Self-Regulatory Organizations; NYSE MKT LLC; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change Relating to NDX and RUT Combination Orders, 62766-62771 [2013-24546]
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Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices
requirements of Section 6(b) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),6 in general, and Section 6(b)(4)
of the Act,7 in particular, in that it is
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general to protect investors and the
public interest.
In particular, the Exchange believes
the proposed rule change will provide
greater clarity to market participants
regarding the Exchange’s rules. In
addition, the Exchange believes that the
proposed rule change will help ensure
that the Exchange’s rules regarding
Exemptions from Position Limits will
always be in alignment with FINRA’s
rules. Accordingly, this proposal is
designed to harmonize the exemptions
from position limits rules across
exchanges and will help protect
investors.
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B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. In this regard
and as indicated above, the Exchange
notes that the rule change being
proposed is substantially similar to BX’s
and BATS’s rules regarding Exemptions
from Position Limits.8
The Exchange believes this proposed
rule change is necessary to establish
uniform rules regarding Exemptions
from Position Limits. Specifically, the
proposed rule change will bring clarity
and consistency to Exchange Rules by
harmonizing the exemptions from
position limits rules across exchanges
and will therefore help protect
investors. The Exchange does not
believe the proposed rule change will
impose any burden on any intramarket
competition as it applies to all
Participants. In addition, the Exchange
does not believe the proposed rule filing
will bring any unnecessary burden on
intermarket competition as it is
consistent with the ‘‘Exemption from
Position Limits’’ rules of BX and BATS.9
6 15
U.S.C. 78f(b).
U.S.C. 78f(b)(4).
8 See supra, note 3.
9 See supra, note 3.
7 15
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has neither solicited
nor received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the proposed rule change
does not (i) significantly affect the
protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate if
consistent with the protection of
investors and the public interest, the
proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 10 and Rule 19b–4(f)(6)
thereunder.11 At any time within 60
days of the filing of such proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml ). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–BOX–
2013–46 and should be submitted on or
before November 12, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–24663 Filed 10–21–13; 8:45 am]
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–
BOX–2013–46 on the subject line.
BILLING CODE 8011–01–P
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–BOX–2013–46. This file
number should be included on the
Self-Regulatory Organizations; NYSE
MKT LLC; Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove a Proposed
Rule Change Relating to NDX and RUT
Combination Orders
10 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). As required under Rule
19b–4(f)(6)(iii), the Exchange provided the
Commission with written notice of its intent to file
the proposed rule change, along with a brief
description and the text of the proposed rule
change, at least five business days prior to the date
of filing of the proposed rule change, or such
shorter time as designated by the Commission.
11 17
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70588; File No. SR–
NYSEMKT–2013–59]
October 1, 2013.
I. Introduction
On June 21, 2013, NYSE MKT LLC
(‘‘NYSE MKT’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
12 17
1 15
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CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
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Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices
thereunder,2 a proposed rule change to
amend NYSE MKT Rule 965NY to
revise the procedures governing the
trading of NDX and RUT combination
orders. The proposed rule change was
published for comment in the Federal
Register on July 9, 2013.3 The
Commission received two comments
regarding the proposal.4 NYSE MKT
responded to the comments on August
19, 2013.5 On August 20, 2013, the
Commission extended to October 7,
2013, the time within which the
Commission must approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
determine whether to disapprove the
proposed rule change.6 This order
institutes proceedings under Section
19(b)(2)(B) of the Act 7 to determine
whether to approve or disapprove the
proposed rule change.
II. Description of the Proposal
NYSE MKT Rule 965NY(b) provides
procedures for trading Nasdaq 100
Index (‘‘NDX’’) and Russell 2000 Index
(‘‘RUT’’) combination orders.8
Currently, NYSE MKT Rule 965NY(b)
allows an ATP Holder holding an NDX
or RUT combination order to execute
the order at the best net debit or credit
so long as (A) no leg of the order would
trade at a price outside the currently
displayed bids or offers in the trading
crowd or bids or offers in the NDX or
RUT Consolidated Book; and (B) at least
one leg of the order would trade at a
price that is better than the
corresponding bid or offer in the NDX
2 17
CFR 240.19b–4.
Securities Exchange Act Release No. 69919
(July 2, 2013), 78 FR 41168 (‘‘Notice’’).
4 See letters to Elizabeth M. Murphy, Secretary,
Commission, from Darren Story, CFA, Student
Options, LLC, dated July 12, 2013 (‘‘Story Letter’’);
and from David Spack, Chief Compliance Officer,
Casey Securities, LLC, dated August 2, 2013
(‘‘Casey Letter’’).
5 See letter from Janet McGinness, Executive Vice
President and Corporate Secretary, NYSE Euronext,
to Elizabeth M. Murphy, Secretary, Commission,
dated August 19, 2013 (‘‘NYSE MKT Response’’).
6 See Securities Exchange Act Release No. 70235
(August 20, 2013), 78 FR 52818 (August 26, 2013).
7 15 U.S.C. 78s(b)(2)(B).
8 See NYSE MKT Rule 965NY(b)(4)(iii). A ‘‘NDX
combination order’’ is an order to purchase or sell
NDX options and the offsetting number of NDX
combinations defined by the delta. An ‘‘NDX
Combination’’ is a long (short) NDX call and a short
(long) NDX put having the same expiration date and
strike price. A ‘‘RUT combination order’’ is an order
to purchase or sell RUT options and the offsetting
number of RUT combinations defined by the delta.
An ‘‘RUT Combination’’ is a long (short) RUT call
and a short (long) RUT put having the same
expiration date and strike price. A ‘‘delta’’ is the
positive (negative) number of NDX or RUT
combinations that must be sold (bought) to establish
a market neutral hedge with the corresponding NDX
or RUT option position. See NYSE MKT Rule
965NY(b)(1)–(3).
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or RUT Consolidated Book.9 An NDX or
RUT combination order that is not
executed immediately may be executed
and printed at the prices originally
quoted for each of the component
option series within two hours after the
time of the original quotes, provided
that, at the time of execution, no
individual leg of the NDX or RUT
combination order may trade ahead of
the corresponding bid or offer in the
NDX or RUT Consolidated Book.10
NYSE MKT proposes to amend NYSE
MKT Rule 965NY(b) to implement a
one-year pilot program that would
revise the procedures for trading NDX
and RUT combination orders. NYSE
MKT believes that the pilot program’s
revised trading procedures would make
the trading of NDX and RUT
combination orders more competitive
with the trading of combinations in
Nasdaq 100 Index futures and Russell
2000 Index futures on the Chicago
Mercantile Exchange (‘‘CME’’) and the
Intercontinental Exchange (‘‘ICE’’),
respectively.11
NYSE MKT notes that its rules
currently preclude trading the legs of an
NDX or RUT combination order outside
of the prevailing market quotes in the
individual component series legs.12
Further, NYSE MKT states that an NDX
or RUT combination order must be
executed at the prices originally quoted,
with no window to find liquidity.13
According to NYSE MKT, the rules of
the CME and ICE allow spread and
combination executions to take place
without regard to market prices, and
these executions are bound only by the
daily price limit.14 Although NYSE
MKT believes that traders prefer to use
NDX or RUT combinations, rather than
futures, to hedge positions in NDX or
RUT options to avoid the execution risk
and increased costs involved in trading
in the futures markets, NYSE MKT
believes that the constraints in NYSE
MKT’s rules can make it more difficult
for an NYSE Amex Options market
participant to execute a complex NDX
or RUT option trading strategy than it is
for a CME or ICE market participant to
execute substantially the same strategy
9 The ATP Holder holding the NDX or RUT
combination order must be bidding or offering in
a multiple of the minimum price variation on the
basis of a total debit or credit for the order, and
must determine that the combination order may not
be executed by a combination of transactions with
the bids and offers displayed in the NDX or RUT
Consolidated Book before executing the order at the
best net debit or credit. See NYSE MKT Rule
965NY(b)(4)(i).
