Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of Proposed Rule Change to Establish an Institutional Liquidity Program on a One-Year Pilot Basis, 70992-71000 [2013-28415]

Download as PDF 70992 Federal Register / Vol. 78, No. 229 / Wednesday, November 27, 2013 / Notices Exchange’s Web site at www.nyse.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR– NYSEARCA–2013–124 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. 2013–28421 Filed 11–26–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–70910; File No. SR– NYSEMKT–2013–91] Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of Proposed Rule Change to Establish an Institutional Liquidity Program on a One-Year Pilot Basis November 21, 2013. emcdonald on DSK67QTVN1PROD with NOTICES 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, NYSE MKT LLC (‘‘NYSE MKT’’ 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—Equities to establish an Institutional Liquidity Program (‘‘Program’’ or ‘‘proposed rule change’’) to attract buying and selling interest in greater size to the Exchange for Exchange-listed or traded securities (including but not limited to Exchangelisted securities and securities traded pursuant to unlisted trading privileges) 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 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 VerDate Mar<15>2010 17:02 Nov 26, 2013 Jkt 232001 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 MKT Rule 107D—Equities to establish an Institutional Liquidity Program to attract buying and selling interest in greater size to the Exchange for Exchange-listed and traded 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 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. PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 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. 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, 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. 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) E:\FR\FM\27NON1.SGM 27NON1 Federal Register / Vol. 78, No. 229 / Wednesday, November 27, 2013 / Notices emcdonald on DSK67QTVN1PROD with NOTICES 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 (‘‘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.’’). VerDate Mar<15>2010 17:02 Nov 26, 2013 Jkt 232001 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 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 PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 70993 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 MKT Rule 107D(a)—Equities. Institutional Liquidity Order First, the term ‘‘Institutional Liquidity Order’’ is defined as a limit order for Exchange-listed or traded securities (including but not limited to Exchangelisted securities and securities traded pursuant to unlisted trading privileges) 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 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 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. E:\FR\FM\27NON1.SGM 27NON1 70994 Federal Register / Vol. 78, No. 229 / Wednesday, November 27, 2013 / Notices emcdonald on DSK67QTVN1PROD with NOTICES organizations 13 to satisfy the above size requirement.14 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 13 The term ‘‘member organization’’ is defined in NYSE MKT Rule 2(b)—Equities 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. 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 VerDate Mar<15>2010 17:02 Nov 26, 2013 Jkt 232001 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)—Equities. 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 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. For example, 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 ILO will consider volume on the Exchange book and away markets in order to satisfy its MTV requirement. PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 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 review activity indicative of non-compliance with the Program’s rules. The Exchange 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 Exchange-listed or traded securities (including but not limited to Exchange-listed securities and securities traded pursuant to unlisted trading privileges) 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—Equities. OLOs will be ranked according to price-sizetime 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 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). E:\FR\FM\27NON1.SGM 27NON1 Federal Register / Vol. 78, No. 229 / Wednesday, November 27, 2013 / Notices 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). Program Third, the term ‘‘Program’’ would be defined as the Institutional Liquidity Program as described in Rule 107D— Equities. Liquidity Identifier Under proposed NYSE MKT Rule 107D(b)—Equities, 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. emcdonald on DSK67QTVN1PROD with NOTICES Institutional Liquidity Order Designations Under proposed NYSE MKT Rule 107D(c)—Equities, a member organization can designate how an ILO would interact with available contraside 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 1designated ILO will not trade through a protected quotation. Any remaining portion of the ILO will be cancelled if designated as a Regulation NMScompliant Immediate or Cancel Order pursuant to Rule 13—Equities, 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 VerDate Mar<15>2010 17:02 Nov 26, 2013 Jkt 232001 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 Exchange Immediate or Cancel Order pursuant to Rule 13— Equities, 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 2designated 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. Priority and Order Allocation Under proposed NYSE MKT Rule 107D(d)—Equities, 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 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. PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 70995 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. 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 E:\FR\FM\27NON1.SGM 27NON1 70996 Federal Register / Vol. 78, No. 229 / Wednesday, November 27, 2013 / Notices 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. emcdonald on DSK67QTVN1PROD with NOTICES 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 Exchange-listed or traded securities VerDate Mar<15>2010 17:02 Nov 26, 2013 Jkt 232001 (including but not limited to Exchangelisted securities and securities traded pursuant to unlisted trading privileges) 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 Exchangelisted or traded 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 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 20 The Exchange will announce any such expansions via a Trader Update. 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.’’). PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 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 Rosenblatt 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 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?’’). E:\FR\FM\27NON1.SGM 27NON1 Federal Register / Vol. 78, No. 229 / Wednesday, November 27, 2013 / Notices 70997 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. 