Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Moving the Rule Text That Provides for Pegging on the Exchange From Supplementary Material .26 of Rule 70-Equities to Rule 13-Equities and Amending Such Text to (i) Permit Designated Market Maker Interest To Be Set as Pegging Interest; (ii) Change References From National Best Bid, National Best Offer and National Best Bid or Offer to Best Protected Bid, Best Protected Offer and Best Protected Bid or Offer, Respectively; (iii) Permit Pegging Interest To Peg to the Opposite Side of the Market; and (iv) Provide for An Offset Value To Be Specified for Pegging Interest, 71853-71860 [2012-29179]
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Federal Register / Vol. 77, No. 233 / Tuesday, December 4, 2012 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68313; File Nos. SR–BATS–
2012–039; SR–BX–2012–063; SR–CBOE–
2012–094; SR–NASDAQ–2012–109; SR–
NYSE–2012–49; SR–NYSEArca–2012–105;
SR–NYSEMKT–2012–48]
Self-Regulatory Organizations; BATS
Exchange, Inc.; NASDAQ OMX BX Inc.;
Chicago Board Options Exchange,
Incorporated; The NASDAQ Stock
Market LLC; New York Stock Exchange
LLC; NYSE Arca LLC; NYSE MKT, LLC;
Notice of Designation of Longer Period
for Commission Action on Proposed
Rule Changes Relating to Adoption of
Listing Standards for Compensation
Committees and Advisors as Required
by Rule 10C–1
November 28, 2012.
I. Introduction
On September 25, 2012, each of BATS
Exchange, Inc. (‘‘BATS’’), NASDAQ
OMX BX, Inc. (‘‘BX’’), Chicago Board
Options Exchange, Incorporated
(‘‘CBOE’’), The NASDAQ Stock Market
LLC (‘‘Nasdaq’’), New York Stock
Exchange LLC (‘‘NYSE’’), NYSE Arca
LLC (‘‘NYSE Arca’’), and NYSE MKT
LLC (‘‘NYSE MKT’’) (collectively
‘‘Exchanges’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) 1 of the Securities Exchange Act
of 1934 (‘‘Act’’),2 and Rule 19b–4
thereunder,3 proposed rule changes to
amend certain of their respective rules
relating to listing standards for
compensation committees and advisors.
The proposed rule changes were
published for comment in the Federal
Register on October 15, 2012.4 The
Commission received fourteen comment
letters on these proposals in total. The
Commission received six comment
letters on the NYSE proposed rule
change,5 seven comment letters on the
1 15
U.S.C. 78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4
4 See Securities Exchange Act Release Nos. 68022
(October 9, 2012), 77 FR 62572 (October 15, 2012)
(SR–BATS–2012–039); 68018 (October 9, 2012), 77
FR 62547 (October 15, 2012) (SR–BX–2012–063);
68020 (October 9, 2012), 77 FR 62558 (October 15,
2012) (SR–CBOE–2012–094); 68013 (October 9,
2012), 77 FR 62563 (October 15, 2012) (SR–
NASDAQ–2012–109); 68011 (October 9, 2012), 77
FR 62541 (October 15, 2012) (SR–NYSE–2012–49);
68006 (October 9, 2012), 77 FR 62587 (October 15,
2012) (SR–NYSEArca–2012–105); 68007 (October 9,
2012), 77 FR 62576 (October 15, 2012) (SR–
NYSEMKT–2012–48).
5 See Letter from Thomas R. Moore, Vice
President, Corporate Secretary and Chief
Governance Officer, Ameriprise Financial, Inc. to
Elizabeth M. Murphy, Secretary, Commission, dated
October 18, 2012; Letter from J. Robert Brown, Jr.,
Director, Corporate & Commercial Law Program,
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2 15
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Nasdaq proposed rule change,6 and one
comment letter on the NYSE Arca
proposed rule change.7 The Commission
received no other comment letters for
any of the other Exchanges’ proposed
rule changes.8
Section 19(b)(2) of the Act 9 provides
that within 45 days of the publication of
notice of the filing of a proposed rule
change, or within such longer period up
to 90 days as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or as to which the
self-regulatory organization consents,
the Commission shall either approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether these
proposed rule changes should be
disapproved. The 45th day from the
publication of notice of filing of these
proposed rule changes is November 29,
University of Denver Sturm College of Law to
Elizabeth M. Murphy, Secretary, Commission, dated
October 30, 2012; Letter from Dorothy Donohue,
Deputy General Counsel, Securities Regulation,
Investment Company Institute to Elizabeth M.
Murphy, Secretary, Commission, dated November
1, 2012; Letter from Brandon J. Rees, Acting
Director, Office of Investment, AFL–CIO to
Elizabeth M. Murphy, Secretary, Commission, dated
November 5, 2012; Letter from Carin Zelenko,
Director, Capital Strategies Department,
International Brotherhood of Teamsters to Elizabeth
M. Murphy, Secretary, Commission, dated
November 5, 2012; and Letter from Wilson Sonsini
Doorich & Rosati, P.C. to Elizabeth M. Murphy,
Secretary, Commission, dated November 14, 2012.
6 See Letter from J. Robert Brown, Jr., Director,
Corporate & Commercial Law Program, University
of Denver Sturm College of Law to Elizabeth M.
Murphy, Secretary, Commission, dated October 30,
2012; Letter from Dorothy Donohue, Deputy
General Counsel, Securities Regulation, Investment
Company Institute to Elizabeth M. Murphy,
Secretary, Commission, dated November 1, 2012;
Letter from Jeff Mahoney, General Counsel, Council
of Institutional Investors to Elizabeth M. Murphy,
Secretary, Commission, dated November 1, 2012;
Letter from Harold R. Carpenter, CFO, Pinnacle
Financial Partners to Elizabeth M. Murphy,
Secretary, Commission, dated November 5, 2012;
Letter from Brandon J. Rees, Acting Director, Office
of Investment, AFL–CIO to Elizabeth M. Murphy,
Secretary, Commission, dated November 5, 2012;
Letter from Carin Zelenko, Director, Capital
Strategies Department, International Brotherhood of
Teamsters to Elizabeth M. Murphy, Secretary,
Commission, dated November 5, 2012; and Letter
from Wilson Sonsini Doorich & Rosati, P.C.
(‘‘WSDR’’) to Elizabeth M. Murphy, Secretary,
Commission, dated November 14, 2012.
7 Letter from Jeff Mahoney, General Counsel,
Council of Institutional Investors to Elizabeth M.
Murphy, Secretary, Commission, dated November
1, 2012.
8 The Commission notes, however, that these
comment letters apply to all of the other Exchanges’
proposed rule changes, where applicable. The
Commission also notes that it has designated a
longer time period for Commission consideration of
similar proposed rule changes for Chicago Stock
Exchange, Inc., and National Stock Exchange, Inc.
See Securities Exchange Act Release Nos. 68311
(November 28, 2012) and 68312 (November 28,
2012), respectively.
9 15 U.S.C. 78s(b)(2).
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71853
2012. The Commission is extending the
45-day time period for Commission
action on these proposed rule changes.
The Commission finds it appropriate
to designate a longer period within
which to take action on these proposed
rule changes so that it has sufficient
time to consider these proposed rule
changes, which would revise the rules
relating to compensation committee and
compensation advisor requirements,
and to consider the comment letters that
have been submitted in connection with
them.
Accordingly, the Commission,
pursuant to Section 19(b)(2) of the
Act,10 designates January 13, 2013, as
the date by which the Commission
should either approve or disapprove or
institute proceedings to determine
whether to disapprove these proposed
rule changes.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–29180 Filed 12–3–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68305; File No. SR–
NYSEMKT–2012–67]
Self-Regulatory Organizations; NYSE
MKT LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Moving the Rule Text
That Provides for Pegging on the
Exchange From Supplementary
Material .26 of Rule 70—Equities to
Rule 13—Equities and Amending Such
Text to (i) Permit Designated Market
Maker Interest To Be Set as Pegging
Interest; (ii) Change References From
National Best Bid, National Best Offer
and National Best Bid or Offer to Best
Protected Bid, Best Protected Offer
and Best Protected Bid or Offer,
Respectively; (iii) Permit Pegging
Interest To Peg to the Opposite Side of
the Market; and (iv) Provide for An
Offset Value To Be Specified for
Pegging Interest
November 28, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on November
14, 2012, NYSE MKT LLC (the
‘‘Exchange’’ or ‘‘NYSE MKT’’) filed with
10 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(31).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
11 17
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71854
Federal Register / Vol. 77, No. 233 / Tuesday, December 4, 2012 / Notices
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 Exchange. The
Exchange filed the proposal as a ‘‘noncontroversial’’ proposed rule change
pursuant to Section 19(b)(3)(A)(iii) of
the Act 3 and Rule 19b–4(f)(6)
thereunder.4 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 move the
rule text that provides for pegging on
the Exchange from Supplementary
Material .26 of Rule 70—Equities to
Rule 13—Equities and amend such text
to (i) permit Designated Market Maker
(‘‘DMM’’) interest to be set as pegging
interest; (ii) change references from
national best bid (‘‘NBB’’), national best
offer (‘‘NBO’’) and national best bid or
offer (‘‘NBBO’’) to best protected bid
(‘‘PBB’’), best protected offer (‘‘PBO’’)
and best protected bid or offer
(‘‘PBBO’’), respectively; (iii) permit
pegging interest to peg to the opposite
side of the market; and (iv) provide for
an offset value to be specified for
pegging interest. 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.
mstockstill on DSK4VPTVN1PROD with
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to move the
rule text that provides for pegging on
the Exchange from Rule 70.26—Equities
3 15
4 17
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6).
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(‘‘Rule 70.26’’) (Pegging for d-Quotes
and e-Quotes) 5 to Rule 13—Equities
(‘‘Rule 13’’) and amend such text to (i)
permit DMM interest to be set as
pegging interest; (ii) change references
from NBB, NBO and NBBO to PBB, PBO
and PBBO, respectively; (iii) permit
pegging interest to peg to the opposite
side of the market; and (iv) provide for
an offset value to be specified for
pegging interest. In moving this text to
Rule 13, the Exchange proposes to make
several other changes to the rule text, so
that the proposed substantive changes
described above can be incorporated in
a logical and transparent manner and to
streamline the rule in a non-substantive
manner.
Background
The New York Stock Exchange LLC
(‘‘NYSE’’) adopted NYSE Rule 70.26 as
part of its Hybrid Market initiative to
provide the ability for Floor brokers to
add pegging instructions to e-Quotes.6
Since its original adoption, the pegging
functionality has been amended a
number of times to, among other things,
include d-Quotes and change the
pegging functionality from pegging to
the Exchange best bid or offer to pegging
to the NBBO.7
As set forth in Rule 70.26(i), e-Quotes,
other than tick-sensitive e-Quotes, may
be set to peg to the NBB (for pegging
interest to buy) or to the NBO (for
pegging interest to sell) as the NBBO
changes, so long as the NBBO is at or
within the limit price. Rule 70.26(ii)
specifies that d-Quotes may also employ
pegging. Rule 70.26(iii) provides that
pegging is active only when autoquoting is active and that Exchange
systems will reject e-Quotes that employ
pegging that are entered 10 seconds or
less before the scheduled close of
trading. Rule 70.26(iv) provides that
pegging e-Quotes and d-Quotes trade on
parity with other interest at the NBBO
after interest entitled to priority is
executed, and Rule 70.26(vi) provides
that a pegging e-Quote or d-Quote that
sets the Exchange best bid or offer is
entitled to priority.
Rule 70.26(v) provides that pegging is
reactive, and that an e-Quote or d-Quote
5 E-Quotes are Floor broker agency interest files.
D-Quotes are e-Quotes for which a Floor broker has
entered discretionary instructions as to size and/or
price.
6 See Securities Exchange Act Release No. 54577
(October 5, 2006), 71 FR 60208 (October 12, 2006)
(SR–NYSE–2006–36). In 2008, the Exchange
adopted the NYSE’s equity trading rules, including
NYSE Rules 70.26 and 13. See Securities Exchange
Act Release No. 58705 (October 1, 2008), 73 FR
58995 (October 8, 2008) (SR–Amex–2008–63).
7 See Securities Exchange Act Release No. 61081
(December 1, 2009), 74 FR 64105 (December 7,
2009) (SR–NYSEAmex–2009–76).
