Self-Regulatory Organizations; BATS-Y Exchange, Inc.; Order Approving Proposed Rule Change, as Modified by Amendment No. 1, To Adopt a New Market Maker Peg Order Available to Exchange Market Makers, 54630-54632 [2012-21768]

Download as PDF 54630 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Notices 2012, ISE filed Amendment No.1 to the proposed rule change.5 This order approves the proposed rule change, as modified by Amendment No. 1. tkelley on DSK3SPTVN1PROD with NOTICES II. Description of the Proposal The Exchange proposed to amend ISE Rules 504 (Series of Options Contracts Open for Trading) and 2009 (Terms of Index Options Contracts) to indicate that, during the expiration week, the strike price intervals for the Related non-STOS Option shall be the same as the strike price interval for the STOS Option. The Exchange also proposed to adopt a rule that would permit ISE to list Short Term Option Series at $0.50 strike price intervals for Eligible Option Classes. In the Notice, the Exchange stated that the principal reason for the proposed expansion is in response to market and customer demand to list actively traded products in more granular strike price intervals and to provide Exchange members and their customers increased trading opportunities in the STOS Program.6 ISE also represented that there are substantial benefits to market participants in the ability to trade the Eligible Option Classes at more granular strike price intervals and that the instant proposal has the support of several of its market makers and was developed in consultations with one such marketmaking firm.7 Furthermore, the Exchange also argued that allowing it to open Related non-STOS Options at the more granular strike price intervals the week before expiration would ensure conformity between STOS options and Related non-STOS Options. The Exchange stated that it has analyzed its capacity, and represented that it and the Options Price Reporting Authority (‘‘OPRA’’) have the necessary systems capacity to handle the potential additional traffic associated with trading the Eligible Option Classes in narrower strike price intervals.8 The Exchange (‘‘CBOE Letter’’). CBOE sought further clarification on how the proposed rule change would be implemented and suggested that the proposed rule change be revised to indicate which, if any, day(s) during the week of expiration for standard options the related non-STOS options could be added. See CBOE Letter at 2. 5 Amendment No. 1 clarified the timing of when additional series of non-STOS, or standard options, may be opened. Because Amendment No. 1 is technical in nature, the Commission is not required to publish it for public comment. 6 See Notice, supra note 3 at 33544. 7 Id. at 33545. 8 Id. The Exchange also stated that, while liquidity levels at each individual option series could decrease as a result of listing short term options series at more granular strike price intervals, it did not expect that the proposed rule change would result in a significant change in liquidity or otherwise cause liquidity in the Eligible Options Classes products to decline. VerDate Mar<15>2010 19:14 Sep 04, 2012 Jkt 226001 also represented that the proposal, if approved, would not increase the number of listed short-term series.9 III. Discussion and Commission Findings After careful review of the proposed rule change and the CBOE Letter, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.10 Specifically, the Commission finds that the proposal is consistent with Section 6(b)(5) of the Act,11 which requires, among other things, that the rules of a national securities exchange be designed to promote just and equitable principles of trade, to prevent fraudulent and manipulative acts, 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 believes that the proposal strikes a reasonable balance between the Exchange’s desire to offer a wider array of investment opportunities and the need to avoid unnecessary proliferation of options series. In approving this proposal, the Commission notes that the Exchange has represented that it and OPRA have the necessary systems capacity to handle the potential additional traffic associated with trading the expanded number of strike price intervals available to the Eligible Option Classes and Related non-STO Options. The Commission expects the Exchange to monitor the trading volume associated with the additional options series listed as a result of this proposal and the effect of these additional series on market fragmentation and on the capacity of the Exchange’s, OPRA’s, and vendors’ automated systems. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,12 that the proposed rule change (SR–ISE–2012–33) be, and it hereby is, approved. 9 See Notice, supra note 3 at 33545 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). 11 15 U.S.C. 78f(b)(5). 12 15 U.S.C. 78s(b)(2). 10 In PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.13 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–21767 Filed 9–4–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–67755; File No. SR–BYX– 2012–012] Self-Regulatory Organizations; BATS– Y Exchange, Inc.; Order Approving Proposed Rule Change, as Modified by Amendment No. 1, To Adopt a New Market Maker Peg Order Available to Exchange Market Makers August 29, 2012. I. Introduction On June 26, 2012, BATS–Y Exchange, Inc. (‘‘Exchange’’ or ‘‘BYX’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to adopt a new Market Maker Peg Order to provide similar functionality as the automated functionality provided to market makers under Rule 11.8(e). The proposed rule change was published for comment in the Federal Register on July 16, 2012.3 The Commission received no comment letters regarding the proposed rule change. This order approves the proposed rule change, as modified by Amendment No. 1. II. Background BYX is proposing to adopt a new Market Maker Peg Order to provide a similar functionality presently available to Exchange market makers under Rule 11.8(e). 