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 nondisplayed 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. 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. 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. 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.’’) 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 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, Continued VerDate Mar<15>2010 17:02 Nov 26, 2013 Jkt 232001 PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 E:\FR\FM\27NON1.SGM 27NON1 EN27NO13.020</GPH> emcdonald on DSK67QTVN1PROD with NOTICES 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 70998 Federal Register / Vol. 78, No. 229 / Wednesday, November 27, 2013 / Notices 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 anticipation strategies, through the use of a minimum size requirement, prior to learning about the existence of large contra-side interest. 2. Statutory Basis emcdonald on DSK67QTVN1PROD with NOTICES 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. 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.’’) 34 15 U.S.C. 78f(b). 35 15 U.S.C. 78f(b)(5). VerDate Mar<15>2010 17:02 Nov 26, 2013 Jkt 232001 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 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 36 See PO 00000 Dark Pool Release at 61209. Frm 00084 Fmt 4703 Sfmt 4703 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 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 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.’’). E:\FR\FM\27NON1.SGM 27NON1 Federal Register / Vol. 78, No. 229 / Wednesday, November 27, 2013 / Notices emcdonald on DSK67QTVN1PROD with NOTICES 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 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. 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.’’). 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.’’). VerDate Mar<15>2010 17:02 Nov 26, 2013 Jkt 232001 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, 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— Equities. The Program will expire on [Date will be determined upon adoption of Rule 107D—Equities]. 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 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. PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 70999 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. E:\FR\FM\27NON1.SGM 27NON1 71000 Federal Register / Vol. 78, No. 229 / Wednesday, November 27, 2013 / Notices IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NYSEMKT–2013–91 on the subject line. Paper Comments emcdonald on DSK67QTVN1PROD with NOTICES • 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–2013–91. 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 (http://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 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– NYSEMKT–2013–91 and should be submitted on or before December 18, 2013. 17:02 Nov 26, 2013 [FR Doc. 2013–28415 Filed 11–26–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION Electronic Comments VerDate Mar<15>2010 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority. 43 Kevin M. O’Neill, Deputy Secretary. Jkt 232001 [Release No. 34–70914; File No. SR– NYSEMKT–2013–93] Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the NYSE MKT Equities Price List and the NYSE Amex Options Fee Schedule Related to CoLocation Services 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 8, 2013, NYSE MKT LLC (the ‘‘Exchange’’ or ‘‘NYSE MKT’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the selfregulatory 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 to amend the NYSE MKT Equities Price List (‘‘Price List’’) and the NYSE Amex Options Fee Schedule (‘‘Fee Schedule’’) related to co-location services in order to provide further specification regarding the fees applicable to cabinets for which power is not utilized (‘‘PNU cabinets’’). The text of the proposed rule change is available on the Exchange’s Web site at www.nyse.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change 43 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 PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend the Price List and the Fee Schedule related to co-location services in order to provide further specification regarding the fees applicable to PNU cabinets.4 The Exchange proposes to implement the change immediately. A User is currently able to obtain one or more PNU cabinets in the data center.5 A PNU cabinet is an unused cabinet in proximity to a User’s existing cabinet(s), which the User reserves for future use, i.e., a cabinet that the User does not anticipate using until some point in the future and therefore is reserved but not currently utilized. Although PNU cabinets do not use power, when the Exchange establishes a PNU cabinet, it includes wiring, circuitry, and hardware and allocates either four kilowatts (‘‘kW’’) or eight 4 The Securities and Exchange Commission (‘‘Commission’’) initially approved the Exchange’s co-location services in Securities Exchange Act Release No. 62961 (September 21, 2010), 75 FR 59299 (September 27, 2010) (SR–NYSEAmex–2010– 80) (the ‘‘Original Co-location Approval’’). The Exchange operates a data center in Mahwah, New Jersey (the ‘‘data center’’) from which it provides co-location services to Users. The Exchange’s colocation services allow Users to rent space in the data center so they may locate their electronic servers in close physical proximity to the Exchange’s trading and execution system. See id. at 59299. 5 For purposes of the Exchange’s co-location services, the term ‘‘User’’ includes (i) member organizations, as that term is defined in the definitions section of the General and Floor Rules of the NYSE MKT Equities Rules, and ATP Holders, as that term is defined in NYSE Amex Options Rule 900.2NY(5); (ii) Sponsored Participants, as that term is defined in Rule 123B.30(a)(ii)(B)—Equities and NYSE Amex Options Rule 900.2NY(77); and (iii) non-member organization and non-ATP Holder broker-dealers and vendors that request to receive co-location services directly from the Exchange. See, e.g., Securities Exchange Act Release Nos. 65974 (December 15, 2011), 76 FR 79249 (December 21, 2011) (SR–NYSEAmex–2011–81) and 65975 (December 15, 2011), 76 FR 79233 (December 21, 2011) (SR–NYSEAmex–2011–82). As specified in the Price List and the Fee Schedule, a User that incurs co-location fees for a particular co-location service pursuant thereto would not be subject to colocation fees for the same co-location service charged by the Exchange’s affiliates New York Stock Exchange LLC and NYSE Arca, Inc. See Securities Exchange Act Release No. 70176 (August 13, 2013), 78 FR 50471 (August 19, 2013) (SR– NYSEMKT–2013–67). E:\FR\FM\27NON1.SGM 27NON1

