Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change Amending NYSE Rule 104 To Codify Certain Traditional Trading Floor Functions That May Be Performed by Designated Market Makers, To Make Exchange Systems Available to DMMs That Would Provide DMMs With Certain Market Information, To Amend the Exchange's Rules Governing the Ability of DMMs To Provide Market Information to Floor Brokers, and To Make Conforming Amendments to Other Rules, 25118-25128 [2013-10015]
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25118
Federal Register / Vol. 78, No. 82 / Monday, April 29, 2013 / Notices
to the safeguarding of securities and
funds in CME’s custody or control or for
which CME is responsible. CME
believes the proposed rule change
accomplishes those objectives because
the changes are designed to incorporate
how the liquidity risk factor is affected
by not only portfolio concentration
based on gross notional, but also the
composition of the portfolio based on an
underlying strategy. CME believes the
proposed rule change would therefore
better align CME’s margin methodology
with the liquidity profile of the actual
instruments in the portfolio and would
therefore contribute to the safeguarding
of securities and funds in CME’s
custody or control or for which CME is
responsible.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
CME does not believe that the
proposed rule change will have any
impact, or impose any burden, on
competition.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
CME has not solicited comments
regarding this proposed rule change.
CME has not received any unsolicited
written comments from interested
parties.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
the proposed rule change or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
emcdonald on DSK67QTVN1PROD with NOTICES
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:
• Send an email to rulecomments@sec.gov. Please include File
Number SR–CME–2013–04 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–CME–2013–04. 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 CME and on CME’s Web site at
https://www.cmegroup.com/marketregulation/files/sec_19b-4_13-04.pdf.
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–CME–2013–04 and should
be submitted on or before May 20, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.4
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013–10019 Filed 4–26–13; 8:45 am]
BILLING CODE 8011–01–P
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–69427; File No. SR–NYSE–
2013–21]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing of Proposed Rule Change
Amending NYSE Rule 104 To Codify
Certain Traditional Trading Floor
Functions That May Be Performed by
Designated Market Makers, To Make
Exchange Systems Available to DMMs
That Would Provide DMMs With
Certain Market Information, To Amend
the Exchange’s Rules Governing the
Ability of DMMs To Provide Market
Information to Floor Brokers, and To
Make Conforming Amendments to
Other Rules
April 23, 2013.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on April 9,
2013, New York Stock Exchange LLC
(the ‘‘Exchange’’ or ‘‘NYSE’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. On April 18, 2013, the
Exchange filed Partial Amendment No.
1 to the proposal.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 amend
proposes to amend NYSE Rule 104 to
codify certain traditional Trading Floor 5
functions that may be performed by
Designated Market Makers (‘‘DMMs’’),6
to make Exchange systems available to
DMMs that would provide DMMs with
certain market information, to amend
the Exchange’s rules governing the
ability of DMMs to provide market
1 15
U.S.C. 78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
4 In Partial Amendment No., 1, the Exchange filed
the Exhibit 3 which was not included in the April
9, 2013 filing.
5 NYSE Rule 6A defines the term ‘‘Trading Floor’’
to mean, in relevant part, ‘‘the restricted-access
physical areas designated by the Exchange for the
trading of securities.’’
6 NYSE Rule 2(i) defines the term ‘‘DMM’’ to
mean an individual member, officer, partner,
employee or associated person of a DMM unit who
is approved by the Exchange to act in the capacity
of a DMM. NYSE Rule 2(j) defines the term ‘‘DMM
unit’’ as a member organization or unit within a
member organization that has been approved to act
as a DMM unit under NYSE Rule 98.
2 15
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information to Floor brokers, and to
make conforming amendments to other
rules. 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.
emcdonald on DSK67QTVN1PROD with NOTICES
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 amend
NYSE Rule 104 to codify certain
traditional Trading Floor functions that
may be performed by DMMs; these
functions were previously described in
the Exchange’s Floor Official Manual. In
addition, the Exchange proposes to
amend its rules to make Exchange
systems available to DMMs that would
provide DMMs with certain market
information about securities in which
the DMM is registered. The Exchange
also proposes to amend its rules
governing the ability of DMMs to make
available certain order and market
information to Floor brokers provided
that the market participant entering the
order had not opted out of such
availability. Finally, the Exchange
proposes to make clarifying and
conforming amendments to other rules.7
As described below, the Exchange
believes that enabling DMMs to perform
certain additional Trading Floor
functions previously performed by
specialists would improve the quality of
certain interactions experienced by
investors (specifically, by increasing the
likelihood of transaction cost-reducing
block transactions).
Specifically, on October 31, 2011,
NYSE and NYSE Amex LLC (‘‘NYSE
Amex’’) each filed with the
7 The Exchange’s affiliate, NYSE Amex [sic] LLC,
has submitted substantially the same proposed rule
change to the Commission. See SR–NYSEMKT–
2013–25.
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Commission, pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 8 and Rule 19b–4
thereunder,9 proposed rule changes to
amend Rule 104. The proposals were
published for comment in the Federal
Register on November 17, 2011.10 The
Commission received no comment
letters on the Proposals. On December
22, 2011, the Commission extended the
time period to February 15, 2012, in
which either to approve the Proposals,
disapprove the Proposals, or to institute
proceedings to determine whether to
disapprove the Proposals.11 The
Commission received no comment
letters on the Proposals during the
extension. On February 15, 2012, the
Commission issued an order instituting
proceedings to determine whether to
disapprove the Proposals.12 The
Commission received six comment
letters supporting the Proposals after the
Commission instituted proceedings to
determine whether to disapprove the
Proposals. After the Commission issued
a notice of designation of longer period
for Commission action on May 14,
2012,13 the Commission disapproved
the proposed rule changes on July 13,
2012.14
As discussed more fully below, the
Commission’s disapproval was based
principally on concerns related to the
fairness and competitive impact of
providing certain order information to
Floor participants. The Exchange is
submitting the present filing to provide
more detailed support demonstrating
the consistency of the proposed rule
change in general, and the provision of
such order information in particular,
with Section 6(b)(5) of the Act and to
otherwise address the concerns raised
by the Commission in its disapproval
order. The Exchange believes that the
Commission’s application of the Act’s
fairness and competition-related
standards must take specific account of
the transformational competitive
dynamics that have reshaped the role of
the Floor over the last decade,
particularly with the potential of the
proposal to improve size interactions
and reduce transaction costs for the
8 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
10 See Securities Exchange Act Release Nos.
65735 (November 10, 2011), 76 FR 71405 (SR–
NYSEAmex–2011–86) (‘‘NYSE Amex Notice’’) and
65736 (November 10, 2011), 76 FR 71399 (SR–
NYSE–2011–56) (‘‘NYSE Notice’’).
11 See Securities Exchange Act Release No. 66036,
76 FR 82011 (December 29, 2011).
12 See Securities Exchange Act Release No. 66397,
77 FR 10586 (February 22, 2012).
13 See Securities Exchange Act Release No. 66981,
77 FR 29730 (May 18, 2012).
14 See Securities Exchange Act Release No. 67437,
77 FR 42525 (July 13, 2012) (‘‘Disapproval Order’’).
9 17
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public. Accordingly, this filing: (1)
Explains the mechanics and operation
of the proposal; (2) provides an
overview of the reshaped competitive
context within which the Floor
operates; and (3) offers three detailed
scenarios illustrating the potential
benefits to the public of making the
proposed order information available to
Floor participants and a demonstration
of how the proposed availability would
improve error resolution. The improved
order interactions illustrated in the
scenarios and the demonstration of
improved error resolution explain in
detail why the proposed consensual
availability of the order information in
question should apply not only to
orders entered on the Floor, but also to
orders entered by off-Floor participants.
DMM Trading Floor Functions
On October 24, 2008, the Commission
approved, as a pilot program, certain
core rules that govern the current
operation of the Exchange.15 These rules
embody the Exchange’s ‘‘New Market
Model.’’ The New Market Model pilot
rules include NYSE Rule 104, which
sets forth certain affirmative obligations
of DMMs, the category of market
participant that replaced specialists.
DMMs have obligations with respect to
the quality of the markets in securities
to which they are assigned that are
similar to certain obligations formerly
held by specialists.
In addition to their trading-related
functions and obligations, DMMs, under
the New Market Model, provide support
on the Trading Floor to assist in the
efficient operation of the Exchange
market and maintain fair and orderly
markets. These Trading Floor functions
were performed by specialists before the
New Market Model was adopted, and
described in the Exchange’s Floor
Official Manual.16 Under the New
15 Securities Exchange Act Release No. 58845, 73
FR 64379 (October 29, 2008) (‘‘New Market Model
Release’’).
16 See 2004 Floor Official Manual, Market
Surveillance June 2004 Edition, Chapter Two,
Section I.A. at 7 (‘‘specialist helps ensure that such
markets are fair, orderly, operationally efficient and
competitive with all other markets in those
securities’’), Section I.B.3. at 10–11 (‘‘[i]n opening
and reopening trading in a listed security, a
specialist should * * * [s]erve as the market
coordinator for the securities in which the specialist
is registered by exercising leadership and managing
trading crowd activity and promptly identifying
unusual market conditions that may affect orderly
trading in those securities, seeking the advice and
assistance of Floor Officials when appropriate’’ and
‘‘[a]ct as a catalyst in the markets for the securities
in which the specialist is registered, making all
reasonable efforts to bring buyers and sellers
together to facilitate the public pricing of orders,
without acting as principal unless reasonably
necessary’’), Section I.B.4. at 11 (‘‘In view of the
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Market Model, there is a continued need
for DMMs to perform these Trading
Floor functions. The Exchange proposes
to add new subparagraph (j)(i) to Rule
104 to codify these historic functions.17
In particular, DMMs perform four
categories of Trading Floor functions:
(1) Maintaining order among Floor
brokers manually trading at the DMM’s
assigned panel, including managing
trading crowd activity and facilitating
Floor broker executions at the post; (2)
facilitating Floor broker interactions,
including either participating as a buyer
or seller, and appropriately
communicating to Floor brokers the
availability of other Floor broker contraside interest; (3) assisting Floor brokers
with respect to their orders, including
resolving errors and, for example,
inputting Floor interest into Exchange
systems in the event of handheld
technology outages; and (4) researching
the status of orders or questioned trades.
The current performance of these four
functions can be illustrated as follows:
emcdonald on DSK67QTVN1PROD with NOTICES
First, a DMM may maintain order among
Floor brokers manually trading at the DMM’s
assigned panel. For example, where there is
significant agency interest in a security, the
DMM may help Floor Officials maintain
order by managing trading crowd activity and
facilitating the execution of one or more
Floor broker’s orders trading at the post.
Second, a DMM may bring Floor brokers
together to facilitate trading, which may
include the DMM acting as a buyer or seller.
This function is consistent with the floorbased nature of the Exchange’s hybrid
market. For example, if a DMM is aware that
a Floor broker representing buying interest
inquired about selling interest in one of his
or her assigned securities and later a Floor
broker representing selling interest makes an
inquiry about buying interest, the assigned
DMM may inform the Floor broker
representing the buying interest of the other
Floor broker’s selling interest. In addition,
the DMM itself may provide contra-side
interest to a Floor broker representing
interest at the post.
Third, DMMs may assist Floor brokers with
respect to their orders by providing
information regarding the status of a Floor
broker’s orders, helping to resolve errors or
questioned trades, adjusting errors, and
cancelling or inputting Floor broker agency
specialist’s central position in the Exchange’s
continuous two-way agency auction market, a
specialist should proceed as follows * * * [e]qually
and impartially provide accurate and timely market
information to all inquiring members in a
professional and courteous manner.’’), and Section
I.B.5. at 12 (A specialist should ‘‘[p]romptly provide
information when necessary to research the status
of an order or a questioned trade and cooperate
with other members in resolving and adjusting
errors.’’). Relevant excerpts of the 2004 Floor
Official Manual are attached as Exhibit 3 of this
filing.
17 The Exchange proposes to redesignate the rule
text currently set forth in section (j) as section (k)
of Rule 104.
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interest on behalf of a Floor broker. For
example, if a Floor broker’s handheld device
is not operational, the DMM may assist the
Floor broker by entering or canceling broker
interest on the Floor broker’s behalf.18
Fourth, DMMs may research the status of
orders or questioned trades. DMMs may do
so on their own initiative or at the request
of the Exchange or a Floor broker when a
Floor broker’s hand-held device is not
operational, when there is activity indicating
that a potentially erroneous order was
entered or a potentially erroneous trade was
executed, or when there otherwise is an
indication that improper activity may be
occurring.
DMM Access to Exchange Systems
The Exchange proposes to amend
Rule 104 to add new subparagraph
(j)(ii), which would state that the
Exchange may make systems available
to a DMM at the post that display the
following types of information about
securities in which the DMM is
registered: (a) Aggregated information
about buying and selling interest; 19 (b)
disaggregated information about the
price and size of any individual order or
Floor broker agency interest file, also
known as ‘‘e-Quotes,’’ except that
Exchange systems would not make
available to DMMs information about
any order or e-Quote, or portion thereof,
that a market participant has elected not
to display to a DMM; and (c) post-trade
information. For the latter two
categories, the DMM would have access
to entering and clearing firm
information and, as applicable, the
badge number of the Floor broker
representing the order. The systems
would not contain any information
about the ultimate customer (i.e., the
name of the member or member
organization’s customer) in a
transaction. Importantly, aggregated
information at each price level about
buying and selling interest that is not
marked dark is already visible to DMMs.
Similarly, aggregated information for
interest not marked dark is visible to
any market participant beyond the Floor
via OpenBook.20
18 The Exchange maintains a full audit trail of all
Floor broker orders, including information
reflecting entry, modification, cancellation, and
execution of such orders.
19 Exchange systems make available to DMMs
aggregate information about the following interest
in securities in which the DMM is registered: (a) All
displayable interest submitted by off-Floor
participants; (b) all Minimum Display Reserve
Orders, including the reserve portion; (c) all
displayable Floor broker agency interest files (‘‘eQuotes’’); (d) all Minimum Display Reserve eQuotes, including the reserve portion; and (e) the
reserve quantity of Non-Display Reserve e-Quotes,
unless the Floor broker elects to exclude that
reserve quantity from availability to the DMM.
20 Floor brokers currently have the ability to make
an order visible to the DMM but not in OpenBook.
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Under the proposed rule change,
Exchange systems would make available
to DMMs disaggregated information
about the following interest in securities
in which the DMM is registered: (a) The
price and size of all displayable interest
submitted by off-Floor participants; and
(b) all e-Quotes, including reserve eQuotes, that the Floor broker has not
elected to exclude from availability to
the DMM.21 Importantly, both Floor
brokers and off-Floor participants would
have the continued ability to enter
partially or completely ‘‘dark’’ orders
that are not visible to the DMM, which
would prevent any communication
about such interest between the DMM
and Floor brokers. The Exchange
believes that it is appropriate to provide
DMMs with this disaggregated order
information because the information
will assist DMMs in carrying out their
Trading Floor functions. In addition to
the potential for improved interaction of
larger-sized orders illustrated by the
three scenarios and related information
below, providing DMMs with access to
the disaggregated order information will
contribute to the DMMs’ ability to carry
out their responsibility for managing the
auction market process at the Exchange,
which includes the function of bringing
buyers and sellers together to facilitate
trading. The proposed rule change
would specifically prohibit DMMs from
using any trading information available
to them in Exchange systems, including
disaggregated order information, in a
manner that would violate the Exchange
rules or federal securities laws or
regulations.