4 BYX adopted Rule 11.8(e) as 13 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 67382 (July 10, 2012), 77 FR 41842 (‘‘Notice’’). The Commission notes that on July 6, 2012, the Exchange submitted Amendment No. 1 to the proposed rule change to make certain amendments that, in part, clarified that it is expected that market makers will perform the necessary checks to comply with Regulation SHO prior to entry of a Market Maker Peg Order. 4 BYX will continue to offer the present automated quote management functionality provided to market makers under Rule 11.8(e) for a period of 3 months after the implementation of the proposed Market Maker Peg Order. The purpose of this transition period, during which both the present automated quote management functionality under Rule 11.8(e) and the Market Maker Peg Order will operate concurrently, is to afford market makers with the opportunity to adequately test the 1 15 E:\FR\FM\05SEN1.SGM 05SEN1 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Notices tkelley on DSK3SPTVN1PROD with NOTICES part of an effort to address issues uncovered by the aberrant trading that occurred on May 6, 2010.5 According to the Exchange, the automated quote management functionality offered by these rules is designed to help Exchange market makers meet the enhanced market maker obligations adopted post May 6, 2010,6 and avoid execution of market maker ‘‘stub quotes’’ in instances of aberrant trading.7 As part of these obligations, BYX requires market makers for each stock in which they are registered to continuously maintain a two-sided quotation within a designated percentage of the National Best Bid and National Best Offer,8 as appropriate. According to BYX, the market maker quoter functionality presents difficulties to market makers in meeting their obligations under Rule 15c3–5 under the Act (the ‘‘Market Access Rule’’) 9 and Regulation SHO.10 Specifically, the current market maker quoter functionality offered to market makers reprices and ‘‘refreshes’’ a market maker’s quote when it is executed against, without any action required by new Market Maker Peg Order and migrate away from the present automated quote management functionality under Rule 11.8(e). Prior to the end of this three month period, BYX represents that it will submit a rule filing to retire the automated quote management functionality under Rule 11.8(e). See Notice, supra note 3 at 41843. 5 Securities Exchange Act Release No. 63342 (November 18, 2010), 75 FR 71768 (November 24, 2010) (SR–BYX–2010–001). 6 Id. 7 For each issue in which a market maker is registered, the market maker quoter functionality optionally creates a quotation for display to comply with market making obligations. Compliant displayed quotations are thereafter allowed to rest and are not adjusted unless the relationship between the quotation and its related national best bid or national best offer, as appropriate, either: (a) Shrinks to a specified number of percentage points away from the Designated Percentage (as defined below) towards the then current national best bid or national best offer, which number of percentage points will be determined and published in a circular distributed to Members from time to time, or (b) expands to within 0.5% of the applicable percentage necessary to trigger an individual stock trading pause, whereupon such bid or offer will be cancelled and re-entered at the Designated Percentage away from the then current national best bid and national best offer, or if no national best bid or national best offer, at the Designated Percentage away from the last reported sale from the responsible single plan processor. Quotations independently entered by market makers are allowed to move freely towards the national best bid or national best offer, as appropriate, for potential execution. In the event of an execution against a quote generated pursuant to the market maker quoter functionality, the market maker’s quote is refreshed on the executed side of the market at the applicable Designated Percentage away from the then national best bid (offer), or if no national best bid (offer), the last reported sale. See Rule 11.8(e). 8 As defined by Regulation NMS Rule 600(b)(42). 17 CFR 242.600. 9 See Notice, supra note 3 at 41843. 10 17 CFR 242.200 through 204. VerDate Mar<15>2010 19:14 Sep 04, 2012 Jkt 226001 the market maker. When a market maker’s quote is refreshed by the Exchange, however, the market maker has an obligation to ensure that the requirements of the Market Access Rule and Regulation SHO are met. To meet these obligations, a market maker must actively monitor the status of its quotes and ensure that the requirements of the Market Access Rule and Regulation SHO are being satisfied. Market Maker Peg Order In an effort to simplify market maker compliance with the requirements of the Market Access Rule and Regulation SHO, BYX proposes to adopt a new order type available only to Exchange market makers, which offers functionality similar to the market maker quoter functionality, but also allows a market maker to comply with the requirements of the Market Access Rule and Regulation SHO. Specifically, BYX proposes to replace the market maker quoter functionality with the Market Maker Peg Order. The Market Maker Peg Order would be a one-sided limit order and similar to other peg orders available to market participants in that the order is tied or ‘‘pegged’’ to a certain price,11 but it would not be eligible for routing pursuant to Rule 11.13(a)(2) and would always be displayed. The Market Maker Peg Order would be limited to market makers and would have its price automatically set and adjusted, both upon entry and any time thereafter, in order to comply with the Exchange’s rules regarding market maker quotation requirements and obligations.12 It is expected that market makers will perform the necessary checks to comply with Regulation SHO, as discussed above, prior to entry of a Market Maker Peg Order. Upon entry and at any time the order exceeds either the ‘‘Defined Limit,’’ as described in Rule 11.8(d)(2)(E), or moves a specified number of percentage points away from the Designated Percentage towards the then current National Best Bid or National Best Offer, the Market Maker Peg Order would be priced by the Exchange at the Designated Percentage 13 away from the then 11.9(c)(8). Market Maker Peg Order is one-sided so a market maker seeking to use Market Maker Peg Orders to comply with the Exchange’s rules regarding market maker quotation requirements would need to submit both a bid and an offer using the order type. 13 The ‘‘Designated Percentage’’ is the individual stock pause trigger percentage listed in Interpretations and Policies .01 to Rule 11.8, less either: (i) Two percentage points for securities that are included in the S&P 500® Index, Russell 1000® Index, and a pilot list of Exchange Traded Products and for all other NMS stocks with a price equal to 54631 current National Best Bid and National Best Offer. Where there is no National Best Bid or National Best Offer, the Market Maker Peg Order would, by default, be priced at the Designated Percentage away from the last reported sale from the responsible single plan processor, unless instructed by the market maker upon entry to cancel or reject where there is no National Best Bid or National Best Offer. According to BYX, in the absence of a National Best Bid or National Best Offer and last reported sale, the order will be cancelled or rejected. Adjustment to the Designated Percentage is designed to avoid an execution against a Market Maker Peg Order that would initiate an individual stock trading pause. In the event of an execution against a Market Maker Peg Order that reduces the size of the Market Maker Peg Order below one round lot, the market maker would need to enter a new order, after performing the regulatory checks discussed above, to satisfy their obligations under Rule 11.8.14 In the event that pricing the Market Maker Peg Order at the Designated Percentage away from the then current National Best Bid and National Best Offer, or, if no National Best Bid or National Best Offer, to the Designated Percentage away from the last reported sale from the responsible single plan processor would result in the order exceeding its limit price, the order will be cancelled or rejected. BYX is also proposing to allow a market maker to designate an offset more aggressive (i.e., smaller) than the Designated Percentage for any given Market Maker Peg Order. This functionality will allow a market maker to quote at price levels that are closer to the National Best Bid and National Best Offer if it elects to do so. To use this functionality, a market maker, upon entry, must designate the desired offset and a percentage away from the National Best Bid or National Best Offer at which the price of such bid or offer will be adjusted back to the desired offset (the ‘‘Reprice Percentage’’).15 11 Rule 12 The PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 or greater than $1 per share; or (ii) twenty percentage points for all NMS stocks with a price less than $1 per share that are not included in the S&P 500® Index, Russell 1000® Index, and a pilot list of Exchange Traded Products. See Rule 11.8(d)(2)(D). 14 Rule 11.8 generally sets forth BYX’s market maker requirements, which include quotation and pricing obligations. 15 If a market maker wishes, it can designate a more aggressive bid while using the Defined Percentage and Defined Limit for its offer, or vice versa. E:\FR\FM\05SEN1.SGM 05SEN1 54632 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Notices tkelley on DSK3SPTVN1PROD with NOTICES Thereafter,16 a Market Maker Peg Order with a market maker-designated offset will have its price automatically adjusted to the market maker-designated offset from the National Best Bid or National Best Offer or last reported sale upon reaching the Reprice Percentage.17 Identical to the behavior of Market Maker Peg Orders using the Defined Percentage and Defined Limit, in the absence of a National Best Bid or National Best Offer, Market Maker Peg Orders with a market maker-designated offset will, by default, have their price adjusted to the Market Makerdesignated offset from the price of the last reported sale from the responsible single plan processor, or, if otherwise instructed by the Market Maker, will be cancelled or rejected. In the absence of a National Best Bid or National Best Offer and a last reported sale, Market Maker Peg Orders with a market makerdesignated offset will be cancelled or rejected. In the event that pricing the Market Maker Peg Order at the market maker-designated offset away from the then current National Best Bid and National Best Offer or last reported sale would result in the order exceeding its limit price, the order will be cancelled or rejected.18 16 In the absence of an offset designation and/or Reprice Percentage, a Market Maker Peg Order will default to using the Defined Percentage and Defined Limit, and the repricing process whereby, upon reaching the Defined Limit, the price of a Market Maker Peg Order bid or offer will be adjusted by the System to the Designated Percentage away from the then current National Best Bid or National Best Offer, or, if no National Best Bid or National Best Offer, to the Designated Percentage away from the last reported sale from the responsible single plan processor. 