Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change To Establish an Institutional Liquidity Program on a One-Year Pilot Basis, 71002-71011 [2013-28414]
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Federal Register / Vol. 78, No. 229 / Wednesday, November 27, 2013 / Notices
appropriate in furtherance of the
purposes of the Act because it would
result in further specification in the
Price List and Fee Schedule regarding
the fees applicable to PNU cabinets.
Although PNU cabinets do not use
power, when the Exchange establishes a
PNU cabinet, it includes wiring,
circuitry, and hardware and allocates
either four kWs or eight kWs of unused
power capacity, depending on the
User’s requirements, as it does for all
cabinets. This allows the cabinet to be
powered and used promptly upon the
User’s request. The proposed
amendment to the Price List and Fee
Schedule would therefore specify that
the applicable monthly PNU Fee is $360
per kW of power allocated to the PNU
cabinet.
Finally, the Exchange notes that it
operates in a highly competitive market
in which market participants can
readily favor competing venues if, for
example, they deem fee levels at a
particular venue to be excessive or if
they determine that another venue’s
products and services are more
competitive than on the Exchange. In
such an environment, the Exchange
must continually review, and consider
adjusting, the services it offers as well
as any corresponding fees and credits to
remain competitive with other
exchanges. For the reasons described
above, the Exchange believes that the
proposed rule change reflects this
competitive environment.
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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
The foregoing rule change is effective
upon filing pursuant to Section
19(b)(3)(A) 16 of the Act and
subparagraph (f)(2) of Rule 19b–4 17
thereunder, because it establishes a due,
fee, or other charge imposed by the
Exchange.
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. If the
16 15
17 17
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(2).
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17:02 Nov 26, 2013
Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 18 of the Act to
determine whether the proposed rule
change should be approved or
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–
NYSEMKT–2013–93 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–2013–93. 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–
18 15
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U.S.C. 78s(b)(2)(B).
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NYSEMKT–2013–93 and should be
submitted on or before December 18,
2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.19
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–28419 Filed 11–26–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70909; File No. SR–NYSE–
2013–72]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing of Proposed Rule Change To
Establish an Institutional Liquidity
Program on a One-Year Pilot Basis
November 21, 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 November
7, 2013, New York Stock Exchange LLC
(‘‘NYSE’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the self-regulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes a one-year
pilot program that would add new Rule
107D to establish an Institutional
Liquidity Program (‘‘Program’’ or
‘‘proposed rule change’’) to attract
buying and selling interest in greater
size to the Exchange for NYSE-listed
securities by facilitating interactions
between institutional customers (and
others with block trading interest) and
providers of liquidity exceeding
minimum size requirements. 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.
19 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
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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
Statutory Basis for, the Proposed Rule
Change
1. Purpose
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The Exchange is proposing a one-year
pilot program that would add new
NYSE Rule 107D to establish an
Institutional Liquidity Program to attract
buying and selling interest in greater
size to the Exchange for NYSE-listed
securities by facilitating interactions
between institutional customers and
others with block trading interest
(collectively, ‘‘Institutional Interest’’)
and providers of liquidity to service this
type of order flow.4 The Program offers
a targeted size discovery mechanism
that would enable consumers and
suppliers of such liquidity to execute
trades larger than the average size
currently occurring on the Exchange or
in most dark pools.
As set forth in more detail below, the
Program at its core would depend on the
interaction between two new proposed
order types, the ‘‘Institutional Liquidity
Order’’ (‘‘ILO’’) and the ‘‘Oversize
Liquidity Order’’ (‘‘OLO’’). In summary
terms, ILOs would express nondisplayed Institutional Interest (5,000 or
more shares with $50,000 or more
market value), and OLOs would express
liquidity of at least 500 shares 5 seeking
4 The Exchange will submit a separate proposal
to amend its Price List in connection with the
proposed Institutional Liquidity Program. Under
that proposal, the Exchange expects to initially
charge member organizations a fee for executions of
their ILOs against OLOs and in turn would initially
provide a credit or free executions to member
organizations for executions of their OLOs against
the ILOs of other member organizations. The
Exchange expects to charge both member
organizations a fee for an execution of an ILO
against another ILO. The fees and credits for
member organizations submitting orders to the
Program will be determined based on experience
with the Program in the first several months.
5 As noted below, OLOs may have a minimum
size of 300 shares for securities with an Average
Daily Volume of less than one million shares. The
500 (or 300) minimum size requirement of OLOs
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to interact with an ILO. The presence of
OLOs in Exchange systems would be
reflected in a new liquidity indicator,
the Liquidity Identifier (‘‘LI’’), to be
disseminated through the Consolidated
Quotation System (‘‘CQS’’). The
Program is a targeted size discovery
mechanism designed to attract
Institutional Interest through a balanced
set of requirements and incentives. The
Exchange believes that the size
requirements, described more fully
below, will stimulate the expression of
Institutional Interest in Exchange
systems, and will ensure that liquidity
suppliers seeking to interact with such
interest commit meaningful size to the
effort, thereby reducing the incidence of
‘‘pinging’’ or probing orders. The
dissemination of LIs, in effect, requires
oversize liquidity suppliers and
Institutional Interest to communicate
the fact, but not the details, of their
trading interest and is designed to
stimulate further the expression of both
types of interest. The Program’s
minimum size requirements on OLOs
and optional use of Minimum
Triggering Volume (‘‘MTV’’) restrictions
with ILOs, as described below, will
reduce the incentives of using such
order anticipation strategies. The
Exchange believes that the incentives
offered by the Program, in particular the
balanced and limited segmentation of
Institutional Interest and the Program’s
incorporation of price-size-time priority,
have the potential to enhance the
discovery of size on the Exchange, to
thereby reduce the transaction costs of
investors, and, more broadly, to offer a
competitive response to serious market
structure concerns held by both the
Exchange and the Commission.
In particular, the Program has the
potential to address three such
concerns. First, the Exchange has
expressed increasing concern about the
migration of orders entered by investors
who are less informed as to short term
price movements toward dark venues
and away from the public markets. At
the same time, increasingly small orders
entered by technology-enabled, shortterm liquidity suppliers have become
concentrated on exchanges.6 Similarly,
significantly betters the dark pool average trade size
of 210 shares in January 2013. Rosenblatt Securities,
Trading Talk, dated March 25, 2013.
6 See Testimony of Joseph Mecane, EVP & Head
of U.S. Equities, NYSE Euronext before the
Subcommittee on Securities, Insurance and
Investment of the Senate Committee on Banking,
Housing and Urban Affairs (December 18, 2012)
(‘‘Exchanges find themselves competing more
directly with Alternative Trading Systems (ATSs or
dark pools) and broker internalization, which are
able to employ different practices than exchanges
with far less oversight and disclosure. Some of this
competition is through cost, some through order
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the Commission has remained sharply
focused on the potential degradation of
prices and price discovery as a result of
the growth of non-displayed venues and
the isolation of displayed liquidity.7
The size discovery mechanism and
incentives of the ILP have the potential
to address this development by
attracting the trading interest of
investors back to the Exchange. Second
and related, the investor orders that
have been diverted to dark pools and
broker internalization venues are, in an
important sense, isolated from the
handling practices, and much of it is through client
segmentation whereby non-exchange venues are
able to incentivize their own or third party liquidity
provisions based on the nature of the person they
are trading against. As a result of this advantage,
large broker-dealers continue to move more order
flow into their own private trading venues for a
‘‘first look’’ before routing on to the lit public
markets. Since the implementation of Reg. NMS,
we’ve seen two markets evolve—the lit public,
regulated and accessible market versus the dark,
selective and private non-transparent market.’’);
Securities Exchange Act Release No. 61358 (January
14, 2010), 75 FR 3594, 3613 (January 21, 2010)
(‘‘Equity Market Structure Concept Release’’) (‘‘It
appears that a significant percentage of the orders
of long-term investors are executed either in dark
pools or at OTC market makers, while a large
percentage of the trading volume in displayed
trading centers is attributable to proprietary firms
executing short-term trading strategies.’’).
7 See Securities Exchange Act Release No. 60997
(Nov. 13, 2009), 74 FR 61208, 61233 (Nov. 23, 2009)
(‘‘Dark Pool Release’’) (‘‘Increasing the volume of
order flow routed to public quoting markets could
reward market participants for displaying their
trading interest, thus leading to an increase in the
display of trading interest. Such a result would be
consistent with the Commission’s emphasis on the
need to encourage displayed liquidity—a critical
reference point for investors. Moreover, increasing
the volume of order flow directed to public
quotations could increase the incentives for markets
to compete by displaying the quotations that would
attract such order flow.’’); Securities Exchange Act
Release No. 42450 (Feb. 23, 2000), 65 FR 10577,
10578 (Feb. 28, 2000) (‘‘Fragmentation Concept
Release) (‘‘These order flow arrangements may
discourage quote competition by isolating investor
order flow from investor limit orders and dealer
quotes displayed in other market centers. Even
when wholesale and internalizing broker-dealers
execute trades at prices better than the national best
bid and offer (‘‘NBBO’’), these superior transaction
prices are often in part determined by formulas
dependent on the NBBO.’’); see also Securities
Exchange Act Release No. 51808 (June 9, 2005), 70
FR 37496, 37499 (June 29, 2005) (‘‘Reg. NMS
Adopting Release’’) (‘‘The importance of
competition among orders has long been
recognized. Indeed, when Congress mandated the
establishment of an NMS, it well stated this basic
principle: ‘Investors must be assured that they are
participants in a system which maximizes the
opportunities for the most willing seller to meet the
most willing buyer.’ To the extent that competition
among orders is lessened, the quality of price
discovery for all sizes of orders can be
compromised.’’); Fragmentation Concept Release at
10580 (‘‘[T]he existence of multiple market centers
competing for order flow in the same security may
isolate orders and hence reduce the opportunity for
interaction of all buying and selling interest in that
security. This may reduce competition on price,
which is one of the most important benefits of
greater interaction of buying and selling interest in
an individual security.’’).
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displayed liquidity elsewhere in the
market system. That is, unless a
displayed limit order is both superior in
price and a protected quote at the top of
an exchange book, the likelihood that an
investor order in a dark pool or
internalization venue would interact
with it is negligible. The danger, of
course, is two-fold: the isolated order
may be denied a price improved
execution, and, more systemically
important, the displayed limit order
may receive no execution at all,
undermining the critical incentive to
display limit orders.8 In contrast,
liquidity attracted to the Exchange
pursuant to the Program, while
segmented in a balanced and limited
way, would be integrated into the
priority rules of the Exchange and
would interact according to those rules
with displayed limit orders on the
Exchange.9 Finally, the Exchange and
the Commission have pointedly noted
the selective pre-trade transparency of
dark pools and the inadequacy of dark
pool transaction reporting.10 As
8 See Dark Pool Release at 61211; see also Reg.
NMS Adopting Release at 37527 (‘‘The Commission
believes, however, that the long-term strength of the
NMS as a whole is best promoted by fostering
greater depth and liquidity, and it follows from this
that the Commission should examine the extent to
which it can encourage the limit orders that provide
this depth and liquidity to the market at the best
prices.’’); Securities Exchange Act Release No.
37619A (September 6, 1996), 61 FR 48290, 48293
(September 12, 1996) (‘‘Order Handling Rules
Release’’) (‘‘[T]he display of customer limit orders
advances the national market system goal of the
public availability of quotation information, as well
as fair competition, market efficiency, best
execution, and disintermediation.’’).
9 Additionally, the Exchange believes that the
Program will address complaints from buy-side
firms about a lack of transparency around the rules
and operations of ATSs. Unlike the Exchange’s
extensive rule filing requirements, ATSs are only
required to file an initial operation report on Form
ATS and an amendment on Form ATS when
implementing a material change to the operation of
the ATS or when any information on Form ATS is
inaccurate. See 17 CFR 242.301(b)(2). The Exchange
environment, however, offers buy-side firms the
desired regulatory and operational transparency
while also minimizing the transaction costs
associated with the trading of block-sized trading
interest.
10 See Dark Pool Release at 61219 (‘‘The public,
however, does not have access to this valuable
information concerning the best prices and sizes for
NMS stocks. Rather, dark pools transmit this
information only to selected market participants. In
this regard, actionable IOIs can create a two-tiered
level of access to information about the best prices
and sizes for NMS stocks that undermines the
Exchange Act objectives for a national market
system. The consolidated quotation data is intended
to provide a single source of information on the best
prices for a listed security across all markets, rather
than force the public to obtain data from many
different exchanges and other markets to learn the
best prices. This objective is not met when dark
pools or other trading venues disseminate
information that is functionally quite similar to
quotations, yet is not included in the consolidated
quotation data. . . . The lack of information
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discussed below, the ILP would bring
enhanced pre-trade transparency to the
trading interest attracted to the Program
through a new liquidity indicator, as
well as the more robust post-trade
transparency of exchanges.