10 See NYSE MKT Rule 965NY(b)(4)(ii).
11 See Notice, 78 FR at 41169.
12 See id. at 41170.
13 See id.
14 See id.
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using Nasdaq 100 Index futures or
Russell 2000 Index futures.15 NYSE
MKT believes that the additional burden
associated with trading on the Exchange
may discourage trading on NYSE MKT
in favor of trading on the CME and
ICE.16 NYSE MKT believes, further, that
it may be at a competitive disadvantage
because market participants who
frequently trade spreads or
combinations, or who trade spreads or
combinations as a strategy for hedging
risk, would tend to utilize a market
venue where they can more consistently
depend on achieving a net price
execution.17
To further level the field of
competition between market
participants trading on NYSE Amex
Options and on the CME and ICE, NYSE
MKT proposes to revise its NDX and
RUT combination order trading
procedures.18 Specifically, NYSE MKT
proposes to amend NYSE MKT Rule
965NY(b)(4) to implement a one-year
pilot program that would allow an ATP
Holder to execute an NDX or RUT
combination order at the best net debit
or credit price, which may be outside
the current derived net market,19 so long
as: (a) The best net debit or credit price
would have been at or within the
derived net market over the preceding
two hours of trading that day; (b) no leg
of the order would trade at a price
outside the displayed bids or offers in
the trading crowd or customer interest
in the NDX or RUT Consolidated Book
at a point in time over the preceding
two-hour period; and (c) at least one leg
of the order would trade at a price that
is better than the corresponding
customer bid or offer in the NDX or RUT
Consolidated Book at the same point in
time over the preceding two-hour
period.20 The ‘‘derived net market’’ is
NYSE MKT’s best bids and offers
displayed in the individual option
series for the strategy at any one point
in time over the previous two hours, not
at separate points in time for each of the
series.21 For example, an ATP Holder
could not use the price of the April 2790
puts at 10:20 a.m. and the price of the
April 2810 calls and puts at 10:30 a.m.
to calculate a derived net market.22
15 See
id.
id.
17 See id.
18 See Notice, 78 FR at 41171.
19 The proposal defines the ‘‘derived net market’’
as NYSE MKT’s best bids and offers displayed in
the individual option series for the strategy at any
one point in time. See NYSE MKT Rule
965NY(b)(4)(iii).
20 See NYSE MKT Rule 965NY(b)(4)(iii).
21 See NYSE MKT Rule 965NY(b)(4)(iii) and
Notice, 78 FR at 41171.
22 See Notice, 78 FR at 41171.
16 See
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NYSE MKT states that the proposed
procedure is generally modeled after
CME Rule 542 and ICE Rule 27.11(a)(v),
in that it would allow an NDX or RUT
combination order to be executed outof-range from the current market prices
in the individual component option
series legs, provided that the reported
net price and related component series
prices were in range within the
preceding two hours.23 According to
NYSE MKT, the rules of the CME and
ICE require only that the reported price
of each component futures contract leg
be within the daily price limit, a
number that the Exchange believes is
generally much wider than the two-hour
derived net market range proposed by
the Exchange.24
Each component leg of an NDX or
RUT combination order would continue
to be reported to the trading floor and
the Options Price Reporting Authority
(‘‘OPRA’’) with a special indicator
identifying the reported price as part of
a combination order trade.25
NYSE MKT states its belief that the
proposed procedure would not lessen
the obligation of ATP Holders to obtain
best execution of options orders for their
customers.26 If the Commission
approves the proposal, NYSE MKT will
issue a regulatory bulletin to ATP
Holders explaining the operation of
Rule 965NY, as amended, and
reminding ATP Holders that the new
procedure does not lessen the obligation
of ATP Holders to obtain best execution
of option orders for their customers.27
NYSE MKT characterizes the
proposed pilot program as a narrowly
tailored trading process that does not go
as far as existing CME and ICE rules.28
NYSE MKT believes that its proposed
procedure would provide market
participants with additional flexibility
in achieving desired combination order
strategies in NDX and RUT and in
determining whether to execute their
strategies using options traded on NYSE
MKT or with comparable products
traded on CME or ICE, respectively.29
23 See id. To be ‘‘in range,’’ the net price of the
NDX or RUT combination order must have been at
or within the derived net market over the preceding
two-hour period, each leg of the order must trade
at a price that would have been at or inside the best
bids and offers displayed in the individual option
series legs at a single point in time over the
preceding two hours, and a least one leg of the
order must trade at a price that would have been
better than the corresponding customer orders in
the NDX or RUT Consolidated Book at the same
point in time. See id.
24 See id.
25 See id.
26 See id.
27 See id.
28 See Notice, 78 FR at 41172.
29 See id.
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NYSE MKT believes that the proposed
pilot program would facilitate the
orderly execution of combination orders
in NDX and RUT at all times, including
during volatile markets, in a manner
that is more competitive with the
existing CME and ICE trading
procedures.30 In addition, NYSE MKT
believes that the proposal will address
customers’ desire to show an order to
other market participants to seek price
improvement or additional liquidity.31
NYSE MKT believes, further, that the
proposal would continue to provide an
incentive for market makers to reduce
the width of their quotes for an options
position that is ‘‘tied’’ to a combination
because, under the proposed procedure,
a market maker would know that its
hedge price has been established and
that he or she would not have to trade
in another market, which would result
in tighter and more liquid markets for
customers who trade options tied to
combinations.32
If NYSE MKT were to propose to
extend the pilot program or to make it
permanent, NYSE MKT would provide
the Commission with a pilot report
analyzing the pilot program.33 The pilot
report, which NYSE MKT would submit
to the Commission on a confidential
basis at least two months prior to the
expiration of the pilot program, would
include information on the number of
combination trades in NDX and RUT
and best bid or offer trade through/trade
at analysis of those trades.34 The pilot
report also would include information
on the NDX and RUT options classes
and other broad-based index option
products, including information on
30 See
id.
id.
32 See id. As explained more fully in footnote 5
in the Notice, a customer may request a market for
the NDX puts that the customer wishes to purchase
based on a specified level of the Nasdaq 100 Index.
Specifying the index level allows market
participants to determine the delta and a theoretical
value of the puts. A market participant will then
give his or her market for the puts and for the
component NDX call and put options that would
comprise the combination portion of the order. The
combination portion of the order is equivalent to an
order to trade futures at the underlying value of the
Nasdaq 100 Index that has been specified by the
parties. The prices quoted for the combination
establish the hedge price for the transaction. When
this occurs, market participants say that the puts
have been ‘‘tied’’ to the combination. See Notice, 78
FR at 41169 at footnote 5 and accompanying text.
(The Commission notes that footnote 5 in the Notice
refers to the position being hedged by the offsetting
NDX combination first as NDX calls, then as NDX
puts. Example 3 in the Notice, on which footnote
5 is based, refers to a customer that wishes to trade
the 35 delta NDX April 2790 puts tied to a
combination. Accordingly, the Commission believes
that NYSE MKT intends to refer to NDX puts as the
position being hedged in footnote 5.)
33 See Notice, 78 FR at 41171–72.
34 See Notice, 78 FR at 41172.
31 See
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average contract value, average daily
volume, open interest, average order
size, percentage of complex orders,
percentage of volume from complex
orders, and average daily notional value
traded.35
III. Summary of Comments and NYSE
MKT’s Response
The Commission received two
comments regarding the proposal,36 and
NYSE MKT responded to the
comments.37 One commenter opposes
the proposal, stating its belief that it
would cause ‘‘irreparable harm’’ to
customers and prohibit competition that
might provide improved prices for
marketable orders.38 The commenter
believes that the prohibition in the
current rule against trading any leg of an
NDX or RUT combination order through
a contemporaneous resting order for that
series does not impede the trading of
NDX or RUT combination orders
because, in some circumstances, it
would be possible to adjust the
component legs of an NDX or RUT
combination order in response to a
change in the markets so that the
combination order would achieve its
desired net price and each leg of the
order would trade within the range of
the current quoted market for the
series.39 The commenter states that
traders frequently make such
adjustments, and that trades should
continue to be executed at or within
current market prices because current
prices reflect available information and
represent the best estimate of the true
value of an option at a given time.40 In
addition, the commenter states its view
that executing a leg of a combination
order outside of the current market
would result in a worse price for the
customer.41 The commenter also does
35 See
id.