17 Market Maker Peg Orders with a market makerdesignated offset may be able to qualify as bona-fide market making for purposes of Regulation SHO, depending on the facts and circumstances. A market maker entering such an order must consider the factors set forth by the Commission in determining whether reliance on the exception from the ‘‘locate’’ requirement of Rule 203 for bona-fide market making is appropriate with respect to the particular Market Maker Peg Order and its designated offset. See 17 CFR 242.203(b)(1). 18 The Market Maker Peg Order will be accepted during Regular Trading Hours and the Pre-Opening and After Hours Trading Sessions. The Pre-Opening Session means the time between 8 a.m. and 9:30 a.m. Eastern Time. The After Hours Trading Session means the time between 4 p.m. and 5 p.m. Eastern Time. By default, the Market Maker Peg Order will be priced at 9:30 a.m. and will only be executable during Regular Trading Hours, however, upon entry, a User may direct the Exchange to automatically price and execute a Market Maker Peg Order during the Pre-Opening Session and After Hours Trading Session (‘‘Extended Hours Market Maker Peg Orders’’). During the Pre-Opening Session and After Hours Trading Session, the wider Designated Percentage and Defined Limit associated with the 9:30 am–9:45 am and 3:35 pm–4 pm periods under Rule 11.8(e) will be applied to Extended Hours Market Maker Peg Orders for which the market maker has not designated an offset more aggressive than the Designated Percentage. VerDate Mar<15>2010 19:14 Sep 04, 2012 Jkt 226001 BYX claims that this order-based approach is superior in terms of the ease in complying with the requirements of the Market Access Rule and Regulation SHO while also providing similar quote adjusting functionality to its market makers.19 BYX also states that market makers would have control of order origination, as required by the Market Access Rule, while also allowing market makers to make marking and locate determinations prior to order entry, as required by Regulation SHO. The Exchange claims that this will allow market makers to fully comply with the requirements of the Market Access Rule and Regulation SHO, as they would when placing any order, while also meeting their Exchange market making obligations.20 III. Discussion and Commission Findings After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.21 Specifically, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,22 which requires, among other things, the rules of an exchange 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 proposed rule change also is designed to support the principles of Section 11A(a)(1) 23 of the Act in that it seeks to assure fair competition among brokers and dealers and among exchange markets. The Commission finds that the Exchange’s proposal is consistent with the Act because it provides a means through which market makers may meet their minimum quoting requirements, which may assist in the maintenance of fair and orderly markets, provide additional liquidity to the Exchange, and prevent excessive volatility. The Commission notes, however, that notwithstanding the availability of the Market Maker Peg Order functionality, the market maker remains responsible for meeting its obligations under Rule 11.8, including entering, monitoring, Notice, supra note 3 at 41845. id. 21 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition and capital formation. 15 U.S.C. 78c(f). 22 15 U.S.C. 78f(b)(5). 23 15 U.S.C. 78k–1(a)(1). and re-submitting, as applicable, compliant quotations. At the same time, the Commission finds that the proposal is reasonably designed to assist market makers in complying with the regulatory requirements of the Market Access Rule and Regulation SHO. The Commission notes, however, that the Market Maker Peg Order, like the current market maker quoter functionality, does not ensure that the market maker is satisfying the requirements of the Market Access Rule or Regulation SHO, including the satisfaction of the locate requirement of Rule 203(b)(1) or an exception thereto. The Commission also notes that, in the event a Market Maker Peg Order is executed against such that the Market Maker Peg Order is reduced in size to below one round lot, the market maker would need to perform the necessary regulatory checks pursuant to the Market Access Rule and Regulation SHO prior to entering a new Market Maker Peg Order. The Commission also believes that providing Exchange market makers with a transition period will serve to minimize the potential market impact caused by the implementation of the Market Maker Peg Order. In addition, by allowing market makers to enter a Market Maker Peg Order that is priced more aggressively than the Designated Percentage, the proposed rules are reasonably designed to provide that quotations submitted by market makers to the Exchange, and displayed to market participants, bear some relationship to the prevailing market price. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,24 that the proposed rule change, as modified by Amendment No. 1, (SR–BYX–2012–012) be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.25 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–21768 Filed 9–4–12; 8:45 am] BILLING CODE 8011–01–P 19 See 20 See PO 00000 Frm 00079 Fmt 4703 Sfmt 9990 24 15 25 17 E:\FR\FM\05SEN1.SGM U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 05SEN1