Definitions
The Exchange proposes to adopt the
following definitions under proposed
NYSE Rule 107D(a).
Institutional Liquidity Order
First, the term ‘‘Institutional Liquidity
Order’’ is defined as a limit order for
NYSE-listed securities of 5,000 or more
shares with a market value of at least
$50,000,11 or a child order of a recorded
instruction that meets such size
requirements.12 An ILO, whether it
constitutes a child order or an entire
order, must be one establishing,
increasing, liquidating, or decreasing a
position in the subject security and may
not be part of an expression of twosided interest on the part of the account
originating the order. An ILO, or the
recorded parent order instruction from
which it is derived, must satisfy the size
requirement above independently, and
size may not be aggregated across
multiple member organizations 13 to
satisfy the above size requirement.14
concerning the ATS on which trades are executed
makes it difficult, if not impossible, for the public
to assess ATS trading in real-time, and to reliably
identify the volume of executions in particular
stocks on individual ATSs. The Commission
preliminarily believes that the current level of posttrade transparency for ATSs is inadequate.’’).
11 The Exchange notes that the size requirement
is similar to other SEC and exchange rules defining
block-sized trading interest. See 17 CFR 240.10b–
18(a)(5)(ii) (including in the definition of block a
quantity of stock that is at least 5,000 shares and
has a purchase price of at least $50,000); CBOE
Stock Exchange Rule 52.11 (permitting the cross of
two original orders at the established bid or offer
irrespective of existing interest so long as the cross
transaction is (i) for at least 5,000 shares, (ii) is for
a principal amount of at least $100,000, and (iii) is
greater in size than any single public customer
order resting on the CBSX Book at the proposed
cross price).
12 If an ILO represents a child order of a recorded
parent order instruction, the Program does not
require that the recorded parent order instruction be
fully executed in the Program. The recorded parent
order instruction may be executed in the Program,
on the Exchange outside of the Program, or at other
venues, as long as the recorded parent order
instruction and the ILO meet the Program’s
requirements.
13 The term ‘‘member organization’’ is defined in
NYSE Rule 2(b) and includes Floor brokers acting
as agents.
14 In other words, a size-eligible recorded parent
order instruction, from which child orders are
derived, must be held by a single member
organization. A member organization may not rely
on the representation from a non-member that the
non-member holds a recorded parent order
instruction sufficient to meet the size requirements
of the Program. But if a single member organization
has a size-eligible recorded parent order instruction,
the member organization may send child orders to
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An ILO, or recorded parent order
instruction, that meets the minimum
size requirement and receives a partial
execution that reduces its size to below
the minimum size requirement will not
become size ineligible. Even though a
member organization receives a partial
execution, and then later cancels the
remaining unexecuted ILO or parent
order instruction, the member
organization has satisfied the size
requirement as long as its intent at the
time of execution was to fill the 5,000
share ILO or recorded parent order
instruction.15 If a member organization
no longer intends to seek a position that
satisfies the above size requirements,
the member organization must take
appropriate steps to ensure that it
cancels any unexecuted ILOs in the
Program.
An ILO may be designated Immediateor-Cancel, or entered as a Reserve Order,
in which case the order or any residual
unexecuted portion will remain
executable against contra-side interest
in accordance with this Rule. An ILO
may be designated with an MTV
requirement that must be met before the
order is executed. The MTV will be an
optional parameter designating a
minimum amount of shares of a security
for which the ILO will attempt to
execute if there is sufficient contra-side
OLO and/or ILO interest available at the
ILO’s limit price or better. Depending on
its designation, an ILO will consider the
volume on the Exchange book and/or
away markets in order to satisfy its MTV
requirement.16 If the MTV requirement
cannot be met by contra-side OLO and/
or ILO interest, the ILO so designated
will not participate in an execution, and
may be cancelled or rest non-displayed
on the Exchange book, pursuant to Rule
107D(c). However, an ILO will execute
even though the execution size is less
than the MTV provided the MTV was
met by available contra-side interest at
the time the ILO attempted to execute.
An execution between an ILO and an
other member organizations to be submitted into
the Program as ILOs. Member organizations
receiving such size ineligible child orders may rely
on the member organization holding the recorded
parent order instruction with respect to the size
eligibility of the recorded parent order instruction
from which the child order is derived.
15 A member organization may partially cancel an
ILO; however, an ILO, or recorded parent order
instruction, will become size ineligible if the size
of the ILO or recorded parent order instruction is
reduced to below the minimum size requirement
because of a partial cancellation. A partially
cancelled ILO will maintain its time priority.
16 As explained below, an ILO may be designated
as Type 1 or Type 2. A Type 1-designated ILO will
consider volume on the Exchange book in order to
satisfy its MTV requirement. A Type 2-designated
ILO will consider volume on the Exchange book
and away markets in order to satisfy its MTV
requirement.
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OLO or between two ILOs cannot trade
through, but may trade at, a protected
quotation, and cannot trade through or
trade at displayed liquidity on the
Exchange.
Under the Program, a member
organization submitting ILOs must
maintain policies and procedures
reasonably designed to ensure that the
above requirements are satisfied and
maintain records sufficient to
reconstruct in a time-sequenced manner
all orders routed to the Exchange as an
ILO, including how recorded parent
order instructions that meet the
minimum size requirement relate to
child order ILOs. In particular, if a
member organization is sending ILOs for
its own account, it must have written
policies and procedures that reflect how
it documents that it has a recorded
parent order that meets the above
requirements. In addition, a member
organization may presume that an
account’s intent to establish, increase,
liquidate, or decrease a position is bona
fide absent concrete indications to the
contrary. Where circumstances indicate
that an account does not intend to
establish the required position, member
organizations should make reasonable
inquiry and follow up appropriately.
For instance, the following
circumstances may indicate that an
account does not intend to establish,
increase, liquidate, or decrease a
position consistent with the Program:
• The account attempts to enter
contemporaneous orders in the same
security on both sides of the market;
• The account enters a pattern of
orders and cancellations apparently
designed to implement a market-making
or spread-trading strategy; or
• The account enters a pattern of
cancellations that consistently produces
positions of a size that are less than the
size requirements of the Program.
Member organizations receiving size
ineligible child orders may rely on the
member organization holding the
recorded parent order instruction with
respect to the size eligibility of the
recorded parent order instruction from
which the child order is derived. The
member organization receiving the child
order will not be responsible for the
failure of the recorded parent order
instruction to meet the requirements of
the Program absent circumstances
indicating the reliance was
unreasonable. For example, if a member
organization receiving the child orders
knew that its customer member
organization primarily engaged in a
pattern and practice of trading the same
security on both sides of the market, it
would not be reasonable to assume that
size ineligible child orders received
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from such member organization would
comply with the Program’s rules, unless
they had information that such trading
did not follow the customer member
organization’s general trading strategy.
The Exchange, with FINRA, will
monitor activity indicative of noncompliance with the Program’s rules
and will exclude non-compliant
member organizations when necessary
to ensure a proper functioning of the
Program.
Oversize Liquidity Order
Second, the term ‘‘Oversize Liquidity
Order’’ is defined as a non-displayed
limit order for NYSE-listed securities
with a minimum size of 500 shares.17
An OLO that meets the minimum size
requirement and receives a partial
execution that reduces its size to below
the applicable minimum size
requirements will still be eligible to
interact with incoming ILOs. An OLO
will become size ineligible if the size of
the OLO is reduced below the minimum
size requirement because of a partial
cancellation. An OLO may be priced at,
inside, or outside the PBBO, or as nondisplayed Primary Pegging Interest
pursuant to Rule 13. OLOs will be
ranked according to price-size-time
priority. OLOs may interact only with
ILOs.
As discussed below, OLOs and ILOs
will be ranked and allocated according
to price then size then time of entry into
Exchange systems 18 and therefore
without regard to whether the size
entered is an odd lot, round lot or part
of round lot. Executions between an ILO
and an OLO will take into account
displayed liquidity available at the same
price on the Exchange book, such that
displayed liquidity will have priority
over equally priced ILOs and OLOs.
OLOs and ILOs priced inside the PBBO
will have priority over inferior-priced
displayed interest, but OLOs and ILOs
may not be priced in sub-penny
increments. Consequently, OLOs and
ILOs may only be priced inside the
PBBO when the spread is greater than
17 OLOs may have a minimum size of 300 shares
for securities with an Average Daily Volume of less
than one million shares.
18 As noted below, the Commission has
previously found the integration of price-size-time
priority into an SRO-sponsored execution venue
that also offered price-time priority to be consistent
with the Act. See Securities Exchange Act Release
No. 43863 (January 19, 2001), 66 FR 8020, 8038
(January 26, 2001) (‘‘SuperMontage Approval
Order’’) (approving Nasdaq’s proposal to give
market participants that enter non-directed orders
three options as to how their orders will interact
with quotes/orders in Nasdaq: price-time; pricesize-time; and price-time that accounts for ECN
access fees).
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$0.01. Finally, ILOs may be designated
as Type 1 or Type 2 (explained below).
Program
Third, the term ‘‘Program’’ would be
defined as the Institutional Liquidity
Program as described in Rule 107D.
Liquidity Identifier
Under proposed NYSE Rule 107D(b),
the Exchange proposes to disseminate
an identifier initially through an
Exchange proprietary data feed, and as
soon as practicable, the Exchange would
disseminate the identifier through the
CQS when an OLO or ILO resides in
Exchange systems. The LI will reflect
the symbol for the particular security,
but will not include the price, side (buy
or sell), or size of the OLO or ILO
interest.
Institutional Liquidity Order
Designations
Under proposed NYSE Rule 107D(c),
a member organization can designate
how an ILO would interact with
available contra-side interest as follows.
As proposed, a Type 1-designated ILO
will interact, at each price level, first
with displayed interest in Exchange
systems, then available contra-side
OLOs and/or ILOs in size-time priority,
and then with any remaining nondisplayed interest in Exchange systems,
except a Type 1-designated ILO will not
trade through a protected quotation.
Any remaining portion of the ILO will
be cancelled if designated as a
Regulation NMS-compliant Immediate
or Cancel Order pursuant to Rule 13, or
if designated as a Reserve Order, rest on
the Exchange book and be available to
interact with other incoming contra-side
OLOs, ILOs, and other available interest
in Exchange systems but will not trade
through a protected quotation.
Accordingly, a Type 1-designated ILO
may interact with other interest in
Exchange systems, but will not route to
other markets.19 A Type 2-designated
ILO will interact, at each price level,
first with displayed interest in Exchange
systems, then available contra-side
OLOs and/or ILOs in size-time priority,
and then with any remaining nondisplayed interest in Exchange systems
and will route to away markets as
necessary to avoid trading through a
protected quotation. Any remaining
portion of the ILO will be cancelled if
designated as an NYSE Immediate or
19 As discussed below, the Type 1 designation
creates multiple and substantial possibilities for
ILOs to be matched with displayed limit orders on
the Exchange. In addition to enhancing the
execution opportunities for Institutional Interest,
therefore, the Type 1 designation directly supports
the all-important incentive to display limit orders.
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Cancel Order pursuant to Rule 13, or if
designated as a Reserve Order, rest on
the Exchange book and be available to
interact with other incoming contra-side
OLOs, ILOs, and other available interest
in Exchange systems. Accordingly, a
Type 2-designated ILO may interact
with other interest in Exchange systems,
and may route to away markets. A nondisplayed, Type 2-designated ILO
resting on the Exchange book will route
to away markets as necessary to avoid
trading through a protected quotation.
Priority and Order Allocation
Under proposed NYSE Rule 107D(d),
the Exchange proposes that competing
OLOs and ILOs will be ranked and
allocated according to price, then size,
then time of entry into Exchange
systems. The size priority of OLOs and
ILOs will be based upon their initial
size at time of entry; however, any
partial cancels of OLOs or ILOs will
reduce their original size for priority
purposes by an equal amount. As such,
when an ILO or OLO is partially
cancelled, its size priority will be
redetermined based on its new size;
however, the ILO or OLO will maintain
its time priority. Displayed liquidity
will have priority over equally priced
ILOs and OLOs. An incoming ILO will
execute first against displayed interest,
then against contra-side ILOs and OLOs,
and finally against any non-displayed
interest in Exchange systems. Any
remaining unexecuted ILO interest will
remain available to interact with other
incoming OLOs and/or ILOs if such
interest is at an eligible price unless the
order is designated IOC. The following
examples illustrate this proposed
method:
emcdonald on DSK67QTVN1PROD with NOTICES
Example 1— PBBO for security ABC is
$9.99–$10.05
OLO 1 is entered to buy ABC at $10.00 for
5,000
OLO 2 is then entered to buy ABC at
$10.00 for 5,000
OLO 3 is then entered to buy ABC at
$10.00 for 4,000
An incoming Type 1 ILO to sell ABC
for 10,000 executes first against OLO 1’s
bid for 5,000, because it is the largest
best-priced bid entered first in time,
then against OLO 2’s bid for 5,000,
because it is the next largest best-priced
bid. OLO 3 is not filled because the
entire size of the ILO to sell 10,000 is
depleted.