Story Letter and Casey Letter.
37 See NYSE MKT Response.
38 See Story Letter at 1.
39 See id. For example, the commenter states that
if a customer seeks to sell 100 RUT April 950 puts
at 30.00 tied to a combination based on a Russell
2000 Index level of 975 with a 20 delta, and the
market moves so that the combination must be
printed at an index level of 980, rather than 975,
the price of the April 950 puts can be lowered by
a corresponding equivalent amount to account for
the increase in the index level. The 5.00-point
change in the index level would require a
corresponding reduction of 1.00 for the April puts
(5.00 × .20 (20 delta) = 1.00). Reducing the April
puts to 29.00 to account for the 5.00-point increase
in the index level results in a $10,000 reduction for
the April puts (30.00 ¥ 29.00 = 1.00 × 100 × 100
= $10,000) and a corresponding $10,000 increase for
the hedging combination (975 ¥ 980 = ¥ 5.00 ×
20 × 100 = $10,000), so that, after the adjustments,
the net price for the combination order remains the
same. See id.
40 See Story Letter at 1–2.
41 See id.
36 See
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not believe that the two-hour look back
window would mitigate the potential
impact of trade-throughs on market
participants that provide liquidity in the
underlying leg options.42
Another commenter supports
implementing the proposal on a pilot
basis.43 The commenter states that its
customers consider NDX and RUT
spreads and combination orders to be
equivalent to Nasdaq 100 Index and
Russell 2000 Index futures, respectively,
and that its customers find futures
contracts to be more attractive than
combination orders due to ease of
execution.44 The commenter believes
that the restriction in the current rule
that prohibits the execution of NDX and
RUT combination orders at a price that
would result in any underlying option
leg trading through a contemporaneous
resting order for that option impedes the
trading of combinations. In particular,
the commenter noted that there are
instances when, by the time a customer
has been found and both parties are
ready to trade, the market has moved in
such a way that consummating the trade
would create a trade-through of a
protected quote, requiring the trade to
either be cancelled, adjusted, or moved
to the futures market.45 The commenter
believes that the proposed two-hour
look back would mitigate an
impediment to trading combination
orders by permitting an NDX or RUT
combination order to trade through
resting interest in instances where the
combination order was at or within the
quoted market at the time of the initial
quote, even though quotes for one of the
legs may move such that the leg is
outside of the market by the time both
parties are able to consummate the
transaction.46 Noting that options prices
may move quickly and that combination
orders in active index derivatives are
difficult to complete, the commenter
emphasizes that the ‘‘important aspect
to consider is that these kinds of
combination orders, if they could be
executable immediately (when the
initial quote was received) would be in
line with all quotes, and no tradethrough issues would exist.’’ 47
The commenter believes, further, that
because NDX and RUT combination
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42 See
Story Letter at 2.
commenter recommends collecting data
concerning the volume of NDX and RUT
combination order trades before and after the
implementation of the pilot, as well as data
regarding the available liquidity and spread sizes in
the individual legs of the combinations. See Casey
Letter at 2.
44 See Casey Letter at 3.
45 See Casey Letter at 1.
46 See id.
47 Id. at 2.
43 This
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orders are difficult to complete, they
require different rules from options
transactions that can be executed almost
immediately with the current quotes.48
In addition, the commenter believes that
the trade-throughs that would be
permitted under the proposed rule
would have a negligible impact on
market participants that provide
liquidity in the individual leg markets
because there are comparable tradethrough exceptions in the equity
markets for block and contingent trades
that do not have a negative impact on
liquidity in the equity market.49 Finally,
the commenter believes that the
proposed pilot program could tighten
spreads because it would lock in hedge
prices and eliminate the need for market
participants to find their hedge in a
different market.50
As discussed above, the commenter
that opposes the proposal believes that
market participants would be able, in
some cases, to adjust the prices of the
individual legs of a combination order
to achieve the order’s desired net price
so that the order may be executed
within the range of the current
markets.51 In addition, the commenter
expresses concern that the proposal
potentially could result in harm to
customers.52 In its response, NYSE MKT
disagrees with the assertion that market
participants could adjust the prices of
the individual legs of a combination
order to achieve the order’s desired net
price because, in some circumstances,
such adjustments would not be feasible
or desirable.53 NYSE MKT also
disagrees strongly with the assertion
that the proposal would result in harm
to customers, and notes that the
commenter fails to specify whether the
proposal would result in harm to
customer orders on the book or to a
customer participating in the
combination order.54 NYSE MKT notes
that both the proposal and the
adjustment process the commenter
describes are designed to facilitate the
execution of a complex order as a clean
cross, to the extent consistent with
market conditions and applicable
48 See
id.
49 According
to the commenter, market
participants ‘‘generally understand that these tradethroughs are not indicative of the real market, and
thus they do not have an adverse impact on quote
size or spread width.’’ See Casey Letter at 2. The
commenter believed, further, that equity market
participants have absorbed the alternative rules for
large and complex orders and continue to interact
in meaningful ways without disruption to the
overall market. See Casey Letter at 4.
50 See Casey Letter at 4.
51 See Story Letter at 1.
52 See id. at 3.
53 See NYSE MKT Response at 1.
54 See NYSE MKT Response at 1–2.
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62769
priority rules.55 NYSE MKT states that,
as a complex negotiated trade,
participants to combination orders agree
on a net debit or credit for a transaction
based on current market conditions.56 In
addition, NYSE MKT states that similar
practices exist in the equity market, and
that its proposed two-hour window is
more restrictive than that of
marketplaces offering competing
products, such as ICE and CME.57
NYSE MKT believes that the proposal
would provide for additional flexibility
in achieving desired combinations and
hedging strategies, and would create a
transparent and more efficient
process.58 NYSE MKT believes, further,
that its proposed two-hour window will
enable the completion of combination
orders in a manner that provides a
reasonable degree of execution
certainty, to the benefit of market
participants and customers participating
in the combination order.59 NYSE MKT
notes that market participants would
not be required to use the two-hour look
back window and that members may
continue to use the current
‘‘adjustment’’ approach.60
IV. Proceedings To Determine Whether
To Approve or Disapprove SR–
NYSEMKT–2013–59 and Grounds for
Disapproval Under Consideration
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) of the Act 61 to determine
whether the proposed rule change
should be approved or disapproved.
Institution of such proceedings is
appropriate at this time in view of the
significant legal and policy issues raised
by the proposed rule change, as
discussed below. Institution of
proceedings does not indicate that the
Commission has reached any
conclusions with respect to any of the
issues involved. Rather, as described in
greater detail below, the Commission
seeks and encourages interested persons
to provide additional comment on the
proposed rule change.
Pursuant to Section 19(b)(2)(B) of the
Act, the Commission is providing notice
of the grounds for disapproval under
consideration. The sections of the Act
and the rules thereunder that are
applicable to the proposed rule change
include Sections 3(a)(1), 6(b)(5), and
55 See
NYSE MKT Response at 2.
id.
57 See NYSE MKT Response at 1.
58 See NYSE MKT Response at 2.
59 See NYSE MKT Response at 1.
60 See NYSE MKT Response at 2.
61 15 U.S.C. 78s(b)(2)(B).
