a specified class; 13 (2) when a
Market Maker order is executed in any
series in a specified class; and (3) when
a Market Maker quote is executed in any
series in an appointed class. The
Exchange also proposes to reflect that
for each of these scenarios the trade
counters will be incremented by one
every time a trade is executed and will
also aggregate the number of contracts
traded during each such execution. The
trade counters will also calculate
applicable percentages for Market
Makers and non-Market Makers using
the proposed Percentage-Based Risk
Limitation Mechanism. These proposed
changes to NYSE Arca Options Rule
6.40(a) are necessary due to the changes
proposed below.
General
As proposed under new Commentary
.01 to NYSE Arca Options Rule 6.40,
and similar to the current description in
existing NYSE Arca Options Rule
6.40(b), the NYSE Arca System would
automatically cancel electronic orders
or quotes pursuant to proposed
paragraph (e) of NYSE Arca Options
Rule 6.40 14 by generating a ‘‘bulk
cancel’’ message.15 Similar to the
current description in existing NYSE
Arca Options Rule 6.40(c), the bulk
cancel message would be processed by
the NYSE Arca System in time priority
with any other quote or order message
received by the NYSE Arca System.
Additionally, any orders or quotes that
matched with a Market Maker’s quote or
a Market Maker’s or non-Market Maker’s
order and were received by the NYSE
Arca System prior to the receipt of the
bulk cancel message would be
automatically executed. However,
orders or quotes received by the NYSE
Arca System after receipt of the bulk
cancel message would not be executed.
In this regard, the proposed rule change
would not relieve a non-Market Maker
or Market Maker of its ‘‘firm quote’’
obligation under Rule 602 of Regulation
NMS 16 or NYSE Arca Options Rule
6.86. Furthermore, the proposed rule
change would not relieve Market
Makers on the Exchange of their quoting
obligations under the Exchange’s
Rules.17
As proposed under new Commentary
.02 to NYSE Arca Options Rule 6.40,
and similar to the current description in
NYSE Arca Options Rule 6.40(d), if one
of the Risk Limitation Mechanisms is
triggered pursuant to proposed
paragraph (b)(1) or (2), (c)(1) or (2), or
(d)(1) or (2) of NYSE Arca Options Rule
6.40, any orders sent by the non-Market
Maker or Market Maker, respectively, in
the specified class would be rejected
until the non-Market Maker or Market
Maker submits a message to the NYSE
Arca System to enable the entry of new
orders. Similarly, if one of the Risk
Limitation Mechanisms is triggered
pursuant to proposed paragraph (b)(3),
(c)(3), or (d)(3) of NYSE Arca Options
Rule 6.40, any quotes sent by the Market
Maker in the appointed class would be
rejected until the Market Maker submits
a message to the NYSE Arca System to
enable the entry of new quotes.
As proposed under new Commentary
.03 to NYSE Arca Options Rule 6.40, the
Exchange would specify via Regulatory
Bulletin any applicable minimum,
maximum and/or default settings for the
Risk Limitation Mechanisms proposed
under NYSE Arca Options Rule 6.40.18
16 17
srobinson on DSK4SPTVN1PROD with NOTICES
13 The
Exchange proposes to include the concept
of a ‘‘specified class’’ to reflect that Market Makers
and non-Market Makers must specify the class(es)
for which a Risk Limitation Mechanism is activated
for orders or none of the Risk Limitation
Mechanisms will be activated.
14 As proposed under NYSE Arca Options Rule
6.40(e), the NYSE Arca System would take the
following action if one of the Risk Limitation
Mechanisms described herein is triggered: (1) If
triggered pursuant to proposed paragraph (b)(1),
(c)(1) or (d)(1) of NYSE Arca Options Rule 6.40, the
NYSE Arca System would automatically cancel all
of the non-Market Maker’s orders in the specified
class; (2) if triggered pursuant to proposed
paragraph (b)(2), (c)(2) or (d)(2) of NYSE Arca
Options Rule 6.40, the NYSE Arca System would
automatically cancel all of the Market Maker’s
orders in the specified class; or (3) if triggered
pursuant to proposed paragraph (b)(3), (c)(3) or
(d)(3) of NYSE Arca Options Rule 6.40, the NYSE
Arca System would automatically cancel all of the
Market Maker’s quotes in the appointed class.
15 As is the case today for the existing Market
Maker Risk Limitation Mechanism, the Risk
Limitation Mechanisms provided under NYSE Arca
Options Rule 6.40 would only be applicable to
electronic trading on the Exchange.
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16:39 Aug 27, 2012
Jkt 226001
CFR 242.602.
e.g., NYSE Arca Options Rule 6.37B.
18 The Exchange will issue the Regulatory
Bulletin at least one trading day in advance of the
settings becoming effective. All such Regulatory
Bulletins will contain information regarding
changes to the settings in the Risk Limitation
Mechanisms, the effective date of such changes and
contact information of Exchange staff who can
provide additional information. The Exchange
distributes Regulatory Bulletins simultaneously to
all OTP Holders and OTP Firms via email and posts
the Regulatory Bulletins to the Exchange’s Web site.
Upon receiving notification of a change to the
settings for the Risk Limitation Mechanisms by the
Exchange, OTP Holders and OTP Firms will be able
to make adjustments they deem necessary to their
own risk settings for the Risk Limitation
Mechanisms using the same electronic interface
that they use to send quotes and orders to the
Exchange. In addition, OTP Holders and OTP Firms
may elect to adjust risk settings in their own
proprietary systems in reaction to any changes
initiated by the Exchange. When adjusting risk
parameters for the Risk Limitation Mechanisms
and/or a proprietary system, in reaction to a change
to the risk settings by the Exchange, OTP Holders
and OTP Firms are able to utilize functionality that
is both readily available and user controlled.
17 See,
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52101
This would include those settings that
are applicable for the existing Market
Maker Risk Limitation Mechanism at
the time the Exchange implements this
proposed change, which, as discussed
above, would be renamed as the
Transaction-Based Risk Limitation
Mechanism, as well as for the proposed
new Volume-Based and PercentageBased Risk Limitation Mechanisms.19
Accordingly, the text proposed within
Commentary .03 is designed to conform
to the text that is currently provided
under Rule 6.40(b)(1).20 The Exchange
also proposes to specify under
Commentary .03 that the Exchange will
not (i) specify a minimum setting of less
than one or a maximum setting of more
than 100 for the Transaction-Based Risk
Limitation Mechanism; (ii) specify a
minimum setting of less than 20 or a
maximum setting of more than 5,000 for
the Volume-Based Risk Limitation
Mechanism; or (iii) specify a minimum
setting of less than 100 or a maximum
setting of more than 2,000 for the
Percentage-Based Risk Limitation
Mechanism. Similarly, as proposed
under new Commentary .03 to NYSE
Arca Options Rule 6.40, the Exchange
would specify via Regulatory Bulletin
the applicable time period(s) for the
Risk Limitation Mechanisms proposed
under NYSE Arca Options Rule 6.40.
The Exchange also proposes to provide
under Commentary .03 that the
Exchange will not specify a time period
of less than 100 milliseconds.
As proposed under new Commentary
.04 to NYSE Arca Options Rule 6.40,
once a Market Maker activates a Risk
Limitation Mechanism provided under
NYSE Arca Options Rule 6.40 for its
quotes in an appointed class, the
mechanism, and the settings established
by the Market Maker, would remain
active unless, and until, the Market
Maker deactivates the mechanism or
changes the settings.21 A non-Market
Accordingly, the Exchange believes that
providing OTP Holders and OTP Firms with at least
one day’s advance notice prior to making
adjustments to the settings of the Risk Limitation
Mechanisms will afford OTP Holders and OTP
Firms sufficient time to review their risk settings
and make operational and/or technological changes,
to either the user controlled risk settings for the
Risk Limitation Mechanisms or to their own
proprietary systems, necessary to accommodate any
such changes made by the Exchange.