Agencies

[Federal Register Volume 77, Number 172 (Wednesday, September 5, 2012)]
[Notices]
[Pages 54630-54632]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-21768]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67755; File No. SR-BYX-2012-012]


Self-Regulatory Organizations; BATS-Y Exchange, Inc.; Order 
Approving Proposed Rule Change, as Modified by Amendment No. 1, To 
Adopt a New Market Maker Peg Order Available to Exchange Market Makers

August 29, 2012.

I. Introduction

    On June 26, 2012, BATS-Y Exchange, Inc. (``Exchange'' or ``BYX'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
adopt a new Market Maker Peg Order to provide similar functionality as 
the automated functionality provided to market makers under Rule 
11.8(e). The proposed rule change was published for comment in the 
Federal Register on July 16, 2012.\3\ The Commission received no 
comment letters regarding the proposed rule change. This order approves 
the proposed rule change, as modified by Amendment No. 1.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 67382 (July 10, 
2012), 77 FR 41842 (``Notice''). The Commission notes that on July 
6, 2012, the Exchange submitted Amendment No. 1 to the proposed rule 
change to make certain amendments that, in part, clarified that it 
is expected that market makers will perform the necessary checks to 
comply with Regulation SHO prior to entry of a Market Maker Peg 
Order.
---------------------------------------------------------------------------

II. Background

    BYX is proposing to adopt a new Market Maker Peg Order to provide a 
similar functionality presently available to Exchange market makers 
under Rule 11.8(e). \4\ BYX adopted Rule 11.8(e) as

[[Page 54631]]

part of an effort to address issues uncovered by the aberrant trading 
that occurred on May 6, 2010.\5\ According to the Exchange, the 
automated quote management functionality offered by these rules is 
designed to help Exchange market makers meet the enhanced market maker 
obligations adopted post May 6, 2010,\6\ and avoid execution of market 
maker ``stub quotes'' in instances of aberrant trading.\7\ As part of 
these obligations, BYX requires market makers for each stock in which 
they are registered to continuously maintain a two-sided quotation 
within a designated percentage of the National Best Bid and National 
Best Offer,\8\ as appropriate. According to BYX, the market maker 
quoter functionality presents difficulties to market makers in meeting 
their obligations under Rule 15c3-5 under the Act (the ``Market Access 
Rule'') \9\ and Regulation SHO.\10\ Specifically, the current market 
maker quoter functionality offered to market makers reprices and 
``refreshes'' a market maker's quote when it is executed against, 
without any action required by the market maker. When a market maker's 
quote is refreshed by the Exchange, however, the market maker has an 
obligation to ensure that the requirements of the Market Access Rule 
and Regulation SHO are met. To meet these obligations, a market maker 
must actively monitor the status of its quotes and ensure that the 
requirements of the Market Access Rule and Regulation SHO are being 
satisfied.
---------------------------------------------------------------------------