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Fmt 4703
Sfmt 4703
will not establish the NBBO as a result
of pegging. Rule 70.26(vii) provides that
pegging e-Quotes will only peg to nonpegging interest that is within the
pegging range selected by the Floor
broker, and that such non-pegging
interest may be available on the
Exchange or be a protected bid or offer
on an away market. Rule 70.26(viii)
provides that an e-Quote or d-Quote will
not sustain the NBBO as a result of
pegging if there is no other non-pegged
interest at that price, and such price is
not the e-Quote’s or d-Quote’s limit
price. Rule 70.26(viii)(A) and (B)
provide that if a buy (sell) pegging eQuote reaches its lowest (highest)
quotable price and it is the NBB (NBO),
such interest will remain displayed at
the NBB (NBO) even if all other interest
at that price cancels. Rule 70.26(ix)
further provides detail of definitions of
the price range that a Floor broker may
designate for pegging e-Quotes, which is
a price range that a Floor broker can add
that is in addition to the limit price for
the pegging e-Quote, provided that it is
not inconsistent with the order’s limit
price.
Rule 70.26(x) provides that pegging
interest will join the NBB or NBO
provided that it is within the e-Quote’s
pegging range. As noted in Rule
70.26(x)(A), a pegging e-Quote will not
join the NBBO if it is locking or crossing
the Exchange best bid or offer, in which
case the pegging e-Quote would peg to
the next available best-priced nonpegging interest. Rule 70.26(x)(B)
further provides that if the NBBO is not
within the price range specified for the
pegging e-Quote, it will peg to the next
available best-priced non-pegging
interest within the price range selected
by the Floor broker.
Rule 70.26(xi) also provides that if a
pegging range has not been included,
the pegging e-Quote will peg to the
NBBO so long as the NBBO is within the
limit price of the e-Quote. Rule
70.26(xii) provides that the
discretionary price range of a d-Quote
will move with a pegging d-Quote,
subject to any floor or ceiling set by the
Floor broker. Rule 70.26(xii)(A)–(C) then
set forth that if the NBBO moves out of
the range of the pegging e-Quote, the
pegging e-Quote will remain at the best
price to which there may be nonpegging interest to peg, and that once
the NBBO returns to within the price
range designated for the pegging eQuote, it will once again peg to the
NBBO. Finally, Rule 70.26(xiii) provides
that a Floor broker may establish a
minimum size of same-side volume to
which the e-Quote or d-Quote will peg.
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Federal Register / Vol. 77, No. 233 / Tuesday, December 4, 2012 / Notices
mstockstill on DSK4VPTVN1PROD with
Summary of Proposed Rule Changes
As noted above, the Exchange
proposes to permit DMM interest to be
set as pegging interest. Because pegging
for DMM interest would generally be the
same as pegging for e-Quotes and dQuotes, the Exchange proposes to
amend the existing text, as described in
more detail below, to define the term
‘‘pegging interest’’ to include e-Quotes,
d-Quotes, and DMM interest.8 The
Exchange believes that it is appropriate
to expand the availability of pegging
interest to DMM interest because it will
assist DMMs in meeting their
obligations pursuant to Rule 104(a)(1)—
Equities to maintain a continuous, twosided quote at or near the NBBO
throughout the trading day.
In particular, the Exchange notes that
other markets have recently been
approved to provide market makers
with pegging order functionality so that
market makers may automatically track
the NBBO in compliance with the
market-wide market maker quoting
requirements.9 The rules adopted or
proposed by those markets set the
pegging functionality to automatically
track the designated percentages set
forth in the market-wide quoting rule
(i.e., Rule 104(a)(1)(B)(iii)—Equities
designated percentages). While the
Exchange’s expansion of pegging
functionality to DMMs would not
include those set percentages, the
Exchange believes that providing DMMs
with the flexibility to engage in sameside or opposite-side pegging with offset
values of their own choosing, as
discussed in more detail below, will
enable DMMs to set their market-making
quoting interest to automatically track
the PBBO at a tighter ratio than the
quoting requirements contemplated by
Rule 104(a)(1)(B)—Equities.10
8 Trading interest that has been set to peg, i.e., eQuotes, d-Quotes, and DMM interest, will be
referred to collectively as ‘‘pegging interest.’’
9 See, e.g., Securities Exchange Act Release Nos.
67584 (Aug. 2, 2012), 77 FR 47472 (Aug. 8, 2012)
(SR–NASDAQ–2012–066) (approving The NASDAQ
Stock Market LLC (‘‘Nasdaq’’) Rule 4751(f)(15),
which establishes a ‘‘Market Maker Peg Order’’);
67756 (Aug. 29, 2012), 77 FR 54633 (Sept. 5, 2012)
(SR–BATS–2012–026) (approving The BATS
Exchange, Inc. (‘‘BATS’’) Rule 11.8(e), which
establishes a ‘‘Market Maker Peg Order’’); and
67755 (Aug. 29, 2012), 77 FR 54630 (Sept. 5, 2012)
(SR–BYX–2012–012) (approving BATS–Y
Exchange, Inc. (‘‘BYX’’) Rule 11.8(e), which
establishes a Market Maker Peg Order).
10 Member organizations are responsible for
determining whether their trading activity qualifies
as bona fide market making for purposes of the
‘‘locate’’ exception and close-out requirements of
Regulation SHO under the Exchange Act.
Compliance with the quoting requirements of Rule
104(a)(1)(B)—Equities, or any other rules of the
Exchange, does not necessarily mean that the DMM,
or other form of Exchange-registered market maker,
is engaged in bona fide market making for purposes
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The Exchange also proposes to change
references to NBB, NBO and NBBO
throughout Rule 70.26 to PBB, PBO and
PBBO, respectively. The Exchange
believes that these changes are more
consistent with the requirements of the
Regulation NMS Order Protection
Rule 11 and the related definition of
protected bid and offer, as set forth in
Regulation NMS Rule 600(b)(57),12
which defines a protected bid or
protected offer as a quote in an NMS
stock that is (i) displayed by an
automated trading center; (ii)
disseminated pursuant to an effective
national market system plan; and (iii) an
automated quotation that is the best bid
or best offer of a national stock exchange
or a national securities association.
Exchange systems monitor the PBBO for
purposes of the Order Protection Rule
and, in this respect, Exchange systems
also move pegging interest based on
moves to the PBBO, not the NBBO.13
The Exchange further proposes to
expand the pegging functionality to
permit pegging to the opposite side of
the market. The existing functionality,
for which pegging interest to buy (sell)
pegs to the PBB (PBO), would be
renamed in the rule as a ‘‘Primary
Pegging Interest.’’ 14 The proposed new
functionality, whereby pegging interest
would peg to the opposite side of the
of Regulation SHO. See 17 CFR 242.203(b)(2)(iii); 17
CFR 242.204(a)(3). The Commission adopted a
narrow exception to Regulation SHO’s ‘‘locate’’
requirement for market makers that may need to
facilitate customer orders in a fast moving market
without possible delays associated with complying
with such requirement. Only market makers
engaged in bona fide market making in the security
at the time they effect the short sale are excepted
from the ‘‘locate’’ requirement. See Exchange Act
Release No. 50103 (July 28, 2004), 69 FR 48008,
48015 (August 6, 2004) (providing guidance as to
what does not constitutes bona fide market making
for purposes of claiming the exception to
Regulation SHO’s ‘‘locate’’ requirement). See also
Exchange Act Release No. 58775 (October 14, 2008),
73 FR 61690, 61698–9 (October 17, 2008) (providing
guidance regarding what is bona fide market
making for purposes of complying with the market
maker exception to Regulation SHO’s ‘‘locate’’
requirement including without limitation whether
the market maker incurs any economic or market
risk with respect to the securities, continuous
quotations that are at or near the market on both
sides and that are communicated and represented
in a way that makes them widely accessible to
investors and other broker-dealers and a pattern of
trading that includes both purchases and sales in
roughly comparable amounts to provide liquidity to
customers or other broker-dealers).
11 17 CFR 242.611.
12 17 CFR 242.600(b)(57).
13 In most instances, the PBBO and the NBBO are
the same. However, if the NBBO is based on a quote
that is no longer protected, i.e., a stale quote, the
PBBO may change before the NBBO changes. In this
regard, the Exchange notes that current Rule
70.26(vii) already specifies that pegging interest
may peg to interest available on the Exchange or a
protected bid or offer on an away market.
14 See proposed paragraph (c) of the pegging
interest text of Rule 13.
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Fmt 4703
Sfmt 4703
71855
market (buy (sell) pegs to the PBO
(PBB)) would be referred to in the
proposed rule as a ‘‘Market Pegging
Interest.’’ 15 The Exchange believes that
adding Market Pegging Interest
functionality would contribute to
narrower spreads for securities and is
consistent with approved rules of other
markets.16
The Exchange also proposes to
provide for an offset value, which
would be a specified amount by which
the price of pegging interest would
differ from the price of the interest to
which it pegs.17 The Exchange proposes
to specify that an offset value would be
optional for Primary Pegging Interest,18
but would be required for Market
Pegging Interest.19 As proposed, when
applying an offset value to Primary
Pegging Interest, the adjusted price for
buy (sell) pegging interest would be the
PBB (PBO) minus (plus) the offset value.
When applying the offset value to
Market Pegging Interest, the adjusted
price for buy (sell) pegging interest
would be the PBO (PBB) minus (plus)
the offset value.20 If the offset value of
pegging interest to buy (sell) would
result in a price that is greater than
$1.00 in an increment smaller than
$0.01, the price of the pegging interest
to buy (sell) would be rounded down
(up) to the nearest permissible
minimum price variation, consistent
with Rule 61—Equities.21
15 See proposed paragraph (d) of the pegging
interest text of Rule 13.
16 See, e.g., Nasdaq Rule 4751(f) and BATS Rule
11.9(c)(8).
17 See proposed paragraph (b) of the pegging
interest text of Rule 13.
18 See proposed paragraph (c)(4) of the pegging
interest text of Rule 13.
19 See proposed paragraph (d)(4) of the pegging
interest text of Rule 13. Because an offset value
would be required for Market Pegging Interest,
Exchange systems would reject Market Pegging
Interest that does not include an offset value.
20 For example, if the PBB is $2.00 and the PBO
is $2.05, pegging interest to buy that is set to peg
to the same side of the market with an offset of
$0.01 would be priced at $1.99 (i.e., $2.00 PBB
minus $0.01 offset). Pegging interest to sell that is
set to peg to the same side of the market with an
offset of $0.01 would be priced at $2.06 (i.e., $2.05
PBO plus $0.01 offset). In contrast, pegging interest
to buy that is set to peg to the opposite side of the
market with an offset of $0.05 would be priced at
$2.00 (i.e., $2.05 PBO minus $0.05 offset). Pegging
interest to sell that is set to peg to the opposite side
of the market with an offset of $0.05 would be
priced at $2.05 (i.e., $2.00 PBB plus $0.05 offset).
21 Continuing with the example above, if the PBB
is $2.00 and the PBO is $2.05, pegging interest to
buy that is set to peg to the same side of the market
with an offset of $0.015 would be priced at $1.98
(i.e., $2.00 PBB minus $0.015 offset equals $1.985
and rounded down to nearest permissible minimum
price variation). Pegging interest to sell that is set
to peg to the same side of the market with an offset
of $0.015 it would be priced at $2.07 (i.e., $2.05
PBO plus $0.015 offset equals $2.065 and rounded
up to nearest permissible minimum price variation).
E:\FR\FM\04DEN1.SGM
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Federal Register / Vol. 77, No. 233 / Tuesday, December 4, 2012 / Notices
The Exchange believes that adding
Market Pegging functionality would
enable pegging interest to potentially
establish a better price than is currently
available, thereby reducing the size of
the spread for a security. For example,
if the PBBO in a security is $10.05–
$10.07, and the buy pegging interest is
pegged to the PBO with an offset of
$0.01, the buy pegging interest would
post on the Exchange as a $10.06 bid,
which would be a new PBB that reduces
the spread and creates a tighter market.
The Exchange notes that unlike Primary
Pegging Interest, which currently cannot
establish or sustain the PBBO as a result
of pegging, Market Pegging Interest can
establish or sustain a PBB or PBO.