19 See supra notes 8, 9, and 11. The default
settings would apply only to Market Makers using
the Transaction-Based Risk Limitation Mechanism,
and further would apply only with respect to a
Market Maker’s quotes, not its orders.
20 See Securities Exchange Act Release No. 67498
(July 25, 2012), 77 FR 45401 (July 31, 2012) (SR–
NYSEArca–2012–76).
21 As noted above, a Market Maker must have one
of the three Risk Limitation Mechanisms active for
its quotes at all times for each class in its
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srobinson on DSK4SPTVN1PROD with NOTICES
Maker or Market Maker must activate a
Risk Limitation Mechanism provided
under NYSE Arca Options Rule 6.40 for
its orders in a specified class, and any
corresponding settings, on a daily basis,
if at all, or the Risk Limitation
Mechanism would not be active. As is
the case today for the existing Market
Maker Risk Limitation Mechanism, the
Risk Limitation Mechanisms provided
under NYSE Arca Options Rule 6.40
would be in effect, if activated by a nonMarket Maker or Market Maker, during
Core Trading Hours,22 including during
Trading Auctions (i.e., executions
during a Trading Auction would be
counted by the trade counters).23
As proposed under new Commentary
.05 to NYSE Arca Options Rule 6.40,
and similar to the current description
under NYSE Arca Options Rule 6.40(f),
in the event that there are no Market
Makers quoting in a class, the best bids
and offers of those orders residing in the
Consolidated Book in the class shall be
disseminated as the Exchange’s best bid
or best offer. If there are no Market
Makers quoting in the class and there
are no orders in the Consolidated Book
in the class, the NYSE Arca System
would disseminate a bid of zero and an
offer of zero.
As proposed under new Commentary
.06 to NYSE Arca Options Rule 6.40, the
trade counters would automatically
reset and commence a new count (1)
when a time period specified by the
Exchange elapses, or (2) if one of the
Risk Limitation Mechanisms provided
under NYSE Arca Options Rule 6.40 is
triggered for a particular class, when the
non-Market Maker or Market Maker
submits a message to the NYSE Arca
System to enable the entry of new
orders or quotes, as provided in
proposed Commentary .02 to Rule 6.40.
As proposed under new Commentary
.07 to NYSE Arca Options Rule 6.40,
only executions against order types
specified by the Exchange via
Regulatory Bulletin and against quotes
of Market Makers would be considered
appointment. Therefore, if a Market Maker
deactivates a Risk Limitation Mechanism, it must
then activate another Risk Limitation Mechanism
for a particular class.
22 See NYSE Arca Options Rule 6.1A(3).
23 See NYSE Arca Options Rule 6.64. For
example, and as discussed above with respect to the
bulk cancel message, an order or quote that matches
with a non-Market Maker’s or Market Maker’s order
or a Market Maker’s quote during a Trading
Auction, but prior to the receipt of the bulk cancel
message by the NYSE Arca System, would be
executed. However, an order or quote received by
the NYSE Arca System during a Trading Auction,
but after receipt of the bulk cancel message, would
not be eligible for execution against the non-Market
Maker’s or Market Maker’s orders or the Market
Maker’s quotes.
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16:39 Aug 27, 2012
Jkt 226001
by a trade counter.24 Executions against
Market Maker orders would not be
considered by a trade counter in
connection with a Market Maker’s
quoting activity. Likewise, executions
against Market Maker quotes would not
be considered by a trade counter in
connection with a Market Maker’s order
activity. The Exchange believes that
specifying applicable order types via
Regulatory Bulletin, including any
changes thereto in the future, (i) would
be consistent with the manner in which
the Exchange currently announces the
applicable minimum, maximum and
default settings for the Risk Limitation
Mechanisms; 25 (ii) would be consistent
with the manner in which the Exchange
proposes to announce the applicable
time period(s) for the Risk Limitation
Mechanisms; and (iii) would also be
consistent with the manner in which the
Commission currently permits other
option exchanges to communicate
settings or parameters for various
exchange mechanisms to their members
other than through the rule filing
process, i.e., via notices, bulletins or
circulars.26
24 Due to technology considerations, the
Exchange plans to initially apply the Risk
Limitation Mechanisms only to the following order
types: ‘‘PNP Orders,’’ ‘‘PNP-Blind Orders,’’ and
‘‘PNP-Light Orders.’’ The Exchange has selected
these particular order types because they are the
most commonly used order types of non-Market
Makers engaged in proprietary trading. In this
respect, non-Market Makers use these order types
because they are non-routable Limit Orders that are
only executed on the Exchange. In the future, the
Exchange may determine to expand the Risk
Limitation Mechanisms to other order types used by
such firms, and it would announce any such
changes via Regulatory Bulletin pursuant to
proposed Commentary .07 to NYSE Arca Options
Rule 6.40.
25 See supra notes 8, 9 and 11.
26 See, e.g., BOX Options Exchange LLC (‘‘BOX’’)
Rule 8140, which provides that, related to BOX’s
Quote Removal Mechanism Upon Technical
Disconnect, BOX Market Makers will be notified of
the value that ‘‘n’’ seconds represents via
Regulatory Circular. See also Securities Exchange
Act Release No. 58140 (July 10, 2008), 73 FR 41384
(July 18, 2008) (SR–BSE–2008–40), in which the
Commission noted that ‘‘n’’ seconds would be
configurable by BOX and any subsequent reconfigurations will be announced to Market Makers
via Regulatory Circular. See also Interpretation and
Policy .05 to Chicago Board Options Exchange
(‘‘CBOE’’) Rule 6.74A, which provides that any
determinations made by CBOE regarding CBOE’s
Automated Improvement Mechanism, such as
eligible classes, order size parameters and the
minimum price increment for certain responses,
shall be communicated in a Regulatory Circular.
See also CBOE Rule 6.13(b)(i)(C)(2)(a), which
provides that CBOE may establish certain maximum
order size eligibility requirements with respect to
automatic executions and announce such
determinations via Regulatory Circular. See also
CBOE Rules 6.45A and 6.45B, which provide that
CBOE will issue a Regulatory Circular to specify
certain priority-related information, including
specifying which priority rules will govern which
classes of options any time CBOE changes the
priority. See also CBOE Rule 6.25(a)(4)(i), which
PO 00000
Frm 00138
Fmt 4703
Sfmt 4703
As proposed under new Commentary
.08 to NYSE Arca Options Rule 6.40, a
determination of whether the conditions
of proposed paragraph (b), (c) or (d) of
NYSE Arca Options Rule 6.40 have been
met, and any resulting cancellation of
orders or quotes pursuant to proposed
paragraph (e) of NYSE Arca Options
Rule 6.40, shall be made on the basis of
TPID.27 For example,28 a non-Market
Maker that submits orders to the
Exchange under separate TPIDs would
not have the orders from each TPID
aggregated for purposes of the Risk
Limitation Mechanisms. Instead, the
orders attributable to each TPID would
be counted by the trade counters
separately, and the triggering of a Risk
Limitation Mechanism for one of the
non-Market Maker’s TPIDs would not
result in a trigger of a Risk Limitation
Mechanism for the other TPID of the
non-Market Maker. Also, as noted
above, a non-Market Maker or a Market
Maker could activate no more than one
of the three Risk Limitation Mechanisms
for a particular class for its orders and
a Market Maker would be required to
have exactly one of the three Risk
Limitation Mechanisms activated at all
times for its quotes for each class in its
appointment. However, a Market Maker
could activate one Risk Limitation
Mechanism for its quotes and a different
Risk Limitation Mechanism for its
orders, even if both are activated for the
same class.