Assume the same facts as above. An
incoming Type 1 ILO to sell ABC for
13,800 with an MTV of 10,000 will
execute first against OLO 1’s bid for
5,000, because it is the largest bestpriced bid entered first in time, then
against OLO 2’s bid for 5,000, because
it is the next largest best-priced bid.
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OLO 3 then receives an execution for
3,800 of its 4,000, at which point the
entire size of the ILO to sell 13,800 is
depleted. Note that the MTV
requirement is met by the aggregate
level of contra-side interest, even
though no individual OLO satisfied the
ILO’s MTV requirement. Additionally,
OLO 3 will still be available to interact
with an incoming ILO since its original
quantity was above the minimum size
requirements.
Assume the same facts above, except
that OLO 2’s bid to buy ABC at $10.00
is for 2,000. An incoming Type 1 ILO to
sell 10,000 executes first against OLO
1’s bid for 5,000, because it is the largest
best-priced bid, then against OLO 3’s
bid for 4,000, because it is the next
largest best-priced bid. OLO 2 then
receives an execution for 1,000 of its
2,000, at which point the entire size of
the ILO to sell 10,000 is depleted.
Additionally, assume the same facts
above, except that OLO 3’s bid to buy
4,000 is priced at $10.01 and there is
also an additional OLO entered to buy
at $10.00 for 4,000 (OLO 4). An
incoming Type 1 ILO to sell 11,000
executes first against OLO 3’s bid for
4,000, because it is the best-priced bid.
OLO 1 then receives an execution for
5,000, because it is the largest next-bestpriced bid, and was entered ahead of
OLO 2. OLO 2 then receives an
execution for 2,000, leaving 3,000
unexecuted shares, at which point the
entire size of the ILO is depleted. Next,
another incoming Type 1 ILO to sell
3,000 executes against OLO 2 for 3,000
since its original quantity was 5,000,
which is greater than the size of OLO 4
at 4,000. Using this same example,
assume prior to the second ILO arriving,
a partial cancel was sent in for OLO 2
to reduce its quantity by 2,000. The
second arriving ILO would execute
against OLO 4, since by partially
canceling 2,000, OLO 2 would have its
original quantity decremented to 3,000,
making OLO 4 larger.
Finally, assume the same facts above,
except that after OLO 3 is entered, ILO
1 is entered to buy ABC at $10.00 for
10,000 with an MTV of 5,000. An
incoming Type 1 ILO to sell 15,000
executes first against ILO 1 because it is
the largest best-priced bid and the
number of shares available exceeds ILO
1’s MTV of 5,000. OLO 1 then receives
an execution for 5,000, because it is the
next largest best-priced bid, and was
entered ahead of OLO 2, at which point
the entire size of the ILO to sell 15,000
is depleted.
Example 2—PBBO for security ABC is
$10.00–10.05 O1 is a limit order and the
Exchange Best Bid at $10.00 for 1,000
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OLO 1 is entered to buy ABC at $10.01 for
5,000
OLO 2 is then entered to buy ABC at
$10.00 for 5,000
An incoming Type 1 ILO to sell ABC
for 6,000 executes first against OLO 1
because it is the best-priced bid, then
against O1’s bid for 1,000. O1 receives
priority over OLO 2 because O1 is a
displayed order on the Exchange. OLO
2 remains available to interact with
incoming ILOs.
Example 3— PBBO for security ABC is
$10.00–10.05
O1 is a limit order and is the Exchange
Best Bid quoted at $10.00 for 1,000
O2 is a limit order to buy and is dark at
$10.00 for 4,000
O3 is a limit order to buy and is
displayable at $9.99 for 2,000
OLO 1 is entered to buy ABC at $10.00 for
4,000
OLO 2 is then entered to buy ABC at $9.99
for 4,000
There is a 100 share away market Bid at
$10.00
An incoming Type 2 ILO to sell ABC
for 12,000 executes first against O1, the
Exchange Best Bid, for 1,000 at $10.00
because it is the best-priced displayed
liquidity, then against OLO 1 for 4,000
because it is the best-priced bid in the
Program and liquidity in the Program
has priority over nondisplayed
liquidity, then against O2 for 4,000
because it is the best-priced
nondisplayed liquidity. The ILO then
sweeps to $9.99, first routing 100 shares
to the away market bid at $10.00. At
$9.99, the ILO executes first against O3
for 2,000 because it is the best-priced
displayed liquidity, then against OLO 2
for 900 because it is the best-priced bid
in the Program.
Implementation
The Exchange proposes that all NYSElisted securities will be eligible for
inclusion in the Institutional Liquidity
Program. In order to provide for an
efficient implementation, the
Institutional Liquidity Program will
initially cover only a certain specified
list of NYSE-listed securities, as
announced by the Exchange via a Trader
Update. The Exchange anticipates that
the securities included within the
Institutional Liquidity Program will be
expanded periodically based on
experience with the Program.20
The Program Would Assist Investors in
Facing the Challenge of Seeking
Counterparties While Minimizing
Transaction Costs
The Commission has consistently
recognized the challenges faced by large
20 The Exchange will announce any such
expansions via a Trader Update.
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investors seeking to interact with
counterparties without adversely
impacting the price of the stock they
seek to trade.21 The Commission has
noted the difficult trade-off that size
traders face in deciding how much of
their trading interest to reveal—
prematurely revealing trading interest
can produce market impact and
increased transaction costs, while
concealing trading interest reduces
opportunities to trade—and the
‘‘perennial challenge’’ that investors,
brokers, and markets face in ‘‘finding
effective and innovative ways to trade in
large sizes with minimized transaction
costs.’’ 22
Non-displayed liquidity in general,
and dark pools in particular, have been
viewed as useful tools to address those
challenges. The Commission noted
specifically in 2009, however, that dark
pools differ starkly in their contribution
to size discovery. While block crossing
networks were producing at that time
average trade sizes as large as 50,000
shares, most dark pools were executing
emcdonald on DSK67QTVN1PROD with NOTICES
21 See Fragmentation Concept Release at 10581
(‘‘Consequently, large investors often seek ways to
interact with order flow and participate in price
competition without submitting a limit order that
would display the full extent of their trading
interest to the market.’’).
22 Equity Market Structure Concept Release at
3612 (‘‘Market participants that need to trade in
large size, such as institutional investors, always
have faced a difficult trading dilemma. On the one
hand, if they prematurely reveal the full extent of
their large trading interest to the market, then
market prices are likely to run away from them (a
price rise for those seeking to buy and a price
decline for those seeking to sell), which would
greatly increase their transaction costs and reduce
their overall investment returns. On the other hand,
if an institutional investor that wants to trade in
large size does nothing, then it will not trade at all.
Finding effective and innovative ways to trade in
large size with minimized transaction costs is a
perennial challenge for institutional investors, the
brokers that represent their orders in the
marketplace, and the trading centers that seek to
execute their orders.’’).
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trades with average sizes comparable to
those on exchanges.23 According to
current data from Rosebay Securities,
institutional block trading venues such
as Liquidnet continue to produce large
average trade sizes of almost 44,000
shares; on the other hand, dark pool
average trade size generally declined
from 443 shares in March 2009 to 210
shares in January 2013.24 Additionally,
a recent white paper from the SEC
highlights similar facts and found that
‘‘The five ATSs with average order sizes
exceeding 1,000 shares collectively
comprise 2.94% of ATS dollar volume
and 3.01% of ATS share volume.25 It is
essential to keep firmly in mind the
apparently limited contribution most
non-displayed venues provide in the
discovery of size.
Moreover, it is equally important to
consider the side effects of the diversion
of a large percentage of investor order
flow away from displayed markets.26
The Commission has squarely raised the
question in the Equity Market Structure
Concept Release of whether the growth
of non-displayed liquidity has begun to
degrade the public price discovery
process by widening spreads, reducing
depth, and increasing short term
volatility.27 The Commission noted then
that the percentage of volume between
non-displayed trading centers and
displayed centers had remained
relatively constant between 70% and
80%.28
There are important indicators that
this perceived static distribution of lit
and dark liquidity is no longer in line
with the facts, particularly when
accounting for the growth in offexchange volume. For example, the
number of securities with greater than
40% TRF share has more than doubled
in the past year to over 56.3% of total
stocks.29 As the chart below shows, over
70% of executions occurring in dark
venues is executed at the NBBO or with
less than $0.001 in price improvement
or $0.10 per round lot. The Exchange
believes that these and other data points
raise serious questions about the value
liquidity in non-displayed venues is
providing to the market.
23 See Dark Pool Release at 61209 (‘‘Most dark
pools, though they may handle large orders,
primarily execute trades with small sizes that are
more comparable to the average size of trades in the
public markets, which was less than 300 shares in
August 2009.’’).
24 Rosenblatt Securities, Trading Talk, dated
March 25, 2013.
25 See Alternative Trading Systems: Description
of ATS Trading in National Market System Stocks.
October 2013. SEC ATS White Paper.
26 The Commission has recognized the migration
of non-displayed liquidity away from the Exchange
toward dark pools. See Equity Market Structure
Concept Release at 3612 (‘‘One consequence of the
decline in market share of the NYSE floor in recent
years is that this historically large undisplayed
liquidity pool in NYSE-listed stocks appears to have
largely migrated to other types of venues. As
discussed [] above, a recent form of undisplayed
liquidity is the dark pool—an ATS that does not
display quotations in the consolidated quotation
data.’’).
27 See Equity Market Structure Concept Release at
3613 (‘‘Comment is requested on whether the
trading volume of undisplayed liquidity has
reached a sufficiently significant level that it has
detracted from the quality of public price discovery
and execution quality. For example, has the level
of undisplayed liquidity led to increased spreads,
reduced depth, or increased short-term volatility in
the displayed trading centers? If so, has such harm
to public price discovery led to a general worsening
of execution quality for investors in undisplayed
markets that execute trades with reference to prices
in the displayed markets?’’).
28 See id. (‘‘In this regard, it appears that the
overall percentage of trading volume between
undisplayed trading centers and displayed trading
centers has remained fairly steady for many years
between 70% and 80%.’’). The Commission
estimated that 25.4% of share volume in NMS
stocks was executed in undisplayed trading centers
in September 2009. Id. at n. 85.
29 Calculation based on Consolidated Tape data as
of October 2013.
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The Exchange also believes that the
data strongly indicate emerging threats
to the public price discovery process.
The Program has the potential to
leverage competition to address, in a
limited way, these important concerns.
emcdonald on DSK67QTVN1PROD with NOTICES
Exchange Interaction Between
Displayed and Non-Displayed Liquidity
In considering the potential of the
Program to address the possible
degradation of the public price
discovery process, it is worth
underscoring the following basic point:
the priority rules of the Exchange (and
exchanges generally) offer a higher level
of interaction between displayed and
non-displayed liquidity than dark pools
and broker internalization venues.30
Consider, by way of illustration, an
example where the PBBO was 10.01 by
10.03 with a displayed limit order one
penny above the PBO at 10.04. An
incoming discretionary limit order to
buy with a displayed price of 10.02 and
a discretionary price of 10.05 would not
only interact with the interest at the
PBO but would also interact with the
displayed limit order one penny above
the PBO at 10.04, once again supporting
the display incentive. In contrast, there
is no reason to expect that a nondisplayed investor order residing in a
dark pool would be matched with any
displayed limit order or otherwise
contribute in any way to the
30 The Commission, in the Regulation NMS
Adopting Release, expressed concern regarding the
display incentives of limit orders below the top of
book. See NMS Adopting Release at 37527 (‘‘The
Commission believes, however, that the long-term
strength of the NMS as a whole is best promoted
by fostering greater depth and liquidity, and it
follows from this that the Commission should
examine the extent to which it can encourage the
limit orders that provide this depth and liquidity
to the market at the best prices.’’)
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fundamentally important incentive to
display. Similarly, consider a Floor
broker who finds a counterparty of a
size trade two pennies below the PBBO,
while there is a public limit order one
penny below the PBBO in the book.
Prior to the Floor broker completing the
trade, the Exchange would protect the
PBBO, the same way a dark pool would
be required to respect the PBBO;
however, the Exchange takes the
additional step of protecting the
displayed orders away from the PBBO
but priced better than the manual trade.
Therefore, in the above example, the
public limit order one penny below the
PBBO also would be protected by the
Exchange, and the incentive to display
thereby strengthened.