56 See
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11A(a) of the Act.62 Section 3(a)(1) of
the Act defines an exchange, in part, as
any organization, association, or group
of persons which constitutes, maintains,
or provides a market place or facilities
for bringing together purchasers and
sellers of securities. Section 6(b)(5) of
the Act requires, among other things,
that the rules of a national securities
exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest. In Section 11A(a) of the
Act, Congress found, in part, that it is
in the public interest and appropriate
for the protection of investors and the
maintenance of fair and orderly markets
to assure the economically efficient
execution of securities transactions.63
The Commission believes that NYSE
MKT’s proposal raises questions as to
whether the proposed rule change is
consistent with these standards. As
discussed above, NYSE MKT’s proposed
pilot program would allow an ATP
Holder to execute an NDX or RUT
combination order outside the current
derived net market so long as: (a) The
best net debit or credit price would have
been at or within the derived net market
over the preceding two hours of trading
that day; (b) no leg of the order would
trade at a price outside the displayed
bids or offers in the trading crowd or
customer interest in the NDX or RUT
Consolidated Book at a point in time
over the preceding two-hour period; and
(c) at least one leg of the order would
trade at a price that is better than the
corresponding customer bid or offer in
the NDX or RUT Consolidated Book at
the same point in time over the
preceding two-hour period.64 By
allowing NDX and RUT combination
orders to be executed outside of the
current derived net market, the
proposed rule change raises concerns
about the potential effect of the proposal
on the markets for NDX and RUT
options, and, in particular, whether or
how the potential for trade-throughs of
prices on NYSE MKT would impact the
incentives of market participants to
provide liquidity in the individual
series comprising the legs of an NDX or
RUT combination order.
NYSE MKT states that practices
similar to the trade-throughs that would
be permitted under the proposal already
62 15 U.S.C. 78c(a)(1), 15 U.S.C. 78f(b)(5), and 15
U.S.C. 78k–1(a)(1)(C).
63 15 U.S.C. 78k–1(a)(1)(C)(i).
64 See NYSE MKT Rule 965NY(b)(4)(iii).
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exist in the equity markets.65 The
Commission notes that the Qualified
Contingent Trade exemption (‘‘QCT
Exemption’’) to Rule 611(a) of
Regulation NMS,66 permits inter-market
trade-throughs of quotations in NMS
stocks for qualified contingent trades,
but does not provide for the intramarket
trade-throughs that the proposal would
permit.67 Thus, the QCT Exemption
does not establish a precedent for an
exchange seeking to trade through its
own market.68 NYSE MKT does not
provide an analysis of the potential
impact of trade-throughs on the NYSE
MKT NDX and RUT limit order books,
nor does it provide a detailed discussion
of how it would study the impact on the
individual leg markets if the proposed
pilot were approved.
In light of these issues and concerns,
the Commission believes that questions
arise regarding whether the proposal is
consistent with the requirements of
Sections 3(a)(1), 6(b)(5), and 11A(a) of
the Act. As the Commission continues
to evaluate the issues presented by the
proposal, the Commission solicits
comment on whether the proposal is
consistent with the Act and whether the
Exchange has met its burden in
presenting a statutory analysis of how
its proposal is consistent with the Act.
In particular, the grounds for
disapproval under consideration
include whether the Exchange’s
proposal is consistent with Section
6(b)(5) of the Act, which requires,
among other things, that the rules of a
national securities exchange be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, and to protect investors and the
public interest. In addition, under the
Commission’s rules of procedure, a selfregulatory organization that proposes to
65 See NYSE MKT Response at 2. As discussed
above, one commenter believed that the tradethroughs permitted in the equity market have not
had a negative impact on liquidity or disrupted the
overall market. See Casey Letter at 2 and 4. See also
note 49, supra, and accompanying text.
66 17 CFR 242.611(a).
67 See Securities Exchange Act Release No. 57620
(April 4, 2008), 73 FR 19271 (April 9, 2008), 73 FR
19271 (order modifying the QCT Exemption); and
54389 (August 31, 2006), 71 FR 52829 (September
7, 2006) (order granting the QCT Exemption).
68 The Commission also notes that under the
Options Order Protection and Locked/Crossed
Market Plan, only an NDX or RUT combination
order that qualifies as a Complex Trade would be
permitted to trade through the quotes in the leg
markets of another exchange that trades NDX or
RUT options. See Securities Exchange Act Release
No. 60405 (July 30, 2009), 74 FR 39632 (August 6,
2009). The proposal does not address how NYSE
MKT would treat an NDX or RUT combination
order that is not a Complex Trade and therefore not
permitted to trade through the NDX or RUT quotes
of another options exchange.
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amend its rules bears the burden of
demonstrating that its proposal is
consistent with the Act.69 In this regard:
the description of the proposed rule change,
its purpose and operation, its effect, and a
legal analysis of its consistency with
applicable requirements must all be
sufficiently detailed and specific to support
an affirmative Commission finding. Any
failure of the self-regulatory organization to
provide the information elicited by Form
19b–4 may result in the Commission not
having a sufficient basis to make an
affirmative finding that a proposed rule
change is consistent with the Exchange Act
and the rules and regulations thereunder that
are applicable to the self-regulatory
organization.70
V. Procedure: Request for Written
Comments
The Commission requests that
interested persons provide written
submissions of their views, data, and
arguments with respect to the concerns
identified above, as well as any other
concerns they may have with the
proposal. In particular, the Commission
invites the written views of interested
persons concerning whether the
proposal is consistent with Sections
3(a)(1), 6(b)(5), 11A(a), or any other
provision of the Act, or the rules and
regulations thereunder. Although there
do not appear to be any issues relevant
to approval or disapproval which would
be facilitated by an oral presentation of
views, data, and arguments, the
Commission will consider, pursuant to
Rule 19b–4, any request for an
opportunity to make an oral
presentation.71
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposal should be approved or
disapproved by November 12, 2013.
Any person who wishes to file a rebuttal
to any other person’s submission must
file that rebuttal by November 26, 2013.
The Commission asks that
commenters address the sufficiency and
merit of the Exchange’s statements in
support of the proposal, in addition to
any other comments they may wish to
submit about the proposed rule change.
In particular, the Commission seeks
comment on the following:
69 Rule
700(b)(3), 17 CFR 201.700(b)(3).
id.
71 Section 19(b)(2) of the Act, as amended by the
Securities Act Amendments of 1975, Public Law
94–29 (June 4, 1975), grants the Commission
flexibility to determine what type of proceeding
—either oral or notice and opportunity for written
comments—is appropriate for consideration of a
particular proposal by a self-regulatory
organization. See Securities Act Amendments of
1975, Senate Comm. on Banking, Housing & Urban
Affairs, S. Rep. No. 75, 94th Cong., 1st Sess. 30
(1975).
70 See
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Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices
1. What, if any, effect do commenters
believe the proposal may have on the
incentives of market participants to
provide liquidity in the series
comprising an NDX or RUT
combination order? Do commenters
believe that permitting NDX and RUT
combination orders to trade through
interest in the leg market potentially
could discourage market participants
from placing limit orders in the
individual series on the NDX and RUT
limit order books? Why or why not?
2. Do commenters believe that NYSE
MKT has adequately analyzed the
potential effects of the proposal on the
markets for NDX and RUT options,
including the potential impact on
market participants providing liquidity
in the series comprising the legs of an
NDX or RUT combination order? Why
or why not?
3. As noted above, one commenter
expresses concern that the flexibility to
trade outside of the current derived net
market could result in harm to
customers.72 NYSE MKT disagrees,
stating in its response that participants
to complex negotiated trades agree on a
net price for a transaction based on
current market conditions.73 In
addition, NYSE MKT notes that market
participants would not be required to
use the two-hour look back window.74
What, if any, impact do commenters
believe the ability to trade outside of the
current derived net market would have
on the quality of executions for
customers trading NDX and RUT
combination orders?
4. NYSE MKT believes that its current
combination order rule ‘‘does not come
close to leveling the field with the CME
and ICE rules for spread and
combination trading,’’ and that the rules
of the CME and ICE require only that the
reported price of each component
futures contract be within the daily
limit price.75 Do commenters believe
that NYSE MKT has fully identified the
multi-legged futures strateg(ies) with
which it believes NDX and RUT
combination orders compete?