Finally, as proposed under new
Commentary .09 to NYSE Arca Options
Rule 6.40 the terms ‘‘class’’ and
‘‘classes’’ include all option series, both
puts and calls, overlying the same
underlying security. The purpose of
Commentary .09 is to eliminate any
potential confusion as to the scope of
the proposed Risk Limitation
Mechanisms.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6(b) of the Securities Exchange
Act of 1934 (the ‘‘Act’’),29 in general,
and furthers the objectives of Section
6(b)(5) of the Act,30 in particular,
provides that, for purposes of nullifying a trade due
to an erroneous print in an underlying or related
instrument, CBOE may announce such underlying
or related instrument via Regulatory Circular. See
also C2 Options Exchange (‘‘C2’’) Rule 6.13, which
provides that C2 may make certain determinations
regarding the price check parameter feature and
announce such determinations via Regulatory
Circular. See also Securities Exchange Act Release
No. 65311 (September 9, 2011), 76 FR 57094
(September 15, 2011) (SR–C2–2011–018).
27 See supra notes 6 and 7.
28 This example would similarly be applicable to
Market Makers.
29 15 U.S.C. 78f(b).
30 15 U.S.C. 78f(b)(5).
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srobinson on DSK4SPTVN1PROD with NOTICES
Federal Register / Vol. 77, No. 167 / Tuesday, August 28, 2012 / Notices
because 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 regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, 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 and
because it is not designed to permit
unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, the proposed rule
change would prevent fraudulent and
manipulative acts and practices and
promote just and equitable principles of
trade because it would provide nonMarket Makers and Market Makers with
greater control and flexibility with
respect to managing risk and the manner
in which they enter orders and quotes.
This would be accomplished by
expanding the existing Market Maker
Risk Limitation Mechanism to Market
Maker orders and the orders of nonMarket Makers as well as through the
creation of the proposed new VolumeBased and Percentage-Based Risk
Limitation Mechanisms. Increased
control and flexibility would also be
accomplished by lowering the minimum
time period applicable to the Risk
Limitation Mechanisms, as compared to
the existing Market Maker Risk
Limitation Mechanism, from one second
to no less than 100 milliseconds. In this
regard, the Exchange believes that a
lower minimum time period would be
more consistent with the rapid trading
that occurs in today’s highly automated
and electronic trading environment. The
Exchange also believes that the
increased control and flexibility that
would result from this proposal would
foster cooperation and coordination
with persons engaged in regulating,
clearing, settling, and processing
information with respect to, and
facilitating transactions in, securities.
The Exchange further believes that the
proposed rule change would remove
impediments to, and perfect the
mechanisms of, a free and open market
and a national market system because it
would promote consistency, fairness,
and objectivity by making the Risk
Limitation Mechanisms available to all
non-Market Makers and Market Makers,
which therefore may enhance the
Exchange’s overall market quality. The
Exchange believes that the potential
increase in the Exchange’s overall
market quality that could result from the
Risk Limitation Mechanisms could
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16:39 Aug 27, 2012
Jkt 226001
therefore contribute to the protection of
investors and the public interest.
The Exchange further believes that the
proposed rule change would remove
impediments to, and perfect the
mechanisms of, a free and open market
and a national market system because it
would permit the Exchange to announce
the minimum, maximum and default
settings for the Risk Limitation
Mechanisms, as well as any applicable
time period(s) and order types, via
Regulatory Bulletin. The Exchange
believes that the flexibility of
announcing these details via Regulatory
Bulletin is necessary because it would
permit the Exchange to reasonably
ensure that, for example, the applicable
settings are at a level that is consistent
with existing market conditions, such
that the Risk Limitation Mechanisms are
able to operate in the manner intended.
Use of Regulatory Bulletins would also
be consistent with the manner in which
the Exchange currently announces the
minimum, maximum and default
settings for the existing Market Maker
Risk Limitation Mechanism as well as
the manner in which the Commission
currently permits other option
exchanges to communicate settings or
parameters for various exchange
mechanisms to their members other
than through the rule filing process, i.e.,
via notices, bulletins or circulars.31
Utilizing Regulatory Bulletins in this
manner would, for example, permit the
Exchange to increase or decrease the
time period applicable to the Risk
Limitation Mechanisms, should the
Exchange choose to do so, to
accommodate systems capacity
concerns, changes in market conditions
or the technology needs and
considerations of Market Makers and
non-Market Makers.
The Exchange also believes that the
use of Regulatory Bulletins in this
manner would further remove
impediments to, and perfect the
mechanisms of, a free and open market
by reducing the resources that would
otherwise be expended, by both the
Exchange and the Commission, if the
Exchange is required to propose a rule
change with the Commission each time
it wishes to change these settings.
However, while the Exchange would
have certain discretion with respect to
the levels at which it could adjust these
31 See supra note 26. For example, NASDAQ
OMX Options Technical Update #2012–9 was
recently distributed to notify participants on
NASDAQ Options Market (‘‘NOM’’), PHLX and
NASDAQ OMX BX Options (‘‘BX’’) that, effective
as of the date of the Technical Update (i.e., July 20,
2012), those markets would decrease the allowable
time interval setting for the ‘‘Rapid Fire Risk
Protection,’’ from increments of one second to
increments as small as 100 milliseconds.
PO 00000
Frm 00139
Fmt 4703
Sfmt 4703
52103
settings, the Exchange would not be
permitted to adjust the settings below
the minimum levels proposed herein.
The Exchange believes that this would
reasonably ensure that the settings are at
all times within a reasonable range.
The Exchange notes that the proposed
rule change would not relieve a nonMarket Maker or Market Maker of its
‘‘firm quote’’ obligation under Rule 602
of Regulation NMS 32 or NYSE Arca
Options Rule 6.86, thereby contributing
to the protection of investors and the
public interest. In this regard, and as
discussed above, the bulk cancel
message generated pursuant to the Risk
Limitation Mechanisms would be
processed in time priority with any
other quote or order message received
by the NYSE Arca System. Additionally,
any orders or quotes that matched with
a Market Maker’s quote or a Market
Maker’s or non-Market Maker’s order
and were received by the NYSE Arca
System prior to the receipt of the bulk
cancel message would be automatically
executed. However, orders or quotes
received by the NYSE Arca System after
receipt of the bulk cancel message
would not be executed. The Exchange
further notes that the proposed rule
change would not relieve Market
Makers on the Exchange of their quoting
obligations under the Exchange’s
Rules.33 In this regard, and as is the case
today, a Market Maker quote that is
cancelled or rejected would no longer
count toward satisfying the Market
Maker’s percentage quoting obligation
under NYSE Arca Options Rule 6.37B.
Additionally, the proposed rule change
is not designed to permit unfair
discrimination between customers,
issuers, brokers, or dealers because it
would be applicable to, and available
for, all market participants on the
Exchange, including non-Market Makers
and Market Makers.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
32 17
CFR 242.602.
supra note 17.
33 See
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Federal Register / Vol. 77, No. 167 / Tuesday, August 28, 2012 / Notices
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed
rule change pursuant to Section
19(b)(3)(A)(iii) of the Act 34 and Rule
19b–4(f)(6) thereunder.35 Because the
proposed rule change does not: (i)
Significantly affect the protection of
investors or the public interest; (ii)
impose any significant burden on
competition; and (iii) become operative
prior to 30 days from the date on which
it was filed, or such shorter time as the
Commission may designate, if
consistent with the protection of
investors and the public interest, the
proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 36 and Rule 19b–4(f)(6)(iii)
thereunder.37
At any time within 60 days of the
filing of such proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
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 rulecomments@sec.gov. Please include File
Number SR–NYSEArca–2012–87 on the
subject line.
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 Section, 100 F Street NE.,
Washington, DC 20549–1090, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing will also be available for
inspection and copying at the
Exchange’s principal office and on its
Internet Web site at www.nyse.com. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–NYSEArca–2012–87 and
should be submitted on or before
September 18, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.38
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–21111 Filed 8–27–12; 8:45 am]
BILLING CODE 8011–01–P
Paper Comments
SMALL BUSINESS ADMINISTRATION
• 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–NYSEArca–2012–87. This
[Disaster Declaration #13230 and #13231]
srobinson on DSK4SPTVN1PROD with NOTICES
34 15
U.S.C. 78s(b)(3)(A)(iii).