    \4\ BYX will continue to offer the present automated quote 
management functionality provided to market makers under Rule 
11.8(e) for a period of 3 months after the implementation of the 
proposed Market Maker Peg Order. The purpose of this transition 
period, during which both the present automated quote management 
functionality under Rule 11.8(e) and the Market Maker Peg Order will 
operate concurrently, is to afford market makers with the 
opportunity to adequately test the new Market Maker Peg Order and 
migrate away from the present automated quote management 
functionality under Rule 11.8(e). Prior to the end of this three 
month period, BYX represents that it will submit a rule filing to 
retire the automated quote management functionality under Rule 
11.8(e). See Notice, supra note 3 at 41843.
    \5\ Securities Exchange Act Release No. 63342 (November 18, 
2010), 75 FR 71768 (November 24, 2010) (SR-BYX-2010-001).
    \6\ Id.
    \7\ For each issue in which a market maker is registered, the 
market maker quoter functionality optionally creates a quotation for 
display to comply with market making obligations. Compliant 
displayed quotations are thereafter allowed to rest and are not 
adjusted unless the relationship between the quotation and its 
related national best bid or national best offer, as appropriate, 
either: (a) Shrinks to a specified number of percentage points away 
from the Designated Percentage (as defined below) towards the then 
current national best bid or national best offer, which number of 
percentage points will be determined and published in a circular 
distributed to Members from time to time, or (b) expands to within 
0.5% of the applicable percentage necessary to trigger an individual 
stock trading pause, whereupon such bid or offer will be cancelled 
and re-entered at the Designated Percentage away from the then 
current national best bid and national best offer, or if no national 
best bid or national best offer, at the Designated Percentage away 
from the last reported sale from the responsible single plan 
processor. Quotations independently entered by market makers are 
allowed to move freely towards the national best bid or national 
best offer, as appropriate, for potential execution. In the event of 
an execution against a quote generated pursuant to the market maker 
quoter functionality, the market maker's quote is refreshed on the 
executed side of the market at the applicable Designated Percentage 
away from the then national best bid (offer), or if no national best 
bid (offer), the last reported sale. See Rule 11.8(e).
    \8\ As defined by Regulation NMS Rule 600(b)(42). 17 CFR 
242.600.
    \9\ See Notice, supra note 3 at 41843.
    \10\ 17 CFR 242.200 through 204.
---------------------------------------------------------------------------

Market Maker Peg Order
    In an effort to simplify market maker compliance with the 
requirements of the Market Access Rule and Regulation SHO, BYX proposes 
to adopt a new order type available only to Exchange market makers, 
which offers functionality similar to the market maker quoter 
functionality, but also allows a market maker to comply with the 
requirements of the Market Access Rule and Regulation SHO. 
Specifically, BYX proposes to replace the market maker quoter 
functionality with the Market Maker Peg Order. The Market Maker Peg 
Order would be a one-sided limit order and similar to other peg orders 
available to market participants in that the order is tied or 
``pegged'' to a certain price,\11\ but it would not be eligible for 
routing pursuant to Rule 11.13(a)(2) and would always be displayed. The 
Market Maker Peg Order would be limited to market makers and would have 
its price automatically set and adjusted, both upon entry and any time 
thereafter, in order to comply with the Exchange's rules regarding 
market maker quotation requirements and obligations.\12\ It is expected 
that market makers will perform the necessary checks to comply with 
Regulation SHO, as discussed above, prior to entry of a Market Maker 
Peg Order. Upon entry and at any time the order exceeds either the 
``Defined Limit,'' as described in Rule 11.8(d)(2)(E), or moves a 
specified number of percentage points away from the Designated 
Percentage towards the then current National Best Bid or National Best 
Offer, the Market Maker Peg Order would be priced by the Exchange at 
the Designated Percentage \13\ away from the then current National Best 
Bid and National Best Offer. Where there is no National Best Bid or 
National Best Offer, the Market Maker Peg Order would, by default, be 
priced at the Designated Percentage away from the last reported sale 
from the responsible single plan processor, unless instructed by the 
market maker upon entry to cancel or reject where there is no National 
Best Bid or National Best Offer. According to BYX, in the absence of a 
National Best Bid or National Best Offer and last reported sale, the 
order will be cancelled or rejected. Adjustment to the Designated 
Percentage is designed to avoid an execution against a Market Maker Peg 
Order that would initiate an individual stock trading pause. In the 
event of an execution against a Market Maker Peg Order that reduces the 
size of the Market Maker Peg Order below one round lot, the market 
maker would need to enter a new order, after performing the regulatory 
checks discussed above, to satisfy their obligations under Rule 
11.8.\14\ In the event that pricing the Market Maker Peg Order at the 
Designated Percentage away from the then current National Best Bid and 
National Best Offer, or, if no National Best Bid or National Best 
Offer, to the Designated Percentage away from the last reported sale 
from the responsible single plan processor would result in the order 
exceeding its limit price, the order will be cancelled or rejected.
---------------------------------------------------------------------------