Unlike a dark pool or internalization
venue, the Program’s ILOs would bolster
the display incentive. Example 3, as
described above, demonstrates such
support. As stated in the above example,
the PBBO for the security is $10.00 by
$10.05 with OLOs within the program to
buy at both $10.00 and $9.99.
Furthermore, there is displayed interest
on the book at $10.00 and $9.99. After
the incoming ILO to sell executes
against all interest priced at the PBB
($10.00), the ILO then interacts with a
displayed limit order priced one penny
away from the PBB. Having received an
execution, the market participant who
placed the limit order has been
rewarded and incentivized to display in
the future.
The Program’s Use of Minimum Size
Requirements Encourages the Price
Discovery Mechanism by Lowering the
Benefits of Certain Order Anticipation
Strategies
As part of the Equity Market Structure
Concept Release, the Commission
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questioned whether the use of
‘‘pinging’’ orders by all or some traders
to assess non-displayed liquidity should
be prohibited or restricted.31 However,
in raising the issue, the Commission
noted a distinction between the use of
pinging orders as the normal search for
liquidity versus using pinging to detect
and trade in front of large trading
interest.32 While some directional
strategies contribute to the quality of
price discovery in a stock,33 order
anticipation strategies which seek to
trade ahead of large buyers or sellers in
an attempt to capture price movement
in the direction of the large trade
interest do not enhance the price
discovery process, detract from market
quality, and harm institutional
investors. The Program limits the
deleterious effects that order
anticipation strategies may have on the
quality of price discovery by imposing
minimum size requirements on OLOs
and permitting ILOs to be entered with
MTV restrictions, as discussed above.
These size requirements are designed to
shift the economics of order anticipation
strategies by ensuring that users of ILOs
are given a meaningful opportunity to
interact with contra-side interest prior
to its own interest being revealed and by
increasing the costs to those using order
31 See Equity Market Structure Concept Release at
3607. A ‘‘pinging’’ order is an immediate-or-cancel
order that can be used to search for and access all
types of non-displayed liquidity, including dark
pools and non-displayed order types at exchanges
and ECNs.
32 Id. at n. 70.
33 See id. at 3608 (‘‘Some ‘directional’ strategies
may be as straightforward as concluding that a stock
price temporarily has moved away from its
‘fundamental value’ and establishing a position in
anticipation that the price will return to such value.
These speculative strategies often may contribute to
the quality of price discovery in a stock.’’)
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emcdonald on DSK67QTVN1PROD with NOTICES
anticipation strategies, through the use
of a minimum size requirement, prior to
learning about the existence of large
contra-side interest.
2. Statutory Basis
The proposed rule change is
consistent with Section 6(b) of the
Act,34 in general, and furthers the
objectives of Section 6(b)(5),35 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, and to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest. The Exchange believes
that the proposed rule change is
consistent with these principles because
it would increase competition among
execution venues, encourage additional
liquidity, and make available additional
liquidity to Institutional Interest.
The proposal arises out of the
competition between the Exchange and
non-exchange venues for block trading
interest and the growth of institutional
trading on less-regulated and lesstransparent execution venues. As the
Commission has previously noted,
broker-dealers acting as over-thecounter market makers and block
positioners provide liquidity directly to
Institutional Interest.36 The Program has
the potential to attract additional
institutional and block trading interest
to the Exchange environment, and
thereby improve transparency of access
arrangements, priority and allocation,
and fees as compared to internalizing
non-exchange venues. Specifically, the
ILO and OLO order types give members
handling Institutional Interest tools to
limit their interactions to counterparties
who have committed to provide
oversize liquidity, and thereby to better
control information about their
institutional customers’ trading interest.
If successful, the Program would at the
same time add to the information in the
consolidated quotation data by
including the Oversize Liquidity
Indicator in CQS. The ILO and OLO
order types, the inclusion of the LI in
the CQS, and the Program’s priority
rules rewarding size have the potential
to stimulate price competition within an
exchange environment for institutionalsized orders, to increase size
interactions, reduce market impact, and
34 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
36 See Dark Pool Release at 61209.
35 15
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reduce the trading costs of institutional
investors.
The Exchange understands that
Section 6(b)(5) of the Act prohibits an
exchange from establishing rules that
treat market participants in an unfairly
discriminatory manner. However,
Section 6(b)(5) of the Act does not
prohibit exchange members or other
broker-dealers from discriminating, so
long as their activities are otherwise
consistent with the federal securities
laws. Nor does Section 6(b)(5) of the Act
require exchanges to preclude
discrimination by broker-dealers.
Broker-dealers commonly differentiate
between customers based on the nature
and profitability of their business. The
Program will simply replicate these
trading dynamics that already exist in
the OTC markets and will present
another competitive venue for
institutional and block order flow
execution.
The differentiation proposed herein
by the Exchange is not designed to
permit unfair discrimination, but
instead to promote a competitive
process around block trading interest
such that Institutional Interest would
receive additional liquidity options than
they receive in the current market. The
Exchange believes that the transparency
and competitiveness of an exchangesponsored program such as the
Institutional Liquidity Program would
enhance the liquidity available to
institutional investors and thereby
reduce their trading costs. As the
Commission has previously recognized,
institutional investors seek to trade
efficiently in large sizes without having
a significant impact on market prices.37
And the ability to interact with
significant amounts of liquidity is
crucial to Institutional Interest looking
to effect transactions while reducing
market impact and transaction costs. As
such, with the knowledge that contraside interest must satisfy minimum size
requirements and the ability of ILOs to
remain non-displayed within the
Program, Institutional Interest would be
more willing to send their orders to a
public market.
Additionally, the Exchange believes
that the Program will promote just and
equitable principles of trade and remove
impediments to and perfect the
37 See Dark Pool Release at 61212 (‘‘The
Commission recognizes that some trading venues,
such as block crossing networks, may use
actionable IOIs as part of a trading mechanism that
offers significant size discovery benefits (that is,
finding contra-side trading interest for large size
without affecting prices). These benefits may be
particularly valuable for institutional investors that
need to trade efficiently in sizes much larger than
those that are typically available in the public
quoting markets.’’).
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71009
mechanism of a free and open market
and a national market system because it
will create additional competition for
institutional and block order flow,
attract institutional and block order flow
to the exchange environment, and
ensure that Institutional Interest benefit
from a larger pool of liquidity and
potentially receive better prices than
they currently receive through bilateral
internalization agreements. As a result,
the Program is designed to provide a
relative enhancement of the incentive to
display than currently exists. The
Exchange also notes that the LI will be
disseminated through the consolidated
public market data stream, and thus be
widely viewable by market participants,
and as such, would increase the amount
of pricing information available to the
marketplace. Therefore, the Program is
reasonably designed to increase market
transparency, thus removing
impediments to and perfecting the
mechanism of a free and open market
and a national market system.
The Exchange believes that the
Program will remove impediments to
and perfect the mechanism of a free and
open market and a national market
system by incentivizing the display of
public limit orders and promoting the
price discovery mechanism. The
increasing concentration of ‘‘toxic,’’ or
highly informed, high frequency order
flow, and the corresponding diversion
of more benign flow to off-exchange
venues, are evident today, and have
been acknowledged with concern by the
Commission.38 The Exchange’s recent
competitive initiatives seek to arrest and
reverse this unsettling dynamic by
attracting a more diverse population of
buyers and sellers to the public
markets.39 The current proposal to
establish an Institutional Liquidity
Program reflects a continuation of these
efforts.
Further, the Exchange believes that
the Program will remove impediments
to and perfect the mechanism of a free
and open market and a national market
system by promoting order interaction.
Specifically, the functionality of ILOs in
38 See Securities Exchange Act Release No. 61358
(January 14, 2010), 75 FR 3594, 3613 (January 21,
2010) (‘‘Equity Market Structure Concept Release’’)
(‘‘It appears that a significant percentage of the
orders of long-term investors are executed either in
dark pools or at OTC market makers, while a large
percentage of the trading volume in displayed
trading centers is attributable to proprietary firms
executing short-term trading strategies.’’).
39 See Securities Exchange Act Release No. 67347
(July 3, 2012), 77 FR 40673 (July 10, 2012) (‘‘By
creating additional competition for retail order
flow, the Program is reasonably designed to attract
retail order flow to the exchange environment,
while helping to ensure that retail investors benefit
from the better price that liquidity providers are
willing to give their orders.’’).
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emcdonald on DSK67QTVN1PROD with NOTICES
the Program provides publicly
displayed liquidity in general,
particularly publicly displayed limit
orders below the top of book, the
potential to interact with Institutional
Interest, thus incentivizing the display
of public limit orders in such a way that
dark pools do not.
The Exchange believes that the pricesize priority of OLOs and ILOs within
the Program proposed herein is
consistent with the Act. The priority is
meant to reward liquidity providers
willing to display greater size, an
incentive that the Commission has
previously approved.40 Requiring that
orders within the Program be executed
based on price-time priority would
undermine the effectiveness of the
Program because it would reduce the
willingness of investors to reveal large
trading interest. By placing a premium
on size, the Program incentivizes large
investors to move away from dark pools
and back towards displayed public
markets.
The Exchange believes that the
Program is designed to protect investors
and the public interest because the
Program has the potential to lower
volatility in a given security by
increasing liquidity and depth at,
inside, and outside the PBBO. The
Commission has previously
acknowledged the relationship between
transaction costs, short-term price
volatility, and temporary imbalances in
trading interest.41 Additionally,
investors are more likely than
professional traders to be on the wrong
side of short-term price swings.42 The
increased liquidity made available
through the Program will decrease the
temporary imbalances in trading interest
due to a large incoming order, reducing
short-term price volatility and investor
trading costs.
Further, the Exchange believes the
Program is designed to protect investors
and the public interest because the
Program has the potential to increase
price improvement and size
improvement opportunities for
institutional investors. Because of the
priority provided to equally-priced
displayed interest outside the Program,
40 See SuperMontage Approval Order at 8038
(‘‘The Commission also concludes that the NASD’s
algorithm based on price/size/time priority is
consistent with the statute.’’).
41 See Dark Pool Release at 61209, n. 4 (‘‘Another
type of implicit transaction cost reflected in the
price of a security is short-term price volatility
caused by temporary imbalances in trading interest.
For example, a significant implicit cost for large
investors (who often represent the consolidated
investments of many individuals) is the price
impact that their large trades can have on the
market.’’)
42 See id.
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Jkt 232001
member organizations must submit
OLOs and ILOs priced within the PBBO
in order to receive priority or else risk
receiving a partial or no fill.
Additionally, the size priority applied to
OLOs or ILOs similarly incentivizes
member organizations to submit large
orders into the Program, offering size
improvement opportunities to
institutional investors.
Finally, the Exchange proposes that
the Commission approve the proposed
rule for a pilot period of twelve months
from the date of implementation, which
will occur no later than 90 days after
Commission approval of Rule 107D. The
Program will expire on [Date will be
determined upon adoption of Rule
107D]. The Exchange believes that this
pilot period is of sufficient length to
permit both the Exchange and the
Commission to assess the impact of the
rule change described herein. During
the pilot period, the Exchange will
submit certain data, periodically as
required by the Commission, including:
summary statistics on the operation of
the Program along with the meaning of
the summary statistics; raw data relating
to the operation of the Program; reports
and data monitoring the Program’s
participants along with their activity;
and the Exchange’s assessment of the
impact of the Program.
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 increase competition
among execution venues and encourage
additional liquidity. The Exchange
notes that a significant percentage of the
orders of institutional investors are
executed over-the-counter. The
Exchange believes that it is appropriate
to create a financial incentive to bring
more institutional order flow to a public
market.
Additionally, as previously stated, the
differentiation proposed herein by the
Exchange is not designed to permit
unfair discrimination, but instead to
promote a competitive process around
block trading such that Institutional
Interest would receive better prices and
greater access to liquidity than they
currently do through bilateral
internalization arrangements. The
Exchange believes that the transparency
and competitiveness of operating a
program such as the Institutional
Liquidity Program on an exchange
market would result in better prices for
PO 00000
Frm 00096
Fmt 4703
Sfmt 4703
Institutional Interest while reducing
their market impact.
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
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.
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–2013–72 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–2013–72. 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
E:\FR\FM\27NON1.SGM
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Federal Register / Vol. 78, No. 229 / Wednesday, November 27, 2013 / Notices
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 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
publicly available. All submissions
should refer to File Number SR–NYSE–
2013–72 and should be submitted on or
before December 18, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.43
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–28414 Filed 11–26–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70911; File No. SR–
NASDAQ–2013–143]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Amend
NASDAQ Rule 4120(c)(7)(C) To Modify
the Parameters for Releasing
Securities for Trading Upon the
Termination of a Trading Halt
emcdonald on DSK67QTVN1PROD with NOTICES
November 21, 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
November 14, 2013, The NASDAQ
Stock Market LLC (‘‘NASDAQ’’ or
‘‘Exchange’’), filed with the Securities
and Exchange Commission
(‘‘Commission’’) the 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.