35 17 CFR 240.19b–4(f)(6).
36 15 U.S.C. 78s(b)(3)(A).
37 17 CFR 240.19b–4(f)(6)(iii). In addition, Rule
19b–4(f)(6)(iii) requires the Exchange to give the
Commission written notice of the Exchange’s intent
to file the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
has satisfied this requirement.
VerDate Mar<15>2010
16:39 Aug 27, 2012
Jkt 226001
Florida Disaster #FL–00070
U.S. Small Business
Administration.
ACTION: Notice.
AGENCY:
This is a notice of an
Administrative declaration of a disaster
for the State of Florida dated 08/21/
2012.
Incident: Severe Storms and Flooding.
Incident Period: 06/09/2012 through
06/11/2012.
Effective Date: 08/21/2012.
Physical Loan Application Deadline
Date: 10/22/2012.
SUMMARY:
Economic Injury (EIDL) Loan
Application Deadline Date: 05/21/2013.
Submit completed loan
applications to: U.S. Small Business
Administration, Processing and
Disbursement Center, 14925 Kingsport
Road, Fort Worth, TX 76155.
ADDRESSES:
A.
Escobar, Office of Disaster Assistance,
U.S. Small Business Administration,
409 3rd Street SW., Suite 6050,
Washington, DC 20416
FOR FURTHER INFORMATION CONTACT:
Notice is
hereby given that as a result of the
Administrator’s disaster declaration,
applications for disaster loans may be
filed at the address listed above or other
locally announced locations.
The following areas have been
determined to be adversely affected by
the disaster:
SUPPLEMENTARY INFORMATION:
Primary Counties: Escambia.
Contiguous Counties:
Florida: Santa Rosa.
Alabama: Baldwin, Escambia.
The Interest Rates are:
Percent
For Physical Damage:
Homeowners With Credit Available Elsewhere ......................
Homeowners Without Credit
Available Elsewhere ..............
Businesses With Credit Available Elsewhere ......................
Businesses
Without
Credit
Available Elsewhere ..............
Non-Profit Organizations With
Credit Available Elsewhere ...
Non-Profit Organizations Without Credit Available Elsewhere .....................................
For Economic Injury:
Businesses & Small Agricultural
Cooperatives Without Credit
Available Elsewhere ..............
Non-Profit Organizations Without
Credit Available Elsewhere
PO 00000
(Catalog of Federal Domestic Assistance
Numbers 59002 and 59008)
Dated: August 21, 2012.
Karen G. Mills,
Administrator.
[FR Doc. 2012–21099 Filed 8–27–12; 8:45 am]
CFR 200.30–3(a)(12).
Frm 00140
Fmt 4703
Sfmt 9990
1.938
6.000
4.000
3.125
3.000
4.000
3.000
The number assigned to this disaster
for physical damage is 13230 6 and for
economic injury is 13231 0.
The States which received an EIDL
Declaration # are Florida, Alabama.
BILLING CODE 8025–01–P
38 17
3.875
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]]>Agencies
[Federal Register Volume 77, Number 167 (Tuesday, August 28, 2012)]
[Notices]
[Pages 52098-52104]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-21111]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67714; File No. SR-NYSEArca-2012-87]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Amending NYSE Arca
Options Rule 6.40 To Expand the Existing Market Maker Risk Limitation
Mechanism Making It Available for Orders From Market Makers as Well as
Non-Market Maker OTP Firms and OTP Holders, and To Provide for Two
Additional Risk Limitation Mechanisms
August 22, 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 August 10, 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 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\ 15 U.S.C. 78a.
\3\ 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 NYSE Arca Options Rule 6.40 to
expand the existing Market Maker Risk Limitation Mechanism to make it
available for orders from Market Makers as well as non-Market Maker OTP
Firms and OTP Holders, and to provide for two additional risk
limitation mechanisms. The text of the proposed rule change is
available on the Exchange's Web site at www.nyse.com, at the principal
office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange adopted the existing Market Maker Risk Limitation
Mechanism to provide a transaction-based mechanism for limiting a
Market Maker's risk during periods of increased and significant trading
activity on the Exchange in the Market Maker's appointment.\4\ The
Exchange now proposes to expand the existing Market Maker Risk
Limitation Mechanism to make it available for orders from Market Makers
as well as orders from non-Market Maker OTP Firms and OTP Holders
(``non-Market Makers''),\5\ and to provide for two additional risk
limitation mechanisms (collectively, the ``Risk Limitation
Mechanisms''). The Exchange is proposing these changes to permit Market
Makers and non-Market Makers to better manage the risk of multiple,
nearly simultaneous executions against their proprietary interest that,
in today's highly automated and electronic trading environment, can
occur across multiple series of different option classes. Consistent
with the ability to better manage risk, the Exchange anticipates that
these changes could enhance the Exchange's overall market quality as a
result of narrowed quote widths and
[[Page 52099]]
increased liquidity for series traded on the Exchange.
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 54238 (July 28,
2006), 71 FR 44758 (August 7, 2006) (SR-NYSEArca-2006-13).
\5\ The Exchange proposes to specify within NYSE Arca Options
Rule 6.40(a) that non-Market Maker OTP Firms and OTP Holders will be
referred to as ``non-Market Makers'' for purposes of NYSE Arca
Options Rule 6.40.
---------------------------------------------------------------------------
As noted above, the Exchange is proposing to make the three Risk
Limitation Mechanisms available to non-Market Makers. The Exchange is
proposing this change to respond to requests from non-Market Makers
that engage in rapid, proprietary trading. In this regard, non-Market
Makers can have risk exposure similar to that of Market Makers, and
have similarly sought ways to mitigate this risk. The Exchange believes
that making the Risk Limitation Mechanisms available to non-Market
Makers will assist them in these efforts.
As is the case today with the Market Maker Risk Limitation
Mechanism, the trade counters, and therefore the Risk Limitation
Mechanisms themselves, would be based on trading permit identification
(``TPID'').\6\ As is also the case today with respect to the existing
Market Maker Risk Limitation Mechanism, Market Makers would be required
to activate one of the three Risk Limitation Mechanisms at all times
for their quotes for each class in their appointment. However, the Risk
Limitation Mechanisms would be entirely voluntary with respect to
orders, both for those of Market Makers and non-Market Makers. Market
Makers and non-Market Makers would only be permitted to activate one of
the three Risk Limitation Mechanisms for a particular class at any
given time for their orders. However, a Market Maker could activate one
Risk Limitation Mechanism for its quotes and a different Risk
Limitation Mechanism for its orders, even if both are activated for the
same class.\7\ The three mechanisms are described in greater detail
below.
---------------------------------------------------------------------------
\6\ TPIDs are assigned to Market Makers and non-Market Makers to
identify them in the Exchange's systems.
\7\ Market Makers on the Exchange are not able to submit orders
on an agency basis. Therefore, a Market Maker within an OTP Firm
that conducts both an agency and a market making business would have
a unique TPID that could only be used for that Market Maker's quotes
and orders. The proposed rule change would not prevent the use of
the Risk Limitation Mechanisms for a non-Market Maker's agency order
flow.
---------------------------------------------------------------------------
(1) Transaction-Based Risk Limitation Mechanism
The existing Market Maker Risk Limitation Mechanism is transaction-
based and automatically cancels all quotes posted by a Market Maker in
an appointed class if the trade counter determines that ``n''
executions within one second have occurred against the quotes of the
Market Maker in the particular appointed class.