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Proposed Specific Rule Changes
As noted above, the Exchange
proposes to delete Rule 70.26 in its
entirety and move the text that provides
for pegging to Rule 13. Because pegging
interest is being expanded to include
DMM interest, the Exchange believes
that Rule 70, which concerns Floor
broker interest only, is no longer the
proper rule within which to provide for
pegging. Rather, because pegging is a
type of modifier, the Exchange believes
it is more appropriate to provide for
pegging within Rule 13 as a defined
term referred to as ‘‘pegging interest.’’
The Exchange notes that Rule 13 is
currently titled ‘‘Definition of Orders.’’
However, Rule 13 currently provides for
orders and order modifiers.22
Accordingly, the Exchange proposes to
change the title of Rule 13 to ‘‘Orders
and Modifiers.’’
As proposed, the new pegging interest
section of Rule 13 would replace the
existing text of Rule 70.26, with
numerous non-substantive changes, as
well as add new rule text to incorporate
the elements proposed above, i.e.,
permitting DMM interest to be set as
pegging interest, changing NBBO to
PBBO, adding the Market Pegging
Interest functionality, and providing for
an offset value to be specified. The
Exchange believes that the proposed
changes to the rule text, as incorporated
in Rule 13, result in a more streamlined
rule that eliminates redundancy in the
current rule while also incorporating the
In contrast, pegging interest to buy that is set to peg
to the opposite side of the market with an offset of
$0.015 would be priced at $2.03 (i.e., $2.05 PBO
minus $0.015 offset equals $2.035 and rounded
down to nearest permissible minimum price
variation). Pegging interest to sell that is set to peg
to the opposite side of the market with an offset of
$0.015 would be priced at $2.02 (i.e., $2.00 PBB
plus $0.015 offset equals $2.015 and rounded up to
nearest permissible minimum price variation).
22 For example, a sell ‘‘plus’’ or buy ‘‘minus’’
order is not an order type per se, but is instead an
order modifier.
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new elements in a logical and
comprehensive manner. For example,
rather than referring to ‘‘pegging eQuotes’’ or ‘‘pegging d-Quotes’’
throughout the rule, the Exchange
proposes to use the term ‘‘pegging
interest,’’ unless the rule is specific only
to a particular type of interest. In
addition, the Exchange proposes to
combine concepts that are currently
addressed separately or in multiple
locations within Rule 70.26, but that can
be logically combined into streamlined
rule text (e.g., the text discussing the
permissible price range and how it
impacts pegging).
The following sets forth the proposed
rule changes (all references to proposed
paragraphs are to the proposed new
pegging interest text of Rule 13):
• Proposed paragraph (a) provides
that ‘‘pegging interest’’ means
displayable or non-displayable interest
to buy or sell at a price set to track the
PBB or PBO as the PBBO changes. The
proposed rule text would replace the
general description of pegging in Rule
70.26(i), with certain changes. As
discussed above, from a substantive
perspective, the Exchange proposes to
replace references to the NBB, NBO, and
NBBO with references to the PBB, PBO,
and PBBO. The Exchange proposes to
delete the reference to the limit price of
an e-Quote as that concept will now be
part of proposed paragraph (a)(4),
relating to the specified price range of
pegging interest. In addition, the
Exchange proposes a clarifying rule
change to add that pegging interest may
be for displayable or non-displayable
interest. The current pegging
functionality is available for all eQuotes and d-Quotes, whether intended
for display or not, and the Exchange
proposes a clarifying rule change to
make clear that pegging interest is
available for both displayable and nondisplayable interest.
• Proposed paragraph (a)(1) provides
that pegging interest can be an e-Quote,
d-Quote, or DMM Interest. The
proposed rule text would replace
without any substantive change rule text
from Rule 70.26(i) referencing e-Quotes
and Rule 70.26(ii), which references dQuotes. The proposal to add DMM
interest is new rule text, as described in
more detail above.
• Proposed paragraph (a)(1)(A)
provides that pegging interest may not
include a sell ‘‘plus’’ or buy ‘‘minus’’
instruction, which replaces without any
substantive change the current text in
Rule 70.26(i) that a tick-sensitive eQuote is not permitted to peg. A ‘‘tick
sensitive’’ e-Quote is one that includes
a sell ‘‘plus’’ or buy ‘‘minus’’
instruction, which are existing defined
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terms in Rule 13. Therefore, the
Exchange proposes to use the sell
‘‘plus’’ or buy ‘‘minus’’ terminology
instead of the current ‘‘tick sensitive’’
language, which is not a defined term in
Exchange rules.23
• Proposed paragraph (a)(1)(B) would
replace without any substantive change
the second sentence of Rule 70.26(iii),
which provides that Exchange systems
shall reject a pegging e-Quote or dQuote that is entered 10 seconds or less
before the scheduled close of trading.24
The Exchange notes that the rationale
for excluding pegging e-Quotes and dQuotes 10 seconds prior to the close is
to assist the DMM with arranging the
close, and because the DMM is aware of
DMM interest, this prohibition is not
necessary for DMM interest. The
Exchange notes that this does not confer
any additional benefit to the DMM
because the DMM may be required to
supply additional liquidity as needed as
part of the closing transaction in order
to meet the obligation set forth in Rule
104(a)(3)—Equities to facilitate the close
of trading for each of the securities in
which the DMM is registered.
• Proposed paragraph (a)(1)(C) would
replace without any substantive change
Rule 70.26(xii) by specifying that
discretionary instructions associated
with a pegging d-Quote would move as
the d-Quote pegs to the PBBO, subject
to any price range and limit price that
may be specified. The Exchange does
not propose to include the reference to
e-Quote that is currently in Rule
70.26(xii) because a d-Quote is an eQuote with discretionary instructions.25
Also, the Exchange proposes to refer to
the specified price range instead of the
current reference to floor or ceiling price
in Rule 70.26(xii). Finally, the Exchange
proposes to include a reference to the
pegging interest’s limit price. The
Exchange notes that the textual
differences between proposed paragraph
(a)(1)(C) and current Rule 70.26(xii) do
not make any substantive changes to the
rule.
• Proposed paragraph (a)(2) would
replace without any substantive change
the first sentence of Rule 70.26(iii), by
specifying that pegging is only active
when auto-quoting is active.
• Proposed paragraph (a)(3) would
replace the rule text in Rule 70.26(vii)
by specifying that pegging interest shall
peg to a price that is based on either (A)
23 This change does not alter the meaning of the
current rule text.
24 The current rule text only refers to e-Quotes,
but since d-Quotes are a subset of e-Quotes,
Exchange systems currently reject both pegging eQuotes and d-Quotes that are entered 10 seconds or
less before the scheduled close of trading.
25 See supra note 5.
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a protected bid or offer, which may be
available on the Exchange or an away
market, or (B) interest that establishes a
price on the Exchange, which may
include Primary or Market Pegging
Interest that has established a price as
a result of an offset value. The current
rule provides that pegging interest only
pegs to other non-pegging interest,
which may be available on the Exchange
or a protected bid or offer on an away
market. The proposed rule text modifies
the existing rule text to take into
consideration the possibility that either
Primary Pegging Interest or Market
Pegging Interest may establish a price on
the Exchange and therefore pegging
interest may peg to other pegging
interest.26 The circumstances where
pegging interest may establish a price is
as a result of the proposed new offset
function, which is why the Exchange
proposes to change this aspect of the
rule.
• Example 1: Assume that the
Exchange best bid and offer, which is
also the PBBO, is $10.05—$10.07, and
there is buy Market Pegging Interest
pegged to the PBO with an offset value
of $0.01, such Market Pegging Interest
would establish a new PBB and
Exchange best bid of $10.06. Because
the Market Pegging Interest established
a new PBB, Primary Pegging Interest to
buy could peg to that $10.06 price and
therefore would be pegging to pegging
interest.
• Example 2: Assume again that the
Exchange best bid or offer, which is also
the PBBO, is $10.05—$10.07, with 100
shares at the bid, and there is buy
Primary Pegging Interest ‘‘A’’ of 500
shares with an offset of $0.01, which
would be at a priced at $10.04, and that
is the only Exchange interest priced at
$10.04. Assume further there is buy
Primary Pegging Interest ‘‘B’’ that will
only peg if there is minimum same-side
volume of 500 shares.27 Because the
Exchange best bid is only 100 shares,
Primary Pegging Interest ‘‘B’’ would peg
to the price that meets the minimum
size requirement, which in this case
would be the price established by the
Primary Pegging Interest ‘‘A’’ at $10.04.
In this scenario, because of the offset
value associated with Primary Pegging
Interest ‘‘A’’, that interest has
established a price and as a result,
Primary Pegging Interest ‘‘B’’ is pegging
to pegging interest.
• Proposed paragraph (a)(4) provides
that pegging interest shall peg only
within the specified price range for the
26 See proposed paragraph (d)(2) of the pegging
interest text of Rule 13.
27 See proposed paragraph (c)(5) of the pegging
interest text of Rule 13.
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pegging interest. The Exchange notes
that while the proposed language is new
rule text, the proposed paragraph does
not make any substantive changes to the
current rule, but rather consolidates rule
text from separate parts of the existing
rule in a streamlined format. In
particular, the proposed rule would
replace the remaining text in Rules
70.26(i) (that pegging interest must be
within the e-Quote’s limit price),
70.26(vii) (that pegging interest pegs to
interest within the price range selected
by the Floor broker), and 70.26(ix),
including (A) through (D) of that
subsection, by replacing the detailed
‘‘price range’’ discussion within current
Rule 70.26(ix) by specifying instead that
pegging interest shall peg only within
the specified price range for the pegging
interest. For example, Rule 70.26(ix)(D)
currently specifies that the price to
which pegging interest pegs cannot be
higher (lower) than the limit price of the
buy (sell) pegging interest, which is also
currently covered in Rule 70.26(i).28 In
this regard, the Exchange proposes not
to include the text of current Rule
70.26(ix)(A), (B) and (C), which refer to
the ‘‘quote price,’’ ‘‘ceiling price’’ and
‘‘floor price,’’ respectively, of pegging
interest. The Exchange does not
consider these terms necessary and
believes that proposed paragraph (a)(4)
is clearer and more streamlined without
their inclusion.29
• Proposed paragraph (a)(4)(A)
specifies that if the PBBO, combined
with any offset value, is not within the
specified price range, the pegging
interest would instead peg to the next
available best-priced interest that is
within the specified price range. Other
than addressing how the offset value
impacts the pegging interest, the
reference to NBBO changing to PBBO,
replacing the phrase ‘‘the price range
selected by the Floor broker’’ with ‘‘the
specified price range,’’ this text is
substantively the same and replaces
current Rule 70.26(x)(B).30
28 This addition would not result in a substantive
change to pegging. Also, the Exchange notes that
Rule 70.26(ix) currently says that the price may not
be ‘‘inconsistent with’’ the limit price. The
Exchange believes that using ’’specified price
range’’ would be clearer than the current
‘‘inconsistent with’’ text because the specified price
range concept is broad enough to include the limit
price of the order as well as any other pricing
instructions that may be included with the pegging
interest.
29 The Exchange considers it inherent that a price
‘‘range’’ will have upper and lower bounds and
therefore does not consider these terms necessary.
30 The Exchange notes that Rule 70.26(x)(B)
provides that pegging interest will ‘‘join’’ the
interest to which it pegs. The Exchange believes
that using ‘‘peg to’’ terminology would be more
precise than the current ‘‘join’’ language.
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71857
• Proposed paragraph (a)(4)(B) would
replace without any substantive change
the current Rule 70.26(xii)(A), (B) and
(C) by specifying that pegging interest
that has reached its specified price
range will remain at that price if the
PBBO goes beyond such price range and
that if the PBBO returns to a price
within the specified price range, it shall
resume pegging. The Exchange notes
that this text is substantively the same
as in current Rule 70.26(xii)(A), (B), and
(C), albeit in a streamlined format. The
Exchange further notes that the
proposed rule text replaces without any
substantive change concepts set forth in
Rule 70.26(x) (that pegging interest will
peg to the NBBO so long as it is in the
specified price range) and 70.26(xi)
(pegging interest without a specified
price range will peg based on the limit
price of the order).
• Proposed paragraph (b) defines the
‘‘offset value,’’ as discussed in more
detail above.
• Proposed paragraph (c) defines the
term ‘‘Primary Pegging Interest,’’ as
discussed in more detail above.