5. Do commenters believe that there
are characteristics associated with the
trading of NDX and RUT options that
potentially could help the Commission
assess the concerns discussed above
regarding the potential to impact the
quality of executions or the incentives
of liquidity providers in the individual
series? If so, please explain. Do
commenters believe that these
characteristics, if any, are unique to
72 See
Story Letter at 3.
NYSE MKT Response at 2.
74 See id.
75 See Notice, 78 FR at 441170 and 41171.
73 See
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NDX and RUT options, or are they also
shared by other broad-based index
options? If so, the Commission is
interested in statistics or other data
concerning the trading of NDX and RUT
options that would help the
Commission to assess these
characteristics.
6. As discussed more fully above, one
commenter believes that the proposal is
unnecessary because market
participants would be able to adjust the
prices of the legs of an NDX or RUT
combination order so that they are at or
within the current market. Another
commenter states that the proposal
would remove an impediment to the
trading of NDX and RUT combination
orders by allowing the orders to trade
through the current market, provided
that the conditions in the rule are
satisfied. Do commenters agree or
disagree with these views and why?
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–NYSEMKT–2013–59 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NYSEMKT–2013–59. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
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62771
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
NYSEMKT–2013–59 and should be
submitted on or before November 12,
2013. Rebuttal comments should be
submitted by November 26, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.76
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–24546 Filed 10–21–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70668; File No. SR–BOX–
2013–48]
Self-Regulatory Organizations; BOX
Options Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Amend
Interpretive Material to Rule 5050 and
Rule 6090
October 11, 2013.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that, on October
4, 2013, BOX Options Exchange LLC
(‘‘BOX’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
as described in Items I and II, below,
which Items have been prepared by the
Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
interpretive material to Rule 5050
(Series of Options Contracts Open for
Trading) and Rule 6090 (Terms of Index
Options Contracts) to give the Exchange
the ability to initiate strike prices in
more granular intervals for Short Term
Options (‘‘STOs’’) in the same manner
as on other options exchanges. The text
of the proposed rule change is available
from the principal office of the
Exchange, at the Commission’s Public
76 17
CFR 200.30–3(a)(57).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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]]>Agencies
[Federal Register Volume 78, Number 204 (Tuesday, October 22, 2013)]
[Notices]
[Pages 62766-62771]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-24546]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70588; File No. SR-NYSEMKT-2013-59]
Self-Regulatory Organizations; NYSE MKT LLC; Order Instituting
Proceedings To Determine Whether To Approve or Disapprove a Proposed
Rule Change Relating to NDX and RUT Combination Orders
October 1, 2013.
I. Introduction
On June 21, 2013, NYSE MKT LLC (``NYSE MKT'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4
[[Page 62767]]
thereunder,\2\ a proposed rule change to amend NYSE MKT Rule 965NY to
revise the procedures governing the trading of NDX and RUT combination
orders. The proposed rule change was published for comment in the
Federal Register on July 9, 2013.\3\ The Commission received two
comments regarding the proposal.\4\ NYSE MKT responded to the comments
on August 19, 2013.\5\ On August 20, 2013, the Commission extended to
October 7, 2013, the time within which the Commission must approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\6\ This order institutes proceedings under Section 19(b)(2)(B)
of the Act \7\ to determine whether to approve or disapprove the
proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 69919 (July 2,
2013), 78 FR 41168 (``Notice'').
\4\ See letters to Elizabeth M. Murphy, Secretary, Commission,
from Darren Story, CFA, Student Options, LLC, dated July 12, 2013
(``Story Letter''); and from David Spack, Chief Compliance Officer,
Casey Securities, LLC, dated August 2, 2013 (``Casey Letter'').
\5\ See letter from Janet McGinness, Executive Vice President
and Corporate Secretary, NYSE Euronext, to Elizabeth M. Murphy,
Secretary, Commission, dated August 19, 2013 (``NYSE MKT
Response'').
\6\ See Securities Exchange Act Release No. 70235 (August 20,
2013), 78 FR 52818 (August 26, 2013).
\7\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
II. Description of the Proposal
NYSE MKT Rule 965NY(b) provides procedures for trading Nasdaq 100
Index (``NDX'') and Russell 2000 Index (``RUT'') combination orders.\8\
Currently, NYSE MKT Rule 965NY(b) allows an ATP Holder holding an NDX
or RUT combination order to execute the order at the best net debit or
credit so long as (A) no leg of the order would trade at a price
outside the currently displayed bids or offers in the trading crowd or
bids or offers in the NDX or RUT Consolidated Book; and (B) at least
one leg of the order would trade at a price that is better than the
corresponding bid or offer in the NDX or RUT Consolidated Book.\9\ An
NDX or RUT combination order that is not executed immediately may be
executed and printed at the prices originally quoted for each of the
component option series within two hours after the time of the original
quotes, provided that, at the time of execution, no individual leg of
the NDX or RUT combination order may trade ahead of the corresponding
bid or offer in the NDX or RUT Consolidated Book.\10\
---------------------------------------------------------------------------
\8\ See NYSE MKT Rule 965NY(b)(4)(iii). A ``NDX combination
order'' is an order to purchase or sell NDX options and the
offsetting number of NDX combinations defined by the delta. An ``NDX
Combination'' is a long (short) NDX call and a short (long) NDX put
having the same expiration date and strike price. A ``RUT
combination order'' is an order to purchase or sell RUT options and
the offsetting number of RUT combinations defined by the delta. An
``RUT Combination'' is a long (short) RUT call and a short (long)
RUT put having the same expiration date and strike price. A
``delta'' is the positive (negative) number of NDX or RUT
combinations that must be sold (bought) to establish a market
neutral hedge with the corresponding NDX or RUT option position. See
NYSE MKT Rule 965NY(b)(1)-(3).
\9\ The ATP Holder holding the NDX or RUT combination order must
be bidding or offering in a multiple of the minimum price variation
on the basis of a total debit or credit for the order, and must
determine that the combination order may not be executed by a
combination of transactions with the bids and offers displayed in
the NDX or RUT Consolidated Book before executing the order at the
best net debit or credit. See NYSE MKT Rule 965NY(b)(4)(i).
\10\ See NYSE MKT Rule 965NY(b)(4)(ii).
---------------------------------------------------------------------------
NYSE MKT proposes to amend NYSE MKT Rule 965NY(b) to implement a
one-year pilot program that would revise the procedures for trading NDX
and RUT combination orders. NYSE MKT believes that the pilot program's
revised trading procedures would make the trading of NDX and RUT
combination orders more competitive with the trading of combinations in
Nasdaq 100 Index futures and Russell 2000 Index futures on the Chicago
Mercantile Exchange (``CME'') and the Intercontinental Exchange
(``ICE''), respectively.\11\
---------------------------------------------------------------------------
\11\ See Notice, 78 FR at 41169.
---------------------------------------------------------------------------
NYSE MKT notes that its rules currently preclude trading the legs
of an NDX or RUT combination order outside of the prevailing market
quotes in the individual component series legs.\12\ Further, NYSE MKT
states that an NDX or RUT combination order must be executed at the
prices originally quoted, with no window to find liquidity.\13\
According to NYSE MKT, the rules of the CME and ICE allow spread and
combination executions to take place without regard to market prices,
and these executions are bound only by the daily price limit.\14\
Although NYSE MKT believes that traders prefer to use NDX or RUT
combinations, rather than futures, to hedge positions in NDX or RUT
options to avoid the execution risk and increased costs involved in
trading in the futures markets, NYSE MKT believes that the constraints
in NYSE MKT's rules can make it more difficult for an NYSE Amex Options
market participant to execute a complex NDX or RUT option trading
strategy than it is for a CME or ICE market participant to execute
substantially the same strategy using Nasdaq 100 Index futures or
Russell 2000 Index futures.\15\ NYSE MKT believes that the additional
burden associated with trading on the Exchange may discourage trading
on NYSE MKT in favor of trading on the CME and ICE.\16\ NYSE MKT
believes, further, that it may be at a competitive disadvantage because
market participants who frequently trade spreads or combinations, or
who trade spreads or combinations as a strategy for hedging risk, would
tend to utilize a market venue where they can more consistently depend
on achieving a net price execution.\17\
---------------------------------------------------------------------------
\12\ See id. at 41170.