The Exchange believes that the
proposed rule change would contribute
substantially to the fair and orderly
operation of the Exchange Trading
Floor. As illustrated in detail below, the
proposed consensual availability of the
order information in question offers the
potential for improved error resolution.
DMM assistance at the post through the
performance of the Trading Floor
functions continues to be an invaluable
resource to minimize any disruption to
the market, particularly if the Exchange
or a customer is experiencing a systems
issue; the Exchange systems that
provide disaggregated order information
play a pivotal role in that assistance.
Allowing DMMs to have access to those
Exchange systems to perform the
Trading Floor functions is more efficient
They would maintain that ability under the
proposed rule.
21 The Exchange previously permitted DMMs to
have access to Exchange systems that contained the
disaggregated order information described above.
The Exchange stopped making such information
available to DMMs on January 19, 2011. See
Information Memo 11–03.
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than diverting Exchange resources to
attend to individual Floor broker issues,
particularly when the DMMs are ready
and able to perform the same functions.
emcdonald on DSK67QTVN1PROD with NOTICES
Ability of DMMs To Provide Market
Information on the Trading Floor
The Exchange proposes to modify the
terms under which DMMs would be
permitted to provide market information
to Floor brokers and visitors on the
Trading Floor. Specifically, Rule
104(j)(iii) would permit a DMM to
provide the market information to
which he or she has access under
proposed Rule 104(j)(ii) to: (1) A Floor
broker in response to an inquiry in the
normal course of business; or (2) a
visitor to the Trading Floor for the
purpose of demonstrating methods of
trading. This aspect of the proposal
builds on and modifies current NYSE
Rule 115, and the Exchange therefore
proposes to delete NYSE Rule 115,
which covers the same subject.22
Currently, NYSE Rule 115 provides
that a DMM may disclose market
information for three purposes. First, a
DMM may disclose market information
for the purpose of demonstrating the
methods of trading to visitors on the
Trading Floor. This aspect of current
Rule 115 would be replicated in
proposed Rule 104(j)(iii)(B). Second, a
DMM may disclose market information
to other market centers in order to
facilitate the operation of the
Intermarket Trading System (‘‘ITS’’).
This text is obsolete as the ITS Plan has
been eliminated and therefore would
not be included in amended Rule 104.23
Third, a DMM may, while acting in a
market making capacity, provide
information about buying or selling
interest in the market, including: (a)
Aggregated buying or selling interest
contained in Floor broker agency
interest files other than interest the
broker has chosen to exclude from the
aggregated buying and selling interest;
(b) aggregated interest of Minimum
Display Reserve Orders; and (c) the
interest included in DMM interest files,
excluding Capital Commitment
Schedule (‘‘CCS’’) interest as described
in Rule 1000(c), in response to an
inquiry from a member conducting a
market probe 24 in the normal course of
business.
22 Rule 115 will be redesignated as ‘‘Reserved.’’
The Exchange further proposes to make conforming
amendments to Rules 13, 98 Former, and 104(a)(6).
23 See Securities Exchange Act Release No. 55397
(March 5, 2007), 72 FR 11066 (March 12, 2007)
(Intermarket Trading System; Notice of Filing and
Immediate Effectiveness of the Twenty Fourth
Amendment to the ITS Plan Relating to the
Elimination of the ITS Plan).
24 Generally, a market probe refers to when a
Floor broker is seeking to ascertain the depth of the
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Proposed Rule 104(j)(iii) would
permit DMMs also to provide
disaggregated and post-trade order
information to Floor brokers.25
Broadening the scope of information
that DMMs can provide Floor brokers
will assist DMMs with carrying out their
historical function of bringing Floor
brokers together to facilitate block and
other large transactions, as
demonstrated by the scenarios
illustrated herein. The Exchange notes
that the proposed visibility is not
without precedent—Rule 115 previously
allowed Exchange specialists to provide
disaggregated order information to Floor
brokers prior to adoption of the Hybrid
Market.26 And, as noted above, both
Floor brokers and off-Floor participants
currently have and will continue to
have the ability to enter partially or
completely ‘‘dark’’ orders that are not
visible to the DMM. DMMs, in other
words, would be unable to see or
disseminate information about such
‘‘dark’’ orders or the dark portion of the
orders in response to an inquiry from a
Floor broker. When providing
information, the individual DMM is
responsible for fairly and impartially
providing accurate and timely
information to all inquiring Floor
brokers about buying and selling
interest in his or her assigned security.
Proposed Rule 104(j)(iii) also would
permit a DMM to provide market
information to a Floor broker in
response to a specific request by the
Floor broker to the DMM at the post,
rather than specifying that the
information must be provided ‘‘in
response to an inquiry from a member
conducting a market probe in the
normal course of business,’’ as currently
provided in Rule 115. The Exchange
believes that the term ‘‘market probe’’
no longer accurately reflects the manner
in which DMMs and Floor brokers
interact on the Trading Floor. Rather,
the Exchange believes that the Floor
broker’s normal course of business, as
an agent for customers, includes both
market in a security to determine at what price
point a security may trade. However, it is a term
of art whose meaning is not codified.
25 Because DMMs on the Trading Floor do not
have access to CCS interest information, the
proposed rule does not specify that DMMs would
not be disseminating such information.
26 See NYSE Regulation Information Memo 05–5
(stating that, under Rule 115, specialists may
disclose the identity of the members or member
organizations representing any orders entrusted to
the specialist). The Exchange amended Rule 115 in
connection with the Hybrid Market because at that
time, there was no way for Floor brokers to enter
fully dark electronic interest. Now that Exchange
systems can accept fully dark electronic interest
from both Floor brokers and off-Floor participants,
the Hybrid Market change to Rule 115 has been
obviated and the rule can return to its former status.
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25121
seeking market probes into the depth of
the market as well as seeking out willing
contra-side buyers and sellers in a
particular security. In addition, the rule
would specify that a Floor broker may
not submit an inquiry to the DMM by
electronic means and that the DMM may
not use electronic means to transmit
market information to a Floor broker in
response to an inquiry. Under the
proposed rule change, Floor brokers
would not have access to Exchange
systems that provide disaggregated
order information, and they would only
be able to access such market
information through a direct interaction
with a DMM at the post.
The Exchange believes that providing
Floor brokers with access to the
disaggregated order information would
serve a valuable function by increasing
the ability of Floor brokers to source
liquidity and provide price discovery
for block transactions, as demonstrated
in the three detailed scenarios below. In
particular, the ability of Floor brokers to
receive the disaggregated order
information should, in turn, enhance
their ability to facilitate transactions for
their customers by identifying market
participants with trading interest that
could trade with the Floor brokers’
customers. Floor brokers have
historically served this role on behalf of
their customers, which include
institutional clients and block-trading
desks, and they continue to perform this
agency function today.
Effect of Market Structural Changes on
the Exchange and the Floor
Before illustrating in detail how the
proposed changes will facilitate block
trades and expedite error resolution, the
Exchange believes it is essential to take
into account the structural and
competitive changes the Exchange and
the Floor have experienced in recent
years. Indeed, the Act’s fairness and
competition-related standards cannot
appropriately guide the Commission’s
review absent a concrete recognition of
the reshaped competition of the
Exchange and the Floor and the array of
execution choices available to market
participants today. Toward that end, it
must be recognized that the Exchange
has undergone fundamental, structural
changes since 2006 and has been
reshaped by the competitive dynamics
that have accompanied these changes.
The reforms and the intensely
competitive environment within which
they have taken place have their roots
in the Commission’s effort to modernize
and strengthen the national market
system for equity securities through
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Regulation NMS.27 In particular, in
March 2006, the Commission approved
the beginning of NYSE’s historic shift
‘‘from a floor-based auction market with
limited automated order interaction to a
more automated market with limited
floor-based auction market
availability.’’ 28 With the approval of the
‘‘Hybrid Market,’’ the NYSE began the
substantial expansion of automatic
execution and the ability of its Floor
members to participate in its automated
market electronically.29 At the time of
approval, automatic executions on the
NYSE represented approximately 11%
of its market share volume, and the bulk
of executions occurred manually in its
floor-based auction.30 The average
speed of execution was over ten
seconds.31 In 2005, the average trade
size in NYSE-listed securities was 724
shares.32 NYSE’s share of consolidated
volume in NYSE-listed names for the
year preceding the approval of the
Hybrid Market was 79.1%.33
Roughly two years later, the NYSE
proposed further and substantial
structural reforms with its New Market
Model.34 Foremost in significance were:
(1) The phasing out of the specialist
system and the concurrent creation of
the DMM; (2) the alteration of the
NYSE’s longstanding priority and parity
rules to allow DMMs to trade on equal
footing with other market participants
where the specialist previously had
been obligated to yield to public
customer orders in the book; and (3) the
elimination of the advance electronic
‘‘look’’ at incoming orders that had been
a historical feature of the specialist
system.35 By 2009, the average speed of
execution was less than a second, and
the average trade size in NYSE-listed
securities had fallen to 268 shares.36 In
2009, the year following the adoption of
the New Market Model, NYSE’s share of
consolidated volume in NYSE-listed
names was 25.1%.37 At the risk of
stating the obvious, these transformative
changes have had the effect of reducing
substantially the scope and utility of
market information accessible to DMMs
and Floor brokers—a perspective from a
27 See Securities Exchange Act Release No. 51808,
70 FR 37496 (June 29, 2005) (‘‘NMS Adopting
Release’’).
28 See Securities Exchange Act Release No. 53539,
71 FR 16353 (March 31, 2006).
29 Id.
30 Id.
31 See Securities Exchange Act Release No. 61358,
FR 3594, 3595 (January 21, 2010) (‘‘Equity Market
Structure Release’’).
32 Id.
33 Id. at 3595.
34 See New Market Model Release.
35 Id. at 64380, 64387–88.
36 Id.
37 Equity Market Structure Release at 3595.
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point of sale with roughly 80% market
share differs starkly from one with less
than 25%. Such changes demonstrate
the flexibility that the market has with
respect to utilizing different venues and
various market models that best suit
their needs.
Today, the Exchange continues to
operate a limited Floor-based auction
model. Not surprisingly, the Floor itself
reflects directly the transformation
recounted above. The current Floor
broker community is distinguished in
significant part by its embrace of
technology, as reflected by the
introduction of Floor broker algorithms
in 2009. Though competitive dynamics
have reduced the Floor’s numbers,
significant demand remains among the
most informed market participants for
the technology-enabled services of
today’s Floor brokers.
The Exchange seeks to compete by
offering market participants a product
that is entirely distinct from the trading
venues of its competitors in one
essential respect—the integration of
human judgment into the price
discovery process at a single, physical
point of sale for each security.38 This
product stands more or less alone
among a diverse array of completely
automated execution venues available to
investors today. It is important to note
that the nature and extent of the
integration of human judgment,
delivered through DMMs and Floor
brokers, is driven by the demands of
informed consumers—there is no
shortage of competing execution venues
that have no DMMs, Floor brokers or
substantial equivalents. Moreover, those
market participants who choose to trade
on the Exchange have no obligation to
utilize the services of a Floor broker, or
to use those services in a particular way.
Whether and how Floor brokers are
used today reflects directly, in other
words, the judgment of market
participants as to the value the Floor
adds.
As demonstrated below, this wholly
consensual integration of human
judgment at the point of sale, and in
particular the visibility of certain
limited order information discussed
herein to DMMs and Floor brokers,
serve legitimate Floor functions (as well
as broader market structure goals) in
three important respects. They: (1)
38 See S. Rept. 94–75 (1975) (‘‘This is not to say
that it is the goal of [the 1975 Amendments] to
ignore or eliminate distinctions between exchange
markets and over-the-counter markets or other
inherent differences or variations in components of
a national market system. Some present distinctions
may tend to disappear in a national market system,
but it is not the intention of the bill to force all
markets for all securities into a single mold.’’)
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Increase the possibility that buyers and
sellers of size positions can meet,
thereby enhancing opportunities to
reduce transaction costs; (2) expedite
the discovery and resolution of errors,
thereby reducing disruptive impacts and
promoting fair and orderly markets; and
(3) leverage the informed choices of
users, allowing the interplay of
competitive forces to determine the
scope and nature of human interaction
in the price discovery process.39 Acute
concerns with respect to the potential
benefits of the referenced order
information in the hands of DMMs and
Floor brokers, the Exchange respectfully
submits, are misplaced. The information
in question would add only a view of
the components and the entering and
clearing firm (not the customer) for
trading interest that is already visible in
the aggregate to DMMs today. Given the
clear obligations of DMMs and the
strictly agency capacity of Floor brokers,
the benefit attributable to the proposed
visibility would enure to the benefit of
the customer or member placing the
order, not the DMM or Floor broker. The
utility of the information, therefore, lies
in its potential to bring buyers and
sellers of size together, not to advantage
intermediaries.
Benefits of Proposed Rule to Trading
Floor and Investors
The Commission’s Disapproval Order
focused on the availability to DMMs and
communication by DMMs to Floor
brokers of disaggregated order
information (specifically, the price and
size of individual orders and the
identity of the entering and clearing
firms for such orders). Before turning to
the particulars of the Disapproval Order,
the Exchange would respectfully
underscore its contention that the acute
concern with respect to the availability
of disaggregated order information to
DMMs and Floor brokers is misplaced.
The incremental information to be made
available is demonstrably useful to
DMMs, as illustrated in the scenarios
and situations below, in bringing
together buyers and sellers of block
positions and in expediting the
resolution of errors and would thereby
promote both order interaction and
orderly markets. However, the
information simply does not add to a
DMMs trading view in any meaningful
way. It does no more than make visible
to the DMM and available to Floor
brokers the component orders of trading
interest that is already visible to the
DMM in the aggregate (and to off-Floor
market participants via OpenBook) and
the entering and clearing firm and Floor
39 See
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broker, if any. Importantly, the benefit
attributable to the availability of such
information would accrue as a practical
matter to the customer or member
organization behind a trade and not to
the DMM or Floor broker involved in
the trade.
In finding that the proposed rule
changes were not consistent with the
requirements of the Act, the
Commission stated that: (1) The
Exchange and commenters had not
explained how the particular
information proposed to be provided
would further legitimate Floor
functions; (2) the Exchange was ‘‘not
proposing to require any additional
obligations from DMMs and Floor
brokers in exchange for the additional
information’’; (3) the Commission was
concerned that the benefit to Floor
members of receiving disaggregated
order information may be more than
slight, ‘‘particularly with respect to less
liquid securities where order
information is less likely to become
rapidly stale’’; and (4) the provision of
disaggregated order information to Floor
Members and, by extension exclusively
to Floor broker customers ‘‘could have
a detrimental effect on competition
between on-Floor and off-Floor
members of the Exchanges.’’ This
revised proposed rule change addresses
these concerns.
emcdonald on DSK67QTVN1PROD with NOTICES
Scenarios Illustrating How the
Particular Information Proposed To Be
Provided Would Further Legitimate
Floor Functions
The Commission stated in the
Disapproval Order that neither the
Exchange nor the commenters have
explained how making available
‘‘disaggregated information about public
orders on the Exchange books as well as
Floor broker e-Quotes’’ to DMMs and
Floor brokers would further legitimate
Floor functions. The scenarios below
illustrate how the particular information
proposed to be provided—the price and
size of individual orders, the identity of
the entering and clearing firm, and Floor
broker badge number for such orders—
would serve the goals of facilitating
block trades and expediting error
resolution. Importantly, each of the
scenarios makes clear that the benefits
to the public flow from not only the
proposed consensual availability of the
information in question for orders
entered on the Floor, but also those
entered by off-Floor participants.