• Proposed paragraph (c)(1) would
replace Rule 70.26(x)(A) by specifying
that Primary Pegging Interest shall not
peg to a price that is locking or crossing
the Exchange best offer (bid), but
instead would peg to the next available
best-priced interest that would not lock
or cross the Exchange best offer (bid). In
moving the text from Rule 70.26(x)(A),
the Exchange proposes two minor
changes: to change the reference from
the NBB (NBO) to the term ‘‘price’’ and
to delete the term ‘‘non-pegging
interest.’’ The Exchange proposes these
modifications because, as discussed
above in connection with proposed
paragraph (a)(3), there may be
circumstances where because of the
offset value, pegging interest may peg to
a price established by pegging interest,
which in some cases, may not be the
PBBO.
• Proposed paragraph (c)(2) would
replace without substantive change
Rules 70.26(v), (viii), (viii)(A), and
(viii)(B) by specifying that Primary
Pegging Interest will not establish a PBB
(PBO) or sustain a PBB (PBO) as a result
of pegging.31
31 The Exchange believes that the proposed rule
text ‘‘as a result of pegging’’ clarifies that the only
time that Primary Pegging Interest will not establish
or sustain the PBBO is if it is following its pegging
instructions. When a Primary Pegging Interest is at
a price because it is the limit price of the Primary
Pegging Interest, such interest will not have
established or sustained the PBBO ‘‘as a result of
pegging’’ and the Exchange believes that it is no
longer necessary to specifically state that pegging
interest at its limit price may remain displayed at
the PBBO, as currently set forth in Rules
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• Proposed paragraph (c)(3) would
replace without any substantive change
Rule 70.26(vi) by specifying that
Primary Pegging Interest may establish
an Exchange best bid or offer. The
Exchange proposes to replace the rule
text set forth in Rule 70.26(vi) that
pegging interest that sets the Exchange
best bid or offer is entitled to priority by
adding to Rule 72—Equities that
pegging interest may have priority
interest.32
• Proposed paragraph (c)(4) provides
that Primary Pegging Interest may
include an offset value for which the
adjusted price for buy (sell) pegging
interest shall be the PBB (PBO) minus
(plus) the offset value, which is new
rule text, as discussed in greater detail
above.
• Proposed paragraph (c)(5) would
replace without any substantive change
Rule 70.26(xiii) by specifying that
Primary Pegging Interest may be
designated with a minimum size of
same-side volume to which such
pegging interest shall peg. Other than
the references to NBB and NBO
changing to PBB and PBO, respectively,
this text is substantively the same as in
current Rule 70.26(xiii).
• Proposed paragraph (d) provides for
new rule text related to the new Market
Pegging Interest, which is discussed in
greater detail above. More specifically,
proposed paragraph (d)(1) would
provide that Market Pegging Interest
shall not peg to a price that is locking
or crossing the Exchange best offer (bid),
but instead shall peg to a price one
minimum price variation lower (higher)
than the Exchange best bid or offer. This
proposed functionality is intended to
prevent Market Pegging Interest from
locking or crossing the Exchange best
bid or offer. 33 Proposed paragraph
70.26(viii)(A) and (B). In addition, the Exchange
proposes not to replace the statement in Rule
70.26(v) that pegging is reactive because that
concept was intended to mean that pegging interest
cannot create a PBB or PBO. However, because
proposed Market Pegging Interest can establish a
new PBB or PBO, the limitation to ‘‘reactive’’ is no
longer relevant and the Exchange believes that the
proposed rule text that Primary Pegging Interest
cannot establish or sustain the PBBO obviates the
need to separately say that pegging is reactive. The
Exchange also proposes to delete the term ‘‘new’’
as being redundant of the concept of establishing
a PBB or PBO.
32 The Exchange proposes to further amend Rule
72—Equities to change a reference to current Rule
70.26 to the proposed new pegging interest text
within Rule 13 and change a reference to e-Quotes
to ‘‘pegging interest,’’ generally.
33 A potential scenario when Market Pegging
Interest could lock or cross the Exchange best bid
or offer could be if a liquidity replenishment point
(‘‘LRP’’) is reached pursuant to Rule 1000—
Equities, and automatic executions on one side of
the market are suspended at the Exchange. In such
scenario, assume that the Exchange best bid is
$10.04, an LRP is reached and the Exchange is slow
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(d)(2) would provide that Market
Pegging Interest to buy (sell) may
establish or sustain a PBB (PBO).
Proposed paragraph (d)(3) would mirror
paragraph (c)(3) by specifying that
Market Pegging Interest may establish
an Exchange best bid or offer. Finally,
proposed paragraph (d)(4), would
require Market Pegging Interest to
include an offset value, as discussed in
more detail above.
The Exchange proposes to delete
without replacing Rule 70.26(iv), which
provides that pegging interest trades on
parity with other interest at the NBBO
after interest entitled to priority is
executed. The Exchange believes that
this text is superfluous, in that pegging
interest is not treated differently than
non-pegging interest for purposes of
determining parity, as set forth in Rule
72—Equities, and Rule 72—Equities
governs the allocation of executions and
priority.34 The Exchange therefore is not
proposing to address this concept in
new pegging interest section of Rule 13.
The Exchange further proposes to add
new subsection (xii) to Rule 72(c)—
Equities to codify how Exchange
systems treat modifications to orders for
purposes of time sequencing.
Specifically, if an order is modified
solely to reduce the size of the order,
Exchange systems accept such a
modification without changing the time
stamp of original order entry.35
Accordingly, the Exchange proposes to
codify in Rule 72(c)(xii)—Equities that
an order that is modified to reduce the
size of the order shall retain the time
stamp of original order entry.
Currently, any other modification to
an order, including increasing the size
of the order or changing the price of the
on the buy side, a new PBB is published at $10.03,
and there is Market Pegging Interest to sell with a
$0.01 offset. Because the Market Pegging Interest to
sell would peg to the PBB priced at $10.03, with
a penny offset, and lock the Exchange’s best bid at
$10.04, the Exchange proposes to reprice the Market
Pegging Interest to sell to $10.05 so that it does not
lock the Exchange best bid.
34 The Exchange proposes to amend Rule
72(a)(i)—Equities and (ii)—Equities to specify that
displayable interest may include pegging interest.
Because pegging interest would be included as
‘‘displayable interest,’’ the description of allocation
of orders would not include pegging interest with
any reference to displayable interest. The Exchange
also proposes conforming edits to Rule
72(a)(ii)(G)—Equities to replace references to Rule
70.26 and e-Quotes with references to Rule 13 and
‘‘pegging interest.’’
35 The manner by which a member organization
may reduce the size of an order without impacting
the time stamp is to submit a partial cancellation
message. For example, if a member organization has
entered an order for 400 shares to buy at $10.00 and
wants to reduce it to 200 shares to buy at $10.00,
the member organization would submit a cancel
message for 200 shares to buy at $10.00, which
would leave the remaining 200 shares of the buy
order with the time stamp of original order entry.
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order, results in the order receiving a
new time stamp. Accordingly, the
Exchange proposes to codify that any
other modification of an order, such as
increasing the size or changing the price
of an order, shall receive a new time
stamp. The Exchange notes that the
proposed rule language covers any
modification of an order, whether
directed by a member organization that
entered the order or entered by
Exchange systems pursuant to rule.36
For example, Exchange systems may reprice an order if the interest is being repriced because it is pegging interest,
pursuant to Rule 13, or because it is a
short sale order during a Short Sale
Period, pursuant to Rule 440B(e)—
Equities.
The proposed changes to Rule
72(c)(xii)—Equities will be effective on
the operative date of this filing. The
Exchange will announce the
implementation date of the proposed
rule change as it relates to pegging
interest changes in a Trader Update to
be published no later than 90 days
following publication of the notice in
the Federal Register. The
implementation date will be no later
than 90 days following publication of
the Trader Update announcing
publication of the notice in the Federal
Register.
2. Statutory Basis
The proposed rule change is
consistent with Section 6(b) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),37 in general, and furthers the
objectives of Section 6(b)(5),38 in
particular, because it is designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in facilitating
transactions in securities, to remove
impediments to, and perfect the
36 To change the price of an order or increase the
size of an order, a member organization would need
to enter a ‘‘cancel/replace’’ message, which serves
to cancel the original order and replace it with a
new order. The replacement order receives a new
time stamp. The ‘‘cancel/replace’’ message can also
be used to change the order marking under
Regulation SHO of a pending sell order (i.e., from
‘‘long’’ to ‘‘short’’). For example, if a seller increases
the size of a pending sell order, the resulting
modified order is considered a new order and must
be marked by the broker-dealer to reflect the seller’s
net position at the time of order modification
pursuant to Rule 200 of Regulation SHO. The
Exchange notes that if a member organization uses
a ‘‘cancel/replace’’ message to reduce the size of the
order, rather than a partial cancellation, because the
‘‘cancel/replace’’ message cancels the original order
in its entirety, the replacement order would receive
a new time stamp, even if the replacement order
represents only a reduction in size of the order.
37 15 U.S.C. 78f(b).
38 15 U.S.C. 78f(b)(5).
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mechanism of, a free and open market
and a national market system and, in
general, to protect investors and the
public interest. The proposed rule
change is also not designed to permit
unfair discrimination.
The Exchange believes that expanding
the pegging functionality to DMM
interest is consistent with the Act
because it will remove impediments to,
and perfect the mechanism of a free and
open market and national market system
and, in general, protect investors and
the public interest by providing a
mechanism for DMMs to assist them
with meeting their market-making
obligations to maintain quoting interest
at or near the NBBO. The Exchange
notes that two other markets have been
approved to offer pegging functionality
expressly for market markers for a
similar purpose.39 The Exchange’s
proposal differs because as proposed,
the DMM would be able to select
whether to enter Primary Pegging
Interest or Market Pegging Interest, and
would be able to select the offset value,
thereby providing the DMM with
flexibility to track the PBBO at a tighter
ratio than contemplated by the rules of
other exchanges that offer a market
maker pegging functionality.
The Exchange further notes that
expanding pegging functionality to
DMM interest is not designed to permit
unfair discrimination. The Exchange
believes that expanding the
functionality to DMMs is consistent
with the existing approved rules, as well
as consistent with the Act because the
expansion is narrowly tailored to offer
the functionality to a class of
participants that has an affirmative
obligation to maintain a quote at or near
the NBBO.40 The Exchange notes that
another class of member organizations,
Supplemental Liquidity Providers
(‘‘SLP’’), provide liquidity to the
Exchange, and certain SLPs can register
as market makers at the Exchange.41
While the Market Pegging Interest
functionality will not be available to
SLPs at this time, the Exchange does not
believe that this is discriminatory
because there is no requirement that a
security be assigned to an SLP, and a
member organization’s participation in
the SLP program is voluntary. By
contrast, all securities traded at the
Exchange must be assigned to a DMM,
and a DMM unit cannot withdraw from
registration in securities assigned to it.
As discussed above, rather than
adding the concepts for the Market Peg
functionality, the offset value, and
supra note 9.
Rule 104(a)(1)(A)—Equities.
41 See Rule 107B—Equities.
expansion to DMM interest in Rule
70.26, the Exchange proposes to
restructure the text of Rule 70.26 and
move it to Rule 13. The Exchange
believes that this will more
appropriately address how pegging
operates and consolidates rule text
relating to orders and modifiers in
single location in the rules. In this
regard, the proposal to change
references to NBB, NBO and NBBO to
PBB, PBO and PBBO, respectively,
would add greater specificity regarding
the interest to which pegging interest
may peg. The Exchange also believes
that these changes are more consistent
with the requirements of the Regulation
NMS Order Protection Rule 42 and the
related definition of protected bid and
offer, as set forth in Regulation NMS
Rule 600(b)(57).43 As noted above,
Exchange systems monitor the PBBO for
purposes of the Order Protection Rule
and, in this respect, Exchange systems
also move pegging interest based on
moves to the PBBO, not the NBBO.44
The Exchange believes that this
increased specificity would perfect the
mechanism of a free and open market
and a national market system and, in
general, would protect investors and the
public interest.
Additionally, use of the proposed
Market Pegging Interest with an offset
value, as well as the proposed offset
functionality for Primary Pegging
Interest, would provide greater
flexibility with respect to the price to
which pegging interest may peg and
would encourage tighter spreads that
move as the PBBO moves. The Exchange
believes that this would remove
impediments to, and perfect the
mechanism of, a free and open market
and a national market system.