\13\ See id.
\14\ See id.
\15\ See id.
\16\ See id.
\17\ See id.
---------------------------------------------------------------------------
To further level the field of competition between market
participants trading on NYSE Amex Options and on the CME and ICE, NYSE
MKT proposes to revise its NDX and RUT combination order trading
procedures.\18\ Specifically, NYSE MKT proposes to amend NYSE MKT Rule
965NY(b)(4) to implement a one-year pilot program that would allow an
ATP Holder to execute an NDX or RUT combination order at the best net
debit or credit price, which may be outside the current derived net
market,\19\ so long as: (a) The best net debit or credit price would
have been at or within the derived net market over the preceding two
hours of trading that day; (b) no leg of the order would trade at a
price outside the displayed bids or offers in the trading crowd or
customer interest in the NDX or RUT Consolidated Book at a point in
time over the preceding two-hour period; and (c) at least one leg of
the order would trade at a price that is better than the corresponding
customer bid or offer in the NDX or RUT Consolidated Book at the same
point in time over the preceding two-hour period.\20\ The ``derived net
market'' is NYSE MKT's best bids and offers displayed in the individual
option series for the strategy at any one point in time over the
previous two hours, not at separate points in time for each of the
series.\21\ For example, an ATP Holder could not use the price of the
April 2790 puts at 10:20 a.m. and the price of the April 2810 calls and
puts at 10:30 a.m. to calculate a derived net market.\22\
---------------------------------------------------------------------------
\18\ See Notice, 78 FR at 41171.
\19\ The proposal defines the ``derived net market'' as NYSE
MKT's best bids and offers displayed in the individual option series
for the strategy at any one point in time. See NYSE MKT Rule
965NY(b)(4)(iii).
\20\ See NYSE MKT Rule 965NY(b)(4)(iii).
\21\ See NYSE MKT Rule 965NY(b)(4)(iii) and Notice, 78 FR at
41171.
\22\ See Notice, 78 FR at 41171.
---------------------------------------------------------------------------
[[Page 62768]]
NYSE MKT states that the proposed procedure is generally modeled
after CME Rule 542 and ICE Rule 27.11(a)(v), in that it would allow an
NDX or RUT combination order to be executed out-of-range from the
current market prices in the individual component option series legs,
provided that the reported net price and related component series
prices were in range within the preceding two hours.\23\ According to
NYSE MKT, the rules of the CME and ICE require only that the reported
price of each component futures contract leg be within the daily price
limit, a number that the Exchange believes is generally much wider than
the two-hour derived net market range proposed by the Exchange.\24\
---------------------------------------------------------------------------
\23\ See id. To be ``in range,'' the net price of the NDX or RUT
combination order must have been at or within the derived net market
over the preceding two-hour period, each leg of the order must trade
at a price that would have been at or inside the best bids and
offers displayed in the individual option series legs at a single
point in time over the preceding two hours, and a least one leg of
the order must trade at a price that would have been better than the
corresponding customer orders in the NDX or RUT Consolidated Book at
the same point in time. See id.
\24\ See id.
---------------------------------------------------------------------------
Each component leg of an NDX or RUT combination order would
continue to be reported to the trading floor and the Options Price
Reporting Authority (``OPRA'') with a special indicator identifying the
reported price as part of a combination order trade.\25\
---------------------------------------------------------------------------
\25\ See id.
---------------------------------------------------------------------------
NYSE MKT states its belief that the proposed procedure would not
lessen the obligation of ATP Holders to obtain best execution of
options orders for their customers.\26\ If the Commission approves the
proposal, NYSE MKT will issue a regulatory bulletin to ATP Holders
explaining the operation of Rule 965NY, as amended, and reminding ATP
Holders that the new procedure does not lessen the obligation of ATP
Holders to obtain best execution of option orders for their
customers.\27\
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\26\ See id.
\27\ See id.
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NYSE MKT characterizes the proposed pilot program as a narrowly
tailored trading process that does not go as far as existing CME and
ICE rules.\28\ NYSE MKT believes that its proposed procedure would
provide market participants with additional flexibility in achieving
desired combination order strategies in NDX and RUT and in determining
whether to execute their strategies using options traded on NYSE MKT or
with comparable products traded on CME or ICE, respectively.\29\
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\28\ See Notice, 78 FR at 41172.
\29\ See id.
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NYSE MKT believes that the proposed pilot program would facilitate
the orderly execution of combination orders in NDX and RUT at all
times, including during volatile markets, in a manner that is more
competitive with the existing CME and ICE trading procedures.\30\ In
addition, NYSE MKT believes that the proposal will address customers'
desire to show an order to other market participants to seek price
improvement or additional liquidity.\31\ NYSE MKT believes, further,
that the proposal would continue to provide an incentive for market
makers to reduce the width of their quotes for an options position that
is ``tied'' to a combination because, under the proposed procedure, a
market maker would know that its hedge price has been established and
that he or she would not have to trade in another market, which would
result in tighter and more liquid markets for customers who trade
options tied to combinations.\32\
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\30\ See id.
\31\ See id.
\32\ See id. As explained more fully in footnote 5 in the
Notice, a customer may request a market for the NDX puts that the
customer wishes to purchase based on a specified level of the Nasdaq
100 Index. Specifying the index level allows market participants to
determine the delta and a theoretical value of the puts. A market
participant will then give his or her market for the puts and for
the component NDX call and put options that would comprise the
combination portion of the order. The combination portion of the
order is equivalent to an order to trade futures at the underlying
value of the Nasdaq 100 Index that has been specified by the
parties. The prices quoted for the combination establish the hedge
price for the transaction. When this occurs, market participants say
that the puts have been ``tied'' to the combination. See Notice, 78
FR at 41169 at footnote 5 and accompanying text. (The Commission
notes that footnote 5 in the Notice refers to the position being
hedged by the offsetting NDX combination first as NDX calls, then as
NDX puts. Example 3 in the Notice, on which footnote 5 is based,
refers to a customer that wishes to trade the 35 delta NDX April
2790 puts tied to a combination. Accordingly, the Commission
believes that NYSE MKT intends to refer to NDX puts as the position
being hedged in footnote 5.)
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If NYSE MKT were to propose to extend the pilot program or to make
it permanent, NYSE MKT would provide the Commission with a pilot report
analyzing the pilot program.\33\ The pilot report, which NYSE MKT would
submit to the Commission on a confidential basis at least two months
prior to the expiration of the pilot program, would include information
on the number of combination trades in NDX and RUT and best bid or
offer trade through/trade at analysis of those trades.\34\ The pilot
report also would include information on the NDX and RUT options
classes and other broad-based index option products, including
information on average contract value, average daily volume, open
interest, average order size, percentage of complex orders, percentage
of volume from complex orders, and average daily notional value
traded.\35\
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\33\ See Notice, 78 FR at 41171-72.
\34\ See Notice, 78 FR at 41172.
\35\ See id.
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III. Summary of Comments and NYSE MKT's Response
The Commission received two comments regarding the proposal,\36\
and NYSE MKT responded to the comments.\37\ One commenter opposes the
proposal, stating its belief that it would cause ``irreparable harm''
to customers and prohibit competition that might provide improved
prices for marketable orders.\38\ The commenter believes that the
prohibition in the current rule against trading any leg of an NDX or
RUT combination order through a contemporaneous resting order for that
series does not impede the trading of NDX or RUT combination orders
because, in some circumstances, it would be possible to adjust the
component legs of an NDX or RUT combination order in response to a
change in the markets so that the combination order would achieve its
desired net price and each leg of the order would trade within the
range of the current quoted market for the series.\39\ The commenter
states that traders frequently make such adjustments, and that trades
should continue to be executed at or within current market prices
because current prices reflect available information and represent the
best estimate of the true value of an option at a given time.\40\ In
addition, the commenter states its view that executing a leg of a
combination order outside of the current market would result in a worse
price for the customer.\41\ The commenter also does
[[Page 62769]]
not believe that the two-hour look back window would mitigate the
potential impact of trade-throughs on market participants that provide
liquidity in the underlying leg options.\42\
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\36\ See Story Letter and Casey Letter.