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Scenario 1: DMM Facilitates Block
Trade Between Floor Broker and
Upstairs Seller by Sharing Price, Size,
and Entering Firm
Assume a pension fund customer
gives Floor broker a 20,000 share order
to buy ABC, a mid-cap stock, at up to
$10.08 at 11:00 a.m. when the PBBO for
the stock is $10.03 by $10.06 with 500
shares on displayed on each side. There
is no crowd at the ABC post at the time
the order is received, but Floor broker
can see from the tape that the stock is
trading electronically on the Exchange.
On the book a penny away from the
inside offer at $10.07, there is a sell
order for 10,000 that has been entered
by Member Organization. There is no
Floor broker representing the sell order,
and there are no Floor broker e-Quotes
on the book. Floor broker tells DMM for
ABC that he or she represents a buyer
of size beyond the displayed market.
Currently, the DMM is permitted to
inform the Floor broker of the aggregate
selling interest at different price points
on the book, but may not access or
provide the identity of the Member
Organization—an off-floor participant—
that entered such selling interest. Under
the proposed rule, the DMM could
inform Floor broker that the off-Floor
Member Organization is an entering
firm for an order to sell 10,000 shares
at $10.07. Floor broker could then
contact the upstairs desk of Member
Organization or Member Organization’s
on-floor representative, if any, who
could then contact his or her upstairs
desk, to explore a possible transaction.
Assume that the 10,000 share sell
order that Member Organization sent to
the Exchange is a child of a 30,000 order
entered electronically by a mutual fund
customer into Member Organization’s
customer-facing execution management
system with non-displayed price
discretion to $10.05. (The parent order
size and price discretion obviously
would not be visible to the DMM or
Floor broker.) Knowing Member
Organization’s identity and the size and
price of the trading interest Member
Organization has entered into Exchange
systems, the Floor broker may now
contact Member Organization or
Member Organization’s on-floor
representative and the Floor broker can
indicate the size of the buying interest
he or she is representing. In this respect,
the Floor broker now can enter into
negotiations directly, similar to how offFloor participants, particularly broker
dealers that internalize flow from their
customers, can reach out directly to
other broker dealers to negotiate blocksized trades. By making contact,
Member Organization and Floor broker
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25123
may agree to do a larger transaction at
a more aggressive price. Assume Floor
Broker and Member Organization agree
to 20,000 shares at $10.05.
Both sides of the trade would have
secured a size transaction within the
parameters of their stated limit. More
importantly, both would have avoided
the potential market impact that a series
of smaller size transactions might have
produced. The transaction in all
likelihood would not have occurred
without the Floor broker’s knowledge of
the price and size of the order and the
identity of the Member Organization
entering it. The Floor broker, in other
words, would have had no incentive to
reveal that he or she represented a buyer
without the meaningful possibility of an
interaction that was indicated by the
size and price of the trading interest and
the identity of the Member Organization
representing it.
The Disapproval Order notes that the
Commission can envision an argument
whereby enabling DMMs to see Floor
broker e-Quotes or the identity of Floor
brokers would facilitate the bringing
together of buyers and sellers of large
orders, apparently suggesting that
limiting DMM visibility to this Floor
broker interest would serve this end of
order interaction effectively. The above
scenario illustrates why limiting access
only to other Floor broker interest
would ignore a large segment of the
trading population, and limit the ability
of buyers and sellers to negotiate
directly, regardless of their location.
Specifically, allowing DMMs to access
the disaggregated information of offFloor participants permits DMMs to
facilitate block transactions between
Floor brokers and those same off-Floor
participants. In the above scenario, the
member organization that has not
elected to utilize a Floor broker is still
able to benefit from the proposed rule
changes by permitting his order
information to be relayed to Floor
brokers on a disaggregated basis. And
importantly, the member organization
has permitted the order information to
be relayed on a disaggregate basis: If the
member organization determines that
the cost of exposing an order on a
disaggregated basis outweighs any
potential benefit, then the member
organization can enter the order dark.
Thus, the member organization can
determine—on an individual basis—the
benefits and costs of the permitting its
own information disclosed on a
disaggregated basis. Visibility of price,
size, and entering firm opens up a wider
range of wholly consensual channels of
communication that more fully and
effectively enhance the potential for
order interaction. Put another way,
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Member Organization remains at all
time in full control of the information
he or she is duty-bound to protect as
agent for the mutual fund seller—when
entering the order on the Exchange and
making it visible to the DMM and Floor
brokers (i.e., Member Organization
could have decided to enter the order
dark), and when he engages with Floor
broker following Floor broker’s
initiation of contact (i.e., Member
Organization could have declined to
engage with the Floor broker when he
or she initiated contact). Moreover, with
Floor broker share of Exchange volume
currently at approximately 9%, the
contra-side interest represented by a
Floor broker in any given situation will
likely be only a small subset of total
available interest.
emcdonald on DSK67QTVN1PROD with NOTICES
Scenario 2: DMM Facilitates Block
Trade by Sharing Post-Trade
Information With Floor Broker
An interaction similar to Scenario 1
could be facilitated by a DMM sharing
post-trade information with a Floor
broker pursuant to the proposed rule.
Assume Floor broker has the same
20,000 share order to buy ABC from his
or her pension fund customer. Assume
in this scenario that Member
Organization has no current interest
entered in Exchange systems, but was a
seller on the Exchange earlier in the
day. Assume the upstairs desk of
Member Organization has the same
parent order of 30,000 shares of ABC as
in Scenario 1. Floor broker approaches
the DMM and asks if there is enough
sell-side interest to accommodate. DMM
tells Floor broker that there is no
interest to accommodate, but that
Member Organization was a seller
earlier in the day. As in Scenario 1,
assume there is no Floor broker
representing the seller. Floor Broker
approaches the upstairs desk of Member
Organization or Member Organization’s
on-floor representative, if any, who
could then contact his or her upstairs
desk, and achieves the same result as in
Scenario 1. As with Scenario 1, the
benefit of the interaction illustrated here
stems from the consensual availability
of information related to orders entered
by an off-Floor participant.
Scenario 3: DMM Facilitates Block
Issuer Repurchase Transaction by
Sharing Price, Size, and Entering Firm
Assume an Exchange-listed issuer
engages a Floor broker to handle a Rule
10b–18 repurchase with a goal of
repurchasing 500,000 shares at a
maximum price of $10.15. Assume the
highest current independent published
bid is $10.03, the last independent
transaction price reported was $10.08,
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and the offer is quoted at $10.07. The
issuer wishes to make a block purchase
of up to 100,000 at $10.07 or better.40
The Floor broker approaches the DMM
and asks about selling interest at the
$10.07 price level. Under the proposed
rule, the DMM could inform Floor
broker that Member Organization is a
seller of 10,000 shares at $10.07.
Assume as in the prior scenarios that
there is no Floor broker representing the
selling interest and that the Floor broker
initiates contact with the upstairs desk
of Member Organization or Member
Organization’s on-floor representative, if
any, who could then contact his or her
upstairs desk, and finds additional
selling interest upstairs as in Scenario 1.
Assume the Floor broker and Member
Organization agree upon a transaction of
100,000 shares at $10.07.
In this scenario, the issuer receives a
large fill at better than the last
independent transaction price, and both
sides have minimized the impact of
their transaction. As the Commission
has previously stated in considering
block purchases by issuers, ‘‘the market
impact of a block purchase is likely to
be less than that of a series of purchases
of smaller amount that in the aggregate
are equal in size to the block but are
accomplished over a period of time.’’ 41
As with Scenarios 1 and 2, the benefit
to the repurchasing issuer and the seller
illustrated here stems from the
consensual availability of information
related to orders entered by an off-Floor
participant.
Situations Where DMM Access to
Entering Firm’s Identity Would Prevent
Errors or Expedite Resolution Thereof
In addition to promoting the
interaction of buyers and sellers in size
transactions, DMM access to the identity
of firms entering individual orders
would improve a DMM’s ability to
identify erroneous trades and to
intervene where entering firms, whether
a Floor broker or off-Floor participant,
are experiencing technology problems.
The proposed visibility would expedite
the identification and possible
40 Rule 10b–18 provides an issuer with a safe
harbor from liability under Section 9(a)(2) of the
Act and Rule 10b–5 under the Act based on the
manner, timing, price, and volume of their
repurchased when in accordance with Rule 10b–
18’s conditions. Rule 10b–18(b)(4) provides the
condition that the total volume of the purchases
cannot exceed 25 percent of the average daily total
volume for that security; however, once per week
the issuer may make one block purchase without
regards to the volume limit if no other Rule 10b–
18 purchase takes place on the same day and the
block purchase is not included when calculating a
security’s four week average daily total volume.
41 See Exchange Act Release No. 17222 (October
17, 1980) (‘‘10b–18 Proposing Release’’). Rule 10b–
18 was originally proposed as Rule 13e–2.
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prevention of such errors. Moreover, the
Exchange’s recent experience in
identifying the source of millions of
unintended trades in more than 150
symbols attributable to a member’s
software malfunction 42 confirms the
potential contribution of the proposed
visibility to the diagnosis and resolution
of problems and the maintenance of
orderly markets. Specifically, in that
situation, the DMMs were the first to
identify the anomalous trades and
report the trades to Exchange officials.
The Exchange believes that had DMMs
also been able to see the commonality
of the entering firm in the spike of
incoming orders, the source of the
disruption may have been identified
more quickly, potentially avoiding
millions of dollars in firm losses.
Finally, entering firm information can
serve to mitigate the effect of less severe
but still important technology problems,
such as Floor broker handheld outages.
DMMs currently are unable to identify
individual Floor broker orders and
cancel them during handheld outages;
the proposed rule would enable them to
perform this important function.
Burdens Placed on DMMs and Floor
Brokers
The Disapproval Order notes that the
Exchange was ‘‘not proposing to require
any additional obligations from DMMs
and Floor brokers in exchange for the
additional information.’’ 43 As noted
above, the Exchange does not believe
the additional information adds
42 Loss Swamps Trading Firm, Wall Street
Journal, August 2, 2012.
43 See Disapproval Order at 10. The Exchange
believes that a close reading of the precedent
indicates that this level of scrutiny of the
incremental obligations associated with a proposal
such as this one is not required. The source of the
scrutiny stems from New Market Model Order in
which the NYSE proposed fundamental structural
changes, including phasing out the specialist
system and a wholesale alteration of the NYSE’s
historic priority and parity rules. See Securities
Exchange Act Release No. 58845, 73 FR 64379
(October 29, 2008) (‘‘New Market Model Release’’).
What was proposed in the New Market Model, in
other words, called for a review by the Commission
that was necessarily intense, in stark contrast with
the modest changes proposed here. Additionally, in
support of what would be regarded as ‘‘special
advantages’’ and ‘‘rewards that are not
disproportionate to the services provided,’’ the
Commission previously cited a series of orders
approving proposals that generally involve the
creation or registration of a new class of market
maker or participation of an existing class in a new
market. Those proposals, similar to the New Market
Model, were structural in nature and in stark
contrast to the limited nature of this proposed rule
change. Furthermore, the principal market
participant impacted by the present proceeding,
Floor brokers, is not a market maker at all, but an
agent, rendering much of the referenced precedent
factually distinct. Accordingly, the Exchange
respectfully suggests that the level of scrutiny
associated with the precedents cited is not required
here.
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emcdonald on DSK67QTVN1PROD with NOTICES
meaningfully to the trading view of the
DMM, and that any such addition
would benefit customers, not DMMs
and Floor brokers. Indeed, the function
of providing disaggregated order
information to Floor brokers upon
request would be an administrative
burden to DMMs rather than a benefit.
Additionally, as noted above, Floor
brokers, as agents, would receive no
benefit attributable to the information,
as such benefit would flow directly and
entirely to the customer whose order
they are representing and the contra
side to it. Moreover, the Exchange
believes, based on fundamental changes
in the competitive context since the
approval of the New Market Model and
the continuing and significant
obligations of DMMs and Floor brokers,
that the proposed availability of
disaggregated order information would
not constitute a disproportionate
benefit. In other words, the potential
value of the information in question has
been substantially diminished since
2006 in that that DMMs only have
information about orders at the
Exchange, which represent
approximately 22% of market-wide
volume in Exchange-listed stocks across
the market.
Notwithstanding the DMM’s evolving
role in the overall trading of Exchangelisted securities, the obligations and
restrictions placed on DMMs and Floor
brokers have remained unchanged. In
addition, the manual process by which
disaggregated order information is
accessed reduces to a minimum any
potential benefit. As demonstrated by
the scenarios above, perhaps its
principal value is the opportunity it
offers to open a consensual dialogue
with a counterparty—an opportunity
aligned with both the interests of other
Floor and non-Floor members as well as
investors. The disaggregated order
information, while inconsequential from
a trading perspective, is thus important
administratively in clearing the way to
size interactions, reducing transaction
costs, and enhancing the quality of the
Exchange’s market.
Specifically, with respect to the
continuing and significant burdens on
DMMs, pursuant to NYSE Rule 104, a
function of a DMM is:
[T]he maintenance, in so far as reasonably
practicable, of a fair and orderly market on
the Exchange in the stocks in which he or she
is so acting. The maintenance of a fair and
orderly market implies the maintenance of
price continuity with reasonable depth, to
the extent possible consistent with the ability
of participants to use reserve orders, and the
minimizing of the effects of temporary
disparity between supply and demand. In
connection with the maintenance of a fair
and orderly market, it is commonly desirable
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that a member acting as DMM engage to a
reasonable degree under existing
circumstances in dealings for the DMM’s
own account when lack of price continuity,
lack of depth, or disparity between supply
and demand exists or is reasonably to be
anticipated.44
Additionally, any transaction by a
DMM for the DMM’s account must ‘‘be
effected in a reasonable and orderly
manner in relation to the condition of
the general market and the market in the
particular stock.’’ 45
Furthermore, the Exchange notes that
any non-public market information that
a DMM receives through Exchange
systems would be subject to specific
restrictions as ‘‘non-public order
information’’ 46 under Exchange Rule
98. For example, Exchange Rule
98(c)(2)(A) would require DMMs to
maintain the confidentiality of any such
non-public market information and
would prohibit the DMM member
organization’s departments, divisions,
or aggregation units that are not part of
the DMM unit, including investment
banking, research, and customer-facing
departments, from having access to that
information. In addition, Rule 98 sets
forth restrictions on access to nonpublic order information by the offFloor locations of a DMM unit,
including restrictions on the ability of a
DMM located on the Trading Floor from
communicating directly with off-Floor
individuals or systems responsible for
making off-Floor trading decisions.47
The manner by which the DMM
would access disaggregated order
information aligns precisely with the
information’s relative lack of trading
utility and its administrative
significance in facilitating size
interactions. A DMM can access the
disaggregated order information only
while located at the post on the Trading
Floor, and a DMM’s ability to access the
disaggregated order information is
largely manual. The DMM must query
44 See
NYSE Rule 104(a)(1).
NYSE Rule 104(g).