The Exchange proposes to amend NYSE Arca Options Rule 6.40(b) to
apply the existing Market Maker Risk Limitation Mechanism not only to
Market Maker quotes, but also to non-Market Maker and Market Maker
orders. As proposed, and similar to the existing process for Market
Maker quotes,\8\ the Transaction-Based Risk Limitation Mechanism would
be triggered for a non-Market Maker whenever a trade counter has
reached ``n'' executions within a time period specified by the Exchange
via Regulatory Bulletin, as discussed further below, against the non-
Market Maker's orders in a specified class. For Market Maker orders,
the Transaction-Based Risk Limitation Mechanism would be triggered when
a trade counter has reached ``n'' executions within a time period
specified by the Exchange against the Market Maker's orders in a
specified class. Accordingly, ``Market Maker'' would be deleted from
the title of NYSE Arca Options Rule 6.40, as would any other references
that would limit NYSE Arca Options Rule 6.40 only to Market Makers.
Additionally, references to ``Transaction-Based'' would be added to
NYSE Arca Options Rule 6.40(b) to differentiate the existing mechanism
from the newly proposed Risk Limitation Mechanisms, as discussed in
greater detail below. Additionally, much of the existing text of NYSE
Arca Options Rule 6.40(b) through (f) would be relocated as new
Commentary to NYSE Arca Options Rule 6.40, as discussed in greater
detail below.
---------------------------------------------------------------------------
\8\ The existing Market Maker quote aspect of the mechanism
would be renumbered as NYSE Arca Options Rule 6.40(b)(3) and would
be triggered when a trade counter has reached ``n'' executions
within a time period specified by the Exchange against the Market
Maker's quotes in an appointed class. As proposed under new
Commentary .03 to NYSE Arca Options Rule 6.40, the Exchange would
announce via Regulatory Bulletin the applicable time period(s) for
the Risk Limitation Mechanisms proposed under NYSE Arca Options Rule
6.40. The Exchange also proposes to specify under Commentary .03
that the Exchange will not specify a time period of less than 100
milliseconds. Additionally, the Exchange anticipates announcing via
Regulatory Bulletin, as described in proposed Commentary .03, that
the minimum, maximum and default settings for ``n,'' as well as the
potential range for such settings, that are in effect at the time
the Exchange implements this proposed change, will continue to apply
to the Transaction-Based Risk Limitation Mechanism in the future. In
this regard, the Exchange notes that it recently amended current
Rule 6.40(b)(1) to specify that the potential range for the settings
applicable to the existing Market Maker Risk Limitation Mechanism
will be between one and 100 executions per second, to eliminate the
current reference to the default setting, and, in the future, to
specify the applicable minimum, maximum and default settings via
Regulatory Bulletin. See Securities Exchange Act Release No. 67498
(July 25, 2012), 77 FR 45401 (July 31, 2012) (SR-NYSEArca-2012-76).
---------------------------------------------------------------------------
(2) Volume-Based Risk Limitation Mechanism
The Exchange proposes to provide for a new Volume-Based Risk
Limitation Mechanism under NYSE Arca Options Rule 6.40(c). The proposed
Volume-Based Risk Limitation Mechanism would be triggered whenever one
of the following conditions is met: (1) For a non-Market Maker, when a
trade counter has reached ``k'' contracts traded within a time period
specified by the Exchange against the non-Market Maker's orders in a
specified class; (2) for a Market Maker, when a trade counter has
reached ``k'' contracts traded within a time period specified by the
Exchange against the Market Maker's orders in a specified class; or (3)
for a Market Maker, when a trade counter has reached ``k'' contracts
traded within a time period specified by the Exchange against the
Market Maker's quotes in an appointed class.\9\
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\9\ The Exchange anticipates announcing via Regulatory Bulletin
that the applicable minimum and maximum settings for ``k'' (as well
as the potential range for the settings applicable to the Volume-
Based Risk Limitation Mechanism) will be 20 and 5,000, respectively.
---------------------------------------------------------------------------
(3) Percentage-Based Risk Limitation Mechanism
The Exchange proposes to provide for a new Percentage-Based Risk
Limitation Mechanism under NYSE Arca Options Rule 6.40(d).\10\ The
proposed Percentage-Based Risk Limitation Mechanism would be triggered
whenever one of the following conditions is met: (1) For a non-Market
Maker, when a trade counter has calculated that the non-Market Maker
has traded ``p'' percentage within a time period specified by the
Exchange against the non-Market Maker's orders in a specified class;
(2) for a Market Maker, when a trade counter has calculated that the
Market Maker has traded ``p'' percentage within a time period specified
by the Exchange against the Market Maker's orders in a specified class;
or (3) for a Market Maker, when a trade counter has calculated that the
Market Maker has traded ``p'' percentage within a time period specified
by the Exchange against the Market Maker's quotes in an appointed
class.\11\ The ``p'' percentage
[[Page 52100]]
specified by the non-Market Maker or Market Maker would be calculated
as follows (and as shown in the examples below):\12\ (1) A trade
counter would first calculate, for each series of an option class, the
percentage of a non-Market Maker's or Market Maker's order size or a
Market Maker's quote size that is executed on each side of the market,
including both displayed and non-displayed size, and (2) a trade
counter would then sum the overall series percentages for the entire
option class to calculate the ``p'' percentage.
---------------------------------------------------------------------------
\10\ The proposed Percentage-Based Risk Limitation Mechanism is
partially based on NASDAQ OMX PHLX (``PHLX'') Rule 1093. See
Securities Exchange Act Release No. 53166 (January 23, 2006), 71 FR
4625 (January 27, 2006) (SR-Phlx-2006-05).
\11\ The Exchange anticipates announcing via Regulatory Bulletin
that the applicable minimum and maximum settings for ``p'' (as well
as the potential range for the settings applicable to the
Percentage-Based Risk Limitation Mechanism) will be 100 and 2,000,
respectively.
\12\ The examples provided below are for Market Maker quotes,
but would similarly apply to non-Market Maker and Market Maker
orders.
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Example 1
For Examples 1 and 2, if a Market Maker is quoting at the National
Best Bid or Offer (``NBBO'') in four series of an appointed class, and
specifies its ``p'' percentage at 100%, a trade counter would calculate
such percentage as follows:
----------------------------------------------------------------------------------------------------------------
Number of
Series Quote size contracts Series
executed percentage
----------------------------------------------------------------------------------------------------------------
Series 1........................................................ 100 40 40
Series 2........................................................ 50 20 40
Series 3........................................................ 200 20 10
Series 4........................................................ 150 15 10
-----------------------------------------------
Total....................................................... 500 95 100
----------------------------------------------------------------------------------------------------------------
In Example 1, the aggregate number of contracts executed among all
series during the time period specified by the Exchange that equals the
specified percentage of 100% is 95 contracts, at which point the
Percentage-Based Risk Limitation Mechanism would be triggered and the
Market Maker's remaining quotes in the appointed class would be
cancelled.
Example 2
----------------------------------------------------------------------------------------------------------------
Number of
Series Quote size contracts Series
executed percentage
----------------------------------------------------------------------------------------------------------------
Series 1........................................................ 100 0 0
Series 2........................................................ 50 0 0
Series 3........................................................ 200 0 0
Series 4........................................................ 150 150 100
-----------------------------------------------
Total....................................................... 500 150 100
----------------------------------------------------------------------------------------------------------------
In Example 2, the aggregate number of contracts executed among all
series during the time period specified by the Exchange that equals the
specified percentage of 100% is 150 contracts, at which point the
Percentage-Based Risk Limitation Mechanism would be triggered and the
Market Maker's remaining quotes in the appointed class would be
cancelled.
Example 3
For Example 3, if a Market Maker is quoting at the NBBO in four
series of a particular option class, and specifies its ``p'' percentage
at 200%, a trade counter would calculate such percentage as follows:
----------------------------------------------------------------------------------------------------------------
Number of
Series Quote size contracts Series
executed percentage
----------------------------------------------------------------------------------------------------------------
Series 1........................................................ 100 80 80
Series 2........................................................ 50 40 80
Series 3........................................................ 200 40 20
Series 4........................................................ 150 30 20
-----------------------------------------------
Total....................................................... 500 190 200
----------------------------------------------------------------------------------------------------------------
In Example 3, the aggregate number of contracts executed among all
series during the time period specified by the Exchange that equals the
specified percentage of 200% is 190 contracts, at which point the
Percentage-Based Risk Limitation Mechanism would be triggered and the
Market Maker's remaining quotes in the appointed class would be
cancelled.