    \11\ Rule 11.9(c)(8).
    \12\ The Market Maker Peg Order is one-sided so a market maker 
seeking to use Market Maker Peg Orders to comply with the Exchange's 
rules regarding market maker quotation requirements would need to 
submit both a bid and an offer using the order type.
    \13\ The ``Designated Percentage'' is the individual stock pause 
trigger percentage listed in Interpretations and Policies .01 to 
Rule 11.8, less either: (i) Two percentage points for securities 
that are included in the S&P 500[supreg] Index, Russell 1000[supreg] 
Index, and a pilot list of Exchange Traded Products and for all 
other NMS stocks with a price equal to or greater than $1 per share; 
or (ii) twenty percentage points for all NMS stocks with a price 
less than $1 per share that are not included in the S&P 500[supreg] 
Index, Russell 1000[supreg] Index, and a pilot list of Exchange 
Traded Products. See Rule 11.8(d)(2)(D).
    \14\ Rule 11.8 generally sets forth BYX's market maker 
requirements, which include quotation and pricing obligations.
---------------------------------------------------------------------------

    BYX is also proposing to allow a market maker to designate an 
offset more aggressive (i.e., smaller) than the Designated Percentage 
for any given Market Maker Peg Order. This functionality will allow a 
market maker to quote at price levels that are closer to the National 
Best Bid and National Best Offer if it elects to do so. To use this 
functionality, a market maker, upon entry, must designate the desired 
offset and a percentage away from the National Best Bid or National 
Best Offer at which the price of such bid or offer will be adjusted 
back to the desired offset (the ``Reprice Percentage'').\15\

[[Page 54632]]