46 NYSE Rule 98(b)(7) defines the term ‘‘nonpublic order’’ to mean ‘‘any order, whether
expressed electronically or verbally, or any
information regarding a reasonably imminent nonpublic transaction or series of transactions entered
or intended for entry or execution on the Exchange
and which is not publicly available on a real-time
basis via an Exchange-provided datafeed, such as
NYSE OpenBook® or otherwise not publicly
available. Non-public orders include order
information at the opening, re-openings, the close,
when the security is trading in slow mode, and
order information in the NYSE Display Book® that
is not available via NYSE OpenBook®.’’
47 See Rules 98(d)(2)(B)(i)–(iii), (f)(1)(A)(i)–(ii),
and (f)(3)(C)(ii). In addition, Rule 98(c)(2)(A)(ii)
provides that a DMM may make available to a Floor
broker associated with an approved person or
member organization any information that the
DMM would be permitted to provide under
Exchange rules to an unaffiliated Floor broker.
45 See
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25125
the specific information about a
particular security, which limits the
number of securities about which
disaggregated order information can be
accessed at any given time. Importantly,
Exchange systems would not provide
disaggregated order information to the
algorithmic trading systems of any
DMM unit,48 and would not support any
electronic dissemination of the
disaggregated order information to other
market participants. As noted above,
participants who do not want the DMM
to have access to disaggregated order
information have the option to enter
dark interest that is not visible to the
DMM in disaggregated form. The
Exchange also notes that the proposed
rule change would specifically prohibit
DMMs from using any trading
information available to them in
Exchange systems, including
disaggregated order information, in a
manner that would violate the Exchange
rules or federal securities laws or
regulations.49
Benefit to Floor of the Proposed
Availability of Disaggregated Order
Information
The Disapproval Order also raised
concerns about the possible benefit to
Floor members of the proposed
availability of order information, stating
that the benefit to Floor members may
be more than slight, ‘‘particularly with
respect to less liquid securities where
order information is less likely to
become rapidly stale.’’ Respectfully, the
Commission’s concern about the
possible benefit to Floor members is
misplaced, irrespective of whether the
security is highly liquid or less liquid.
It has been noted above, but is worth
stressing, that DMMs currently have
access to aggregated order information
that fully reflects the size of trading
interest for a particular security on the
Exchange that has not been designated
as dark by the entering firm. Similarly,
such aggregated information for interest
not marked dark is visible to any market
participant beyond the Floor via
OpenBook. What is proposed, therefore,
is not making a new segment of trading
interest visible to DMMs, but rather
48 The order information in these systems would
be available for a DMM to view manually at the post
and as such is different from the advance order-byorder information that DMM trading algorithms
previously received before implementation of the
New Market Model pilot (sometimes referred to as
‘‘the look’’). Under the proposed rule change, as is
the case today, DMM trading algorithms would
have the same information with respect to orders
entered on the Exchange, Floor broker agency
interest files or reserve interest as is disseminated
to the public by the Exchange. See Rule 104(b)(iii).
49 See Proposed NYSE Rule 104(j)(ii).
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making the components of already
visible trading interest available, along
with the entering firm, clearing firm,
and badge number of the Floor broker,
if any. Since the proposal would not
increase the visibility of trading interest
in less liquid securities, the question of
whether such information is more or
less likely to remain fresh or become
stale is not at issue in a meaningful way.
The point of the proposed availability of
order information is to enable Floor
brokers to search more effectively for
size counterparties for their customers
and to expedite the ability of DMMs to
resolve errors, not to improve the
trading position of DMMs.
Moreover, the question of staleness is
further beside the point when one
remembers that DMM trading today is
predominantly automated and
algorithmic. Even if the proposed
visibility included trading interest that
was not currently visible—it does not—
DMMs as a practical matter would need
to integrate such information into their
automated trading models to use it.
Exchange systems, however, would
specifically prevent such use.
To the extent that the Commission is
concerned that a DMM could otherwise
use the proposed incremental
information for trading purposes, it is
useful to consider the premise
apparently underlying the concern. The
premise is presumably that learning the
component sizes of trading interest that
is already visible in the aggregate, or
that learning the identity of the entering
firm, clearing firm, or the Floor broker
for a component order, could somehow
add sufficiently to the DMMs view of
the market to induce the DMM to trade
on the same side or opposite side of a
component order. The Exchange is
aware of no facts, data or analyisis that
would support such a premise.
Additionally, firms already advertise
many of these particulars of their
trading interest on both a pre- and posttrade basis (IOIs and other forms)
through a variety of electronic vendor
solutions, such as Bloomberg 50 and
Autex.51 Therefore, the ability and
willingness of firms to advertise their
interest is hardly a new concept in
today’s marketplace. The proposal
would simply restore within the
Exchange environment features and
services previously available on the
50 Bloomberg allows brokers to disseminate IOIs
to the buy-side via Bloomberg’s Execution
Management Solutions.
51 Autex is an electronic platform from Thomson
Financial that allows potential buyers and sellers to
identify other large traders by showing ‘‘trade
advertisements’’ in a stock. The interface presents
indicators of interest among traders, permitting buyside clients to identify optimum trading partners.
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Floor and currently offered beyond the
Floor by multiple market data vendors.
Moreover, the balance of benefits and
potential costs would favor
unambiguously a choice on the part of
a member or customer to make
disaggregated order information visible
to the DMM and available to Floor
brokers. As illustrated in detail by
Scenarios 1 and 2 above, the potential
benefits to a customer of sharing
disaggregated order information (again,
by choosing not to enter the order dark)
would be both significant and concrete.
A member’s sharing of a customer’s
order information, for example, would
make it possible for contra side interest
to initiate contact with the member and
for the customer to experience a size
transaction that avoids market impact
and reduces transaction costs. In
contrast, the potential cost of sharing
the information would be de minimis
because the component order
information would add nothing
meaningful to the information reflected
in the aggregate trading interest already
visible to DMM and to the market via
OpenBook. More fundamentally,
members today can choose from an
array of alternatives to the Exchange’s
integration of human judgment into the
price discovery process at a single,
physical point of sale. That choice
represents the ultimate check on any
imbalance in the allocation of benefits
to DMMs or Floor brokers.
It is also worth noting that the utility
of disaggregated order to the Floor is
largely independent from its freshness
or staleness as trading information.
Information that is stale in trading
terms, for example, may nonetheless be
enormously helpful to an agent like a
Floor broker in the search for a size
counterparty. Assume, for instance, that
there is no live interest expressed in the
Display Book at or near a particular
price point. It may nonetheless be useful
for a Floor broker to know that a
particular firm had entered an order in
the security at a particular level a day
or two before. Knowing the identity of
the entering firm could allow a Floor
broker to identify a counterparty in
much the same way as Scenario 1 above,
producing the same size interaction and
reduced transaction costs for both sides
of the trade. Notably, this utility is also
distinct from how actively traded a
particular security is.
Moreover, Section 11(a) obligations
on Floor brokers ensure that investors,
not Floor brokers, will reap the benefits
of access to the disaggregated order
information, providing that Floor
brokers will not ‘‘effect any transaction
on [the] exchange for its own
PO 00000
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account * * *.’’ 52 This trading
restriction has been in place since 1978,
when Floor brokers regularly had access
to disaggregated order information on
the Floor. The Exchange amended Rule
115 regarding what information could
be provided in connection with a
market look because, at the time, the
Exchange did not have the technology to
replicate the ability of Floor brokers to
maintain certain interest as ‘‘dark.’’
Although the Exchange reduced the
access to information available to Floor
brokers—which was always via the
specialist, and now, DMM—the trading
restrictions were not lessened. Now that
the Exchange has enabled market
participants to replicate electronically
the type of dark interest formerly
maintained manually by Floor brokers,
the Exchange can restore the access to
disaggregated order information without
any need to adjust the applicable
trading restrictions. These applicable
trading restrictions provide assurance
that the Floor brokers will not be
reaping the benefits of access to
disaggregated order information; the
benefits will directly flow to investors.
Existing trading restrictions and the
additional affirmative obligations
required by the New Market Model
provide appropriate controls, ensuring
that the adoption of Rule 104(j) meets
the requirements of Section 6(b)(5) of
the Act. As previously enumerated,
DMMs are subject to a number of
restrictions governing access to nonpublic order information that remains
unchanged since before the adoption of
the New Market Model, and which were
put in place when DMMs still had an
agency role. Even though they no longer
act as agents, DMMs are still subject to
those trading restrictions. The rules of
the Exchange are designed such that any
additional access by DMMs and Floor
brokers to information not available
generally to off-Floor traders carries
with it restrictive obligations regarding
the permitted use of such information.
Floor Competition With Off-Floor
Members
The Disapproval Order expresses
concern about the provision of
disaggregated order information to Floor
Members and, by extension, exclusively
to Floor broker customers and the
potential ‘‘detrimental effect on
competition between on-Floor and offFloor members of the Exchanges.’’
Several points bear emphasis here. The
Floor broker’s ability to share
information in this way aligns with the
agency relationship between the Floor
broker and his or her customer, and is
52 15
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complementary to other affected market
participants. That is, the agent-Floor
broker is enabled to make full disclosure
to his or her principal-customer. The
customer, given his or her own trading
interest, has an interest in not
disseminating the information learned
from the Floor broker. The member
organization and the member
organization’s customer benefit in that
the Floor broker’s customer potentially
could initiate direct contact with the
member organization. In this way, the
Floor broker’s sharing of this type of
information with the customer provides
a sort of check of the principal on the
agent and ensures that the agent adds
value. The Exchange’s integration of
human judgment into a point of sale
occurs, in other words, within a
competitive landscape filled with
customer choice among both exchange
and off-exchange venues. The modest
increase in visibility offered by the
proposed rules, especially in light of
increasing dispersal of liquidity, in no
way upsets that competitive balance.
In addition, extending the proposed
visibility to other off-Floor participants
presents obvious dangers. NYSE Rules
98 and 104(b) are not applicable to other
proprietary traders, for example.
Accordingly, if disaggregated
information were provided
electronically to all market participants,
there would be no mechanism or
informational barrier ensuring that the
disaggregated information could only be
used for the benefit of investors. Rule
104(j)’s success in protecting investors
and the public interest is directly tied to
its limited access.
Finally, any off-Floor member is free
to utilize the services of a Floor broker,
in which case, the benefits of the
proposed rule change would flow
entirely to the off-Floor member (or the
customer entering the order).
Additionally, the benefits of the
proposed rule change still inure to those
participants who choose not to utilize
Floor brokers because Floor brokers may
source liquidity from those participants.
The proposed rule change is not a zerosum game: The benefits of the proposal
are spread across market participants,
not limited to a select few at the
expense of others.
Conforming Amendments
To reflect the information that would
be available to DMMs through Exchange
systems, the Exchange proposes
amendments to Rules 70(e), (f) and (i)
and 70.25(a)(vii) to specify which
information is available to a DMM
through Exchange systems. The
Exchange also proposes changes to Rule
70 to specify what information about
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e-Quotes is available to the DMM. The
Exchange notes that the proposed
amendments to Rule 70 do not change
the operation of the existing rule, other
than to specify which interest may be
available to the DMM on a disaggregated
basis, as discussed above. Rather, the
amendments are proposed as clarifying
changes with respect to the manner that
Floor broker agency interest currently
operates and how such interest may be
available to the DMM. For example,
current Rule 70(e) states that a Floor
broker has discretion to exclude all of
his or her agency interest, subject to the
provisions in the rule, from the
aggregated agency interest information
available to the DMM consistent with
Exchange rules governing Reserve
Orders. Because ‘‘excluding’’ interest
from the information available to the
DMM is similar to how Reserve Orders
operate pursuant to Rule 13, the
Exchange proposes to harmonize the
terms and use term ‘‘e-Quote’’ to replace
the term ‘‘Floor broker agency interest,’’
use the term ‘‘Minimum Display
Reserve e-Quote’’ to replace the concept
in current Rule 70(f)(ii), and use the
term ‘‘Non-Display Reserve e-Quotes’’ to
replace the concept in current Rule
70(f)(i). The Exchange also proposes to
provide more specificity in amended
Rule 70 of how such interest would be
made available to the DMM, consistent
with the current operation of the Rule.
In addition, the Exchange proposes to
delete Rule 104(a)(6), which currently
provides that DMMs, trading assistants
and anyone acting on their behalf are
prohibited from using the Display
Book® system to access information
about Floor broker agency interest
excluded from the aggregated agency
interest and Minimum Display Reserve
Order information other than for the
purpose of effecting transactions that are
reasonably imminent where such Floor
broker agency and Minimum Display
Reserve Order interest information is
necessary to effect such transaction.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
the requirements of Section 6(b) of the
Act,53 in general, and Section 6(b)(5) of
the Act,54 in particular, in that it is
designed to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism for a free and open market
and a national market system and, in
general, to protect investors and the
public interest.
53 15
54 15
PO 00000
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
Frm 00070
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25127
Specifically, the Exchange believes
that the proposed change promotes just
and equitable principles of trade
because the proposed change is an
integration of human judgment into the
price discovery process at a single,
physical point of sale, whose nature and
extent is driven by the demands of
informed consumers. With no shortage
of competing execution venues and the
lack of an obligation on the part of
market participants to utilize the
services of a Floor broker, whether and
how Floor brokers are used reflect the
value placed by market participants on
what the Floor adds. The wholly
consensual integration of human
judgment will serve legitimate Floor
functions in three respects: (1) It
increases the possibility that buyers and
sellers of size positions can meet,
thereby enhancing their opportunities to
reduce transaction costs; (2) it expedites
the discovery and resolution of errors,
thereby reducing disruptive impacts and
promoting fair and orderly markets; and
(3) it leverages the informed choices of
users, allowing the interplay of
competitive forces to determine the
scope and nature of human interaction
in the price discovery process.
Similarly, the Exchange believes that
the proposed change will protect
investors and the public interest
because existing trading restrictions and
additional affirmative obligations
required by the New Market Model
provide appropriate controls. As
previously stated, DMMs are subject to
a number of restrictions governing
access to non-public order information.
Additionally, the rules of the Exchange
are designed such that any additional
access by DMMs and Floor brokers to
information not available generally to
off-Floor traders carries with it
restrictive obligations regarding the
permitted use of such information.
Additionally, the Exchange believes
that the proposed change will remove
impediments to, and perfect the
mechanisms of, a free and open market
and a national market system because
the proposed change clarifies that
DMMs may perform certain defined
Trading Floor functions, which were
previously performed by specialists, in
furtherance of the efficient, fair, and
orderly operation of the Exchange.
Increasing the amount of information,
including disaggregated order
information, that a DMM is permitted to
view and provide to Floor brokers
would further the ability of DMMs to
carry out the defined Trading Floor
functions and, as a result is designed to
remove impediments to and perfect the
mechanism of a free and open market
through the efficient operation of the
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Exchange, in particular by facilitating
the bringing of buyers and sellers
together.
The Exchange also believes that the
proposed change is equitable and not
unfairly discriminatory because
extending the proposed visibility to
other off-Floor participants presents
obvious dangers: NYSE Rules 98 and
104(b) are not applicable to other
proprietary traders, and if disaggregated
information were provided
electronically to all participants, there
would be no mechanism or
informational barrier ensuring that the
disaggregated information could only be
used for the benefit of investors.