Trade Counter
The trade counters serve as the basis for determining whether a
Risk Limitation Mechanism is triggered. NYSE Arca Options Rule 6.40(a)
currently describes the existing trade counter, which is incremented
every time a Market Maker executes a trade against its quote in any
series in an appointed class. The Exchange proposes to amend NYSE Arca
Options Rule 6.40(a) to reflect that the existing trade counter will be
replaced by separate trade counters that the NYSE Arca System will
maintain for each of the
[[Page 52101]]
following scenarios: (1) When a non-Market Maker order is executed in
any series in a specified class; \13\ (2) when a Market Maker order is
executed in any series in a specified class; and (3) when a Market
Maker quote is executed in any series in an appointed class. The
Exchange also proposes to reflect that for each of these scenarios the
trade counters will be incremented by one every time a trade is
executed and will also aggregate the number of contracts traded during
each such execution. The trade counters will also calculate applicable
percentages for Market Makers and non-Market Makers using the proposed
Percentage-Based Risk Limitation Mechanism. These proposed changes to
NYSE Arca Options Rule 6.40(a) are necessary due to the changes
proposed below.
---------------------------------------------------------------------------
\13\ The Exchange proposes to include the concept of a
``specified class'' to reflect that Market Makers and non-Market
Makers must specify the class(es) for which a Risk Limitation
Mechanism is activated for orders or none of the Risk Limitation
Mechanisms will be activated.
---------------------------------------------------------------------------
General
As proposed under new Commentary .01 to NYSE Arca Options Rule
6.40, and similar to the current description in existing NYSE Arca
Options Rule 6.40(b), the NYSE Arca System would automatically cancel
electronic orders or quotes pursuant to proposed paragraph (e) of NYSE
Arca Options Rule 6.40 \14\ by generating a ``bulk cancel''
message.\15\ Similar to the current description in existing NYSE Arca
Options Rule 6.40(c), the bulk cancel message would be processed by the
NYSE Arca System in time priority with any other quote or order message
received by the NYSE Arca System. Additionally, any orders or quotes
that matched with a Market Maker's quote or a Market Maker's or non-
Market Maker's order and were received by the NYSE Arca System prior to
the receipt of the bulk cancel message would be automatically executed.
However, orders or quotes received by the NYSE Arca System after
receipt of the bulk cancel message would not be executed. In this
regard, the proposed rule change would not relieve a non-Market Maker
or Market Maker of its ``firm quote'' obligation under Rule 602 of
Regulation NMS \16\ or NYSE Arca Options Rule 6.86. Furthermore, the
proposed rule change would not relieve Market Makers on the Exchange of
their quoting obligations under the Exchange's Rules.\17\
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\14\ As proposed under NYSE Arca Options Rule 6.40(e), the NYSE
Arca System would take the following action if one of the Risk
Limitation Mechanisms described herein is triggered: (1) If
triggered pursuant to proposed paragraph (b)(1), (c)(1) or (d)(1) of
NYSE Arca Options Rule 6.40, the NYSE Arca System would
automatically cancel all of the non-Market Maker's orders in the
specified class; (2) if triggered pursuant to proposed paragraph
(b)(2), (c)(2) or (d)(2) of NYSE Arca Options Rule 6.40, the NYSE
Arca System would automatically cancel all of the Market Maker's
orders in the specified class; or (3) if triggered pursuant to
proposed paragraph (b)(3), (c)(3) or (d)(3) of NYSE Arca Options
Rule 6.40, the NYSE Arca System would automatically cancel all of
the Market Maker's quotes in the appointed class.
\15\ As is the case today for the existing Market Maker Risk
Limitation Mechanism, the Risk Limitation Mechanisms provided under
NYSE Arca Options Rule 6.40 would only be applicable to electronic
trading on the Exchange.
\16\ 17 CFR 242.602.
\17\ See, e.g., NYSE Arca Options Rule 6.37B.
---------------------------------------------------------------------------
As proposed under new Commentary .02 to NYSE Arca Options Rule
6.40, and similar to the current description in NYSE Arca Options Rule
6.40(d), if one of the Risk Limitation Mechanisms is triggered pursuant
to proposed paragraph (b)(1) or (2), (c)(1) or (2), or (d)(1) or (2) of
NYSE Arca Options Rule 6.40, any orders sent by the non-Market Maker or
Market Maker, respectively, in the specified class would be rejected
until the non-Market Maker or Market Maker submits a message to the
NYSE Arca System to enable the entry of new orders. Similarly, if one
of the Risk Limitation Mechanisms is triggered pursuant to proposed
paragraph (b)(3), (c)(3), or (d)(3) of NYSE Arca Options Rule 6.40, any
quotes sent by the Market Maker in the appointed class would be
rejected until the Market Maker submits a message to the NYSE Arca
System to enable the entry of new quotes.
As proposed under new Commentary .03 to NYSE Arca Options Rule
6.40, the Exchange would specify via Regulatory Bulletin any applicable
minimum, maximum and/or default settings for the Risk Limitation
Mechanisms proposed under NYSE Arca Options Rule 6.40.\18\ This would
include those settings that are applicable for the existing Market
Maker Risk Limitation Mechanism at the time the Exchange implements
this proposed change, which, as discussed above, would be renamed as
the Transaction-Based Risk Limitation Mechanism, as well as for the
proposed new Volume-Based and Percentage-Based Risk Limitation
Mechanisms.\19\ Accordingly, the text proposed within Commentary .03 is
designed to conform to the text that is currently provided under Rule
6.40(b)(1).\20\ The Exchange also proposes to specify under Commentary
.03 that the Exchange will not (i) specify a minimum setting of less
than one or a maximum setting of more than 100 for the Transaction-
Based Risk Limitation Mechanism; (ii) specify a minimum setting of less
than 20 or a maximum setting of more than 5,000 for the Volume-Based
Risk Limitation Mechanism; or (iii) specify a minimum setting of less
than 100 or a maximum setting of more than 2,000 for the Percentage-
Based Risk Limitation Mechanism. Similarly, as proposed under new
Commentary .03 to NYSE Arca Options Rule 6.40, the Exchange would
specify via Regulatory Bulletin the applicable time period(s) for the
Risk Limitation Mechanisms proposed under NYSE Arca Options Rule 6.40.
The Exchange also proposes to provide under Commentary .03 that the
Exchange will not specify a time period of less than 100 milliseconds.
---------------------------------------------------------------------------
\18\ The Exchange will issue the Regulatory Bulletin at least
one trading day in advance of the settings becoming effective. All
such Regulatory Bulletins will contain information regarding changes
to the settings in the Risk Limitation Mechanisms, the effective
date of such changes and contact information of Exchange staff who
can provide additional information. The Exchange distributes
Regulatory Bulletins simultaneously to all OTP Holders and OTP Firms
via email and posts the Regulatory Bulletins to the Exchange's Web
site.
Upon receiving notification of a change to the settings for the
Risk Limitation Mechanisms by the Exchange, OTP Holders and OTP
Firms will be able to make adjustments they deem necessary to their
own risk settings for the Risk Limitation Mechanisms using the same
electronic interface that they use to send quotes and orders to the
Exchange. In addition, OTP Holders and OTP Firms may elect to adjust
risk settings in their own proprietary systems in reaction to any
changes initiated by the Exchange. When adjusting risk parameters
for the Risk Limitation Mechanisms and/or a proprietary system, in
reaction to a change to the risk settings by the Exchange, OTP
Holders and OTP Firms are able to utilize functionality that is both
readily available and user controlled.