Thereafter,\16\ a Market Maker Peg Order with a market maker-designated 
offset will have its price automatically adjusted to the market maker-
designated offset from the National Best Bid or National Best Offer or 
last reported sale upon reaching the Reprice Percentage.\17\ Identical 
to the behavior of Market Maker Peg Orders using the Defined Percentage 
and Defined Limit, in the absence of a National Best Bid or National 
Best Offer, Market Maker Peg Orders with a market maker-designated 
offset will, by default, have their price adjusted to the Market Maker-
designated offset from the price of the last reported sale from the 
responsible single plan processor, or, if otherwise instructed by the 
Market Maker, will be cancelled or rejected. In the absence of a 
National Best Bid or National Best Offer and a last reported sale, 
Market Maker Peg Orders with a market maker-designated offset will be 
cancelled or rejected. In the event that pricing the Market Maker Peg 
Order at the market maker-designated offset away from the then current 
National Best Bid and National Best Offer or last reported sale would 
result in the order exceeding its limit price, the order will be 
cancelled or rejected.\18\
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    \15\ If a market maker wishes, it can designate a more 
aggressive bid while using the Defined Percentage and Defined Limit 
for its offer, or vice versa.
    \16\ In the absence of an offset designation and/or Reprice 
Percentage, a Market Maker Peg Order will default to using the 
Defined Percentage and Defined Limit, and the repricing process 
whereby, upon reaching the Defined Limit, the price of a Market 
Maker Peg Order bid or offer will be adjusted by the System to the 
Designated Percentage away from the then current National Best Bid 
or National Best Offer, or, if no National Best Bid or National Best 
Offer, to the Designated Percentage away from the last reported sale 
from the responsible single plan processor.
    \17\ Market Maker Peg Orders with a market maker-designated 
offset may be able to qualify as bona-fide market making for 
purposes of Regulation SHO, depending on the facts and 
circumstances. A market maker entering such an order must consider 
the factors set forth by the Commission in determining whether 
reliance on the exception from the ``locate'' requirement of Rule 
203 for bona-fide market making is appropriate with respect to the 
particular Market Maker Peg Order and its designated offset. See 17 
CFR 242.203(b)(1).
    \18\ The Market Maker Peg Order will be accepted during Regular 
Trading Hours and the Pre-Opening and After Hours Trading Sessions. 
The Pre-Opening Session means the time between 8 a.m. and 9:30 a.m. 
Eastern Time. The After Hours Trading Session means the time between 
4 p.m. and 5 p.m. Eastern Time. By default, the Market Maker Peg 
Order will be priced at 9:30 a.m. and will only be executable during 
Regular Trading Hours, however, upon entry, a User may direct the 
Exchange to automatically price and execute a Market Maker Peg Order 
during the Pre-Opening Session and After Hours Trading Session 
(``Extended Hours Market Maker Peg Orders''). During the Pre-Opening 
Session and After Hours Trading Session, the wider Designated 
Percentage and Defined Limit associated with the 9:30 am-9:45 am and 
3:35 pm-4 pm periods under Rule 11.8(e) will be applied to Extended 
Hours Market Maker Peg Orders for which the market maker has not 
designated an offset more aggressive than the Designated Percentage.
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    BYX claims that this order-based approach is superior in terms of 
the ease in complying with the requirements of the Market Access Rule 
and Regulation SHO while also providing similar quote adjusting 
functionality to its market makers.\19\ BYX also states that market 
makers would have control of order origination, as required by the 
Market Access Rule, while also allowing market makers to make marking 
and locate determinations prior to order entry, as required by 
Regulation SHO. The Exchange claims that this will allow market makers 
to fully comply with the requirements of the Market Access Rule and 
Regulation SHO, as they would when placing any order, while also 
meeting their Exchange market making obligations.\20\
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    \19\ See Notice, supra note 3 at 41845.
    \20\ See id.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\21\ Specifically, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(5) of the Act,\22\ which 
requires, among other things, the rules of an exchange 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 proposed rule change also is designed to 
support the principles of Section 11A(a)(1) \23\ of the Act in that it 
seeks to assure fair competition among brokers and dealers and among 
exchange markets.
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    \21\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).
    \22\ 15 U.S.C. 78f(b)(5).
    \23\ 15 U.S.C. 78k-1(a)(1).
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    The Commission finds that the Exchange's proposal is consistent 
with the Act because it provides a means through which market makers 
may meet their minimum quoting requirements, which may assist in the 
maintenance of fair and orderly markets, provide additional liquidity 
to the Exchange, and prevent excessive volatility. The Commission 
notes, however, that notwithstanding the availability of the Market 
Maker Peg Order functionality, the market maker remains responsible for 
meeting its obligations under Rule 11.8, including entering, 
monitoring, and re-submitting, as applicable, compliant quotations. At 
the same time, the Commission finds that the proposal is reasonably 
designed to assist market makers in complying with the regulatory 
requirements of the Market Access Rule and Regulation SHO. The 
Commission notes, however, that the Market Maker Peg Order, like the 
current market maker quoter functionality, does not ensure that the 
market maker is satisfying the requirements of the Market Access Rule 
or Regulation SHO, including the satisfaction of the locate requirement 
of Rule 203(b)(1) or an exception thereto. The Commission also notes 
that, in the event a Market Maker Peg Order is executed against such 
that the Market Maker Peg Order is reduced in size to below one round 
lot, the market maker would need to perform the necessary regulatory 
checks pursuant to the Market Access Rule and Regulation SHO prior to 
entering a new Market Maker Peg Order.
    The Commission also believes that providing Exchange market makers 
with a transition period will serve to minimize the potential market 
impact caused by the implementation of the Market Maker Peg Order. In 
addition, by allowing market makers to enter a Market Maker Peg Order 
that is priced more aggressively than the Designated Percentage, the 
proposed rules are reasonably designed to provide that quotations 
submitted by market makers to the Exchange, and displayed to market 
participants, bear some relationship to the prevailing market price.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change, as modified by Amendment No. 1, 
(SR-BYX-2012-012) be, and hereby is, approved.
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    \24\ 15 U.S.C. 78s(b)(2).
    \25\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-21768 Filed 9-4-12; 8:45 am]
BILLING CODE 8011-01-P
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