Additionally, requiring an offset value
to be specified for pegging interest that
pegs to the opposite side of the market
would prevent fraudulent and
manipulative acts and practices,
promote just and equitable principles of
trade, and foster cooperation and
coordination with persons engaged in
facilitating transactions in securities by
preventing pegging interest from locking
or crossing the opposite side of the
market. The Exchange further believes
that the proposal fosters competition as
other markets already offer similar
functionality.
The Exchange also believes that the
proposed rule change would promote
clarity and transparency by adding
greater specificity with respect to the
interest to which pegging interest may
39 See
42 See
40 See
43 See
VerDate Mar<15>2010
17:31 Dec 03, 2012
supra note 10.
supra note 11.
44 See supra note 12.
Jkt 229001
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71859
peg. In this regard, the proposed
realignment and consolidation of
existing rule text would result in a
clearer rule, which would benefit all
member organizations as well as others
that read the rule.
The Exchange further believes that the
proposed rule change would promote
clarity and transparency by removing
superfluous rule text that merely
describes the manner in which all
trading interest is treated, regardless of
whether it is pegging interest. For
example, removing the text within
current Rule 70.26(iv), which provides
that pegging interest trades on parity
with non-pegging interest, would
eliminate potential confusion regarding
whether pegging interest is treated
differently than non-pegging interest
with respect to determining parity.
Finally, the Exchange believes that
the proposed change to Rule 72-Equities
to codify which modifications to an
order that Exchange systems accept and
time stamp treatment for such modified
orders would promote clarity and
transparency and therefore remove
impediments to, and perfect the
mechanism of, a free and open market
and a national market system because
the proposed rule change makes clear
when a modification to an order results
in a new time stamp for that order.
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.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
does not (i) significantly affect the
protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 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,
provided that the self-regulatory
organization has given the Commission
written notice of its intent to file the
proposed rule change at least five
business days prior to the date of filing
E:\FR\FM\04DEN1.SGM
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71860
Federal Register / Vol. 77, No. 233 / Tuesday, December 4, 2012 / Notices
of the proposed rule change or such
shorter time as designated by the
Commission, the proposed rule change
has become effective pursuant to
Section 19(b)(3)(A) of the Act 45 and
Rule 19b-4(f)(6) thereunder.46
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:
mstockstill on DSK4VPTVN1PROD with
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–NYSEMKT–2012–67 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–NYSEMKT–2012–67. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
45 15
46 17
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6).
VerDate Mar<15>2010
17:31 Dec 03, 2012
Jkt 229001
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
NYSEMKT–2012–67 and should be
submitted on or before December 26,
2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.47
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–29179 Filed 12–3–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68312; File No. SR–NSX–
2012–015]
Self-Regulatory Organizations;
National Stock Exchange, Inc.; Notice
of Designation of Longer Period for
Commission Action on a Proposed
Rule Change Relating to Adoption of
Listing Standards for Compensation
Committees and Advisors as Required
by Rule 10C–1
November 28, 2012.
I. Introduction
On September 26, 2012, National
Stock Exchange, Inc. (‘‘NSX’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) 1 of the Securities
Exchange Act of 1934 (‘‘Act’’),2 and
Rule 19b–4 thereunder,3 proposed a rule
change to amend certain of its rules
relating to listing standards for
compensation committees and advisors.
The proposed rule change was
published for comment in the Federal
Register on October 17, 2012.4 The
Commission received no comment
letters on this proposal.5
47 17
C.F.R. 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
4 See Securities Exchange Act Release No. 68039
(October 10, 2012), 77 FR 63914 (October 17, 2012)
(SR–NSX–2012–15).
5 The Commission notes, however, that fourteen
comment letters were received in total concerning
similar rule changes proposed by other national
securities exchanges. See Securities Exchange Act
Release No. 68313, (November 28, 2012) (Notice of
Designation of Longer Period for Commission
Action on Proposed Rule Changes Relating to
Adoption of Listing Standards for Compensation
1 15
PO 00000
Frm 00089
Fmt 4703
Sfmt 4703
Section 19(b)(2) of the Act 6 provides
that within 45 days of the publication of
notice of the filing of a proposed rule
change, or within such longer period up
to 90 days as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or as to which the
self-regulatory organization consents,
the Commission shall either approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether the
proposed rule change should be
disapproved. The 45th day from the
publication of notice of filing of this
proposed rule change is December 1,
2012. The Commission is extending the
45-day time period for Commission
action on the proposed rule change.
The Commission finds it appropriate
to designate a longer period within
which to take action on this proposed
rule change so that it has sufficient time
to consider this proposed rule change,
which would revise the rules relating to
compensation committee and
compensation advisor requirements.
Accordingly, the Commission,
pursuant to Section 19(b)(2) of the Act,7
designates January 15, 2013, as the date
by which the Commission should either
approve or disapprove or institute
proceedings to determine whether to
disapprove this proposed rule change.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.8
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–29241 Filed 12–3–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68310; File No. SR–EDGX–
2012–47]
Self-Regulatory Organizations; EDGX
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend EDGX Rule
15.1(a) and (c)
November 28, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
Committees and Advisors as Required by Rule 10C–
1 for BATS Exchange, Inc., NASDAQ OMX BX, Inc.
Chicago Board Options Exchange, Inc., The
NASDAQ Stock Market LLC, New York Stock
Exchange LLC, NYSE Arca LLC, and NYSE MKT
LLC).
6 15 U.S.C. 78s(b)(2).
7 15 U.S.C. 78s(b)(2).
8 17 CFR 200.30–3(a)(31).
E:\FR\FM\04DEN1.SGM
04DEN1
]]>Agencies
[Federal Register Volume 77, Number 233 (Tuesday, December 4, 2012)]
[Notices]
[Pages 71853-71860]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-29179]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68305; File No. SR-NYSEMKT-2012-67]
Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and
Immediate Effectiveness of Proposed Rule Change Moving the Rule Text
That Provides for Pegging on the Exchange From Supplementary Material
.26 of Rule 70--Equities to Rule 13--Equities and Amending Such Text to
(i) Permit Designated Market Maker Interest To Be Set as Pegging
Interest; (ii) Change References From National Best Bid, National Best
Offer and National Best Bid or Offer to Best Protected Bid, Best
Protected Offer and Best Protected Bid or Offer, Respectively; (iii)
Permit Pegging Interest To Peg to the Opposite Side of the Market; and
(iv) Provide for An Offset Value To Be Specified for Pegging Interest
November 28, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on November 14, 2012, NYSE MKT LLC (the ``Exchange'' or ``NYSE
MKT'') filed with
[[Page 71854]]
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 Exchange. The Exchange filed the proposal as
a ``non-controversial'' proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to move the rule text that provides for
pegging on the Exchange from Supplementary Material .26 of Rule 70--
Equities to Rule 13--Equities and amend such text to (i) permit
Designated Market Maker (``DMM'') interest to be set as pegging
interest; (ii) change references from national best bid (``NBB''),
national best offer (``NBO'') and national best bid or offer (``NBBO'')
to best protected bid (``PBB''), best protected offer (``PBO'') and
best protected bid or offer (``PBBO''), respectively; (iii) permit
pegging interest to peg to the opposite side of the market; and (iv)
provide for an offset value to be specified for pegging interest. 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 proposes to move the rule text that provides for
pegging on the Exchange from Rule 70.26--Equities (``Rule 70.26'')
(Pegging for d-Quotes and e-Quotes) \5\ to Rule 13--Equities (``Rule
13'') and amend such text to (i) permit DMM interest to be set as
pegging interest; (ii) change references from NBB, NBO and NBBO to PBB,
PBO and PBBO, respectively; (iii) permit pegging interest to peg to the
opposite side of the market; and (iv) provide for an offset value to be
specified for pegging interest. In moving this text to Rule 13, the
Exchange proposes to make several other changes to the rule text, so
that the proposed substantive changes described above can be
incorporated in a logical and transparent manner and to streamline the
rule in a non-substantive manner.
---------------------------------------------------------------------------
\5\ E-Quotes are Floor broker agency interest files. D-Quotes
are e-Quotes for which a Floor broker has entered discretionary
instructions as to size and/or price.
---------------------------------------------------------------------------
Background
The New York Stock Exchange LLC (``NYSE'') adopted NYSE Rule 70.26
as part of its Hybrid Market initiative to provide the ability for
Floor brokers to add pegging instructions to e-Quotes.\6\ Since its
original adoption, the pegging functionality has been amended a number
of times to, among other things, include d-Quotes and change the
pegging functionality from pegging to the Exchange best bid or offer to
pegging to the NBBO.\7\
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 54577 (October 5,
2006), 71 FR 60208 (October 12, 2006) (SR-NYSE-2006-36). In 2008,
the Exchange adopted the NYSE's equity trading rules, including NYSE
Rules 70.26 and 13. See Securities Exchange Act Release No. 58705
(October 1, 2008), 73 FR 58995 (October 8, 2008) (SR-Amex-2008-63).
\7\ See Securities Exchange Act Release No. 61081 (December 1,
2009), 74 FR 64105 (December 7, 2009) (SR-NYSEAmex-2009-76).
---------------------------------------------------------------------------
As set forth in Rule 70.26(i), e-Quotes, other than tick-sensitive
e-Quotes, may be set to peg to the NBB (for pegging interest to buy) or
to the NBO (for pegging interest to sell) as the NBBO changes, so long
as the NBBO is at or within the limit price. Rule 70.26(ii) specifies
that d-Quotes may also employ pegging. Rule 70.26(iii) provides that
pegging is active only when auto-quoting is active and that Exchange
systems will reject e-Quotes that employ pegging that are entered 10
seconds or less before the scheduled close of trading. Rule 70.26(iv)
provides that pegging e-Quotes and d-Quotes trade on parity with other
interest at the NBBO after interest entitled to priority is executed,
and Rule 70.26(vi) provides that a pegging e-Quote or d-Quote that sets
the Exchange best bid or offer is entitled to priority.
Rule 70.26(v) provides that pegging is reactive, and that an e-
Quote or d-Quote will not establish the NBBO as a result of pegging.
Rule 70.26(vii) provides that pegging e-Quotes will only peg to non-
pegging interest that is within the pegging range selected by the Floor
broker, and that such non-pegging interest may be available on the
Exchange or be a protected bid or offer on an away market. Rule
70.26(viii) provides that an e-Quote or d-Quote will not sustain the
NBBO as a result of pegging if there is no other non-pegged interest at
that price, and such price is not the e-Quote's or d-Quote's limit
price. Rule 70.26(viii)(A) and (B) provide that if a buy (sell) pegging
e-Quote reaches its lowest (highest) quotable price and it is the NBB
(NBO), such interest will remain displayed at the NBB (NBO) even if all
other interest at that price cancels. Rule 70.26(ix) further provides
detail of definitions of the price range that a Floor broker may
designate for pegging e-Quotes, which is a price range that a Floor
broker can add that is in addition to the limit price for the pegging
e-Quote, provided that it is not inconsistent with the order's limit
price.
Rule 70.26(x) provides that pegging interest will join the NBB or
NBO provided that it is within the e-Quote's pegging range. As noted in
Rule 70.26(x)(A), a pegging e-Quote will not join the NBBO if it is
locking or crossing the Exchange best bid or offer, in which case the
pegging e-Quote would peg to the next available best-priced non-pegging
interest. Rule 70.26(x)(B) further provides that if the NBBO is not
within the price range specified for the pegging e-Quote, it will peg
to the next available best-priced non-pegging interest within the price
range selected by the Floor broker.
Rule 70.26(xi) also provides that if a pegging range has not been
included, the pegging e-Quote will peg to the NBBO so long as the NBBO
is within the limit price of the e-Quote. Rule 70.26(xii) provides that
the discretionary price range of a d-Quote will move with a pegging d-
Quote, subject to any floor or ceiling set by the Floor broker. Rule
70.26(xii)(A)-(C) then set forth that if the NBBO moves out of the
range of the pegging e-Quote, the pegging e-Quote will remain at the
best price to which there may be non-pegging interest to peg, and that
once the NBBO returns to within the price range designated for the
pegging e-Quote, it will once again peg to the NBBO. Finally, Rule
70.26(xiii) provides that a Floor broker may establish a minimum size
of same-side volume to which the e-Quote or d-Quote will peg.