43 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
NASDAQ Rule 4120(c)(7)(C) to modify
the parameters for releasing securities
for trading upon the termination of a
trading halt. NASDAQ will implement
the proposed change immediately.
The text of the proposed rule change
is below.3 Proposed new language is
italicized; proposed deletions are in
brackets.
*
*
*
*
*
4120. Limit Up-Limit Down Plan and
Trading Halts
(a)–(b) No change.
(c) Procedure for Initiating and
Terminating a Trading Halt
(1)–(6) No change.
(7)
(A)–(B) No change.
(C) If at the end of a Display Only
Period or during the subsequent process
to release the security for trading,
Nasdaq detects an order imbalance in
the security, Nasdaq will extend the
Display Only Period as permitted under
subparagraph (A). In the case of
subparagraph (B), any order imbalance
during the Pre-Launch Period or during
the subsequent process to release the
security for trading will result in a delay
of the release for trading of the IPO until
the end of the order imbalance and
satisfaction of the other requirements for
release of the IPO contained in
subparagraph (B). Order imbalances are
established as follows:
(1) Order imbalances under
subparagraph (A) shall be established
when (i) the last available Current
Reference Price[s], as defined in Rule
4753(a)(2)(A), disseminated [15 seconds
and ]immediately prior to the end of the
Display Only Period and any of the
three preceding Current Reference
Prices differ by more than the greater of
5 percent or 50 cents, or (ii) all buy or
sell market orders will not be executed
in the cross.
(2) Order imbalances under
subparagraph (B) shall be established
when (i) the Current Reference Price[s],
as defined in Rule 4753(a)(2)(A),
disseminated [15 seconds and
]immediately prior to commencing the
release of the IPO for trading during the
Pre-Launch Period and any of the three
preceding Current Reference Prices
differ by more than the greater of 5
3 The text of the rule change is available on the
Exchange’s Web site at https://
nasdaq.cchwallstreet.com, at the principal office of
the Exchange, and at the Commission’s Public
Reference Room.
PO 00000
Frm 00097
Fmt 4703
Sfmt 4703
71011
percent or 50 cents, or (ii) all buy or sell
market orders will not be executed in
the cross.
(3) Order imbalances under both
subparagraphs (A) and (B) shall be
established during the subsequent
process to release a security for trading,
which occurs at the termination of
either a Display Only Period under
subparagraph (A) or a Pre-Launch
Period under subparagraph (B), if, upon
completion of the cross calculation, (i)
the calculated price at which the
security would be released for trading
and any of the three preceding Current
Reference Prices disseminated
immediately prior to the initiation of the
cross calculation differ by more than the
greater of 5 percent or 50 cents, or (ii)
all buy or sell market orders would not
be executed in the cross.
*
*
*
*
*
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
Exchange 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 these
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 aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
Rule 4120(c)(7)(C) to strengthen the
price volatility comparison of the order
imbalance tests done at the conclusion
of the Display Only Period and PreLaunch Period by increasing the number
of Current Reference Prices that are
compared. The Exchange is also
proposing to extend the order imbalance
tests of the rule to also include the
process by which a company’s securities
are released for trading after a halt.
Securities subject to a halt under Rule
4120(a) cannot be released when there
is an order imbalance in the security.
Historically, order imbalances were
defined uniformly under Rule
4120(c)(7)(C) for all halts under Rule
4120(a) as: (i) the Current Reference
Prices, as defined in Rule
E:\FR\FM\27NON1.SGM
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Agencies
[Federal Register Volume 78, Number 229 (Wednesday, November 27, 2013)]
[Notices]
[Pages 71002-71011]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-28414]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70909; File No. SR-NYSE-2013-72]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing of Proposed Rule Change To Establish an Institutional
Liquidity Program on a One-Year Pilot Basis
November 21, 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 November 7, 2013, New York Stock Exchange LLC (``NYSE''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes a one-year pilot program that would add new
Rule 107D to establish an Institutional Liquidity Program (``Program''
or ``proposed rule change'') to attract buying and selling interest in
greater size to the Exchange for NYSE-listed securities by facilitating
interactions between institutional customers (and others with block
trading interest) and providers of liquidity exceeding minimum size
requirements. 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.
[[Page 71003]]
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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange is proposing a one-year pilot program that would add
new NYSE Rule 107D to establish an Institutional Liquidity Program to
attract buying and selling interest in greater size to the Exchange for
NYSE-listed securities by facilitating interactions between
institutional customers and others with block trading interest
(collectively, ``Institutional Interest'') and providers of liquidity
to service this type of order flow.\4\ The Program offers a targeted
size discovery mechanism that would enable consumers and suppliers of
such liquidity to execute trades larger than the average size currently
occurring on the Exchange or in most dark pools.
---------------------------------------------------------------------------
\4\ The Exchange will submit a separate proposal to amend its
Price List in connection with the proposed Institutional Liquidity
Program. Under that proposal, the Exchange expects to initially
charge member organizations a fee for executions of their ILOs
against OLOs and in turn would initially provide a credit or free
executions to member organizations for executions of their OLOs
against the ILOs of other member organizations. The Exchange expects
to charge both member organizations a fee for an execution of an ILO
against another ILO. The fees and credits for member organizations
submitting orders to the Program will be determined based on
experience with the Program in the first several months.
---------------------------------------------------------------------------
As set forth in more detail below, the Program at its core would
depend on the interaction between two new proposed order types, the
``Institutional Liquidity Order'' (``ILO'') and the ``Oversize
Liquidity Order'' (``OLO''). In summary terms, ILOs would express non-
displayed Institutional Interest (5,000 or more shares with $50,000 or
more market value), and OLOs would express liquidity of at least 500
shares \5\ seeking to interact with an ILO. The presence of OLOs in
Exchange systems would be reflected in a new liquidity indicator, the
Liquidity Identifier (``LI''), to be disseminated through the
Consolidated Quotation System (``CQS''). The Program is a targeted size
discovery mechanism designed to attract Institutional Interest through
a balanced set of requirements and incentives. The Exchange believes
that the size requirements, described more fully below, will stimulate
the expression of Institutional Interest in Exchange systems, and will
ensure that liquidity suppliers seeking to interact with such interest
commit meaningful size to the effort, thereby reducing the incidence of
``pinging'' or probing orders. The dissemination of LIs, in effect,
requires oversize liquidity suppliers and Institutional Interest to
communicate the fact, but not the details, of their trading interest
and is designed to stimulate further the expression of both types of
interest. The Program's minimum size requirements on OLOs and optional
use of Minimum Triggering Volume (``MTV'') restrictions with ILOs, as
described below, will reduce the incentives of using such order
anticipation strategies. The Exchange believes that the incentives
offered by the Program, in particular the balanced and limited
segmentation of Institutional Interest and the Program's incorporation
of price-size-time priority, have the potential to enhance the
discovery of size on the Exchange, to thereby reduce the transaction
costs of investors, and, more broadly, to offer a competitive response
to serious market structure concerns held by both the Exchange and the
Commission.
---------------------------------------------------------------------------
\5\ As noted below, OLOs may have a minimum size of 300 shares
for securities with an Average Daily Volume of less than one million
shares. The 500 (or 300) minimum size requirement of OLOs
significantly betters the dark pool average trade size of 210 shares
in January 2013. Rosenblatt Securities, Trading Talk, dated March
25, 2013.
---------------------------------------------------------------------------
In particular, the Program has the potential to address three such
concerns. First, the Exchange has expressed increasing concern about
the migration of orders entered by investors who are less informed as
to short term price movements toward dark venues and away from the
public markets. At the same time, increasingly small orders entered by
technology-enabled, short-term liquidity suppliers have become
concentrated on exchanges.\6\ Similarly, the Commission has remained
sharply focused on the potential degradation of prices and price
discovery as a result of the growth of non-displayed venues and the
isolation of displayed liquidity.\7\ The size discovery mechanism and
incentives of the ILP have the potential to address this development by
attracting the trading interest of investors back to the Exchange.
Second and related, the investor orders that have been diverted to dark
pools and broker internalization venues are, in an important sense,
isolated from the
[[Page 71004]]
displayed liquidity elsewhere in the market system. That is, unless a
displayed limit order is both superior in price and a protected quote
at the top of an exchange book, the likelihood that an investor order
in a dark pool or internalization venue would interact with it is
negligible. The danger, of course, is two-fold: the isolated order may
be denied a price improved execution, and, more systemically important,
the displayed limit order may receive no execution at all, undermining
the critical incentive to display limit orders.\8\ In contrast,
liquidity attracted to the Exchange pursuant to the Program, while
segmented in a balanced and limited way, would be integrated into the
priority rules of the Exchange and would interact according to those
rules with displayed limit orders on the Exchange.\9\ Finally, the
Exchange and the Commission have pointedly noted the selective pre-
trade transparency of dark pools and the inadequacy of dark pool
transaction reporting.\10\ As discussed below, the ILP would bring
enhanced pre-trade transparency to the trading interest attracted to
the Program through a new liquidity indicator, as well as the more
robust post-trade transparency of exchanges.
---------------------------------------------------------------------------
\6\ See Testimony of Joseph Mecane, EVP & Head of U.S. Equities,
NYSE Euronext before the Subcommittee on Securities, Insurance and
Investment of the Senate Committee on Banking, Housing and Urban
Affairs (December 18, 2012) (``Exchanges find themselves competing
more directly with Alternative Trading Systems (ATSs or dark pools)
and broker internalization, which are able to employ different
practices than exchanges with far less oversight and disclosure.
Some of this competition is through cost, some through order
handling practices, and much of it is through client segmentation
whereby non-exchange venues are able to incentivize their own or
third party liquidity provisions based on the nature of the person
they are trading against. As a result of this advantage, large
broker-dealers continue to move more order flow into their own
private trading venues for a ``first look'' before routing on to the
lit public markets. Since the implementation of Reg. NMS, we've seen
two markets evolve--the lit public, regulated and accessible market
versus the dark, selective and private non-transparent market.'');
Securities Exchange Act Release No. 61358 (January 14, 2010), 75 FR
3594, 3613 (January 21, 2010) (``Equity Market Structure Concept
Release'') (``It appears that a significant percentage of the orders
of long-term investors are executed either in dark pools or at OTC
market makers, while a large percentage of the trading volume in
displayed trading centers is attributable to proprietary firms
executing short-term trading strategies.'').
\7\ See Securities Exchange Act Release No. 60997 (Nov. 13,
2009), 74 FR 61208, 61233 (Nov. 23, 2009) (``Dark Pool Release'')
(``Increasing the volume of order flow routed to public quoting
markets could reward market participants for displaying their
trading interest, thus leading to an increase in the display of
trading interest. Such a result would be consistent with the
Commission's emphasis on the need to encourage displayed liquidity--
a critical reference point for investors. Moreover, increasing the
volume of order flow directed to public quotations could increase
the incentives for markets to compete by displaying the quotations
that would attract such order flow.''); Securities Exchange Act
Release No. 42450 (Feb. 23, 2000), 65 FR 10577, 10578 (Feb. 28,
2000) (``Fragmentation Concept Release) (``These order flow
arrangements may discourage quote competition by isolating investor
order flow from investor limit orders and dealer quotes displayed in
other market centers. Even when wholesale and internalizing broker-
dealers execute trades at prices better than the national best bid
and offer (``NBBO''), these superior transaction prices are often in
part determined by formulas dependent on the NBBO.''); see also
Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR
37496, 37499 (June 29, 2005) (``Reg. NMS Adopting Release'') (``The
importance of competition among orders has long been recognized.
Indeed, when Congress mandated the establishment of an NMS, it well
stated this basic principle: `Investors must be assured that they
are participants in a system which maximizes the opportunities for
the most willing seller to meet the most willing buyer.' To the
extent that competition among orders is lessened, the quality of
price discovery for all sizes of orders can be compromised.'');
Fragmentation Concept Release at 10580 (``[T]he existence of
multiple market centers competing for order flow in the same
security may isolate orders and hence reduce the opportunity for
interaction of all buying and selling interest in that security.
This may reduce competition on price, which is one of the most
important benefits of greater interaction of buying and selling
interest in an individual security.'').
\8\ See Dark Pool Release at 61211; see also Reg. NMS Adopting
Release at 37527 (``The Commission believes, however, that the long-
term strength of the NMS as a whole is best promoted by fostering
greater depth and liquidity, and it follows from this that the
Commission should examine the extent to which it can encourage the
limit orders that provide this depth and liquidity to the market at
the best prices.''); Securities Exchange Act Release No. 37619A
(September 6, 1996), 61 FR 48290, 48293 (September 12, 1996)
(``Order Handling Rules Release'') (``[T]he display of customer
limit orders advances the national market system goal of the public
availability of quotation information, as well as fair competition,
market efficiency, best execution, and disintermediation.'').