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. The
Exchange believes that the proposed
rule change will facilitate the execution
of block trades, and as a result, will
reduce the market impact and
associated transactions costs for
members wishing to take advantage of
the rule proposal. The reduction of
transaction costs, along with the
proposal’s other purpose of expediting
error resolution, will improve the
efficiency of the market and remove
barriers to order execution, thus
increasing the level of participation and
competition in the marketplace.
The Exchange operates in a highly
competitive market in which market
participants can easily and readily
direct order flow to competing venues.
The Exchange’s integration of human
judgment into a point of sale occurs
within that competitive landscape filled
with customer choice among both
exchange and off-exchange venues. The
modest increase in visibility offered by
the proposed rules, especially in light of
increasing dispersal of liquidity, in no
way upsets that competitive balance.
emcdonald on DSK67QTVN1PROD with NOTICES
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
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
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longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) by order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–NYSE–2013–21 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–NYSE–2013–21. 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
a.m. and 3 p.m. Copies of the filing will
also 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
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Fmt 4703
Sfmt 9990
information that you wish to make
available publicly. All submissions
should refer to File Number SR–NYSE–
2013–21 and should be submitted on or
before May 20, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.55
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013–10015 Filed 4–26–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–69362A; File No. 600–23]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Notice of
Filing of Amended Application for
Registration as a Clearing Agency;
Correction
Securities and Exchange
Commission.
AGENCY:
ACTION:
Notice; correction.
The Securities and Exchange
Commission published a document in
the Federal Register of April 17, 2013
concerning a Notice of Filing of
Amended Application for Registration
as a Clearing Agency. The document
contained an incorrect citation
regarding the Director of the Division of
Trading and Markets’ delegated
authority to publish notice of such an
application.
SUMMARY:
Neil
Lombardo, Division of Trading and
Markets, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549, (202) 551–4649.
FOR FURTHER INFORMATION CONTACT:
Correction
In the Federal Register of April 17,
2013, in FR Doc. 2013–08924, on page
22925, in footnote twenty-three, which
appears in the second column, correct
the footnote to read: ‘‘17 CFR 200.30–
3(a)(16).’’
Dated: April 24, 2013.
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–10032 Filed 4–26–13; 8:45 am]
BILLING CODE 8011–01–P
55 17
E:\FR\FM\29APN1.SGM
CFR 200.30–3(a)(12).
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Agencies
[Federal Register Volume 78, Number 82 (Monday, April 29, 2013)]
[Notices]
[Pages 25118-25128]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-10015]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69427; File No. SR-NYSE-2013-21]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing of Proposed Rule Change Amending NYSE Rule 104 To
Codify Certain Traditional Trading Floor Functions That May Be
Performed by Designated Market Makers, To Make Exchange Systems
Available to DMMs That Would Provide DMMs With Certain Market
Information, To Amend the Exchange's Rules Governing the Ability of
DMMs To Provide Market Information to Floor Brokers, and To Make
Conforming Amendments to Other Rules
April 23, 2013.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on April 9, 2013, New York Stock Exchange LLC (the
``Exchange'' or ``NYSE'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I and II below, which Items have been prepared by the self-
regulatory organization. On April 18, 2013, the Exchange filed Partial
Amendment No. 1 to the proposal.\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\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
\4\ In Partial Amendment No., 1, the Exchange filed the Exhibit
3 which was not included in the April 9, 2013 filing.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend proposes to amend NYSE Rule 104 to
codify certain traditional Trading Floor \5\ functions that may be
performed by Designated Market Makers (``DMMs''),\6\ to make Exchange
systems available to DMMs that would provide DMMs with certain market
information, to amend the Exchange's rules governing the ability of
DMMs to provide market
[[Page 25119]]
information to Floor brokers, and to make conforming amendments to
other rules. 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.
---------------------------------------------------------------------------
\5\ NYSE Rule 6A defines the term ``Trading Floor'' to mean, in
relevant part, ``the restricted-access physical areas designated by
the Exchange for the trading of securities.''
\6\ NYSE Rule 2(i) defines the term ``DMM'' to mean an
individual member, officer, partner, employee or associated person
of a DMM unit who is approved by the Exchange to act in the capacity
of a DMM. NYSE Rule 2(j) defines the term ``DMM unit'' as a member
organization or unit within a member organization that has been
approved to act as a DMM unit under NYSE Rule 98.
---------------------------------------------------------------------------
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 amend NYSE Rule 104 to codify certain
traditional Trading Floor functions that may be performed by DMMs;
these functions were previously described in the Exchange's Floor
Official Manual. In addition, the Exchange proposes to amend its rules
to make Exchange systems available to DMMs that would provide DMMs with
certain market information about securities in which the DMM is
registered. The Exchange also proposes to amend its rules governing the
ability of DMMs to make available certain order and market information
to Floor brokers provided that the market participant entering the
order had not opted out of such availability. Finally, the Exchange
proposes to make clarifying and conforming amendments to other
rules.\7\ As described below, the Exchange believes that enabling DMMs
to perform certain additional Trading Floor functions previously
performed by specialists would improve the quality of certain
interactions experienced by investors (specifically, by increasing the
likelihood of transaction cost-reducing block transactions).
---------------------------------------------------------------------------
\7\ The Exchange's affiliate, NYSE Amex [sic] LLC, has submitted
substantially the same proposed rule change to the Commission. See
SR-NYSEMKT-2013-25.
---------------------------------------------------------------------------
Specifically, on October 31, 2011, NYSE and NYSE Amex LLC (``NYSE
Amex'') each filed with the Commission, pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \8\ and Rule 19b-4
thereunder,\9\ proposed rule changes to amend Rule 104. The proposals
were published for comment in the Federal Register on November 17,
2011.\10\ The Commission received no comment letters on the Proposals.
On December 22, 2011, the Commission extended the time period to
February 15, 2012, in which either to approve the Proposals, disapprove
the Proposals, or to institute proceedings to determine whether to
disapprove the Proposals.\11\ The Commission received no comment
letters on the Proposals during the extension. On February 15, 2012,
the Commission issued an order instituting proceedings to determine
whether to disapprove the Proposals.\12\ The Commission received six
comment letters supporting the Proposals after the Commission
instituted proceedings to determine whether to disapprove the
Proposals. After the Commission issued a notice of designation of
longer period for Commission action on May 14, 2012,\13\ the Commission
disapproved the proposed rule changes on July 13, 2012.\14\
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\8\ 15 U.S.C. 78s(b)(1).
\9\ 17 CFR 240.19b-4.
\10\ See Securities Exchange Act Release Nos. 65735 (November
10, 2011), 76 FR 71405 (SR-NYSEAmex-2011-86) (``NYSE Amex Notice'')
and 65736 (November 10, 2011), 76 FR 71399 (SR-NYSE-2011-56) (``NYSE
Notice'').
\11\ See Securities Exchange Act Release No. 66036, 76 FR 82011
(December 29, 2011).
\12\ See Securities Exchange Act Release No. 66397, 77 FR 10586
(February 22, 2012).
\13\ See Securities Exchange Act Release No. 66981, 77 FR 29730
(May 18, 2012).
\14\ See Securities Exchange Act Release No. 67437, 77 FR 42525
(July 13, 2012) (``Disapproval Order'').
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As discussed more fully below, the Commission's disapproval was
based principally on concerns related to the fairness and competitive
impact of providing certain order information to Floor participants.
The Exchange is submitting the present filing to provide more detailed
support demonstrating the consistency of the proposed rule change in
general, and the provision of such order information in particular,
with Section 6(b)(5) of the Act and to otherwise address the concerns
raised by the Commission in its disapproval order. The Exchange
believes that the Commission's application of the Act's fairness and
competition-related standards must take specific account of the
transformational competitive dynamics that have reshaped the role of
the Floor over the last decade, particularly with the potential of the
proposal to improve size interactions and reduce transaction costs for
the public. Accordingly, this filing: (1) Explains the mechanics and
operation of the proposal; (2) provides an overview of the reshaped
competitive context within which the Floor operates; and (3) offers
three detailed scenarios illustrating the potential benefits to the
public of making the proposed order information available to Floor
participants and a demonstration of how the proposed availability would
improve error resolution. The improved order interactions illustrated
in the scenarios and the demonstration of improved error resolution
explain in detail why the proposed consensual availability of the order
information in question should apply not only to orders entered on the
Floor, but also to orders entered by off-Floor participants.
DMM Trading Floor Functions
On October 24, 2008, the Commission approved, as a pilot program,
certain core rules that govern the current operation of the
Exchange.\15\ These rules embody the Exchange's ``New Market Model.''
The New Market Model pilot rules include NYSE Rule 104, which sets
forth certain affirmative obligations of DMMs, the category of market
participant that replaced specialists. DMMs have obligations with
respect to the quality of the markets in securities to which they are
assigned that are similar to certain obligations formerly held by
specialists.
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\15\ Securities Exchange Act Release No. 58845, 73 FR 64379
(October 29, 2008) (``New Market Model Release'').
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In addition to their trading-related functions and obligations,
DMMs, under the New Market Model, provide support on the Trading Floor
to assist in the efficient operation of the Exchange market and
maintain fair and orderly markets. These Trading Floor functions were
performed by specialists before the New Market Model was adopted, and
described in the Exchange's Floor Official Manual.\16\ Under the New
[[Page 25120]]
Market Model, there is a continued need for DMMs to perform these
Trading Floor functions. The Exchange proposes to add new subparagraph
(j)(i) to Rule 104 to codify these historic functions.\17\
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\16\ See 2004 Floor Official Manual, Market Surveillance June
2004 Edition, Chapter Two, Section I.A. at 7 (``specialist helps
ensure that such markets are fair, orderly, operationally efficient
and competitive with all other markets in those securities''),
Section I.B.3. at 10-11 (``[i]n opening and reopening trading in a
listed security, a specialist should * * * [s]erve as the market
coordinator for the securities in which the specialist is registered
by exercising leadership and managing trading crowd activity and
promptly identifying unusual market conditions that may affect
orderly trading in those securities, seeking the advice and
assistance of Floor Officials when appropriate'' and ``[a]ct as a
catalyst in the markets for the securities in which the specialist
is registered, making all reasonable efforts to bring buyers and
sellers together to facilitate the public pricing of orders, without
acting as principal unless reasonably necessary''), Section I.B.4.
at 11 (``In view of the specialist's central position in the
Exchange's continuous two-way agency auction market, a specialist
should proceed as follows * * * [e]qually and impartially provide
accurate and timely market information to all inquiring members in a
professional and courteous manner.''), and Section I.B.5. at 12 (A
specialist should ``[p]romptly provide information when necessary to
research the status of an order or a questioned trade and cooperate
with other members in resolving and adjusting errors.''). Relevant
excerpts of the 2004 Floor Official Manual are attached as Exhibit 3
of this filing.
\17\ The Exchange proposes to redesignate the rule text
currently set forth in section (j) as section (k) of Rule 104.
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In particular, DMMs perform four categories of Trading Floor
functions: (1) Maintaining order among Floor brokers manually trading
at the DMM's assigned panel, including managing trading crowd activity
and facilitating Floor broker executions at the post; (2) facilitating
Floor broker interactions, including either participating as a buyer or
seller, and appropriately communicating to Floor brokers the
availability of other Floor broker contra-side interest; (3) assisting
Floor brokers with respect to their orders, including resolving errors
and, for example, inputting Floor interest into Exchange systems in the
event of handheld technology outages; and (4) researching the status of
orders or questioned trades. The current performance of these four
functions can be illustrated as follows:
First, a DMM may maintain order among Floor brokers manually
trading at the DMM's assigned panel. For example, where there is
significant agency interest in a security, the DMM may help Floor
Officials maintain order by managing trading crowd activity and
facilitating the execution of one or more Floor broker's orders
trading at the post.
Second, a DMM may bring Floor brokers together to facilitate
trading, which may include the DMM acting as a buyer or seller. This
function is consistent with the floor-based nature of the Exchange's
hybrid market. For example, if a DMM is aware that a Floor broker
representing buying interest inquired about selling interest in one
of his or her assigned securities and later a Floor broker
representing selling interest makes an inquiry about buying
interest, the assigned DMM may inform the Floor broker representing
the buying interest of the other Floor broker's selling interest. In
addition, the DMM itself may provide contra-side interest to a Floor
broker representing interest at the post.
Third, DMMs may assist Floor brokers with respect to their
orders by providing information regarding the status of a Floor
broker's orders, helping to resolve errors or questioned trades,
adjusting errors, and cancelling or inputting Floor broker agency
interest on behalf of a Floor broker. For example, if a Floor
broker's handheld device is not operational, the DMM may assist the
Floor broker by entering or canceling broker interest on the Floor
broker's behalf.\18\
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\18\ The Exchange maintains a full audit trail of all Floor
broker orders, including information reflecting entry, modification,
cancellation, and execution of such orders.
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Fourth, DMMs may research the status of orders or questioned
trades. DMMs may do so on their own initiative or at the request of
the Exchange or a Floor broker when a Floor broker's hand-held
device is not operational, when there is activity indicating that a
potentially erroneous order was entered or a potentially erroneous
trade was executed, or when there otherwise is an indication that
improper activity may be occurring.
DMM Access to Exchange Systems
The Exchange proposes to amend Rule 104 to add new subparagraph
(j)(ii), which would state that the Exchange may make systems available
to a DMM at the post that display the following types of information
about securities in which the DMM is registered: (a) Aggregated
information about buying and selling interest; \19\ (b) disaggregated
information about the price and size of any individual order or Floor
broker agency interest file, also known as ``e-Quotes,'' except that
Exchange systems would not make available to DMMs information about any
order or e-Quote, or portion thereof, that a market participant has
elected not to display to a DMM; and (c) post-trade information. For
the latter two categories, the DMM would have access to entering and
clearing firm information and, as applicable, the badge number of the
Floor broker representing the order. The systems would not contain any
information about the ultimate customer (i.e., the name of the member
or member organization's customer) in a transaction. Importantly,
aggregated information at each price level about buying and selling
interest that is not marked dark is already visible to DMMs. Similarly,
aggregated information for interest not marked dark is visible to any
market participant beyond the Floor via OpenBook.\20\
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\19\ Exchange systems make available to DMMs aggregate
information about the following interest in securities in which the
DMM is registered: (a) All displayable interest submitted by off-
Floor participants; (b) all Minimum Display Reserve Orders,
including the reserve portion; (c) all displayable Floor broker
agency interest files (``e-Quotes''); (d) all Minimum Display
Reserve e-Quotes, including the reserve portion; and (e) the reserve
quantity of Non-Display Reserve e-Quotes, unless the Floor broker
elects to exclude that reserve quantity from availability to the
DMM.
\20\ Floor brokers currently have the ability to make an order
visible to the DMM but not in OpenBook. They would maintain that
ability under the proposed rule.
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Under the proposed rule change, Exchange systems would make
available to DMMs disaggregated information about the following
interest in securities in which the DMM is registered: (a) The price
and size of all displayable interest submitted by off-Floor
participants; and (b) all e-Quotes, including reserve e-Quotes, that
the Floor broker has not elected to exclude from availability to the
DMM.\21\ Importantly, both Floor brokers and off-Floor participants
would have the continued ability to enter partially or completely
``dark'' orders that are not visible to the DMM, which would prevent
any communication about such interest between the DMM and Floor
brokers. The Exchange believes that it is appropriate to provide DMMs
with this disaggregated order information because the information will
assist DMMs in carrying out their Trading Floor functions. In addition
to the potential for improved interaction of larger-sized orders
illustrated by the three scenarios and related information below,
providing DMMs with access to the disaggregated order information will
contribute to the DMMs' ability to carry out their responsibility for
managing the auction market process at the Exchange, which includes the
function of bringing buyers and sellers together to facilitate trading.