[[Page 71855]]
Summary of Proposed Rule Changes
As noted above, the Exchange proposes to permit DMM interest to be
set as pegging interest. Because pegging for DMM interest would
generally be the same as pegging for e-Quotes and d-Quotes, the
Exchange proposes to amend the existing text, as described in more
detail below, to define the term ``pegging interest'' to include e-
Quotes, d-Quotes, and DMM interest.\8\ The Exchange believes that it is
appropriate to expand the availability of pegging interest to DMM
interest because it will assist DMMs in meeting their obligations
pursuant to Rule 104(a)(1)--Equities to maintain a continuous, two-
sided quote at or near the NBBO throughout the trading day.
---------------------------------------------------------------------------
\8\ Trading interest that has been set to peg, i.e., e-Quotes,
d-Quotes, and DMM interest, will be referred to collectively as
``pegging interest.''
---------------------------------------------------------------------------
In particular, the Exchange notes that other markets have recently
been approved to provide market makers with pegging order functionality
so that market makers may automatically track the NBBO in compliance
with the market-wide market maker quoting requirements.\9\ The rules
adopted or proposed by those markets set the pegging functionality to
automatically track the designated percentages set forth in the market-
wide quoting rule (i.e., Rule 104(a)(1)(B)(iii)--Equities designated
percentages). While the Exchange's expansion of pegging functionality
to DMMs would not include those set percentages, the Exchange believes
that providing DMMs with the flexibility to engage in same-side or
opposite-side pegging with offset values of their own choosing, as
discussed in more detail below, will enable DMMs to set their market-
making quoting interest to automatically track the PBBO at a tighter
ratio than the quoting requirements contemplated by Rule 104(a)(1)(B)--
Equities.\10\
---------------------------------------------------------------------------
\9\ See, e.g., Securities Exchange Act Release Nos. 67584 (Aug.
2, 2012), 77 FR 47472 (Aug. 8, 2012) (SR-NASDAQ-2012-066) (approving
The NASDAQ Stock Market LLC (``Nasdaq'') Rule 4751(f)(15), which
establishes a ``Market Maker Peg Order''); 67756 (Aug. 29, 2012), 77
FR 54633 (Sept. 5, 2012) (SR-BATS-2012-026) (approving The BATS
Exchange, Inc. (``BATS'') Rule 11.8(e), which establishes a ``Market
Maker Peg Order''); and 67755 (Aug. 29, 2012), 77 FR 54630 (Sept. 5,
2012) (SR-BYX-2012-012) (approving BATS-Y Exchange, Inc. (``BYX'')
Rule 11.8(e), which establishes a Market Maker Peg Order).
\10\ Member organizations are responsible for determining
whether their trading activity qualifies as bona fide market making
for purposes of the ``locate'' exception and close-out requirements
of Regulation SHO under the Exchange Act. Compliance with the
quoting requirements of Rule 104(a)(1)(B)--Equities, or any other
rules of the Exchange, does not necessarily mean that the DMM, or
other form of Exchange-registered market maker, is engaged in bona
fide market making for purposes of Regulation SHO. See 17 CFR
242.203(b)(2)(iii); 17 CFR 242.204(a)(3). The Commission adopted a
narrow exception to Regulation SHO's ``locate'' requirement for
market makers that may need to facilitate customer orders in a fast
moving market without possible delays associated with complying with
such requirement. Only market makers engaged in bona fide market
making in the security at the time they effect the short sale are
excepted from the ``locate'' requirement. See Exchange Act Release
No. 50103 (July 28, 2004), 69 FR 48008, 48015 (August 6, 2004)
(providing guidance as to what does not constitutes bona fide market
making for purposes of claiming the exception to Regulation SHO's
``locate'' requirement). See also Exchange Act Release No. 58775
(October 14, 2008), 73 FR 61690, 61698-9 (October 17, 2008)
(providing guidance regarding what is bona fide market making for
purposes of complying with the market maker exception to Regulation
SHO's ``locate'' requirement including without limitation whether
the market maker incurs any economic or market risk with respect to
the securities, continuous quotations that are at or near the market
on both sides and that are communicated and represented in a way
that makes them widely accessible to investors and other broker-
dealers and a pattern of trading that includes both purchases and
sales in roughly comparable amounts to provide liquidity to
customers or other broker-dealers).
---------------------------------------------------------------------------
The Exchange also proposes to change references to NBB, NBO and
NBBO throughout Rule 70.26 to PBB, PBO and PBBO, respectively. The
Exchange believes that these changes are more consistent with the
requirements of the Regulation NMS Order Protection Rule \11\ and the
related definition of protected bid and offer, as set forth in
Regulation NMS Rule 600(b)(57),\12\ which defines a protected bid or
protected offer as a quote in an NMS stock that is (i) displayed by an
automated trading center; (ii) disseminated pursuant to an effective
national market system plan; and (iii) an automated quotation that is
the best bid or best offer of a national stock exchange or a national
securities association. Exchange systems monitor the PBBO for purposes
of the Order Protection Rule and, in this respect, Exchange systems
also move pegging interest based on moves to the PBBO, not the
NBBO.\13\
---------------------------------------------------------------------------
\11\ 17 CFR 242.611.
\12\ 17 CFR 242.600(b)(57).
\13\ In most instances, the PBBO and the NBBO are the same.
However, if the NBBO is based on a quote that is no longer
protected, i.e., a stale quote, the PBBO may change before the NBBO
changes. In this regard, the Exchange notes that current Rule
70.26(vii) already specifies that pegging interest may peg to
interest available on the Exchange or a protected bid or offer on an
away market.
---------------------------------------------------------------------------
The Exchange further proposes to expand the pegging functionality
to permit pegging to the opposite side of the market. The existing
functionality, for which pegging interest to buy (sell) pegs to the PBB
(PBO), would be renamed in the rule as a ``Primary Pegging Interest.''
\14\ The proposed new functionality, whereby pegging interest would peg
to the opposite side of the market (buy (sell) pegs to the PBO (PBB))
would be referred to in the proposed rule as a ``Market Pegging
Interest.'' \15\ The Exchange believes that adding Market Pegging
Interest functionality would contribute to narrower spreads for
securities and is consistent with approved rules of other markets.\16\
---------------------------------------------------------------------------
\14\ See proposed paragraph (c) of the pegging interest text of
Rule 13.
\15\ See proposed paragraph (d) of the pegging interest text of
Rule 13.
\16\ See, e.g., Nasdaq Rule 4751(f) and BATS Rule 11.9(c)(8).
---------------------------------------------------------------------------
The Exchange also proposes to provide for an offset value, which
would be a specified amount by which the price of pegging interest
would differ from the price of the interest to which it pegs.\17\ The
Exchange proposes to specify that an offset value would be optional for
Primary Pegging Interest,\18\ but would be required for Market Pegging
Interest.\19\ As proposed, when applying an offset value to Primary
Pegging Interest, the adjusted price for buy (sell) pegging interest
would be the PBB (PBO) minus (plus) the offset value. When applying the
offset value to Market Pegging Interest, the adjusted price for buy
(sell) pegging interest would be the PBO (PBB) minus (plus) the offset
value.\20\ If the offset value of pegging interest to buy (sell) would
result in a price that is greater than $1.00 in an increment smaller
than $0.01, the price of the pegging interest to buy (sell) would be
rounded down (up) to the nearest permissible minimum price variation,
consistent with Rule 61--Equities.\21\
---------------------------------------------------------------------------
\17\ See proposed paragraph (b) of the pegging interest text of
Rule 13.
\18\ See proposed paragraph (c)(4) of the pegging interest text
of Rule 13.
\19\ See proposed paragraph (d)(4) of the pegging interest text
of Rule 13. Because an offset value would be required for Market
Pegging Interest, Exchange systems would reject Market Pegging
Interest that does not include an offset value.
\20\ For example, if the PBB is $2.00 and the PBO is $2.05,
pegging interest to buy that is set to peg to the same side of the
market with an offset of $0.01 would be priced at $1.99 (i.e., $2.00
PBB minus $0.01 offset). Pegging interest to sell that is set to peg
to the same side of the market with an offset of $0.01 would be
priced at $2.06 (i.e., $2.05 PBO plus $0.01 offset). In contrast,
pegging interest to buy that is set to peg to the opposite side of
the market with an offset of $0.05 would be priced at $2.00 (i.e.,
$2.05 PBO minus $0.05 offset). Pegging interest to sell that is set
to peg to the opposite side of the market with an offset of $0.05
would be priced at $2.05 (i.e., $2.00 PBB plus $0.05 offset).
\21\ Continuing with the example above, if the PBB is $2.00 and
the PBO is $2.05, pegging interest to buy that is set to peg to the
same side of the market with an offset of $0.015 would be priced at
$1.98 (i.e., $2.00 PBB minus $0.015 offset equals $1.985 and rounded
down to nearest permissible minimum price variation). Pegging
interest to sell that is set to peg to the same side of the market
with an offset of $0.015 it would be priced at $2.07 (i.e., $2.05
PBO plus $0.015 offset equals $2.065 and rounded up to nearest
permissible minimum price variation). In contrast, pegging interest
to buy that is set to peg to the opposite side of the market with an
offset of $0.015 would be priced at $2.03 (i.e., $2.05 PBO minus
$0.015 offset equals $2.035 and rounded down to nearest permissible
minimum price variation). Pegging interest to sell that is set to
peg to the opposite side of the market with an offset of $0.015
would be priced at $2.02 (i.e., $2.00 PBB plus $0.015 offset equals
$2.015 and rounded up to nearest permissible minimum price
variation).
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[[Page 71856]]
The Exchange believes that adding Market Pegging functionality
would enable pegging interest to potentially establish a better price
than is currently available, thereby reducing the size of the spread
for a security. For example, if the PBBO in a security is $10.05-
$10.07, and the buy pegging interest is pegged to the PBO with an
offset of $0.01, the buy pegging interest would post on the Exchange as
a $10.06 bid, which would be a new PBB that reduces the spread and
creates a tighter market. The Exchange notes that unlike Primary
Pegging Interest, which currently cannot establish or sustain the PBBO
as a result of pegging, Market Pegging Interest can establish or
sustain a PBB or PBO.
Proposed Specific Rule Changes
As noted above, the Exchange proposes to delete Rule 70.26 in its
entirety and move the text that provides for pegging to Rule 13.
Because pegging interest is being expanded to include DMM interest, the
Exchange believes that Rule 70, which concerns Floor broker interest
only, is no longer the proper rule within which to provide for pegging.
Rather, because pegging is a type of modifier, the Exchange believes it
is more appropriate to provide for pegging within Rule 13 as a defined
term referred to as ``pegging interest.'' The Exchange notes that Rule
13 is currently titled ``Definition of Orders.'' However, Rule 13
currently provides for orders and order modifiers.\22\ Accordingly, the
Exchange proposes to change the title of Rule 13 to ``Orders and
Modifiers.''
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\22\ For example, a sell ``plus'' or buy ``minus'' order is not
an order type per se, but is instead an order modifier.
---------------------------------------------------------------------------
As proposed, the new pegging interest section of Rule 13 would
replace the existing text of Rule 70.26, with numerous non-substantive
changes, as well as add new rule text to incorporate the elements
proposed above, i.e., permitting DMM interest to be set as pegging
interest, changing NBBO to PBBO, adding the Market Pegging Interest
functionality, and providing for an offset value to be specified. The
Exchange believes that the proposed changes to the rule text, as
incorporated in Rule 13, result in a more streamlined rule that
eliminates redundancy in the current rule while also incorporating the
new elements in a logical and comprehensive manner. For example, rather
than referring to ``pegging e-Quotes'' or ``pegging d-Quotes''
throughout the rule, the Exchange proposes to use the term ``pegging
interest,'' unless the rule is specific only to a particular type of
interest. In addition, the Exchange proposes to combine concepts that
are currently addressed separately or in multiple locations within Rule
70.26, but that can be logically combined into streamlined rule text
(e.g., the text discussing the permissible price range and how it
impacts pegging).