\37\ See NYSE MKT Response.
\38\ See Story Letter at 1.
\39\ See id. For example, the commenter states that if a
customer seeks to sell 100 RUT April 950 puts at 30.00 tied to a
combination based on a Russell 2000 Index level of 975 with a 20
delta, and the market moves so that the combination must be printed
at an index level of 980, rather than 975, the price of the April
950 puts can be lowered by a corresponding equivalent amount to
account for the increase in the index level. The 5.00-point change
in the index level would require a corresponding reduction of 1.00
for the April puts (5.00 x .20 (20 delta) = 1.00). Reducing the
April puts to 29.00 to account for the 5.00-point increase in the
index level results in a $10,000 reduction for the April puts (30.00
- 29.00 = 1.00 x 100 x 100 = $10,000) and a corresponding $10,000
increase for the hedging combination (975 - 980 = - 5.00 x 20 x 100
= $10,000), so that, after the adjustments, the net price for the
combination order remains the same. See id.
\40\ See Story Letter at 1-2.
\41\ See id.
\42\ See Story Letter at 2.
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Another commenter supports implementing the proposal on a pilot
basis.\43\ The commenter states that its customers consider NDX and RUT
spreads and combination orders to be equivalent to Nasdaq 100 Index and
Russell 2000 Index futures, respectively, and that its customers find
futures contracts to be more attractive than combination orders due to
ease of execution.\44\ The commenter believes that the restriction in
the current rule that prohibits the execution of NDX and RUT
combination orders at a price that would result in any underlying
option leg trading through a contemporaneous resting order for that
option impedes the trading of combinations. In particular, the
commenter noted that there are instances when, by the time a customer
has been found and both parties are ready to trade, the market has
moved in such a way that consummating the trade would create a trade-
through of a protected quote, requiring the trade to either be
cancelled, adjusted, or moved to the futures market.\45\ The commenter
believes that the proposed two-hour look back would mitigate an
impediment to trading combination orders by permitting an NDX or RUT
combination order to trade through resting interest in instances where
the combination order was at or within the quoted market at the time of
the initial quote, even though quotes for one of the legs may move such
that the leg is outside of the market by the time both parties are able
to consummate the transaction.\46\ Noting that options prices may move
quickly and that combination orders in active index derivatives are
difficult to complete, the commenter emphasizes that the ``important
aspect to consider is that these kinds of combination orders, if they
could be executable immediately (when the initial quote was received)
would be in line with all quotes, and no trade-through issues would
exist.'' \47\
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\43\ This commenter recommends collecting data concerning the
volume of NDX and RUT combination order trades before and after the
implementation of the pilot, as well as data regarding the available
liquidity and spread sizes in the individual legs of the
combinations. See Casey Letter at 2.
\44\ See Casey Letter at 3.
\45\ See Casey Letter at 1.
\46\ See id.
\47\ Id. at 2.
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The commenter believes, further, that because NDX and RUT
combination orders are difficult to complete, they require different
rules from options transactions that can be executed almost immediately
with the current quotes.\48\ In addition, the commenter believes that
the trade-throughs that would be permitted under the proposed rule
would have a negligible impact on market participants that provide
liquidity in the individual leg markets because there are comparable
trade-through exceptions in the equity markets for block and contingent
trades that do not have a negative impact on liquidity in the equity
market.\49\ Finally, the commenter believes that the proposed pilot
program could tighten spreads because it would lock in hedge prices and
eliminate the need for market participants to find their hedge in a
different market.\50\
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\48\ See id.
\49\ According to the commenter, market participants ``generally
understand that these trade-throughs are not indicative of the real
market, and thus they do not have an adverse impact on quote size or
spread width.'' See Casey Letter at 2. The commenter believed,
further, that equity market participants have absorbed the
alternative rules for large and complex orders and continue to
interact in meaningful ways without disruption to the overall
market. See Casey Letter at 4.
\50\ See Casey Letter at 4.
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As discussed above, the commenter that opposes the proposal
believes that market participants would be able, in some cases, to
adjust the prices of the individual legs of a combination order to
achieve the order's desired net price so that the order may be executed
within the range of the current markets.\51\ In addition, the commenter
expresses concern that the proposal potentially could result in harm to
customers.\52\ In its response, NYSE MKT disagrees with the assertion
that market participants could adjust the prices of the individual legs
of a combination order to achieve the order's desired net price
because, in some circumstances, such adjustments would not be feasible
or desirable.\53\ NYSE MKT also disagrees strongly with the assertion
that the proposal would result in harm to customers, and notes that the
commenter fails to specify whether the proposal would result in harm to
customer orders on the book or to a customer participating in the
combination order.\54\ NYSE MKT notes that both the proposal and the
adjustment process the commenter describes are designed to facilitate
the execution of a complex order as a clean cross, to the extent
consistent with market conditions and applicable priority rules.\55\
NYSE MKT states that, as a complex negotiated trade, participants to
combination orders agree on a net debit or credit for a transaction
based on current market conditions.\56\ In addition, NYSE MKT states
that similar practices exist in the equity market, and that its
proposed two-hour window is more restrictive than that of marketplaces
offering competing products, such as ICE and CME.\57\
---------------------------------------------------------------------------
\51\ See Story Letter at 1.
\52\ See id. at 3.
\53\ See NYSE MKT Response at 1.
\54\ See NYSE MKT Response at 1-2.
\55\ See NYSE MKT Response at 2.
\56\ See id.
\57\ See NYSE MKT Response at 1.
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NYSE MKT believes that the proposal would provide for additional
flexibility in achieving desired combinations and hedging strategies,
and would create a transparent and more efficient process.\58\ NYSE MKT
believes, further, that its proposed two-hour window will enable the
completion of combination orders in a manner that provides a reasonable
degree of execution certainty, to the benefit of market participants
and customers participating in the combination order.\59\ NYSE MKT
notes that market participants would not be required to use the two-
hour look back window and that members may continue to use the current
``adjustment'' approach.\60\
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\58\ See NYSE MKT Response at 2.
\59\ See NYSE MKT Response at 1.
\60\ See NYSE MKT Response at 2.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEMKT-2013-59 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \61\ to determine whether the proposed rule
change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the significant
legal and policy issues raised by the proposed rule change, as
discussed below. Institution of proceedings does not indicate that the
Commission has reached any conclusions with respect to any of the
issues involved. Rather, as described in greater detail below, the
Commission seeks and encourages interested persons to provide
additional comment on the proposed rule change.
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\61\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act, the Commission is
providing notice of the grounds for disapproval under consideration.
The sections of the Act and the rules thereunder that are applicable to
the proposed rule change include Sections 3(a)(1), 6(b)(5), and
[[Page 62770]]
11A(a) of the Act.\62\ Section 3(a)(1) of the Act defines an exchange,
in part, as any organization, association, or group of persons which
constitutes, maintains, or provides a market place or facilities for
bringing together purchasers and sellers of securities. Section 6(b)(5)
of the Act requires, among other things, that the rules of a national
securities exchange be designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
to remove impediments to and perfect the mechanism of a free and open
market and a national market system and, in general, to protect
investors and the public interest. In Section 11A(a) of the Act,
Congress found, in part, that it is in the public interest and
appropriate for the protection of investors and the maintenance of fair
and orderly markets to assure the economically efficient execution of
securities transactions.\63\
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\62\ 15 U.S.C. 78c(a)(1), 15 U.S.C. 78f(b)(5), and 15 U.S.C.
78k-1(a)(1)(C).
\63\ 15 U.S.C. 78k-1(a)(1)(C)(i).