Accordingly, the Exchange believes that providing OTP Holders
and OTP Firms with at least one day's advance notice prior to making
adjustments to the settings of the Risk Limitation Mechanisms will
afford OTP Holders and OTP Firms sufficient time to review their
risk settings and make operational and/or technological changes, to
either the user controlled risk settings for the Risk Limitation
Mechanisms or to their own proprietary systems, necessary to
accommodate any such changes made by the Exchange.
\19\ See supra notes 8, 9, and 11. The default settings would
apply only to Market Makers using the Transaction-Based Risk
Limitation Mechanism, and further would apply only with respect to a
Market Maker's quotes, not its orders.
\20\ See Securities Exchange Act Release No. 67498 (July 25,
2012), 77 FR 45401 (July 31, 2012) (SR-NYSEArca-2012-76).
---------------------------------------------------------------------------
As proposed under new Commentary .04 to NYSE Arca Options Rule
6.40, once a Market Maker activates a Risk Limitation Mechanism
provided under NYSE Arca Options Rule 6.40 for its quotes in an
appointed class, the mechanism, and the settings established by the
Market Maker, would remain active unless, and until, the Market Maker
deactivates the mechanism or changes the settings.\21\ A non-Market
[[Page 52102]]
Maker or Market Maker must activate a Risk Limitation Mechanism
provided under NYSE Arca Options Rule 6.40 for its orders in a
specified class, and any corresponding settings, on a daily basis, if
at all, or the Risk Limitation Mechanism would not be active. As is the
case today for the existing Market Maker Risk Limitation Mechanism, the
Risk Limitation Mechanisms provided under NYSE Arca Options Rule 6.40
would be in effect, if activated by a non-Market Maker or Market Maker,
during Core Trading Hours,\22\ including during Trading Auctions (i.e.,
executions during a Trading Auction would be counted by the trade
counters).\23\
---------------------------------------------------------------------------
\21\ As noted above, a Market Maker must have one of the three
Risk Limitation Mechanisms active for its quotes at all times for
each class in its appointment. Therefore, if a Market Maker
deactivates a Risk Limitation Mechanism, it must then activate
another Risk Limitation Mechanism for a particular class.
\22\ See NYSE Arca Options Rule 6.1A(3).
\23\ See NYSE Arca Options Rule 6.64. For example, and as
discussed above with respect to the bulk cancel message, an order or
quote that matches with a non-Market Maker's or Market Maker's order
or a Market Maker's quote during a Trading Auction, but prior to the
receipt of the bulk cancel message by the NYSE Arca System, would be
executed. However, an order or quote received by the NYSE Arca
System during a Trading Auction, but after receipt of the bulk
cancel message, would not be eligible for execution against the non-
Market Maker's or Market Maker's orders or the Market Maker's
quotes.
---------------------------------------------------------------------------
As proposed under new Commentary .05 to NYSE Arca Options Rule
6.40, and similar to the current description under NYSE Arca Options
Rule 6.40(f), in the event that there are no Market Makers quoting in a
class, the best bids and offers of those orders residing in the
Consolidated Book in the class shall be disseminated as the Exchange's
best bid or best offer. If there are no Market Makers quoting in the
class and there are no orders in the Consolidated Book in the class,
the NYSE Arca System would disseminate a bid of zero and an offer of
zero.
As proposed under new Commentary .06 to NYSE Arca Options Rule
6.40, the trade counters would automatically reset and commence a new
count (1) when a time period specified by the Exchange elapses, or (2)
if one of the Risk Limitation Mechanisms provided under NYSE Arca
Options Rule 6.40 is triggered for a particular class, when the non-
Market Maker or Market Maker submits a message to the NYSE Arca System
to enable the entry of new orders or quotes, as provided in proposed
Commentary .02 to Rule 6.40.
As proposed under new Commentary .07 to NYSE Arca Options Rule
6.40, only executions against order types specified by the Exchange via
Regulatory Bulletin and against quotes of Market Makers would be
considered by a trade counter.\24\ Executions against Market Maker
orders would not be considered by a trade counter in connection with a
Market Maker's quoting activity. Likewise, executions against Market
Maker quotes would not be considered by a trade counter in connection
with a Market Maker's order activity. The Exchange believes that
specifying applicable order types via Regulatory Bulletin, including
any changes thereto in the future, (i) would be consistent with the
manner in which the Exchange currently announces the applicable
minimum, maximum and default settings for the Risk Limitation
Mechanisms; \25\ (ii) would be consistent with the manner in which the
Exchange proposes to announce the applicable time period(s) for the
Risk Limitation Mechanisms; and (iii) would also be consistent with the
manner in which the Commission currently permits other option exchanges
to communicate settings or parameters for various exchange mechanisms
to their members other than through the rule filing process, i.e., via
notices, bulletins or circulars.\26\
---------------------------------------------------------------------------
\24\ Due to technology considerations, the Exchange plans to
initially apply the Risk Limitation Mechanisms only to the following
order types: ``PNP Orders,'' ``PNP-Blind Orders,'' and ``PNP-Light
Orders.'' The Exchange has selected these particular order types
because they are the most commonly used order types of non-Market
Makers engaged in proprietary trading. In this respect, non-Market
Makers use these order types because they are non-routable Limit
Orders that are only executed on the Exchange. In the future, the
Exchange may determine to expand the Risk Limitation Mechanisms to
other order types used by such firms, and it would announce any such
changes via Regulatory Bulletin pursuant to proposed Commentary .07
to NYSE Arca Options Rule 6.40.
\25\ See supra notes 8, 9 and 11.
\26\ See, e.g., BOX Options Exchange LLC (``BOX'') Rule 8140,
which provides that, related to BOX's Quote Removal Mechanism Upon
Technical Disconnect, BOX Market Makers will be notified of the
value that ``n'' seconds represents via Regulatory Circular. See
also Securities Exchange Act Release No. 58140 (July 10, 2008), 73
FR 41384 (July 18, 2008) (SR-BSE-2008-40), in which the Commission
noted that ``n'' seconds would be configurable by BOX and any
subsequent re-configurations will be announced to Market Makers via
Regulatory Circular. See also Interpretation and Policy .05 to
Chicago Board Options Exchange (``CBOE'') Rule 6.74A, which provides
that any determinations made by CBOE regarding CBOE's Automated
Improvement Mechanism, such as eligible classes, order size
parameters and the minimum price increment for certain responses,
shall be communicated in a Regulatory Circular. See also CBOE Rule
6.13(b)(i)(C)(2)(a), which provides that CBOE may establish certain
maximum order size eligibility requirements with respect to
automatic executions and announce such determinations via Regulatory
Circular. See also CBOE Rules 6.45A and 6.45B, which provide that
CBOE will issue a Regulatory Circular to specify certain priority-
related information, including specifying which priority rules will
govern which classes of options any time CBOE changes the priority.
See also CBOE Rule 6.25(a)(4)(i), which provides that, for purposes
of nullifying a trade due to an erroneous print in an underlying or
related instrument, CBOE may announce such underlying or related
instrument via Regulatory Circular. See also C2 Options Exchange
(``C2'') Rule 6.13, which provides that C2 may make certain
determinations regarding the price check parameter feature and
announce such determinations via Regulatory Circular. See also
Securities Exchange Act Release No. 65311 (September 9, 2011), 76 FR
57094 (September 15, 2011) (SR-C2-2011-018).