\9\ Additionally, the Exchange believes that the Program will
address complaints from buy-side firms about a lack of transparency
around the rules and operations of ATSs. Unlike the Exchange's
extensive rule filing requirements, ATSs are only required to file
an initial operation report on Form ATS and an amendment on Form ATS
when implementing a material change to the operation of the ATS or
when any information on Form ATS is inaccurate. See 17 CFR
242.301(b)(2). The Exchange environment, however, offers buy-side
firms the desired regulatory and operational transparency while also
minimizing the transaction costs associated with the trading of
block-sized trading interest.
\10\ See Dark Pool Release at 61219 (``The public, however, does
not have access to this valuable information concerning the best
prices and sizes for NMS stocks. Rather, dark pools transmit this
information only to selected market participants. In this regard,
actionable IOIs can create a two-tiered level of access to
information about the best prices and sizes for NMS stocks that
undermines the Exchange Act objectives for a national market system.
The consolidated quotation data is intended to provide a single
source of information on the best prices for a listed security
across all markets, rather than force the public to obtain data from
many different exchanges and other markets to learn the best prices.
This objective is not met when dark pools or other trading venues
disseminate information that is functionally quite similar to
quotations, yet is not included in the consolidated quotation data.
. . . The lack of information concerning the ATS on which trades are
executed makes it difficult, if not impossible, for the public to
assess ATS trading in real-time, and to reliably identify the volume
of executions in particular stocks on individual ATSs. The
Commission preliminarily believes that the current level of post-
trade transparency for ATSs is inadequate.'').
---------------------------------------------------------------------------
Definitions
The Exchange proposes to adopt the following definitions under
proposed NYSE Rule 107D(a).
Institutional Liquidity Order
First, the term ``Institutional Liquidity Order'' is defined as a
limit order for NYSE-listed securities of 5,000 or more shares with a
market value of at least $50,000,\11\ or a child order of a recorded
instruction that meets such size requirements.\12\ An ILO, whether it
constitutes a child order or an entire order, must be one establishing,
increasing, liquidating, or decreasing a position in the subject
security and may not be part of an expression of two-sided interest on
the part of the account originating the order. An ILO, or the recorded
parent order instruction from which it is derived, must satisfy the
size requirement above independently, and size may not be aggregated
across multiple member organizations \13\ to satisfy the above size
requirement.\14\
---------------------------------------------------------------------------
\11\ The Exchange notes that the size requirement is similar to
other SEC and exchange rules defining block-sized trading interest.
See 17 CFR 240.10b-18(a)(5)(ii) (including in the definition of
block a quantity of stock that is at least 5,000 shares and has a
purchase price of at least $50,000); CBOE Stock Exchange Rule 52.11
(permitting the cross of two original orders at the established bid
or offer irrespective of existing interest so long as the cross
transaction is (i) for at least 5,000 shares, (ii) is for a
principal amount of at least $100,000, and (iii) is greater in size
than any single public customer order resting on the CBSX Book at
the proposed cross price).
\12\ If an ILO represents a child order of a recorded parent
order instruction, the Program does not require that the recorded
parent order instruction be fully executed in the Program. The
recorded parent order instruction may be executed in the Program, on
the Exchange outside of the Program, or at other venues, as long as
the recorded parent order instruction and the ILO meet the Program's
requirements.
\13\ The term ``member organization'' is defined in NYSE Rule
2(b) and includes Floor brokers acting as agents.
\14\ In other words, a size-eligible recorded parent order
instruction, from which child orders are derived, must be held by a
single member organization. A member organization may not rely on
the representation from a non-member that the non-member holds a
recorded parent order instruction sufficient to meet the size
requirements of the Program. But if a single member organization has
a size-eligible recorded parent order instruction, the member
organization may send child orders to other member organizations to
be submitted into the Program as ILOs. Member organizations
receiving such size ineligible child orders may rely on the member
organization holding the recorded parent order instruction with
respect to the size eligibility of the recorded parent order
instruction from which the child order is derived.
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An ILO, or recorded parent order instruction, that meets the
minimum size requirement and receives a partial execution that reduces
its size to below the minimum size requirement will not become size
ineligible. Even though a member organization receives a partial
execution, and then later cancels the remaining unexecuted ILO or
parent order instruction, the member organization has satisfied the
size requirement as long as its intent at the time of execution was to
fill the 5,000 share ILO or recorded parent order instruction.\15\ If a
member organization no longer intends to seek a position that satisfies
the above size requirements, the member organization must take
appropriate steps to ensure that it cancels any unexecuted ILOs in the
Program.
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\15\ A member organization may partially cancel an ILO; however,
an ILO, or recorded parent order instruction, will become size
ineligible if the size of the ILO or recorded parent order
instruction is reduced to below the minimum size requirement because
of a partial cancellation. A partially cancelled ILO will maintain
its time priority.
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An ILO may be designated Immediate-or-Cancel, or entered as a
Reserve Order, in which case the order or any residual unexecuted
portion will remain executable against contra-side interest in
accordance with this Rule. An ILO may be designated with an MTV
requirement that must be met before the order is executed. The MTV will
be an optional parameter designating a minimum amount of shares of a
security for which the ILO will attempt to execute if there is
sufficient contra-side OLO and/or ILO interest available at the ILO's
limit price or better. Depending on its designation, an ILO will
consider the volume on the Exchange book and/or away markets in order
to satisfy its MTV requirement.\16\ If the MTV requirement cannot be
met by contra-side OLO and/or ILO interest, the ILO so designated will
not participate in an execution, and may be cancelled or rest non-
displayed on the Exchange book, pursuant to Rule 107D(c). However, an
ILO will execute even though the execution size is less than the MTV
provided the MTV was met by available contra-side interest at the time
the ILO attempted to execute. An execution between an ILO and an
[[Page 71005]]
OLO or between two ILOs cannot trade through, but may trade at, a
protected quotation, and cannot trade through or trade at displayed
liquidity on the Exchange.
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\16\ As explained below, an ILO may be designated as Type 1 or
Type 2. A Type 1-designated ILO will consider volume on the Exchange
book in order to satisfy its MTV requirement. A Type 2-designated
ILO will consider volume on the Exchange book and away markets in
order to satisfy its MTV requirement.
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Under the Program, a member organization submitting ILOs must
maintain policies and procedures reasonably designed to ensure that the
above requirements are satisfied and maintain records sufficient to
reconstruct in a time-sequenced manner all orders routed to the
Exchange as an ILO, including how recorded parent order instructions
that meet the minimum size requirement relate to child order ILOs. In
particular, if a member organization is sending ILOs for its own
account, it must have written policies and procedures that reflect how
it documents that it has a recorded parent order that meets the above
requirements. In addition, a member organization may presume that an
account's intent to establish, increase, liquidate, or decrease a
position is bona fide absent concrete indications to the contrary.
Where circumstances indicate that an account does not intend to
establish the required position, member organizations should make
reasonable inquiry and follow up appropriately. For instance, the
following circumstances may indicate that an account does not intend to
establish, increase, liquidate, or decrease a position consistent with
the Program:
The account attempts to enter contemporaneous orders in
the same security on both sides of the market;
The account enters a pattern of orders and cancellations
apparently designed to implement a market-making or spread-trading
strategy; or
The account enters a pattern of cancellations that
consistently produces positions of a size that are less than the size
requirements of the Program.
Member organizations receiving size ineligible child orders may
rely on the member organization holding the recorded parent order
instruction with respect to the size eligibility of the recorded parent
order instruction from which the child order is derived. The member
organization receiving the child order will not be responsible for the
failure of the recorded parent order instruction to meet the
requirements of the Program absent circumstances indicating the
reliance was unreasonable. For example, if a member organization
receiving the child orders knew that its customer member organization
primarily engaged in a pattern and practice of trading the same
security on both sides of the market, it would not be reasonable to
assume that size ineligible child orders received from such member
organization would comply with the Program's rules, unless they had
information that such trading did not follow the customer member
organization's general trading strategy. The Exchange, with FINRA, will
monitor activity indicative of non-compliance with the Program's rules
and will exclude non-compliant member organizations when necessary to
ensure a proper functioning of the Program.
Oversize Liquidity Order
Second, the term ``Oversize Liquidity Order'' is defined as a non-
displayed limit order for NYSE-listed securities with a minimum size of
500 shares.\17\ An OLO that meets the minimum size requirement and
receives a partial execution that reduces its size to below the
applicable minimum size requirements will still be eligible to interact
with incoming ILOs. An OLO will become size ineligible if the size of
the OLO is reduced below the minimum size requirement because of a
partial cancellation. An OLO may be priced at, inside, or outside the
PBBO, or as non-displayed Primary Pegging Interest pursuant to Rule 13.
OLOs will be ranked according to price-size-time priority. OLOs may
interact only with ILOs.
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\17\ OLOs may have a minimum size of 300 shares for securities
with an Average Daily Volume of less than one million shares.
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As discussed below, OLOs and ILOs will be ranked and allocated
according to price then size then time of entry into Exchange systems
\18\ and therefore without regard to whether the size entered is an odd
lot, round lot or part of round lot. Executions between an ILO and an
OLO will take into account displayed liquidity available at the same
price on the Exchange book, such that displayed liquidity will have
priority over equally priced ILOs and OLOs. OLOs and ILOs priced inside
the PBBO will have priority over inferior-priced displayed interest,
but OLOs and ILOs may not be priced in sub-penny increments.
Consequently, OLOs and ILOs may only be priced inside the PBBO when the
spread is greater than $0.01. Finally, ILOs may be designated as Type 1
or Type 2 (explained below).
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\18\ As noted below, the Commission has previously found the
integration of price-size-time priority into an SRO-sponsored
execution venue that also offered price-time priority to be
consistent with the Act. See Securities Exchange Act Release No.
43863 (January 19, 2001), 66 FR 8020, 8038 (January 26, 2001)
(``SuperMontage Approval Order'') (approving Nasdaq's proposal to
give market participants that enter non-directed orders three
options as to how their orders will interact with quotes/orders in
Nasdaq: price-time; price-size-time; and price-time that accounts
for ECN access fees).
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Program
Third, the term ``Program'' would be defined as the Institutional
Liquidity Program as described in Rule 107D.
Liquidity Identifier
Under proposed NYSE Rule 107D(b), the Exchange proposes to
disseminate an identifier initially through an Exchange proprietary
data feed, and as soon as practicable, the Exchange would disseminate
the identifier through the CQS when an OLO or ILO resides in Exchange
systems. The LI will reflect the symbol for the particular security,
but will not include the price, side (buy or sell), or size of the OLO
or ILO interest.
Institutional Liquidity Order Designations
Under proposed NYSE Rule 107D(c), a member organization can
designate how an ILO would interact with available contra-side interest
as follows. As proposed, a Type 1-designated ILO will interact, at each
price level, first with displayed interest in Exchange systems, then
available contra-side OLOs and/or ILOs in size-time priority, and then
with any remaining non-displayed interest in Exchange systems, except a
Type 1-designated ILO will not trade through a protected quotation. Any
remaining portion of the ILO will be cancelled if designated as a
Regulation NMS-compliant Immediate or Cancel Order pursuant to Rule 13,
or if designated as a Reserve Order, rest on the Exchange book and be
available to interact with other incoming contra-side OLOs, ILOs, and
other available interest in Exchange systems but will not trade through
a protected quotation. Accordingly, a Type 1-designated ILO may
interact with other interest in Exchange systems, but will not route to
other markets.\19\ A Type 2-designated ILO will interact, at each price
level, first with displayed interest in Exchange systems, then
available contra-side OLOs and/or ILOs in size-time priority, and then
with any remaining non-displayed interest in Exchange systems and will
route to away markets as necessary to avoid trading through a protected
quotation. Any remaining portion of the ILO will be cancelled if
designated as an NYSE Immediate or
[[Page 71006]]
Cancel Order pursuant to Rule 13, or if designated as a Reserve Order,
rest on the Exchange book and be available to interact with other
incoming contra-side OLOs, ILOs, and other available interest in
Exchange systems. Accordingly, a Type 2-designated ILO may interact
with other interest in Exchange systems, and may route to away markets.
A non-displayed, Type 2-designated ILO resting on the Exchange book
will route to away markets as necessary to avoid trading through a
protected quotation.
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\19\ As discussed below, the Type 1 designation creates multiple
and substantial possibilities for ILOs to be matched with displayed
limit orders on the Exchange. In addition to enhancing the execution
opportunities for Institutional Interest, therefore, the Type 1
designation directly supports the all-important incentive to display
limit orders.