The proposed rule change would specifically prohibit DMMs from using
any trading information available to them in Exchange systems,
including disaggregated order information, in a manner that would
violate the Exchange rules or federal securities laws or regulations.
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\21\ The Exchange previously permitted DMMs to have access to
Exchange systems that contained the disaggregated order information
described above. The Exchange stopped making such information
available to DMMs on January 19, 2011. See Information Memo 11-03.
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The Exchange believes that the proposed rule change would
contribute substantially to the fair and orderly operation of the
Exchange Trading Floor. As illustrated in detail below, the proposed
consensual availability of the order information in question offers the
potential for improved error resolution. DMM assistance at the post
through the performance of the Trading Floor functions continues to be
an invaluable resource to minimize any disruption to the market,
particularly if the Exchange or a customer is experiencing a systems
issue; the Exchange systems that provide disaggregated order
information play a pivotal role in that assistance. Allowing DMMs to
have access to those Exchange systems to perform the Trading Floor
functions is more efficient
[[Page 25121]]
than diverting Exchange resources to attend to individual Floor broker
issues, particularly when the DMMs are ready and able to perform the
same functions.
Ability of DMMs To Provide Market Information on the Trading Floor
The Exchange proposes to modify the terms under which DMMs would be
permitted to provide market information to Floor brokers and visitors
on the Trading Floor. Specifically, Rule 104(j)(iii) would permit a DMM
to provide the market information to which he or she has access under
proposed Rule 104(j)(ii) to: (1) A Floor broker in response to an
inquiry in the normal course of business; or (2) a visitor to the
Trading Floor for the purpose of demonstrating methods of trading. This
aspect of the proposal builds on and modifies current NYSE Rule 115,
and the Exchange therefore proposes to delete NYSE Rule 115, which
covers the same subject.\22\
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\22\ Rule 115 will be redesignated as ``Reserved.'' The Exchange
further proposes to make conforming amendments to Rules 13, 98
Former, and 104(a)(6).
---------------------------------------------------------------------------
Currently, NYSE Rule 115 provides that a DMM may disclose market
information for three purposes. First, a DMM may disclose market
information for the purpose of demonstrating the methods of trading to
visitors on the Trading Floor. This aspect of current Rule 115 would be
replicated in proposed Rule 104(j)(iii)(B). Second, a DMM may disclose
market information to other market centers in order to facilitate the
operation of the Intermarket Trading System (``ITS''). This text is
obsolete as the ITS Plan has been eliminated and therefore would not be
included in amended Rule 104.\23\ Third, a DMM may, while acting in a
market making capacity, provide information about buying or selling
interest in the market, including: (a) Aggregated buying or selling
interest contained in Floor broker agency interest files other than
interest the broker has chosen to exclude from the aggregated buying
and selling interest; (b) aggregated interest of Minimum Display
Reserve Orders; and (c) the interest included in DMM interest files,
excluding Capital Commitment Schedule (``CCS'') interest as described
in Rule 1000(c), in response to an inquiry from a member conducting a
market probe \24\ in the normal course of business.
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\23\ See Securities Exchange Act Release No. 55397 (March 5,
2007), 72 FR 11066 (March 12, 2007) (Intermarket Trading System;
Notice of Filing and Immediate Effectiveness of the Twenty Fourth
Amendment to the ITS Plan Relating to the Elimination of the ITS
Plan).
\24\ Generally, a market probe refers to when a Floor broker is
seeking to ascertain the depth of the market in a security to
determine at what price point a security may trade. However, it is a
term of art whose meaning is not codified.
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Proposed Rule 104(j)(iii) would permit DMMs also to provide
disaggregated and post-trade order information to Floor brokers.\25\
Broadening the scope of information that DMMs can provide Floor brokers
will assist DMMs with carrying out their historical function of
bringing Floor brokers together to facilitate block and other large
transactions, as demonstrated by the scenarios illustrated herein. The
Exchange notes that the proposed visibility is not without precedent--
Rule 115 previously allowed Exchange specialists to provide
disaggregated order information to Floor brokers prior to adoption of
the Hybrid Market.\26\ And, as noted above, both Floor brokers and off-
Floor participants currently have and will continue to have the ability
to enter partially or completely ``dark'' orders that are not visible
to the DMM. DMMs, in other words, would be unable to see or disseminate
information about such ``dark'' orders or the dark portion of the
orders in response to an inquiry from a Floor broker. When providing
information, the individual DMM is responsible for fairly and
impartially providing accurate and timely information to all inquiring
Floor brokers about buying and selling interest in his or her assigned
security.
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\25\ Because DMMs on the Trading Floor do not have access to CCS
interest information, the proposed rule does not specify that DMMs
would not be disseminating such information.
\26\ See NYSE Regulation Information Memo 05-5 (stating that,
under Rule 115, specialists may disclose the identity of the members
or member organizations representing any orders entrusted to the
specialist). The Exchange amended Rule 115 in connection with the
Hybrid Market because at that time, there was no way for Floor
brokers to enter fully dark electronic interest. Now that Exchange
systems can accept fully dark electronic interest from both Floor
brokers and off-Floor participants, the Hybrid Market change to Rule
115 has been obviated and the rule can return to its former status.
---------------------------------------------------------------------------
Proposed Rule 104(j)(iii) also would permit a DMM to provide market
information to a Floor broker in response to a specific request by the
Floor broker to the DMM at the post, rather than specifying that the
information must be provided ``in response to an inquiry from a member
conducting a market probe in the normal course of business,'' as
currently provided in Rule 115. The Exchange believes that the term
``market probe'' no longer accurately reflects the manner in which DMMs
and Floor brokers interact on the Trading Floor. Rather, the Exchange
believes that the Floor broker's normal course of business, as an agent
for customers, includes both seeking market probes into the depth of
the market as well as seeking out willing contra-side buyers and
sellers in a particular security. In addition, the rule would specify
that a Floor broker may not submit an inquiry to the DMM by electronic
means and that the DMM may not use electronic means to transmit market
information to a Floor broker in response to an inquiry. Under the
proposed rule change, Floor brokers would not have access to Exchange
systems that provide disaggregated order information, and they would
only be able to access such market information through a direct
interaction with a DMM at the post.
The Exchange believes that providing Floor brokers with access to
the disaggregated order information would serve a valuable function by
increasing the ability of Floor brokers to source liquidity and provide
price discovery for block transactions, as demonstrated in the three
detailed scenarios below. In particular, the ability of Floor brokers
to receive the disaggregated order information should, in turn, enhance
their ability to facilitate transactions for their customers by
identifying market participants with trading interest that could trade
with the Floor brokers' customers. Floor brokers have historically
served this role on behalf of their customers, which include
institutional clients and block-trading desks, and they continue to
perform this agency function today.
Effect of Market Structural Changes on the Exchange and the Floor
Before illustrating in detail how the proposed changes will
facilitate block trades and expedite error resolution, the Exchange
believes it is essential to take into account the structural and
competitive changes the Exchange and the Floor have experienced in
recent years. Indeed, the Act's fairness and competition-related
standards cannot appropriately guide the Commission's review absent a
concrete recognition of the reshaped competition of the Exchange and
the Floor and the array of execution choices available to market
participants today. Toward that end, it must be recognized that the
Exchange has undergone fundamental, structural changes since 2006 and
has been reshaped by the competitive dynamics that have accompanied
these changes. The reforms and the intensely competitive environment
within which they have taken place have their roots in the Commission's
effort to modernize and strengthen the national market system for
equity securities through
[[Page 25122]]
Regulation NMS.\27\ In particular, in March 2006, the Commission
approved the beginning of NYSE's historic shift ``from a floor-based
auction market with limited automated order interaction to a more
automated market with limited floor-based auction market
availability.'' \28\ With the approval of the ``Hybrid Market,'' the
NYSE began the substantial expansion of automatic execution and the
ability of its Floor members to participate in its automated market
electronically.\29\ At the time of approval, automatic executions on
the NYSE represented approximately 11% of its market share volume, and
the bulk of executions occurred manually in its floor-based
auction.\30\ The average speed of execution was over ten seconds.\31\
In 2005, the average trade size in NYSE-listed securities was 724
shares.\32\ NYSE's share of consolidated volume in NYSE-listed names
for the year preceding the approval of the Hybrid Market was 79.1%.\33\
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\27\ See Securities Exchange Act Release No. 51808, 70 FR 37496
(June 29, 2005) (``NMS Adopting Release'').
\28\ See Securities Exchange Act Release No. 53539, 71 FR 16353
(March 31, 2006).
\29\ Id.
\30\ Id.
\31\ See Securities Exchange Act Release No. 61358, FR 3594,
3595 (January 21, 2010) (``Equity Market Structure Release'').
\32\ Id.
\33\ Id. at 3595.
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Roughly two years later, the NYSE proposed further and substantial
structural reforms with its New Market Model.\34\ Foremost in
significance were: (1) The phasing out of the specialist system and the
concurrent creation of the DMM; (2) the alteration of the NYSE's
longstanding priority and parity rules to allow DMMs to trade on equal
footing with other market participants where the specialist previously
had been obligated to yield to public customer orders in the book; and
(3) the elimination of the advance electronic ``look'' at incoming
orders that had been a historical feature of the specialist system.\35\
By 2009, the average speed of execution was less than a second, and the
average trade size in NYSE-listed securities had fallen to 268
shares.\36\ In 2009, the year following the adoption of the New Market
Model, NYSE's share of consolidated volume in NYSE-listed names was
25.1%.\37\ At the risk of stating the obvious, these transformative
changes have had the effect of reducing substantially the scope and
utility of market information accessible to DMMs and Floor brokers--a
perspective from a point of sale with roughly 80% market share differs
starkly from one with less than 25%. Such changes demonstrate the
flexibility that the market has with respect to utilizing different
venues and various market models that best suit their needs.
---------------------------------------------------------------------------
\34\ See New Market Model Release.
\35\ Id. at 64380, 64387-88.
\36\ Id.
\37\ Equity Market Structure Release at 3595.
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Today, the Exchange continues to operate a limited Floor-based
auction model. Not surprisingly, the Floor itself reflects directly the
transformation recounted above. The current Floor broker community is
distinguished in significant part by its embrace of technology, as
reflected by the introduction of Floor broker algorithms in 2009.
Though competitive dynamics have reduced the Floor's numbers,
significant demand remains among the most informed market participants
for the technology-enabled services of today's Floor brokers.
The Exchange seeks to compete by offering market participants a
product that is entirely distinct from the trading venues of its
competitors in one essential respect--the integration of human judgment
into the price discovery process at a single, physical point of sale
for each security.\38\ This product stands more or less alone among a
diverse array of completely automated execution venues available to
investors today. It is important to note that the nature and extent of
the integration of human judgment, delivered through DMMs and Floor
brokers, is driven by the demands of informed consumers--there is no
shortage of competing execution venues that have no DMMs, Floor brokers
or substantial equivalents. Moreover, those market participants who
choose to trade on the Exchange have no obligation to utilize the
services of a Floor broker, or to use those services in a particular
way. Whether and how Floor brokers are used today reflects directly, in
other words, the judgment of market participants as to the value the
Floor adds.
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\38\ See S. Rept. 94-75 (1975) (``This is not to say that it is
the goal of [the 1975 Amendments] to ignore or eliminate
distinctions between exchange markets and over-the-counter markets
or other inherent differences or variations in components of a
national market system. Some present distinctions may tend to
disappear in a national market system, but it is not the intention
of the bill to force all markets for all securities into a single
mold.'')
---------------------------------------------------------------------------
As demonstrated below, this wholly consensual integration of human
judgment at the point of sale, and in particular the visibility of
certain limited order information discussed herein to DMMs and Floor
brokers, serve legitimate Floor functions (as well as broader market
structure goals) in three important respects. They: (1) Increase the
possibility that buyers and sellers of size positions can meet, thereby
enhancing opportunities to reduce transaction costs; (2) expedite the
discovery and resolution of errors, thereby reducing disruptive impacts
and promoting fair and orderly markets; and (3) leverage the informed
choices of users, allowing the interplay of competitive forces to
determine the scope and nature of human interaction in the price
discovery process.\39\ Acute concerns with respect to the potential
benefits of the referenced order information in the hands of DMMs and
Floor brokers, the Exchange respectfully submits, are misplaced. The
information in question would add only a view of the components and the
entering and clearing firm (not the customer) for trading interest that
is already visible in the aggregate to DMMs today. Given the clear
obligations of DMMs and the strictly agency capacity of Floor brokers,
the benefit attributable to the proposed visibility would enure to the
benefit of the customer or member placing the order, not the DMM or
Floor broker. The utility of the information, therefore, lies in its
potential to bring buyers and sellers of size together, not to
advantage intermediaries.
---------------------------------------------------------------------------
\39\ See H.R. Rept. 94-229 (1975).
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Benefits of Proposed Rule to Trading Floor and Investors
The Commission's Disapproval Order focused on the availability to
DMMs and communication by DMMs to Floor brokers of disaggregated order
information (specifically, the price and size of individual orders and
the identity of the entering and clearing firms for such orders).
Before turning to the particulars of the Disapproval Order, the
Exchange would respectfully underscore its contention that the acute
concern with respect to the availability of disaggregated order
information to DMMs and Floor brokers is misplaced. The incremental
information to be made available is demonstrably useful to DMMs, as
illustrated in the scenarios and situations below, in bringing together
buyers and sellers of block positions and in expediting the resolution
of errors and would thereby promote both order interaction and orderly
markets. However, the information simply does not add to a DMMs trading
view in any meaningful way. It does no more than make visible to the
DMM and available to Floor brokers the component orders of trading
interest that is already visible to the DMM in the aggregate (and to
off-Floor market participants via OpenBook) and the entering and
clearing firm and Floor
[[Page 25123]]
broker, if any. Importantly, the benefit attributable to the
availability of such information would accrue as a practical matter to
the customer or member organization behind a trade and not to the DMM
or Floor broker involved in the trade.
In finding that the proposed rule changes were not consistent with
the requirements of the Act, the Commission stated that: (1) The
Exchange and commenters had not explained how the particular
information proposed to be provided would further legitimate Floor
functions; (2) the Exchange was ``not proposing to require any
additional obligations from DMMs and Floor brokers in exchange for the
additional information''; (3) the Commission was concerned that the
benefit to Floor members of receiving disaggregated order information
may be more than slight, ``particularly with respect to less liquid
securities where order information is less likely to become rapidly
stale''; and (4) the provision of disaggregated order information to
Floor Members and, by extension exclusively to Floor broker customers
``could have a detrimental effect on competition between on-Floor and
off-Floor members of the Exchanges.'' This revised proposed rule change
addresses these concerns.
Scenarios Illustrating How the Particular Information Proposed To Be
Provided Would Further Legitimate Floor Functions
The Commission stated in the Disapproval Order that neither the
Exchange nor the commenters have explained how making available
``disaggregated information about public orders on the Exchange books
as well as Floor broker e-Quotes'' to DMMs and Floor brokers would
further legitimate Floor functions. The scenarios below illustrate how
the particular information proposed to be provided--the price and size
of individual orders, the identity of the entering and clearing firm,
and Floor broker badge number for such orders--would serve the goals of
facilitating block trades and expediting error resolution. Importantly,
each of the scenarios makes clear that the benefits to the public flow
from not only the proposed consensual availability of the information
in question for orders entered on the Floor, but also those entered by
off-Floor participants.