---------------------------------------------------------------------------
As proposed under new Commentary .08 to NYSE Arca Options Rule
6.40, a determination of whether the conditions of proposed paragraph
(b), (c) or (d) of NYSE Arca Options Rule 6.40 have been met, and any
resulting cancellation of orders or quotes pursuant to proposed
paragraph (e) of NYSE Arca Options Rule 6.40, shall be made on the
basis of TPID.\27\ For example,\28\ a non-Market Maker that submits
orders to the Exchange under separate TPIDs would not have the orders
from each TPID aggregated for purposes of the Risk Limitation
Mechanisms. Instead, the orders attributable to each TPID would be
counted by the trade counters separately, and the triggering of a Risk
Limitation Mechanism for one of the non-Market Maker's TPIDs would not
result in a trigger of a Risk Limitation Mechanism for the other TPID
of the non-Market Maker. Also, as noted above, a non-Market Maker or a
Market Maker could activate no more than one of the three Risk
Limitation Mechanisms for a particular class for its orders and a
Market Maker would be required to have exactly one of the three Risk
Limitation Mechanisms activated at all times for its quotes for each
class in its appointment. However, a Market Maker could activate one
Risk Limitation Mechanism for its quotes and a different Risk
Limitation Mechanism for its orders, even if both are activated for the
same class.
---------------------------------------------------------------------------
\27\ See supra notes 6 and 7.
\28\ This example would similarly be applicable to Market
Makers.
---------------------------------------------------------------------------
Finally, as proposed under new Commentary .09 to NYSE Arca Options
Rule 6.40 the terms ``class'' and ``classes'' include all option
series, both puts and calls, overlying the same underlying security.
The purpose of Commentary .09 is to eliminate any potential confusion
as to the scope of the proposed Risk Limitation Mechanisms.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Securities Exchange Act of 1934 (the
``Act''),\29\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\30\ in particular,
[[Page 52103]]
because 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 regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, 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
and because it is not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\29\ 15 U.S.C. 78f(b).
\30\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
In particular, the proposed rule change would prevent fraudulent
and manipulative acts and practices and promote just and equitable
principles of trade because it would provide non-Market Makers and
Market Makers with greater control and flexibility with respect to
managing risk and the manner in which they enter orders and quotes.
This would be accomplished by expanding the existing Market Maker Risk
Limitation Mechanism to Market Maker orders and the orders of non-
Market Makers as well as through the creation of the proposed new
Volume-Based and Percentage-Based Risk Limitation Mechanisms. Increased
control and flexibility would also be accomplished by lowering the
minimum time period applicable to the Risk Limitation Mechanisms, as
compared to the existing Market Maker Risk Limitation Mechanism, from
one second to no less than 100 milliseconds. In this regard, the
Exchange believes that a lower minimum time period would be more
consistent with the rapid trading that occurs in today's highly
automated and electronic trading environment. The Exchange also
believes that the increased control and flexibility that would result
from this proposal would foster cooperation and coordination with
persons engaged in regulating, clearing, settling, and processing
information with respect to, and facilitating transactions in,
securities.
The Exchange further believes that the proposed rule change would
remove impediments to, and perfect the mechanisms of, a free and open
market and a national market system because it would promote
consistency, fairness, and objectivity by making the Risk Limitation
Mechanisms available to all non-Market Makers and Market Makers, which
therefore may enhance the Exchange's overall market quality. The
Exchange believes that the potential increase in the Exchange's overall
market quality that could result from the Risk Limitation Mechanisms
could therefore contribute to the protection of investors and the
public interest.
The Exchange further believes that the proposed rule change would
remove impediments to, and perfect the mechanisms of, a free and open
market and a national market system because it would permit the
Exchange to announce the minimum, maximum and default settings for the
Risk Limitation Mechanisms, as well as any applicable time period(s)
and order types, via Regulatory Bulletin. The Exchange believes that
the flexibility of announcing these details via Regulatory Bulletin is
necessary because it would permit the Exchange to reasonably ensure
that, for example, the applicable settings are at a level that is
consistent with existing market conditions, such that the Risk
Limitation Mechanisms are able to operate in the manner intended. Use
of Regulatory Bulletins would also be consistent with the manner in
which the Exchange currently announces the minimum, maximum and default
settings for the existing Market Maker Risk Limitation Mechanism as
well as the manner in which the Commission currently permits other
option exchanges to communicate settings or parameters for various
exchange mechanisms to their members other than through the rule filing
process, i.e., via notices, bulletins or circulars.\31\ Utilizing
Regulatory Bulletins in this manner would, for example, permit the
Exchange to increase or decrease the time period applicable to the Risk
Limitation Mechanisms, should the Exchange choose to do so, to
accommodate systems capacity concerns, changes in market conditions or
the technology needs and considerations of Market Makers and non-Market
Makers.
---------------------------------------------------------------------------
\31\ See supra note 26. For example, NASDAQ OMX Options
Technical Update 2012-9 was recently distributed to notify
participants on NASDAQ Options Market (``NOM''), PHLX and NASDAQ OMX
BX Options (``BX'') that, effective as of the date of the Technical
Update (i.e., July 20, 2012), those markets would decrease the
allowable time interval setting for the ``Rapid Fire Risk
Protection,'' from increments of one second to increments as small
as 100 milliseconds.
---------------------------------------------------------------------------
The Exchange also believes that the use of Regulatory Bulletins in
this manner would further remove impediments to, and perfect the
mechanisms of, a free and open market by reducing the resources that
would otherwise be expended, by both the Exchange and the Commission,
if the Exchange is required to propose a rule change with the
Commission each time it wishes to change these settings. However, while
the Exchange would have certain discretion with respect to the levels
at which it could adjust these settings, the Exchange would not be
permitted to adjust the settings below the minimum levels proposed
herein. The Exchange believes that this would reasonably ensure that
the settings are at all times within a reasonable range.
The Exchange notes that the proposed rule change would not relieve
a non-Market Maker or Market Maker of its ``firm quote'' obligation
under Rule 602 of Regulation NMS \32\ or NYSE Arca Options Rule 6.86,
thereby contributing to the protection of investors and the public
interest. In this regard, and as discussed above, the bulk cancel
message generated pursuant to the Risk Limitation Mechanisms would be
processed in time priority with any other quote or order message
received by the NYSE Arca System. Additionally, any orders or quotes
that matched with a Market Maker's quote or a Market Maker's or non-
Market Maker's order and were received by the NYSE Arca System prior to
the receipt of the bulk cancel message would be automatically executed.
However, orders or quotes received by the NYSE Arca System after
receipt of the bulk cancel message would not be executed. The Exchange
further notes that the proposed rule change would not relieve Market
Makers on the Exchange of their quoting obligations under the
Exchange's Rules.\33\ In this regard, and as is the case today, a
Market Maker quote that is cancelled or rejected would no longer count
toward satisfying the Market Maker's percentage quoting obligation
under NYSE Arca Options Rule 6.37B. Additionally, the proposed rule
change is not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers because it would be applicable
to, and available for, all market participants on the Exchange,
including non-Market Makers and Market Makers.
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\32\ 17 CFR 242.602.
\33\ See supra note 17.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
[[Page 52104]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \34\ and Rule 19b-4(f)(6) thereunder.\35\
Because the proposed rule change does not: (i) Significantly affect the
protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act \36\ and Rule 19b-
4(f)(6)(iii) thereunder.\37\
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\34\ 15 U.S.C. 78s(b)(3)(A)(iii).
\35\ 17 CFR 240.19b-4(f)(6).
\36\ 15 U.S.C. 78s(b)(3)(A).
\37\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires the Exchange to give the Commission written
notice of the Exchange's intent to file the proposed rule change,
along with a brief description and text of the proposed rule change,
at least five business days prior to the date of filing of the
proposed rule change, or such shorter time as designated by the
Commission. The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of such proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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-NYSEArca-2012-87 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-NYSEArca-2012-87. 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 Section, 100 F Street
NE., Washington, DC 20549-1090, on official business days between the
hours of 10:00 a.m. and 3:00 p.m. Copies of the filing will also be
available for inspection and copying at the Exchange's principal office
and on its Internet Web site at www.nyse.com. All comments received
will be posted without change; the Commission does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NYSEArca-2012-87 and should be submitted
on or before September 18, 2012.
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\38\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\38\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-21111 Filed 8-27-12; 8:45 am]
BILLING CODE 8011-01-P