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Priority and Order Allocation
Under proposed NYSE Rule 107D(d), the Exchange proposes that
competing OLOs and ILOs will be ranked and allocated according to
price, then size, then time of entry into Exchange systems. The size
priority of OLOs and ILOs will be based upon their initial size at time
of entry; however, any partial cancels of OLOs or ILOs will reduce
their original size for priority purposes by an equal amount. As such,
when an ILO or OLO is partially cancelled, its size priority will be
redetermined based on its new size; however, the ILO or OLO will
maintain its time priority. Displayed liquidity will have priority over
equally priced ILOs and OLOs. An incoming ILO will execute first
against displayed interest, then against contra-side ILOs and OLOs, and
finally against any non-displayed interest in Exchange systems. Any
remaining unexecuted ILO interest will remain available to interact
with other incoming OLOs and/or ILOs if such interest is at an eligible
price unless the order is designated IOC. The following examples
illustrate this proposed method:
Example 1-- PBBO for security ABC is $9.99-$10.05
OLO 1 is entered to buy ABC at $10.00 for 5,000
OLO 2 is then entered to buy ABC at $10.00 for 5,000
OLO 3 is then entered to buy ABC at $10.00 for 4,000
An incoming Type 1 ILO to sell ABC for 10,000 executes first
against OLO 1's bid for 5,000, because it is the largest best-priced
bid entered first in time, then against OLO 2's bid for 5,000, because
it is the next largest best-priced bid. OLO 3 is not filled because the
entire size of the ILO to sell 10,000 is depleted.
Assume the same facts as above. An incoming Type 1 ILO to sell ABC
for 13,800 with an MTV of 10,000 will execute first against OLO 1's bid
for 5,000, because it is the largest best-priced bid entered first in
time, then against OLO 2's bid for 5,000, because it is the next
largest best-priced bid. OLO 3 then receives an execution for 3,800 of
its 4,000, at which point the entire size of the ILO to sell 13,800 is
depleted. Note that the MTV requirement is met by the aggregate level
of contra-side interest, even though no individual OLO satisfied the
ILO's MTV requirement. Additionally, OLO 3 will still be available to
interact with an incoming ILO since its original quantity was above the
minimum size requirements.
Assume the same facts above, except that OLO 2's bid to buy ABC at
$10.00 is for 2,000. An incoming Type 1 ILO to sell 10,000 executes
first against OLO 1's bid for 5,000, because it is the largest best-
priced bid, then against OLO 3's bid for 4,000, because it is the next
largest best-priced bid. OLO 2 then receives an execution for 1,000 of
its 2,000, at which point the entire size of the ILO to sell 10,000 is
depleted.
Additionally, assume the same facts above, except that OLO 3's bid
to buy 4,000 is priced at $10.01 and there is also an additional OLO
entered to buy at $10.00 for 4,000 (OLO 4). An incoming Type 1 ILO to
sell 11,000 executes first against OLO 3's bid for 4,000, because it is
the best-priced bid. OLO 1 then receives an execution for 5,000,
because it is the largest next-best-priced bid, and was entered ahead
of OLO 2. OLO 2 then receives an execution for 2,000, leaving 3,000
unexecuted shares, at which point the entire size of the ILO is
depleted. Next, another incoming Type 1 ILO to sell 3,000 executes
against OLO 2 for 3,000 since its original quantity was 5,000, which is
greater than the size of OLO 4 at 4,000. Using this same example,
assume prior to the second ILO arriving, a partial cancel was sent in
for OLO 2 to reduce its quantity by 2,000. The second arriving ILO
would execute against OLO 4, since by partially canceling 2,000, OLO 2
would have its original quantity decremented to 3,000, making OLO 4
larger.
Finally, assume the same facts above, except that after OLO 3 is
entered, ILO 1 is entered to buy ABC at $10.00 for 10,000 with an MTV
of 5,000. An incoming Type 1 ILO to sell 15,000 executes first against
ILO 1 because it is the largest best-priced bid and the number of
shares available exceeds ILO 1's MTV of 5,000. OLO 1 then receives an
execution for 5,000, because it is the next largest best-priced bid,
and was entered ahead of OLO 2, at which point the entire size of the
ILO to sell 15,000 is depleted.
Example 2--PBBO for security ABC is $10.00-10.05 O1 is a limit
order and the Exchange Best Bid at $10.00 for 1,000
OLO 1 is entered to buy ABC at $10.01 for 5,000
OLO 2 is then entered to buy ABC at $10.00 for 5,000
An incoming Type 1 ILO to sell ABC for 6,000 executes first against
OLO 1 because it is the best-priced bid, then against O1's bid for
1,000. O1 receives priority over OLO 2 because O1 is a displayed order
on the Exchange. OLO 2 remains available to interact with incoming
ILOs.
Example 3-- PBBO for security ABC is $10.00-10.05
O1 is a limit order and is the Exchange Best Bid quoted at
$10.00 for 1,000
O2 is a limit order to buy and is dark at $10.00 for 4,000
O3 is a limit order to buy and is displayable at $9.99 for 2,000
OLO 1 is entered to buy ABC at $10.00 for 4,000
OLO 2 is then entered to buy ABC at $9.99 for 4,000
There is a 100 share away market Bid at $10.00
An incoming Type 2 ILO to sell ABC for 12,000 executes first
against O1, the Exchange Best Bid, for 1,000 at $10.00 because it is
the best-priced displayed liquidity, then against OLO 1 for 4,000
because it is the best-priced bid in the Program and liquidity in the
Program has priority over nondisplayed liquidity, then against O2 for
4,000 because it is the best-priced nondisplayed liquidity. The ILO
then sweeps to $9.99, first routing 100 shares to the away market bid
at $10.00. At $9.99, the ILO executes first against O3 for 2,000
because it is the best-priced displayed liquidity, then against OLO 2
for 900 because it is the best-priced bid in the Program.
Implementation
The Exchange proposes that all NYSE-listed securities will be
eligible for inclusion in the Institutional Liquidity Program. In order
to provide for an efficient implementation, the Institutional Liquidity
Program will initially cover only a certain specified list of NYSE-
listed securities, as announced by the Exchange via a Trader Update.
The Exchange anticipates that the securities included within the
Institutional Liquidity Program will be expanded periodically based on
experience with the Program.\20\
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\20\ The Exchange will announce any such expansions via a Trader
Update.
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The Program Would Assist Investors in Facing the Challenge of Seeking
Counterparties While Minimizing Transaction Costs
The Commission has consistently recognized the challenges faced by
large
[[Page 71007]]
investors seeking to interact with counterparties without adversely
impacting the price of the stock they seek to trade.\21\ The Commission
has noted the difficult trade-off that size traders face in deciding
how much of their trading interest to reveal--prematurely revealing
trading interest can produce market impact and increased transaction
costs, while concealing trading interest reduces opportunities to
trade--and the ``perennial challenge'' that investors, brokers, and
markets face in ``finding effective and innovative ways to trade in
large sizes with minimized transaction costs.'' \22\
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\21\ See Fragmentation Concept Release at 10581 (``Consequently,
large investors often seek ways to interact with order flow and
participate in price competition without submitting a limit order
that would display the full extent of their trading interest to the
market.'').
\22\ Equity Market Structure Concept Release at 3612 (``Market
participants that need to trade in large size, such as institutional
investors, always have faced a difficult trading dilemma. On the one
hand, if they prematurely reveal the full extent of their large
trading interest to the market, then market prices are likely to run
away from them (a price rise for those seeking to buy and a price
decline for those seeking to sell), which would greatly increase
their transaction costs and reduce their overall investment returns.
On the other hand, if an institutional investor that wants to trade
in large size does nothing, then it will not trade at all. Finding
effective and innovative ways to trade in large size with minimized
transaction costs is a perennial challenge for institutional
investors, the brokers that represent their orders in the
marketplace, and the trading centers that seek to execute their
orders.'').
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Non-displayed liquidity in general, and dark pools in particular,
have been viewed as useful tools to address those challenges. The
Commission noted specifically in 2009, however, that dark pools differ
starkly in their contribution to size discovery. While block crossing
networks were producing at that time average trade sizes as large as
50,000 shares, most dark pools were executing trades with average sizes
comparable to those on exchanges.\23\ According to current data from
Rosebay Securities, institutional block trading venues such as
Liquidnet continue to produce large average trade sizes of almost
44,000 shares; on the other hand, dark pool average trade size
generally declined from 443 shares in March 2009 to 210 shares in
January 2013.\24\ Additionally, a recent white paper from the SEC
highlights similar facts and found that ``The five ATSs with average
order sizes exceeding 1,000 shares collectively comprise 2.94% of ATS
dollar volume and 3.01% of ATS share volume.\25\ It is essential to
keep firmly in mind the apparently limited contribution most non-
displayed venues provide in the discovery of size.
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\23\ See Dark Pool Release at 61209 (``Most dark pools, though
they may handle large orders, primarily execute trades with small
sizes that are more comparable to the average size of trades in the
public markets, which was less than 300 shares in August 2009.'').
\24\ Rosenblatt Securities, Trading Talk, dated March 25, 2013.
\25\ See Alternative Trading Systems: Description of ATS Trading
in National Market System Stocks. October 2013. SEC ATS White Paper.
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Moreover, it is equally important to consider the side effects of
the diversion of a large percentage of investor order flow away from
displayed markets.\26\ The Commission has squarely raised the question
in the Equity Market Structure Concept Release of whether the growth of
non-displayed liquidity has begun to degrade the public price discovery
process by widening spreads, reducing depth, and increasing short term
volatility.\27\ The Commission noted then that the percentage of volume
between non-displayed trading centers and displayed centers had
remained relatively constant between 70% and 80%.\28\
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\26\ The Commission has recognized the migration of non-
displayed liquidity away from the Exchange toward dark pools. See
Equity Market Structure Concept Release at 3612 (``One consequence
of the decline in market share of the NYSE floor in recent years is
that this historically large undisplayed liquidity pool in NYSE-
listed stocks appears to have largely migrated to other types of
venues. As discussed [] above, a recent form of undisplayed
liquidity is the dark pool--an ATS that does not display quotations
in the consolidated quotation data.'').
\27\ See Equity Market Structure Concept Release at 3613
(``Comment is requested on whether the trading volume of undisplayed
liquidity has reached a sufficiently significant level that it has
detracted from the quality of public price discovery and execution
quality. For example, has the level of undisplayed liquidity led to
increased spreads, reduced depth, or increased short-term volatility
in the displayed trading centers? If so, has such harm to public
price discovery led to a general worsening of execution quality for
investors in undisplayed markets that execute trades with reference
to prices in the displayed markets?'').
\28\ See id. (``In this regard, it appears that the overall
percentage of trading volume between undisplayed trading centers and
displayed trading centers has remained fairly steady for many years
between 70% and 80%.''). The Commission estimated that 25.4% of
share volume in NMS stocks was executed in undisplayed trading
centers in September 2009. Id. at n. 85.
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There are important indicators that this perceived static
distribution of lit and dark liquidity is no longer in line with the
facts, particularly when accounting for the growth in off-exchange
volume. For example, the number of securities with greater than 40% TRF
share has more than doubled in the past year to over 56.3% of total
stocks.\29\ As the chart below shows, over 70% of executions occurring
in dark venues is executed at the NBBO or with less than $0.001 in
price improvement or $0.10 per round lot. The Exchange believes that
these and other data points raise serious questions about the value
liquidity in non-displayed venues is providing to the market.
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\29\ Calculation based on Consolidated Tape data as of October
2013.
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[[Page 71008]]
[GRAPHIC] [TIFF OMITTED] TN27NO13.024
The Exchange also believes that the data strongly indicate emerging
threats to the public price discovery process. The Program has the
potential to leverage competition to address, in a limited way, these
important concerns.
Exchange Interaction Between Displayed and Non-Displayed Liquidity
In considering the potential of the Program to address the possible
degradation of the public price discovery process, it is worth
underscoring the following basic point: the priority rules of the
Exchange (and exchanges generally) offer a higher level of interaction
between displayed and non-displayed liquidity than dark pools and
broker internalization venues.\30\ Consider, by way of illustration, an
example where the PBBO was 10.01 by 10.03 with a displayed limit order
one penny above the PBO at 10.04. An incoming discretionary limit order
to buy with a displayed price of 10.02 and a discretionary price of
10.05 would not only interact with the interest at the PBO but would
also interact with the displayed limit order one penny above the PBO at
10.04, once again supporting the display incentive. In contrast, there
is no reason to expect that a non-displayed investor order residing in
a dark pool would be matched with any displayed limit order or
otherwise contribute in any way to the fundamentally important
incentive to display. Similarly, consider a Floor broker who finds a
counterparty of a size trade two pennies below the PBBO, while there is
a public limit order one penny below the PBBO in the book. Prior to the
Floor broker completing the trade, the Exchange would protect the PBBO,
the same way a dark pool would be required to respect the PBBO;
however, the Exchange takes the additional step of protecting the
displayed orders away from the PBBO but priced better than the manual
trade. Therefore, in the above example, the public limit order one
penny below the PBBO also would be protected by the Exchange, and the
incentive to display thereby strengthened.