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The Commission believes that NYSE MKT's proposal raises questions
as to whether the proposed rule change is consistent with these
standards. As discussed above, NYSE MKT's proposed pilot program would
allow an ATP Holder to execute an NDX or RUT combination order outside
the current derived net market so long as: (a) The best net debit or
credit price would have been at or within the derived net market over
the preceding two hours of trading that day; (b) no leg of the order
would trade at a price outside the displayed bids or offers in the
trading crowd or customer interest in the NDX or RUT Consolidated Book
at a point in time over the preceding two-hour period; and (c) at least
one leg of the order would trade at a price that is better than the
corresponding customer bid or offer in the NDX or RUT Consolidated Book
at the same point in time over the preceding two-hour period.\64\ By
allowing NDX and RUT combination orders to be executed outside of the
current derived net market, the proposed rule change raises concerns
about the potential effect of the proposal on the markets for NDX and
RUT options, and, in particular, whether or how the potential for
trade-throughs of prices on NYSE MKT would impact the incentives of
market participants to provide liquidity in the individual series
comprising the legs of an NDX or RUT combination order.
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\64\ See NYSE MKT Rule 965NY(b)(4)(iii).
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NYSE MKT states that practices similar to the trade-throughs that
would be permitted under the proposal already exist in the equity
markets.\65\ The Commission notes that the Qualified Contingent Trade
exemption (``QCT Exemption'') to Rule 611(a) of Regulation NMS,\66\
permits inter-market trade-throughs of quotations in NMS stocks for
qualified contingent trades, but does not provide for the intramarket
trade-throughs that the proposal would permit.\67\ Thus, the QCT
Exemption does not establish a precedent for an exchange seeking to
trade through its own market.\68\ NYSE MKT does not provide an analysis
of the potential impact of trade-throughs on the NYSE MKT NDX and RUT
limit order books, nor does it provide a detailed discussion of how it
would study the impact on the individual leg markets if the proposed
pilot were approved.
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\65\ See NYSE MKT Response at 2. As discussed above, one
commenter believed that the trade-throughs permitted in the equity
market have not had a negative impact on liquidity or disrupted the
overall market. See Casey Letter at 2 and 4. See also note 49,
supra, and accompanying text.
\66\ 17 CFR 242.611(a).
\67\ See Securities Exchange Act Release No. 57620 (April 4,
2008), 73 FR 19271 (April 9, 2008), 73 FR 19271 (order modifying the
QCT Exemption); and 54389 (August 31, 2006), 71 FR 52829 (September
7, 2006) (order granting the QCT Exemption).
\68\ The Commission also notes that under the Options Order
Protection and Locked/Crossed Market Plan, only an NDX or RUT
combination order that qualifies as a Complex Trade would be
permitted to trade through the quotes in the leg markets of another
exchange that trades NDX or RUT options. See Securities Exchange Act
Release No. 60405 (July 30, 2009), 74 FR 39632 (August 6, 2009). The
proposal does not address how NYSE MKT would treat an NDX or RUT
combination order that is not a Complex Trade and therefore not
permitted to trade through the NDX or RUT quotes of another options
exchange.
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In light of these issues and concerns, the Commission believes that
questions arise regarding whether the proposal is consistent with the
requirements of Sections 3(a)(1), 6(b)(5), and 11A(a) of the Act. As
the Commission continues to evaluate the issues presented by the
proposal, the Commission solicits comment on whether the proposal is
consistent with the Act and whether the Exchange has met its burden in
presenting a statutory analysis of how its proposal is consistent with
the Act. In particular, the grounds for disapproval under consideration
include whether the Exchange's proposal is consistent with Section
6(b)(5) of the Act, which requires, among other things, that the rules
of a national securities exchange be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and to protect investors and the public interest.
In addition, under the Commission's rules of procedure, a self-
regulatory organization that proposes to amend its rules bears the
burden of demonstrating that its proposal is consistent with the
Act.\69\ In this regard:
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\69\ Rule 700(b)(3), 17 CFR 201.700(b)(3).
the description of the proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and
specific to support an affirmative Commission finding. Any failure
of the self-regulatory organization to provide the information
elicited by Form 19b-4 may result in the Commission not having a
sufficient basis to make an affirmative finding that a proposed rule
change is consistent with the Exchange Act and the rules and
regulations thereunder that are applicable to the self-regulatory
organization.\70\
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\70\ See id.
V. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
concerns identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Sections 3(a)(1), 6(b)(5), 11A(a), or any other
provision of the Act, or the rules and regulations thereunder. Although
there do not appear to be any issues relevant to approval or
disapproval which would be facilitated by an oral presentation of
views, data, and arguments, the Commission will consider, pursuant to
Rule 19b-4, any request for an opportunity to make an oral
presentation.\71\
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\71\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding --either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by November 12, 2013. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
November 26, 2013.
The Commission asks that commenters address the sufficiency and
merit of the Exchange's statements in support of the proposal, in
addition to any other comments they may wish to submit about the
proposed rule change. In particular, the Commission seeks comment on
the following:
[[Page 62771]]
1. What, if any, effect do commenters believe the proposal may have
on the incentives of market participants to provide liquidity in the
series comprising an NDX or RUT combination order? Do commenters
believe that permitting NDX and RUT combination orders to trade through
interest in the leg market potentially could discourage market
participants from placing limit orders in the individual series on the
NDX and RUT limit order books? Why or why not?
2. Do commenters believe that NYSE MKT has adequately analyzed the
potential effects of the proposal on the markets for NDX and RUT
options, including the potential impact on market participants
providing liquidity in the series comprising the legs of an NDX or RUT
combination order? Why or why not?
3. As noted above, one commenter expresses concern that the
flexibility to trade outside of the current derived net market could
result in harm to customers.\72\ NYSE MKT disagrees, stating in its
response that participants to complex negotiated trades agree on a net
price for a transaction based on current market conditions.\73\ In
addition, NYSE MKT notes that market participants would not be required
to use the two-hour look back window.\74\ What, if any, impact do
commenters believe the ability to trade outside of the current derived
net market would have on the quality of executions for customers
trading NDX and RUT combination orders?
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\72\ See Story Letter at 3.
\73\ See NYSE MKT Response at 2.
\74\ See id.
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4. NYSE MKT believes that its current combination order rule ``does
not come close to leveling the field with the CME and ICE rules for
spread and combination trading,'' and that the rules of the CME and ICE
require only that the reported price of each component futures contract
be within the daily limit price.\75\ Do commenters believe that NYSE
MKT has fully identified the multi-legged futures strateg(ies) with
which it believes NDX and RUT combination orders compete?
---------------------------------------------------------------------------
\75\ See Notice, 78 FR at 441170 and 41171.
---------------------------------------------------------------------------
5. Do commenters believe that there are characteristics associated
with the trading of NDX and RUT options that potentially could help the
Commission assess the concerns discussed above regarding the potential
to impact the quality of executions or the incentives of liquidity
providers in the individual series? If so, please explain. Do
commenters believe that these characteristics, if any, are unique to
NDX and RUT options, or are they also shared by other broad-based index
options? If so, the Commission is interested in statistics or other
data concerning the trading of NDX and RUT options that would help the
Commission to assess these characteristics.
6. As discussed more fully above, one commenter believes that the
proposal is unnecessary because market participants would be able to
adjust the prices of the legs of an NDX or RUT combination order so
that they are at or within the current market. Another commenter states
that the proposal would remove an impediment to the trading of NDX and
RUT combination orders by allowing the orders to trade through the
current market, provided that the conditions in the rule are satisfied.
Do commenters agree or disagree with these views and why?
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NYSEMKT-2013-59 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEMKT-2013-59. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSEMKT-2013-59 and should
be submitted on or before November 12, 2013. Rebuttal comments should
be submitted by November 26, 2013.
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\76\ 17 CFR 200.30-3(a)(57).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\76\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24546 Filed 10-21-13; 8:45 am]
BILLING CODE 8011-01-P