Agencies

[Federal Register Volume 78, Number 229 (Wednesday, November 27, 2013)]
[Notices]
[Pages 70992-71000]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-28415]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70910; File No. SR-NYSEMKT-2013-91]


Self-Regulatory Organizations; NYSE MKT 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, NYSE MKT LLC (``NYSE MKT'' 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--Equities to establish an Institutional Liquidity Program 
(``Program'' or ``proposed rule change'') to attract buying and selling 
interest in greater size to the Exchange for Exchange-listed or traded 
securities (including but not limited to Exchange-listed securities and 
securities traded pursuant to unlisted trading privileges) 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.

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 MKT Rule 107D--Equities to establish an Institutional 
Liquidity Program to attract buying and selling interest in greater 
size to the Exchange for Exchange-listed and traded 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.
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    \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.
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    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.
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    \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.
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    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,

[[Page 70993]]

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 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.
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    \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 Sec.  
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.'').
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Definitions
    The Exchange proposes to adopt the following definitions under 
proposed NYSE MKT Rule 107D(a)--Equities.
Institutional Liquidity Order
    First, the term ``Institutional Liquidity Order'' is defined as a 
limit order for Exchange-listed or traded securities (including but not 
limited to Exchange-listed securities and securities traded pursuant to 
unlisted trading privileges) 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

[[Page 70994]]

organizations \13\ to satisfy the above size requirement.\14\
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    \11\ The Exchange notes that the size requirement is similar to 
other SEC and exchange rules defining block-sized trading interest. 
See 17 CFR Sec.  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 MKT 
Rule 2(b)--Equities 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)--Equities. 
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 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. For 
example, 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 
review activity indicative of non-compliance with the Program's rules. 
The Exchange 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 Exchange-listed or traded securities 
(including but not limited to Exchange-listed securities and securities 
traded pursuant to unlisted trading privileges) 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--Equities. OLOs will be ranked according to price-size-time 
priority. OLOs may interact only with ILOs.
---------------------------------------------------------------------------

    \17\ OLOs may have a minimum size of 300 shares for securities 
with an Average Daily Volume of less than one million shares.
---------------------------------------------------------------------------

    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

[[Page 70995]]

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--Equities.
Liquidity Identifier
    Under proposed NYSE MKT Rule 107D(b)--Equities, 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 MKT Rule 107D(c)--Equities, 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--Equities, 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 
Exchange Immediate or Cancel Order pursuant to Rule 13--Equities, 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 MKT Rule 107D(d)--Equities, 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

[[Page 70996]]

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 Exchange-listed or traded securities 
(including but not limited to Exchange-listed securities and securities 
traded pursuant to unlisted trading privileges) 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 Exchange-listed 
or traded 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\
---------------------------------------------------------------------------

    \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 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\
---------------------------------------------------------------------------

    \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.'').
---------------------------------------------------------------------------

    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 
Rosenblatt 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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

[[Page 70997]]

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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \29\ Calculation based on Consolidated Tape data as of October 
2013.
[GRAPHIC] [TIFF OMITTED] TN27NO13.020

    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.
---------------------------------------------------------------------------

    \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.'')
---------------------------------------------------------------------------

    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,

[[Page 70998]]

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 anticipation strategies, through the use of a minimum size 
requirement, prior to learning about the existence of large contra-side 
interest.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \36\ See Dark Pool Release at 61209.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.'').
---------------------------------------------------------------------------

    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

[[Page 70999]]

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.
---------------------------------------------------------------------------

    \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.'').
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \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.'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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--Equities. The Program will expire on [Date will 
be determined upon adoption of Rule 107D--Equities]. 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.

[[Page 71000]]

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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEMKT-2013-91 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-2013-91. 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 (http://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 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- NYSEMKT-2013-91 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\
---------------------------------------------------------------------------

    \43\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-28415 Filed 11-26-13; 8:45 am]
BILLING CODE 8011-01-P