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\30\ The Commission, in the Regulation NMS Adopting Release,
expressed concern regarding the display incentives of limit orders
below the top of book. See NMS Adopting Release at 37527 (``The
Commission believes, however, that the long-term strength of the NMS
as a whole is best promoted by fostering greater depth and
liquidity, and it follows from this that the Commission should
examine the extent to which it can encourage the limit orders that
provide this depth and liquidity to the market at the best
prices.'')
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Unlike a dark pool or internalization venue, the Program's ILOs
would bolster the display incentive. Example 3, as described above,
demonstrates such support. As stated in the above example, the PBBO for
the security is $10.00 by $10.05 with OLOs within the program to buy at
both $10.00 and $9.99. Furthermore, there is displayed interest on the
book at $10.00 and $9.99. After the incoming ILO to sell executes
against all interest priced at the PBB ($10.00), the ILO then interacts
with a displayed limit order priced one penny away from the PBB. Having
received an execution, the market participant who placed the limit
order has been rewarded and incentivized to display in the future.
The Program's Use of Minimum Size Requirements Encourages the Price
Discovery Mechanism by Lowering the Benefits of Certain Order
Anticipation Strategies
As part of the Equity Market Structure Concept Release, the
Commission questioned whether the use of ``pinging'' orders by all or
some traders to assess non-displayed liquidity should be prohibited or
restricted.\31\ However, in raising the issue, the Commission noted a
distinction between the use of pinging orders as the normal search for
liquidity versus using pinging to detect and trade in front of large
trading interest.\32\ While some directional strategies contribute to
the quality of price discovery in a stock,\33\ order anticipation
strategies which seek to trade ahead of large buyers or sellers in an
attempt to capture price movement in the direction of the large trade
interest do not enhance the price discovery process, detract from
market quality, and harm institutional investors. The Program limits
the deleterious effects that order anticipation strategies may have on
the quality of price discovery by imposing minimum size requirements on
OLOs and permitting ILOs to be entered with MTV restrictions, as
discussed above. These size requirements are designed to shift the
economics of order anticipation strategies by ensuring that users of
ILOs are given a meaningful opportunity to interact with contra-side
interest prior to its own interest being revealed and by increasing the
costs to those using order
[[Page 71009]]
anticipation strategies, through the use of a minimum size requirement,
prior to learning about the existence of large contra-side interest.
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\31\ See Equity Market Structure Concept Release at 3607. A
``pinging'' order is an immediate-or-cancel order that can be used
to search for and access all types of non-displayed liquidity,
including dark pools and non-displayed order types at exchanges and
ECNs.
\32\ Id. at n. 70.
\33\ See id. at 3608 (``Some `directional' strategies may be as
straightforward as concluding that a stock price temporarily has
moved away from its `fundamental value' and establishing a position
in anticipation that the price will return to such value. These
speculative strategies often may contribute to the quality of price
discovery in a stock.'')
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2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the
Act,\34\ in general, and furthers the objectives of Section
6(b)(5),\35\ 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, and to
remove impediments to and perfect the mechanism of a free and open
market and a national market system and, in general, to protect
investors and the public interest. The Exchange believes that the
proposed rule change is consistent with these principles because it
would increase competition among execution venues, encourage additional
liquidity, and make available additional liquidity to Institutional
Interest.
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\34\ 15 U.S.C. 78f(b).
\35\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The proposal arises out of the competition between the Exchange and
non-exchange venues for block trading interest and the growth of
institutional trading on less-regulated and less-transparent execution
venues. As the Commission has previously noted, broker-dealers acting
as over-the-counter market makers and block positioners provide
liquidity directly to Institutional Interest.\36\ The Program has the
potential to attract additional institutional and block trading
interest to the Exchange environment, and thereby improve transparency
of access arrangements, priority and allocation, and fees as compared
to internalizing non-exchange venues. Specifically, the ILO and OLO
order types give members handling Institutional Interest tools to limit
their interactions to counterparties who have committed to provide
oversize liquidity, and thereby to better control information about
their institutional customers' trading interest. If successful, the
Program would at the same time add to the information in the
consolidated quotation data by including the Oversize Liquidity
Indicator in CQS. The ILO and OLO order types, the inclusion of the LI
in the CQS, and the Program's priority rules rewarding size have the
potential to stimulate price competition within an exchange environment
for institutional-sized orders, to increase size interactions, reduce
market impact, and reduce the trading costs of institutional investors.
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\36\ See Dark Pool Release at 61209.
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The Exchange understands that Section 6(b)(5) of the Act prohibits
an exchange from establishing rules that treat market participants in
an unfairly discriminatory manner. However, Section 6(b)(5) of the Act
does not prohibit exchange members or other broker-dealers from
discriminating, so long as their activities are otherwise consistent
with the federal securities laws. Nor does Section 6(b)(5) of the Act
require exchanges to preclude discrimination by broker-dealers. Broker-
dealers commonly differentiate between customers based on the nature
and profitability of their business. The Program will simply replicate
these trading dynamics that already exist in the OTC markets and will
present another competitive venue for institutional and block order
flow execution.
The differentiation proposed herein by the Exchange is not designed
to permit unfair discrimination, but instead to promote a competitive
process around block trading interest such that Institutional Interest
would receive additional liquidity options than they receive in the
current market. The Exchange believes that the transparency and
competitiveness of an exchange-sponsored program such as the
Institutional Liquidity Program would enhance the liquidity available
to institutional investors and thereby reduce their trading costs. As
the Commission has previously recognized, institutional investors seek
to trade efficiently in large sizes without having a significant impact
on market prices.\37\ And the ability to interact with significant
amounts of liquidity is crucial to Institutional Interest looking to
effect transactions while reducing market impact and transaction costs.
As such, with the knowledge that contra-side interest must satisfy
minimum size requirements and the ability of ILOs to remain non-
displayed within the Program, Institutional Interest would be more
willing to send their orders to a public market.
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\37\ See Dark Pool Release at 61212 (``The Commission recognizes
that some trading venues, such as block crossing networks, may use
actionable IOIs as part of a trading mechanism that offers
significant size discovery benefits (that is, finding contra-side
trading interest for large size without affecting prices). These
benefits may be particularly valuable for institutional investors
that need to trade efficiently in sizes much larger than those that
are typically available in the public quoting markets.'').
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Additionally, the Exchange believes that the Program will promote
just and equitable principles of trade and remove impediments to and
perfect the mechanism of a free and open market and a national market
system because it will create additional competition for institutional
and block order flow, attract institutional and block order flow to the
exchange environment, and ensure that Institutional Interest benefit
from a larger pool of liquidity and potentially receive better prices
than they currently receive through bilateral internalization
agreements. As a result, the Program is designed to provide a relative
enhancement of the incentive to display than currently exists. The
Exchange also notes that the LI will be disseminated through the
consolidated public market data stream, and thus be widely viewable by
market participants, and as such, would increase the amount of pricing
information available to the marketplace. Therefore, the Program is
reasonably designed to increase market transparency, thus removing
impediments to and perfecting the mechanism of a free and open market
and a national market system.
The Exchange believes that the Program will remove impediments to
and perfect the mechanism of a free and open market and a national
market system by incentivizing the display of public limit orders and
promoting the price discovery mechanism. The increasing concentration
of ``toxic,'' or highly informed, high frequency order flow, and the
corresponding diversion of more benign flow to off-exchange venues, are
evident today, and have been acknowledged with concern by the
Commission.\38\ The Exchange's recent competitive initiatives seek to
arrest and reverse this unsettling dynamic by attracting a more diverse
population of buyers and sellers to the public markets.\39\ The current
proposal to establish an Institutional Liquidity Program reflects a
continuation of these efforts.
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\38\ See Securities Exchange Act Release No. 61358 (January 14,
2010), 75 FR 3594, 3613 (January 21, 2010) (``Equity Market
Structure Concept Release'') (``It appears that a significant
percentage of the orders of long-term investors are executed either
in dark pools or at OTC market makers, while a large percentage of
the trading volume in displayed trading centers is attributable to
proprietary firms executing short-term trading strategies.'').
\39\ See Securities Exchange Act Release No. 67347 (July 3,
2012), 77 FR 40673 (July 10, 2012) (``By creating additional
competition for retail order flow, the Program is reasonably
designed to attract retail order flow to the exchange environment,
while helping to ensure that retail investors benefit from the
better price that liquidity providers are willing to give their
orders.'').
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Further, the Exchange believes that the Program will remove
impediments to and perfect the mechanism of a free and open market and
a national market system by promoting order interaction. Specifically,
the functionality of ILOs in
[[Page 71010]]
the Program provides publicly displayed liquidity in general,
particularly publicly displayed limit orders below the top of book, the
potential to interact with Institutional Interest, thus incentivizing
the display of public limit orders in such a way that dark pools do
not.
The Exchange believes that the price-size priority of OLOs and ILOs
within the Program proposed herein is consistent with the Act. The
priority is meant to reward liquidity providers willing to display
greater size, an incentive that the Commission has previously
approved.\40\ Requiring that orders within the Program be executed
based on price-time priority would undermine the effectiveness of the
Program because it would reduce the willingness of investors to reveal
large trading interest. By placing a premium on size, the Program
incentivizes large investors to move away from dark pools and back
towards displayed public markets.
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\40\ See SuperMontage Approval Order at 8038 (``The Commission
also concludes that the NASD's algorithm based on price/size/time
priority is consistent with the statute.'').
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The Exchange believes that the Program is designed to protect
investors and the public interest because the Program has the potential
to lower volatility in a given security by increasing liquidity and
depth at, inside, and outside the PBBO. The Commission has previously
acknowledged the relationship between transaction costs, short-term
price volatility, and temporary imbalances in trading interest.\41\
Additionally, investors are more likely than professional traders to be
on the wrong side of short-term price swings.\42\ The increased
liquidity made available through the Program will decrease the
temporary imbalances in trading interest due to a large incoming order,
reducing short-term price volatility and investor trading costs.
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\41\ See Dark Pool Release at 61209, n. 4 (``Another type of
implicit transaction cost reflected in the price of a security is
short-term price volatility caused by temporary imbalances in
trading interest. For example, a significant implicit cost for large
investors (who often represent the consolidated investments of many
individuals) is the price impact that their large trades can have on
the market.'')
\42\ See id.
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Further, the Exchange believes the Program is designed to protect
investors and the public interest because the Program has the potential
to increase price improvement and size improvement opportunities for
institutional investors. Because of the priority provided to equally-
priced displayed interest outside the Program, member organizations
must submit OLOs and ILOs priced within the PBBO in order to receive
priority or else risk receiving a partial or no fill. Additionally, the
size priority applied to OLOs or ILOs similarly incentivizes member
organizations to submit large orders into the Program, offering size
improvement opportunities to institutional investors.
Finally, the Exchange proposes that the Commission approve the
proposed rule for a pilot period of twelve months from the date of
implementation, which will occur no later than 90 days after Commission
approval of Rule 107D. The Program will expire on [Date will be
determined upon adoption of Rule 107D]. The Exchange believes that this
pilot period is of sufficient length to permit both the Exchange and
the Commission to assess the impact of the rule change described
herein. During the pilot period, the Exchange will submit certain data,
periodically as required by the Commission, including: summary
statistics on the operation of the Program along with the meaning of
the summary statistics; raw data relating to the operation of the
Program; reports and data monitoring the Program's participants along
with their activity; and the Exchange's assessment of the impact of the
Program.
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 increase competition among execution
venues and encourage additional liquidity. The Exchange notes that a
significant percentage of the orders of institutional investors are
executed over-the-counter. The Exchange believes that it is appropriate
to create a financial incentive to bring more institutional order flow
to a public market.
Additionally, as previously stated, the differentiation proposed
herein by the Exchange is not designed to permit unfair discrimination,
but instead to promote a competitive process around block trading such
that Institutional Interest would receive better prices and greater
access to liquidity than they currently do through bilateral
internalization arrangements. The Exchange believes that the
transparency and competitiveness of operating a program such as the
Institutional Liquidity Program on an exchange market would result in
better prices for Institutional Interest while reducing their market
impact.
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 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.
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-2013-72 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-2013-72. 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
[[Page 71011]]
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 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 publicly available. All submissions should refer to
File Number SR-NYSE-2013-72 and should be submitted on or before
December 18, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\43\
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\43\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-28414 Filed 11-26-13; 8:45 am]
BILLING CODE 8011-01-P