The following sets forth the proposed rule changes (all references
to proposed paragraphs are to the proposed new pegging interest text of
Rule 13):
Proposed paragraph (a) provides that ``pegging interest''
means displayable or non-displayable interest to buy or sell at a price
set to track the PBB or PBO as the PBBO changes. The proposed rule text
would replace the general description of pegging in Rule 70.26(i), with
certain changes. As discussed above, from a substantive perspective,
the Exchange proposes to replace references to the NBB, NBO, and NBBO
with references to the PBB, PBO, and PBBO. The Exchange proposes to
delete the reference to the limit price of an e-Quote as that concept
will now be part of proposed paragraph (a)(4), relating to the
specified price range of pegging interest. In addition, the Exchange
proposes a clarifying rule change to add that pegging interest may be
for displayable or non-displayable interest. The current pegging
functionality is available for all e-Quotes and d-Quotes, whether
intended for display or not, and the Exchange proposes a clarifying
rule change to make clear that pegging interest is available for both
displayable and non-displayable interest.
Proposed paragraph (a)(1) provides that pegging interest
can be an e-Quote, d-Quote, or DMM Interest. The proposed rule text
would replace without any substantive change rule text from Rule
70.26(i) referencing e-Quotes and Rule 70.26(ii), which references d-
Quotes. The proposal to add DMM interest is new rule text, as described
in more detail above.
Proposed paragraph (a)(1)(A) provides that pegging
interest may not include a sell ``plus'' or buy ``minus'' instruction,
which replaces without any substantive change the current text in Rule
70.26(i) that a tick-sensitive e-Quote is not permitted to peg. A
``tick sensitive'' e-Quote is one that includes a sell ``plus'' or buy
``minus'' instruction, which are existing defined terms in Rule 13.
Therefore, the Exchange proposes to use the sell ``plus'' or buy
``minus'' terminology instead of the current ``tick sensitive''
language, which is not a defined term in Exchange rules.\23\
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\23\ This change does not alter the meaning of the current rule
text.
---------------------------------------------------------------------------
Proposed paragraph (a)(1)(B) would replace without any
substantive change the second sentence of Rule 70.26(iii), which
provides that Exchange systems shall reject a pegging e-Quote or d-
Quote that is entered 10 seconds or less before the scheduled close of
trading.\24\ The Exchange notes that the rationale for excluding
pegging e-Quotes and d-Quotes 10 seconds prior to the close is to
assist the DMM with arranging the close, and because the DMM is aware
of DMM interest, this prohibition is not necessary for DMM interest.
The Exchange notes that this does not confer any additional benefit to
the DMM because the DMM may be required to supply additional liquidity
as needed as part of the closing transaction in order to meet the
obligation set forth in Rule 104(a)(3)--Equities to facilitate the
close of trading for each of the securities in which the DMM is
registered.
---------------------------------------------------------------------------
\24\ The current rule text only refers to e-Quotes, but since d-
Quotes are a subset of e-Quotes, Exchange systems currently reject
both pegging e-Quotes and d-Quotes that are entered 10 seconds or
less before the scheduled close of trading.
---------------------------------------------------------------------------
Proposed paragraph (a)(1)(C) would replace without any
substantive change Rule 70.26(xii) by specifying that discretionary
instructions associated with a pegging d-Quote would move as the d-
Quote pegs to the PBBO, subject to any price range and limit price that
may be specified. The Exchange does not propose to include the
reference to e-Quote that is currently in Rule 70.26(xii) because a d-
Quote is an e-Quote with discretionary instructions.\25\ Also, the
Exchange proposes to refer to the specified price range instead of the
current reference to floor or ceiling price in Rule 70.26(xii).
Finally, the Exchange proposes to include a reference to the pegging
interest's limit price. The Exchange notes that the textual differences
between proposed paragraph (a)(1)(C) and current Rule 70.26(xii) do not
make any substantive changes to the rule.
---------------------------------------------------------------------------
\25\ See supra note 5.
---------------------------------------------------------------------------
Proposed paragraph (a)(2) would replace without any
substantive change the first sentence of Rule 70.26(iii), by specifying
that pegging is only active when auto-quoting is active.
Proposed paragraph (a)(3) would replace the rule text in
Rule 70.26(vii) by specifying that pegging interest shall peg to a
price that is based on either (A)
[[Page 71857]]
a protected bid or offer, which may be available on the Exchange or an
away market, or (B) interest that establishes a price on the Exchange,
which may include Primary or Market Pegging Interest that has
established a price as a result of an offset value. The current rule
provides that pegging interest only pegs to other non-pegging interest,
which may be available on the Exchange or a protected bid or offer on
an away market. The proposed rule text modifies the existing rule text
to take into consideration the possibility that either Primary Pegging
Interest or Market Pegging Interest may establish a price on the
Exchange and therefore pegging interest may peg to other pegging
interest.\26\ The circumstances where pegging interest may establish a
price is as a result of the proposed new offset function, which is why
the Exchange proposes to change this aspect of the rule.
---------------------------------------------------------------------------
\26\ See proposed paragraph (d)(2) of the pegging interest text
of Rule 13.
---------------------------------------------------------------------------
Example 1: Assume that the Exchange best bid and offer,
which is also the PBBO, is $10.05--$10.07, and there is buy Market
Pegging Interest pegged to the PBO with an offset value of $0.01, such
Market Pegging Interest would establish a new PBB and Exchange best bid
of $10.06. Because the Market Pegging Interest established a new PBB,
Primary Pegging Interest to buy could peg to that $10.06 price and
therefore would be pegging to pegging interest.
Example 2: Assume again that the Exchange best bid or
offer, which is also the PBBO, is $10.05--$10.07, with 100 shares at
the bid, and there is buy Primary Pegging Interest ``A'' of 500 shares
with an offset of $0.01, which would be at a priced at $10.04, and that
is the only Exchange interest priced at $10.04. Assume further there is
buy Primary Pegging Interest ``B'' that will only peg if there is
minimum same-side volume of 500 shares.\27\ Because the Exchange best
bid is only 100 shares, Primary Pegging Interest ``B'' would peg to the
price that meets the minimum size requirement, which in this case would
be the price established by the Primary Pegging Interest ``A'' at
$10.04. In this scenario, because of the offset value associated with
Primary Pegging Interest ``A'', that interest has established a price
and as a result, Primary Pegging Interest ``B'' is pegging to pegging
interest.
---------------------------------------------------------------------------
\27\ See proposed paragraph (c)(5) of the pegging interest text
of Rule 13.
---------------------------------------------------------------------------
Proposed paragraph (a)(4) provides that pegging interest
shall peg only within the specified price range for the pegging
interest. The Exchange notes that while the proposed language is new
rule text, the proposed paragraph does not make any substantive changes
to the current rule, but rather consolidates rule text from separate
parts of the existing rule in a streamlined format. In particular, the
proposed rule would replace the remaining text in Rules 70.26(i) (that
pegging interest must be within the e-Quote's limit price), 70.26(vii)
(that pegging interest pegs to interest within the price range selected
by the Floor broker), and 70.26(ix), including (A) through (D) of that
subsection, by replacing the detailed ``price range'' discussion within
current Rule 70.26(ix) by specifying instead that pegging interest
shall peg only within the specified price range for the pegging
interest. For example, Rule 70.26(ix)(D) currently specifies that the
price to which pegging interest pegs cannot be higher (lower) than the
limit price of the buy (sell) pegging interest, which is also currently
covered in Rule 70.26(i).\28\ In this regard, the Exchange proposes not
to include the text of current Rule 70.26(ix)(A), (B) and (C), which
refer to the ``quote price,'' ``ceiling price'' and ``floor price,''
respectively, of pegging interest. The Exchange does not consider these
terms necessary and believes that proposed paragraph (a)(4) is clearer
and more streamlined without their inclusion.\29\
---------------------------------------------------------------------------
\28\ This addition would not result in a substantive change to
pegging. Also, the Exchange notes that Rule 70.26(ix) currently says
that the price may not be ``inconsistent with'' the limit price. The
Exchange believes that using ''specified price range'' would be
clearer than the current ``inconsistent with'' text because the
specified price range concept is broad enough to include the limit
price of the order as well as any other pricing instructions that
may be included with the pegging interest.
\29\ The Exchange considers it inherent that a price ``range''
will have upper and lower bounds and therefore does not consider
these terms necessary.
---------------------------------------------------------------------------
Proposed paragraph (a)(4)(A) specifies that if the PBBO,
combined with any offset value, is not within the specified price
range, the pegging interest would instead peg to the next available
best-priced interest that is within the specified price range. Other
than addressing how the offset value impacts the pegging interest, the
reference to NBBO changing to PBBO, replacing the phrase ``the price
range selected by the Floor broker'' with ``the specified price
range,'' this text is substantively the same and replaces current Rule
70.26(x)(B).\30\
---------------------------------------------------------------------------
\30\ The Exchange notes that Rule 70.26(x)(B) provides that
pegging interest will ``join'' the interest to which it pegs. The
Exchange believes that using ``peg to'' terminology would be more
precise than the current ``join'' language.
---------------------------------------------------------------------------
Proposed paragraph (a)(4)(B) would replace without any
substantive change the current Rule 70.26(xii)(A), (B) and (C) by
specifying that pegging interest that has reached its specified price
range will remain at that price if the PBBO goes beyond such price
range and that if the PBBO returns to a price within the specified
price range, it shall resume pegging. The Exchange notes that this text
is substantively the same as in current Rule 70.26(xii)(A), (B), and
(C), albeit in a streamlined format. The Exchange further notes that
the proposed rule text replaces without any substantive change concepts
set forth in Rule 70.26(x) (that pegging interest will peg to the NBBO
so long as it is in the specified price range) and 70.26(xi) (pegging
interest without a specified price range will peg based on the limit
price of the order).
Proposed paragraph (b) defines the ``offset value,'' as
discussed in more detail above.
Proposed paragraph (c) defines the term ``Primary Pegging
Interest,'' as discussed in more detail above.
Proposed paragraph (c)(1) would replace Rule 70.26(x)(A)
by specifying that Primary Pegging Interest shall not peg to a price
that is locking or crossing the Exchange best offer (bid), but instead
would peg to the next available best-priced interest that would not
lock or cross the Exchange best offer (bid). In moving the text from
Rule 70.26(x)(A), the Exchange proposes two minor changes: to change
the reference from the NBB (NBO) to the term ``price'' and to delete
the term ``non-pegging interest.'' The Exchange proposes these
modifications because, as discussed above in connection with proposed
paragraph (a)(3), there may be circumstances where because of the
offset value, pegging interest may peg to a price established by
pegging interest, which in some cases, may not be the PBBO.
Proposed paragraph (c)(2) would replace without
substantive change Rules 70.26(v), (viii), (viii)(A), and (viii)(B) by
specifying that Primary Pegging Interest will not establish a PBB (PBO)
or sustain a PBB (PBO) as a result of pegging.\31\
---------------------------------------------------------------------------
\31\ The Exchange believes that the proposed rule text ``as a
result of pegging'' clarifies that the only time that Primary
Pegging Interest will not establish or sustain the PBBO is if it is
following its pegging instructions. When a Primary Pegging Interest
is at a price because it is the limit price of the Primary Pegging
Interest, such interest will not have established or sustained the
PBBO ``as a result of pegging'' and the Exchange believes that it is
no longer necessary to specifically state that pegging interest at
its limit price may remain displayed at the PBBO, as currently set
forth in Rules 70.26(viii)(A) and (B). In addition, the Exchange
proposes not to replace the statement in Rule 70.26(v) that pegging
is reactive because that concept was intended to mean that pegging
interest cannot create a PBB or PBO. However, because proposed
Market Pegging Interest can establish a new PBB or PBO, the
limitation to ``reactive'' is no longer relevant and the Exchange
believes that the proposed rule text that Primary Pegging Interest
cannot establish or sustain the PBBO obviates the need to separately
say that pegging is reactive. The Exchange also proposes to delete
the term ``new'' as being redundant of the concept of establishing a
PBB or PBO.
---------------------------------------------------------------------------
[[Page 71858]]
Proposed paragraph (c)(3) would replace without any
substantive change Rule 70.26(vi) by specifying that Primary Pegging
Interest may establish an Exchange best bid or offer. The Exchange
proposes to replace the rule text set forth in Rule 70.26(vi) that
pegging interest that sets the Exchange best bid or offer is entitled
to priority by adding to Rule 72--Equities that pegging interest may
have priority interest.\32\
---------------------------------------------------------------------------
\32\ The Exchange proposes to further amend Rule 72--Equities to
change a reference to current Rule 70.26 to the proposed new pegging
interest text within Rule 13 and change a reference to e-Quotes to
``pegging interest,'' generally.