Scenario 1: DMM Facilitates Block Trade Between Floor Broker and
Upstairs Seller by Sharing Price, Size, and Entering Firm
Assume a pension fund customer gives Floor broker a 20,000 share
order to buy ABC, a mid-cap stock, at up to $10.08 at 11:00 a.m. when
the PBBO for the stock is $10.03 by $10.06 with 500 shares on displayed
on each side. There is no crowd at the ABC post at the time the order
is received, but Floor broker can see from the tape that the stock is
trading electronically on the Exchange. On the book a penny away from
the inside offer at $10.07, there is a sell order for 10,000 that has
been entered by Member Organization. There is no Floor broker
representing the sell order, and there are no Floor broker e-Quotes on
the book. Floor broker tells DMM for ABC that he or she represents a
buyer of size beyond the displayed market. Currently, the DMM is
permitted to inform the Floor broker of the aggregate selling interest
at different price points on the book, but may not access or provide
the identity of the Member Organization--an off-floor participant--that
entered such selling interest. Under the proposed rule, the DMM could
inform Floor broker that the off-Floor Member Organization is an
entering firm for an order to sell 10,000 shares at $10.07. Floor
broker could then contact the upstairs desk of Member Organization or
Member Organization's on-floor representative, if any, who could then
contact his or her upstairs desk, to explore a possible transaction.
Assume that the 10,000 share sell order that Member Organization
sent to the Exchange is a child of a 30,000 order entered
electronically by a mutual fund customer into Member Organization's
customer-facing execution management system with non-displayed price
discretion to $10.05. (The parent order size and price discretion
obviously would not be visible to the DMM or Floor broker.) Knowing
Member Organization's identity and the size and price of the trading
interest Member Organization has entered into Exchange systems, the
Floor broker may now contact Member Organization or Member
Organization's on-floor representative and the Floor broker can
indicate the size of the buying interest he or she is representing. In
this respect, the Floor broker now can enter into negotiations
directly, similar to how off-Floor participants, particularly broker
dealers that internalize flow from their customers, can reach out
directly to other broker dealers to negotiate block-sized trades. By
making contact, Member Organization and Floor broker may agree to do a
larger transaction at a more aggressive price. Assume Floor Broker and
Member Organization agree to 20,000 shares at $10.05.
Both sides of the trade would have secured a size transaction
within the parameters of their stated limit. More importantly, both
would have avoided the potential market impact that a series of smaller
size transactions might have produced. The transaction in all
likelihood would not have occurred without the Floor broker's knowledge
of the price and size of the order and the identity of the Member
Organization entering it. The Floor broker, in other words, would have
had no incentive to reveal that he or she represented a buyer without
the meaningful possibility of an interaction that was indicated by the
size and price of the trading interest and the identity of the Member
Organization representing it.
The Disapproval Order notes that the Commission can envision an
argument whereby enabling DMMs to see Floor broker e-Quotes or the
identity of Floor brokers would facilitate the bringing together of
buyers and sellers of large orders, apparently suggesting that limiting
DMM visibility to this Floor broker interest would serve this end of
order interaction effectively. The above scenario illustrates why
limiting access only to other Floor broker interest would ignore a
large segment of the trading population, and limit the ability of
buyers and sellers to negotiate directly, regardless of their location.
Specifically, allowing DMMs to access the disaggregated information of
off-Floor participants permits DMMs to facilitate block transactions
between Floor brokers and those same off-Floor participants. In the
above scenario, the member organization that has not elected to utilize
a Floor broker is still able to benefit from the proposed rule changes
by permitting his order information to be relayed to Floor brokers on a
disaggregated basis. And importantly, the member organization has
permitted the order information to be relayed on a disaggregate basis:
If the member organization determines that the cost of exposing an
order on a disaggregated basis outweighs any potential benefit, then
the member organization can enter the order dark. Thus, the member
organization can determine--on an individual basis--the benefits and
costs of the permitting its own information disclosed on a
disaggregated basis. Visibility of price, size, and entering firm opens
up a wider range of wholly consensual channels of communication that
more fully and effectively enhance the potential for order interaction.
Put another way,
[[Page 25124]]
Member Organization remains at all time in full control of the
information he or she is duty-bound to protect as agent for the mutual
fund seller--when entering the order on the Exchange and making it
visible to the DMM and Floor brokers (i.e., Member Organization could
have decided to enter the order dark), and when he engages with Floor
broker following Floor broker's initiation of contact (i.e., Member
Organization could have declined to engage with the Floor broker when
he or she initiated contact). Moreover, with Floor broker share of
Exchange volume currently at approximately 9%, the contra-side interest
represented by a Floor broker in any given situation will likely be
only a small subset of total available interest.
Scenario 2: DMM Facilitates Block Trade by Sharing Post-Trade
Information With Floor Broker
An interaction similar to Scenario 1 could be facilitated by a DMM
sharing post-trade information with a Floor broker pursuant to the
proposed rule. Assume Floor broker has the same 20,000 share order to
buy ABC from his or her pension fund customer. Assume in this scenario
that Member Organization has no current interest entered in Exchange
systems, but was a seller on the Exchange earlier in the day. Assume
the upstairs desk of Member Organization has the same parent order of
30,000 shares of ABC as in Scenario 1. Floor broker approaches the DMM
and asks if there is enough sell-side interest to accommodate. DMM
tells Floor broker that there is no interest to accommodate, but that
Member Organization was a seller earlier in the day. As in Scenario 1,
assume there is no Floor broker representing the seller. Floor Broker
approaches the upstairs desk of Member Organization or Member
Organization's on-floor representative, if any, who could then contact
his or her upstairs desk, and achieves the same result as in Scenario
1. As with Scenario 1, the benefit of the interaction illustrated here
stems from the consensual availability of information related to orders
entered by an off-Floor participant.
Scenario 3: DMM Facilitates Block Issuer Repurchase Transaction by
Sharing Price, Size, and Entering Firm
Assume an Exchange-listed issuer engages a Floor broker to handle a
Rule 10b-18 repurchase with a goal of repurchasing 500,000 shares at a
maximum price of $10.15. Assume the highest current independent
published bid is $10.03, the last independent transaction price
reported was $10.08, and the offer is quoted at $10.07. The issuer
wishes to make a block purchase of up to 100,000 at $10.07 or
better.\40\ The Floor broker approaches the DMM and asks about selling
interest at the $10.07 price level. Under the proposed rule, the DMM
could inform Floor broker that Member Organization is a seller of
10,000 shares at $10.07. Assume as in the prior scenarios that there is
no Floor broker representing the selling interest and that the Floor
broker initiates contact with the upstairs desk of Member Organization
or Member Organization's on-floor representative, if any, who could
then contact his or her upstairs desk, and finds additional selling
interest upstairs as in Scenario 1. Assume the Floor broker and Member
Organization agree upon a transaction of 100,000 shares at $10.07.
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\40\ Rule 10b-18 provides an issuer with a safe harbor from
liability under Section 9(a)(2) of the Act and Rule 10b-5 under the
Act based on the manner, timing, price, and volume of their
repurchased when in accordance with Rule 10b-18's conditions. Rule
10b-18(b)(4) provides the condition that the total volume of the
purchases cannot exceed 25 percent of the average daily total volume
for that security; however, once per week the issuer may make one
block purchase without regards to the volume limit if no other Rule
10b-18 purchase takes place on the same day and the block purchase
is not included when calculating a security's four week average
daily total volume.
---------------------------------------------------------------------------
In this scenario, the issuer receives a large fill at better than
the last independent transaction price, and both sides have minimized
the impact of their transaction. As the Commission has previously
stated in considering block purchases by issuers, ``the market impact
of a block purchase is likely to be less than that of a series of
purchases of smaller amount that in the aggregate are equal in size to
the block but are accomplished over a period of time.'' \41\ As with
Scenarios 1 and 2, the benefit to the repurchasing issuer and the
seller illustrated here stems from the consensual availability of
information related to orders entered by an off-Floor participant.
---------------------------------------------------------------------------
\41\ See Exchange Act Release No. 17222 (October 17, 1980)
(``10b-18 Proposing Release''). Rule 10b-18 was originally proposed
as Rule 13e-2.
---------------------------------------------------------------------------
Situations Where DMM Access to Entering Firm's Identity Would Prevent
Errors or Expedite Resolution Thereof
In addition to promoting the interaction of buyers and sellers in
size transactions, DMM access to the identity of firms entering
individual orders would improve a DMM's ability to identify erroneous
trades and to intervene where entering firms, whether a Floor broker or
off-Floor participant, are experiencing technology problems. The
proposed visibility would expedite the identification and possible
prevention of such errors. Moreover, the Exchange's recent experience
in identifying the source of millions of unintended trades in more than
150 symbols attributable to a member's software malfunction \42\
confirms the potential contribution of the proposed visibility to the
diagnosis and resolution of problems and the maintenance of orderly
markets. Specifically, in that situation, the DMMs were the first to
identify the anomalous trades and report the trades to Exchange
officials. The Exchange believes that had DMMs also been able to see
the commonality of the entering firm in the spike of incoming orders,
the source of the disruption may have been identified more quickly,
potentially avoiding millions of dollars in firm losses. Finally,
entering firm information can serve to mitigate the effect of less
severe but still important technology problems, such as Floor broker
handheld outages. DMMs currently are unable to identify individual
Floor broker orders and cancel them during handheld outages; the
proposed rule would enable them to perform this important function.
---------------------------------------------------------------------------
\42\ Loss Swamps Trading Firm, Wall Street Journal, August 2,
2012.
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Burdens Placed on DMMs and Floor Brokers
The Disapproval Order notes that the Exchange was ``not proposing
to require any additional obligations from DMMs and Floor brokers in
exchange for the additional information.'' \43\ As noted above, the
Exchange does not believe the additional information adds
[[Page 25125]]
meaningfully to the trading view of the DMM, and that any such addition
would benefit customers, not DMMs and Floor brokers. Indeed, the
function of providing disaggregated order information to Floor brokers
upon request would be an administrative burden to DMMs rather than a
benefit. Additionally, as noted above, Floor brokers, as agents, would
receive no benefit attributable to the information, as such benefit
would flow directly and entirely to the customer whose order they are
representing and the contra side to it. Moreover, the Exchange
believes, based on fundamental changes in the competitive context since
the approval of the New Market Model and the continuing and significant
obligations of DMMs and Floor brokers, that the proposed availability
of disaggregated order information would not constitute a
disproportionate benefit. In other words, the potential value of the
information in question has been substantially diminished since 2006 in
that that DMMs only have information about orders at the Exchange,
which represent approximately 22% of market-wide volume in Exchange-
listed stocks across the market.
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\43\ See Disapproval Order at 10. The Exchange believes that a
close reading of the precedent indicates that this level of scrutiny
of the incremental obligations associated with a proposal such as
this one is not required. The source of the scrutiny stems from New
Market Model Order in which the NYSE proposed fundamental structural
changes, including phasing out the specialist system and a wholesale
alteration of the NYSE's historic priority and parity rules. See
Securities Exchange Act Release No. 58845, 73 FR 64379 (October 29,
2008) (``New Market Model Release''). What was proposed in the New
Market Model, in other words, called for a review by the Commission
that was necessarily intense, in stark contrast with the modest
changes proposed here. Additionally, in support of what would be
regarded as ``special advantages'' and ``rewards that are not
disproportionate to the services provided,'' the Commission
previously cited a series of orders approving proposals that
generally involve the creation or registration of a new class of
market maker or participation of an existing class in a new market.
Those proposals, similar to the New Market Model, were structural in
nature and in stark contrast to the limited nature of this proposed
rule change. Furthermore, the principal market participant impacted
by the present proceeding, Floor brokers, is not a market maker at
all, but an agent, rendering much of the referenced precedent
factually distinct. Accordingly, the Exchange respectfully suggests
that the level of scrutiny associated with the precedents cited is
not required here.
---------------------------------------------------------------------------
Notwithstanding the DMM's evolving role in the overall trading of
Exchange-listed securities, the obligations and restrictions placed on
DMMs and Floor brokers have remained unchanged. In addition, the manual
process by which disaggregated order information is accessed reduces to
a minimum any potential benefit. As demonstrated by the scenarios
above, perhaps its principal value is the opportunity it offers to open
a consensual dialogue with a counterparty--an opportunity aligned with
both the interests of other Floor and non-Floor members as well as
investors. The disaggregated order information, while inconsequential
from a trading perspective, is thus important administratively in
clearing the way to size interactions, reducing transaction costs, and
enhancing the quality of the Exchange's market.
Specifically, with respect to the continuing and significant
burdens on DMMs, pursuant to NYSE Rule 104, a function of a DMM is:
[T]he maintenance, in so far as reasonably practicable, of a
fair and orderly market on the Exchange in the stocks in which he or
she is so acting. The maintenance of a fair and orderly market
implies the maintenance of price continuity with reasonable depth,
to the extent possible consistent with the ability of participants
to use reserve orders, and the minimizing of the effects of
temporary disparity between supply and demand. In connection with
the maintenance of a fair and orderly market, it is commonly
desirable that a member acting as DMM engage to a reasonable degree
under existing circumstances in dealings for the DMM's own account
when lack of price continuity, lack of depth, or disparity between
supply and demand exists or is reasonably to be anticipated.\44\
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\44\ See NYSE Rule 104(a)(1).
Additionally, any transaction by a DMM for the DMM's account must
``be effected in a reasonable and orderly manner in relation to the
condition of the general market and the market in the particular
stock.'' \45\
---------------------------------------------------------------------------
\45\ See NYSE Rule 104(g).
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Furthermore, the Exchange notes that any non-public market
information that a DMM receives through Exchange systems would be
subject to specific restrictions as ``non-public order information''
\46\ under Exchange Rule 98. For example, Exchange Rule 98(c)(2)(A)
would require DMMs to maintain the confidentiality of any such non-
public market information and would prohibit the DMM member
organization's departments, divisions, or aggregation units that are
not part of the DMM unit, including investment banking, research, and
customer-facing departments, from having access to that information. In
addition, Rule 98 sets forth restrictions on access to non-public order
information by the off-Floor locations of a DMM unit, including
restrictions on the ability of a DMM located on the Trading Floor from
communicating directly with off-Floor individuals or systems
responsible for making off-Floor trading decisions.\47\
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\46\ NYSE Rule 98(b)(7) defines the term ``non-public order'' to
mean ``any order, whether expressed electronically or verbally, or
any information regarding a reasonably imminent non-public
transaction or series of transactions entered or intended for entry
or execution on the Exchange and which is not publicly available on
a real-time basis via an Exchange-provided datafeed, such as NYSE
OpenBook[supreg] or otherwise not publicly available. Non-public
orders include order information at the opening, re-openings, the
close, when the security is trading in slow mode, and order
information in the NYSE Display Book[supreg] that is not available
via NYSE OpenBook[supreg].''
\47\ See Rules 98(d)(2)(B)(i)-(iii), (f)(1)(A)(i)-(ii), and
(f)(3)(C)(ii). In addition, Rule 98(c)(2)(A)(ii) provides that a DMM
may make available to a Floor broker associated with an approved
person or member organization any information that the DMM would be
permitted to provide under Exchange rules to an unaffiliated Floor
broker.