---------------------------------------------------------------------------
Proposed paragraph (c)(4) provides that Primary Pegging
Interest may include an offset value for which the adjusted price for
buy (sell) pegging interest shall be the PBB (PBO) minus (plus) the
offset value, which is new rule text, as discussed in greater detail
above.
Proposed paragraph (c)(5) would replace without any
substantive change Rule 70.26(xiii) by specifying that Primary Pegging
Interest may be designated with a minimum size of same-side volume to
which such pegging interest shall peg. Other than the references to NBB
and NBO changing to PBB and PBO, respectively, this text is
substantively the same as in current Rule 70.26(xiii).
Proposed paragraph (d) provides for new rule text related
to the new Market Pegging Interest, which is discussed in greater
detail above. More specifically, proposed paragraph (d)(1) would
provide that Market Pegging Interest shall not peg to a price that is
locking or crossing the Exchange best offer (bid), but instead shall
peg to a price one minimum price variation lower (higher) than the
Exchange best bid or offer. This proposed functionality is intended to
prevent Market Pegging Interest from locking or crossing the Exchange
best bid or offer. \33\ Proposed paragraph (d)(2) would provide that
Market Pegging Interest to buy (sell) may establish or sustain a PBB
(PBO). Proposed paragraph (d)(3) would mirror paragraph (c)(3) by
specifying that Market Pegging Interest may establish an Exchange best
bid or offer. Finally, proposed paragraph (d)(4), would require Market
Pegging Interest to include an offset value, as discussed in more
detail above.
---------------------------------------------------------------------------
\33\ A potential scenario when Market Pegging Interest could
lock or cross the Exchange best bid or offer could be if a liquidity
replenishment point (``LRP'') is reached pursuant to Rule 1000--
Equities, and automatic executions on one side of the market are
suspended at the Exchange. In such scenario, assume that the
Exchange best bid is $10.04, an LRP is reached and the Exchange is
slow on the buy side, a new PBB is published at $10.03, and there is
Market Pegging Interest to sell with a $0.01 offset. Because the
Market Pegging Interest to sell would peg to the PBB priced at
$10.03, with a penny offset, and lock the Exchange's best bid at
$10.04, the Exchange proposes to reprice the Market Pegging Interest
to sell to $10.05 so that it does not lock the Exchange best bid.
---------------------------------------------------------------------------
The Exchange proposes to delete without replacing Rule 70.26(iv),
which provides that pegging interest trades on parity with other
interest at the NBBO after interest entitled to priority is executed.
The Exchange believes that this text is superfluous, in that pegging
interest is not treated differently than non-pegging interest for
purposes of determining parity, as set forth in Rule 72--Equities, and
Rule 72--Equities governs the allocation of executions and
priority.\34\ The Exchange therefore is not proposing to address this
concept in new pegging interest section of Rule 13.
---------------------------------------------------------------------------
\34\ The Exchange proposes to amend Rule 72(a)(i)--Equities and
(ii)--Equities to specify that displayable interest may include
pegging interest. Because pegging interest would be included as
``displayable interest,'' the description of allocation of orders
would not include pegging interest with any reference to displayable
interest. The Exchange also proposes conforming edits to Rule
72(a)(ii)(G)--Equities to replace references to Rule 70.26 and e-
Quotes with references to Rule 13 and ``pegging interest.''
---------------------------------------------------------------------------
The Exchange further proposes to add new subsection (xii) to Rule
72(c)--Equities to codify how Exchange systems treat modifications to
orders for purposes of time sequencing. Specifically, if an order is
modified solely to reduce the size of the order, Exchange systems
accept such a modification without changing the time stamp of original
order entry.\35\ Accordingly, the Exchange proposes to codify in Rule
72(c)(xii)--Equities that an order that is modified to reduce the size
of the order shall retain the time stamp of original order entry.
---------------------------------------------------------------------------
\35\ The manner by which a member organization may reduce the
size of an order without impacting the time stamp is to submit a
partial cancellation message. For example, if a member organization
has entered an order for 400 shares to buy at $10.00 and wants to
reduce it to 200 shares to buy at $10.00, the member organization
would submit a cancel message for 200 shares to buy at $10.00, which
would leave the remaining 200 shares of the buy order with the time
stamp of original order entry.
---------------------------------------------------------------------------
Currently, any other modification to an order, including increasing
the size of the order or changing the price of the order, results in
the order receiving a new time stamp. Accordingly, the Exchange
proposes to codify that any other modification of an order, such as
increasing the size or changing the price of an order, shall receive a
new time stamp. The Exchange notes that the proposed rule language
covers any modification of an order, whether directed by a member
organization that entered the order or entered by Exchange systems
pursuant to rule.\36\ For example, Exchange systems may re-price an
order if the interest is being re-priced because it is pegging
interest, pursuant to Rule 13, or because it is a short sale order
during a Short Sale Period, pursuant to Rule 440B(e)--Equities.
---------------------------------------------------------------------------
\36\ To change the price of an order or increase the size of an
order, a member organization would need to enter a ``cancel/
replace'' message, which serves to cancel the original order and
replace it with a new order. The replacement order receives a new
time stamp. The ``cancel/replace'' message can also be used to
change the order marking under Regulation SHO of a pending sell
order (i.e., from ``long'' to ``short''). For example, if a seller
increases the size of a pending sell order, the resulting modified
order is considered a new order and must be marked by the broker-
dealer to reflect the seller's net position at the time of order
modification pursuant to Rule 200 of Regulation SHO. The Exchange
notes that if a member organization uses a ``cancel/replace''
message to reduce the size of the order, rather than a partial
cancellation, because the ``cancel/replace'' message cancels the
original order in its entirety, the replacement order would receive
a new time stamp, even if the replacement order represents only a
reduction in size of the order.
---------------------------------------------------------------------------
The proposed changes to Rule 72(c)(xii)--Equities will be effective
on the operative date of this filing. The Exchange will announce the
implementation date of the proposed rule change as it relates to
pegging interest changes in a Trader Update to be published no later
than 90 days following publication of the notice in the Federal
Register. The implementation date will be no later than 90 days
following publication of the Trader Update announcing publication of
the notice in the Federal Register.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the
Securities Exchange Act of 1934 (the ``Act''),\37\ in general, and
furthers the objectives of Section 6(b)(5),\38\ in particular, because
it is designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in facilitating
transactions in securities, to remove impediments to, and perfect the
[[Page 71859]]
mechanism of, a free and open market and a national market system and,
in general, to protect investors and the public interest. The proposed
rule change is also not designed to permit unfair discrimination.
---------------------------------------------------------------------------
\37\ 15 U.S.C. 78f(b).
\38\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that expanding the pegging functionality to
DMM interest is consistent with the Act because it will remove
impediments to, and perfect the mechanism of a free and open market and
national market system and, in general, protect investors and the
public interest by providing a mechanism for DMMs to assist them with
meeting their market-making obligations to maintain quoting interest at
or near the NBBO. The Exchange notes that two other markets have been
approved to offer pegging functionality expressly for market markers
for a similar purpose.\39\ The Exchange's proposal differs because as
proposed, the DMM would be able to select whether to enter Primary
Pegging Interest or Market Pegging Interest, and would be able to
select the offset value, thereby providing the DMM with flexibility to
track the PBBO at a tighter ratio than contemplated by the rules of
other exchanges that offer a market maker pegging functionality.
---------------------------------------------------------------------------
\39\ See supra note 9.
---------------------------------------------------------------------------
The Exchange further notes that expanding pegging functionality to
DMM interest is not designed to permit unfair discrimination. The
Exchange believes that expanding the functionality to DMMs is
consistent with the existing approved rules, as well as consistent with
the Act because the expansion is narrowly tailored to offer the
functionality to a class of participants that has an affirmative
obligation to maintain a quote at or near the NBBO.\40\ The Exchange
notes that another class of member organizations, Supplemental
Liquidity Providers (``SLP''), provide liquidity to the Exchange, and
certain SLPs can register as market makers at the Exchange.\41\ While
the Market Pegging Interest functionality will not be available to SLPs
at this time, the Exchange does not believe that this is discriminatory
because there is no requirement that a security be assigned to an SLP,
and a member organization's participation in the SLP program is
voluntary. By contrast, all securities traded at the Exchange must be
assigned to a DMM, and a DMM unit cannot withdraw from registration in
securities assigned to it.
---------------------------------------------------------------------------
\40\ See Rule 104(a)(1)(A)--Equities.
\41\ See Rule 107B--Equities.
---------------------------------------------------------------------------
As discussed above, rather than adding the concepts for the Market
Peg functionality, the offset value, and expansion to DMM interest in
Rule 70.26, the Exchange proposes to restructure the text of Rule 70.26
and move it to Rule 13. The Exchange believes that this will more
appropriately address how pegging operates and consolidates rule text
relating to orders and modifiers in single location in the rules. In
this regard, the proposal to change references to NBB, NBO and NBBO to
PBB, PBO and PBBO, respectively, would add greater specificity
regarding the interest to which pegging interest may peg. The Exchange
also believes that these changes are more consistent with the
requirements of the Regulation NMS Order Protection Rule \42\ and the
related definition of protected bid and offer, as set forth in
Regulation NMS Rule 600(b)(57).\43\ As noted above, Exchange systems
monitor the PBBO for purposes of the Order Protection Rule and, in this
respect, Exchange systems also move pegging interest based on moves to
the PBBO, not the NBBO.\44\ The Exchange believes that this increased
specificity would perfect the mechanism of a free and open market and a
national market system and, in general, would protect investors and the
public interest.
---------------------------------------------------------------------------
\42\ See supra note 10.
\43\ See supra note 11.
\44\ See supra note 12.
---------------------------------------------------------------------------
Additionally, use of the proposed Market Pegging Interest with an
offset value, as well as the proposed offset functionality for Primary
Pegging Interest, would provide greater flexibility with respect to the
price to which pegging interest may peg and would encourage tighter
spreads that move as the PBBO moves. The Exchange believes that this
would remove impediments to, and perfect the mechanism of, a free and
open market and a national market system. Additionally, requiring an
offset value to be specified for pegging interest that pegs to the
opposite side of the market would prevent fraudulent and manipulative
acts and practices, promote just and equitable principles of trade, and
foster cooperation and coordination with persons engaged in
facilitating transactions in securities by preventing pegging interest
from locking or crossing the opposite side of the market. The Exchange
further believes that the proposal fosters competition as other markets
already offer similar functionality.
The Exchange also believes that the proposed rule change would
promote clarity and transparency by adding greater specificity with
respect to the interest to which pegging interest may peg. In this
regard, the proposed realignment and consolidation of existing rule
text would result in a clearer rule, which would benefit all member
organizations as well as others that read the rule.
The Exchange further believes that the proposed rule change would
promote clarity and transparency by removing superfluous rule text that
merely describes the manner in which all trading interest is treated,
regardless of whether it is pegging interest. For example, removing the
text within current Rule 70.26(iv), which provides that pegging
interest trades on parity with non-pegging interest, would eliminate
potential confusion regarding whether pegging interest is treated
differently than non-pegging interest with respect to determining
parity.
Finally, the Exchange believes that the proposed change to Rule 72-
Equities to codify which modifications to an order that Exchange
systems accept and time stamp treatment for such modified orders would
promote clarity and transparency and therefore remove impediments to,
and perfect the mechanism of, a free and open market and a national
market system because the proposed rule change makes clear when a
modification to an order results in a new time stamp for that order.
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.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule does not (i) significantly
affect the protection of investors or the public interest; (ii) impose
any significant burden on competition; and (iii) become operative for
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, provided that the self-regulatory
organization has given the Commission written notice of its intent to
file the proposed rule change at least five business days prior to the
date of filing
[[Page 71860]]
of the proposed rule change or such shorter time as designated by the
Commission, the proposed rule change has become effective pursuant to
Section 19(b)(3)(A) of the Act \45\ and Rule 19b-4(f)(6)
thereunder.\46\
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\45\ 15 U.S.C. 78s(b)(3)(A).
\46\ 17 CFR 240.19b-4(f)(6).
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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-NYSEMKT-2012-67 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-NYSEMKT-2012-67. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSEMKT-2012-67 and should
be submitted on or before December 26, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\47\
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\47\ 17 C.F.R. 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-29179 Filed 12-3-12; 8:45 am]
BILLING CODE 8011-01-P