---------------------------------------------------------------------------
The manner by which the DMM would access disaggregated order
information aligns precisely with the information's relative lack of
trading utility and its administrative significance in facilitating
size interactions. A DMM can access the disaggregated order information
only while located at the post on the Trading Floor, and a DMM's
ability to access the disaggregated order information is largely
manual. The DMM must query the specific information about a particular
security, which limits the number of securities about which
disaggregated order information can be accessed at any given time.
Importantly, Exchange systems would not provide disaggregated order
information to the algorithmic trading systems of any DMM unit,\48\ and
would not support any electronic dissemination of the disaggregated
order information to other market participants. As noted above,
participants who do not want the DMM to have access to disaggregated
order information have the option to enter dark interest that is not
visible to the DMM in disaggregated form. The Exchange also notes that
the proposed rule change would specifically prohibit DMMs from using
any trading information available to them in Exchange systems,
including disaggregated order information, in a manner that would
violate the Exchange rules or federal securities laws or
regulations.\49\
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\48\ The order information in these systems would be available
for a DMM to view manually at the post and as such is different from
the advance order-by-order information that DMM trading algorithms
previously received before implementation of the New Market Model
pilot (sometimes referred to as ``the look''). Under the proposed
rule change, as is the case today, DMM trading algorithms would have
the same information with respect to orders entered on the Exchange,
Floor broker agency interest files or reserve interest as is
disseminated to the public by the Exchange. See Rule 104(b)(iii).
\49\ See Proposed NYSE Rule 104(j)(ii).
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Benefit to Floor of the Proposed Availability of Disaggregated Order
Information
The Disapproval Order also raised concerns about the possible
benefit to Floor members of the proposed availability of order
information, stating that the benefit to Floor members may be more than
slight, ``particularly with respect to less liquid securities where
order information is less likely to become rapidly stale.''
Respectfully, the Commission's concern about the possible benefit to
Floor members is misplaced, irrespective of whether the security is
highly liquid or less liquid.
It has been noted above, but is worth stressing, that DMMs
currently have access to aggregated order information that fully
reflects the size of trading interest for a particular security on the
Exchange that has not been designated as dark by the entering firm.
Similarly, such aggregated information for interest not marked dark is
visible to any market participant beyond the Floor via OpenBook. What
is proposed, therefore, is not making a new segment of trading interest
visible to DMMs, but rather
[[Page 25126]]
making the components of already visible trading interest available,
along with the entering firm, clearing firm, and badge number of the
Floor broker, if any. Since the proposal would not increase the
visibility of trading interest in less liquid securities, the question
of whether such information is more or less likely to remain fresh or
become stale is not at issue in a meaningful way. The point of the
proposed availability of order information is to enable Floor brokers
to search more effectively for size counterparties for their customers
and to expedite the ability of DMMs to resolve errors, not to improve
the trading position of DMMs.
Moreover, the question of staleness is further beside the point
when one remembers that DMM trading today is predominantly automated
and algorithmic. Even if the proposed visibility included trading
interest that was not currently visible--it does not--DMMs as a
practical matter would need to integrate such information into their
automated trading models to use it. Exchange systems, however, would
specifically prevent such use.
To the extent that the Commission is concerned that a DMM could
otherwise use the proposed incremental information for trading
purposes, it is useful to consider the premise apparently underlying
the concern. The premise is presumably that learning the component
sizes of trading interest that is already visible in the aggregate, or
that learning the identity of the entering firm, clearing firm, or the
Floor broker for a component order, could somehow add sufficiently to
the DMMs view of the market to induce the DMM to trade on the same side
or opposite side of a component order. The Exchange is aware of no
facts, data or analyisis that would support such a premise.
Additionally, firms already advertise many of these particulars of
their trading interest on both a pre- and post-trade basis (IOIs and
other forms) through a variety of electronic vendor solutions, such as
Bloomberg \50\ and Autex.\51\ Therefore, the ability and willingness of
firms to advertise their interest is hardly a new concept in today's
marketplace. The proposal would simply restore within the Exchange
environment features and services previously available on the Floor and
currently offered beyond the Floor by multiple market data vendors.
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\50\ Bloomberg allows brokers to disseminate IOIs to the buy-
side via Bloomberg's Execution Management Solutions.
\51\ Autex is an electronic platform from Thomson Financial that
allows potential buyers and sellers to identify other large traders
by showing ``trade advertisements'' in a stock. The interface
presents indicators of interest among traders, permitting buy-side
clients to identify optimum trading partners.
---------------------------------------------------------------------------
Moreover, the balance of benefits and potential costs would favor
unambiguously a choice on the part of a member or customer to make
disaggregated order information visible to the DMM and available to
Floor brokers. As illustrated in detail by Scenarios 1 and 2 above, the
potential benefits to a customer of sharing disaggregated order
information (again, by choosing not to enter the order dark) would be
both significant and concrete. A member's sharing of a customer's order
information, for example, would make it possible for contra side
interest to initiate contact with the member and for the customer to
experience a size transaction that avoids market impact and reduces
transaction costs. In contrast, the potential cost of sharing the
information would be de minimis because the component order information
would add nothing meaningful to the information reflected in the
aggregate trading interest already visible to DMM and to the market via
OpenBook. More fundamentally, members today can choose from an array of
alternatives to the Exchange's integration of human judgment into the
price discovery process at a single, physical point of sale. That
choice represents the ultimate check on any imbalance in the allocation
of benefits to DMMs or Floor brokers.
It is also worth noting that the utility of disaggregated order to
the Floor is largely independent from its freshness or staleness as
trading information. Information that is stale in trading terms, for
example, may nonetheless be enormously helpful to an agent like a Floor
broker in the search for a size counterparty. Assume, for instance,
that there is no live interest expressed in the Display Book at or near
a particular price point. It may nonetheless be useful for a Floor
broker to know that a particular firm had entered an order in the
security at a particular level a day or two before. Knowing the
identity of the entering firm could allow a Floor broker to identify a
counterparty in much the same way as Scenario 1 above, producing the
same size interaction and reduced transaction costs for both sides of
the trade. Notably, this utility is also distinct from how actively
traded a particular security is.
Moreover, Section 11(a) obligations on Floor brokers ensure that
investors, not Floor brokers, will reap the benefits of access to the
disaggregated order information, providing that Floor brokers will not
``effect any transaction on [the] exchange for its own account * * *.''
\52\ This trading restriction has been in place since 1978, when Floor
brokers regularly had access to disaggregated order information on the
Floor. The Exchange amended Rule 115 regarding what information could
be provided in connection with a market look because, at the time, the
Exchange did not have the technology to replicate the ability of Floor
brokers to maintain certain interest as ``dark.'' Although the Exchange
reduced the access to information available to Floor brokers--which was
always via the specialist, and now, DMM--the trading restrictions were
not lessened. Now that the Exchange has enabled market participants to
replicate electronically the type of dark interest formerly maintained
manually by Floor brokers, the Exchange can restore the access to
disaggregated order information without any need to adjust the
applicable trading restrictions. These applicable trading restrictions
provide assurance that the Floor brokers will not be reaping the
benefits of access to disaggregated order information; the benefits
will directly flow to investors.
---------------------------------------------------------------------------
\52\ 15 U.S.C. 78k(a) (2012).
---------------------------------------------------------------------------
Existing trading restrictions and the additional affirmative
obligations required by the New Market Model provide appropriate
controls, ensuring that the adoption of Rule 104(j) meets the
requirements of Section 6(b)(5) of the Act. As previously enumerated,
DMMs are subject to a number of restrictions governing access to non-
public order information that remains unchanged since before the
adoption of the New Market Model, and which were put in place when DMMs
still had an agency role. Even though they no longer act as agents,
DMMs are still subject to those trading restrictions. The rules of the
Exchange are designed such that any additional access by DMMs and Floor
brokers to information not available generally to off-Floor traders
carries with it restrictive obligations regarding the permitted use of
such information.
Floor Competition With Off-Floor Members
The Disapproval Order expresses concern about the provision of
disaggregated order information to Floor Members and, by extension,
exclusively to Floor broker customers and the potential ``detrimental
effect on competition between on-Floor and off-Floor members of the
Exchanges.'' Several points bear emphasis here. The Floor broker's
ability to share information in this way aligns with the agency
relationship between the Floor broker and his or her customer, and is
[[Page 25127]]
complementary to other affected market participants. That is, the
agent-Floor broker is enabled to make full disclosure to his or her
principal-customer. The customer, given his or her own trading
interest, has an interest in not disseminating the information learned
from the Floor broker. The member organization and the member
organization's customer benefit in that the Floor broker's customer
potentially could initiate direct contact with the member organization.
In this way, the Floor broker's sharing of this type of information
with the customer provides a sort of check of the principal on the
agent and ensures that the agent adds value. The Exchange's integration
of human judgment into a point of sale occurs, in other words, within a
competitive landscape filled with customer choice among both exchange
and off-exchange venues. The modest increase in visibility offered by
the proposed rules, especially in light of increasing dispersal of
liquidity, in no way upsets that competitive balance.
In addition, extending the proposed visibility to other off-Floor
participants presents obvious dangers. NYSE Rules 98 and 104(b) are not
applicable to other proprietary traders, for example. Accordingly, if
disaggregated information were provided electronically to all market
participants, there would be no mechanism or informational barrier
ensuring that the disaggregated information could only be used for the
benefit of investors. Rule 104(j)'s success in protecting investors and
the public interest is directly tied to its limited access.
Finally, any off-Floor member is free to utilize the services of a
Floor broker, in which case, the benefits of the proposed rule change
would flow entirely to the off-Floor member (or the customer entering
the order). Additionally, the benefits of the proposed rule change
still inure to those participants who choose not to utilize Floor
brokers because Floor brokers may source liquidity from those
participants. The proposed rule change is not a zero-sum game: The
benefits of the proposal are spread across market participants, not
limited to a select few at the expense of others.
Conforming Amendments
To reflect the information that would be available to DMMs through
Exchange systems, the Exchange proposes amendments to Rules 70(e), (f)
and (i) and 70.25(a)(vii) to specify which information is available to
a DMM through Exchange systems. The Exchange also proposes changes to
Rule 70 to specify what information about e-Quotes is available to the
DMM. The Exchange notes that the proposed amendments to Rule 70 do not
change the operation of the existing rule, other than to specify which
interest may be available to the DMM on a disaggregated basis, as
discussed above. Rather, the amendments are proposed as clarifying
changes with respect to the manner that Floor broker agency interest
currently operates and how such interest may be available to the DMM.
For example, current Rule 70(e) states that a Floor broker has
discretion to exclude all of his or her agency interest, subject to the
provisions in the rule, from the aggregated agency interest information
available to the DMM consistent with Exchange rules governing Reserve
Orders. Because ``excluding'' interest from the information available
to the DMM is similar to how Reserve Orders operate pursuant to Rule
13, the Exchange proposes to harmonize the terms and use term ``e-
Quote'' to replace the term ``Floor broker agency interest,'' use the
term ``Minimum Display Reserve e-Quote'' to replace the concept in
current Rule 70(f)(ii), and use the term ``Non-Display Reserve e-
Quotes'' to replace the concept in current Rule 70(f)(i). The Exchange
also proposes to provide more specificity in amended Rule 70 of how
such interest would be made available to the DMM, consistent with the
current operation of the Rule.
In addition, the Exchange proposes to delete Rule 104(a)(6), which
currently provides that DMMs, trading assistants and anyone acting on
their behalf are prohibited from using the Display Book[supreg] system
to access information about Floor broker agency interest excluded from
the aggregated agency interest and Minimum Display Reserve Order
information other than for the purpose of effecting transactions that
are reasonably imminent where such Floor broker agency and Minimum
Display Reserve Order interest information is necessary to effect such
transaction.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the requirements of Section 6(b) of the Act,\53\ in general, and
Section 6(b)(5) of the Act,\54\ in particular, in that it is designed
to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism for a free and open market and
a national market system and, in general, to protect investors and the
public interest.
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\53\ 15 U.S.C. 78f(b).
\54\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Specifically, the Exchange believes that the proposed change
promotes just and equitable principles of trade because the proposed
change is an integration of human judgment into the price discovery
process at a single, physical point of sale, whose nature and extent is
driven by the demands of informed consumers. With no shortage of
competing execution venues and the lack of an obligation on the part of
market participants to utilize the services of a Floor broker, whether
and how Floor brokers are used reflect the value placed by market
participants on what the Floor adds. The wholly consensual integration
of human judgment will serve legitimate Floor functions in three
respects: (1) It increases the possibility that buyers and sellers of
size positions can meet, thereby enhancing their opportunities to
reduce transaction costs; (2) it expedites the discovery and resolution
of errors, thereby reducing disruptive impacts and promoting fair and
orderly markets; and (3) it leverages the informed choices of users,
allowing the interplay of competitive forces to determine the scope and
nature of human interaction in the price discovery process.
Similarly, the Exchange believes that the proposed change will
protect investors and the public interest because existing trading
restrictions and additional affirmative obligations required by the New
Market Model provide appropriate controls. As previously stated, DMMs
are subject to a number of restrictions governing access to non-public
order information. Additionally, the rules of the Exchange are designed
such that any additional access by DMMs and Floor brokers to
information not available generally to off-Floor traders carries with
it restrictive obligations regarding the permitted use of such
information.
Additionally, the Exchange believes that the proposed change will
remove impediments to, and perfect the mechanisms of, a free and open
market and a national market system because the proposed change
clarifies that DMMs may perform certain defined Trading Floor
functions, which were previously performed by specialists, in
furtherance of the efficient, fair, and orderly operation of the
Exchange. Increasing the amount of information, including disaggregated
order information, that a DMM is permitted to view and provide to Floor
brokers would further the ability of DMMs to carry out the defined
Trading Floor functions and, as a result is designed to remove
impediments to and perfect the mechanism of a free and open market
through the efficient operation of the
[[Page 25128]]
Exchange, in particular by facilitating the bringing of buyers and
sellers together.
The Exchange also believes that the proposed change is equitable
and not unfairly discriminatory because extending the proposed
visibility to other off-Floor participants presents obvious dangers:
NYSE Rules 98 and 104(b) are not applicable to other proprietary
traders, and if disaggregated information were provided electronically
to all participants, there would be no mechanism or informational
barrier ensuring that the disaggregated information could only be used
for the benefit of investors.
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. The Exchange believes that
the proposed rule change will facilitate the execution of block trades,
and as a result, will reduce the market impact and associated
transactions costs for members wishing to take advantage of the rule
proposal. The reduction of transaction costs, along with the proposal's
other purpose of expediting error resolution, will improve the
efficiency of the market and remove barriers to order execution, thus
increasing the level of participation and competition in the
marketplace.
The Exchange operates in a highly competitive market in which
market participants can easily and readily direct order flow to
competing venues. The Exchange's integration of human judgment into a
point of sale occurs within that competitive landscape filled with
customer choice among both exchange and off-exchange venues. The modest
increase in visibility offered by the proposed rules, especially in
light of increasing dispersal of liquidity, in no way upsets that
competitive balance.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NYSE-2013-21 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-NYSE-2013-21. 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
a.m. and 3 p.m. Copies of the filing will also 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-NYSE-2013-21 and should be
submitted on or before May 20, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\55\
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\55\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-10015 Filed 4-26-13; 8:45 am]
BILLING CODE 8011-01-P