Self-Regulatory Organizations; BATS Y-Exchange, Inc.; Order Approving a Proposed Rule Change To Amend BYX Rule 12.6 To Conform to FINRA Rule 5320 Relating to Trading Ahead of Customer Orders, 72944-72946 [2013-28968]
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72944
Federal Register / Vol. 78, No. 233 / Wednesday, December 4, 2013 / Notices
SECURITIES AND EXCHANGE
COMMISSION
and trading outside normal market
hours.
[Release No. 34–70951; File No. SR–BYX–
2013–036]
Background
Current Rule 12.6, the customer order
protection rule, generally prohibits
Members from trading on a proprietary
basis ahead of, or along with, customer
orders that are executable at the same
price as the proprietary order. The
current rule contains several exceptions
that make it permissible for a Member
to enter a proprietary order while
representing a customer order that could
be executed at the same price, including
permitting transactions for the purpose
of facilitating the execution, on a
riskless principal basis, of one or more
customer orders.
Self-Regulatory Organizations; BATS
Y-Exchange, Inc.; Order Approving a
Proposed Rule Change To Amend BYX
Rule 12.6 To Conform to FINRA Rule
5320 Relating to Trading Ahead of
Customer Orders
November 27, 2013.
I. Introduction
On October 3, 2013, BATS YExchange, Inc. (the ‘‘Exchange’’ or
‘‘BYX’’) filed with the Securities and
Exchange Commission (‘‘Commission’’
or ‘‘SEC’’), pursuant to Section 19(b)(1)
of the Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to amend BYX
Rule 12.6 (‘‘Rule 12.6’’) to make it
substantially similar to Financial
Industry Regulatory Authority
(‘‘FINRA’’) Rule 5320. The proposed
rule change was published for comment
in the Federal Register on October 22,
2013.3 The Commission received no
comments on the proposal. This order
approves the proposed rule change.
II. Description of the Proposed Rule
Change
EMCDONALD on DSK67QTVN1PROD with NOTICES
The Exchange proposes to amend
Rule 12.6, which limits trading ahead of
customer orders by Members,4 to have
the rule substantially conform to FINRA
Rule 5320.5 As with FINRA Rule 5320,
the proposed amendments to Rule 12.6
would prohibit Members from trading
ahead of customer orders, subject to
specified exceptions. Rule 12.6, as
proposed to be amended, would include
exceptions for large orders and
institutional accounts, proprietary
transactions effected by a trading unit of
a Member with no knowledge of
customer orders held by another trading
unit of the Member, riskless principal
transactions, intermarket sweep orders
(‘‘ISOs’’), and odd lot and bona fide
error transactions, described below.
Rule 12.6 also would provide the same
guidance as FINRA Rule 5320 with
respect to minimum price improvement
standards, order handling procedures,
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 70663
(October 11, 2013), 78 FR 62896 (SR–BYX–2013–
036) (‘‘Notice’’).
4 Members are registered brokers or dealers that
have been admitted to membership at the Exchange.
BYX Rule 1.5(n).
5 See Securities Exchange Act Release No. 63895
(February 11, 2011), 76 FR 9386 (February 17, 2011)
(SR–FINRA–2009–90).
2 17
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Jkt 232001
Proposal To Adopt Text of FINRA Rule
5320
To harmonize its rules with FINRA,
the Exchange proposes to delete the
current text of Rule 12.6 and its
supplementary material and adopt the
text and supplementary material of
FINRA Rule 5320, with certain changes,
as Rule 12.6. FINRA Rule 5320 generally
provides that a FINRA member that
accepts and holds an order in an equity
security for its own customer, or a
customer of another broker-dealer,
without immediately executing the
order is prohibited from trading that
security on the same side of the market
for its own account at a price that would
satisfy the customer order, unless it
immediately thereafter executes the
customer order up to the size and at the
same or better price at which it traded
for its own account.
Exceptions
The proposed amendments to Rule
12.6 would include exceptions to the
prohibition against trading ahead of
customer orders. A Member that meets
the conditions of an exception would be
permitted to trade a security on the
same side of the market for its own
account at a price that would satisfy a
customer order in certain
circumstances. The exceptions are set
forth below.
Large Orders and Institutional Accounts
One exception would permit a
Member to negotiate terms and
conditions with respect to the
acceptance of certain large-sized orders
(orders of 10,000 shares or more unless
such orders are less than $100,000 in
value) or orders from institutional
accounts. The term ‘‘institutional
account’’ would be defined in
accordance with FINRA Rule 4512(c).
Accordingly, an institutional account
would be defined as the account of: (1)
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Frm 00086
Fmt 4703
Sfmt 4703
A bank savings and loan association,
insurance company or registered
investment company; (2) an investment
adviser registered either with the SEC
under Section 203 of the Investment
Advisers Act or with a state securities
commission (or any agency or office
performing like functions); or (3) any
other person (whether a natural person,
corporation, partnership, trust or
otherwise) with total assets of at least
$50 million. This exception to Rule
12.6, as amended, would require the
Member to provide clear and
comprehensive written disclosure to
each customer at account opening and
annually thereafter that: (a) States that
the Member may trade proprietarily at
prices that would satisfy the customer
order; and (b) provides the customer
with a meaningful opportunity to opt in
to the Rule 12.6 protections with respect
to all or any portion of its order. In
addition, if a customer does not opt in
to the protections with respect to all or
any portion of its order, the Member
may reasonably conclude that such
customer has consented to the Member
trading a security on the same side of
the market for its own account at a price
that would satisfy the customer’s order.6
In lieu of providing written disclosure
to customers at account opening and
annually thereafter, Rule 12.6 would
permit Members to provide clear and
comprehensive oral disclosure to, and
obtain consent from, a customer on an
order-by-order basis. Under Rule 12.6,
the Member would be required to
document who provided such consent
and that such consent evidences the
customer’s understanding of the terms
and conditions of the order. If a
customer opted in to the protections of
Rule 12.6, a Member could still obtain
consent on an order-by-order basis to
trade ahead of or along with an order
from that customer, provided that the
Member documented who provided
such consent and that such consent
evidenced the customer’s understanding
of the terms and conditions of the order.
No-Knowledge Exception
The Exchange also proposes to
include in Interpretation and Policy .02
a ‘‘no-knowledge’’ exception to Rule
12.6. The proposed exception would
allow one trading unit of a Member to
trade in a proprietary capacity and at
prices that would satisfy customer
orders held by another, separate trading
unit of the Member (‘‘the No-Knowledge
6 A customer would retain the right to withdraw
consent at any time. Therefore, a Member’s
reasonable conclusion that a customer has
consented to the Member trading along with such
customer’s order would be subject to further
instruction and modification from the customer.
E:\FR\FM\04DEN1.SGM
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Federal Register / Vol. 78, No. 233 / Wednesday, December 4, 2013 / Notices
EMCDONALD on DSK67QTVN1PROD with NOTICES
Exception’’). The No-Knowledge
Exception would be applicable with
respect to NMS stocks, as defined in
Rule 600 of Regulation NMS under the
Act.
To avail itself of the No-Knowledge
Exception, a Member would be required
to meet certain conditions. First, it
would have to implement and utilize an
effective system of internal controls
(such as appropriate information
barriers) that operate to prevent the
proprietary trading unit from obtaining
knowledge of the customer orders held
by a separate trading unit. As proposed,
Interpretation and Policy .02 would
make clear that appropriate information
barriers must, at a minimum, comply
with the Exchange’s existing
requirements regarding the prevention
of the misuse of material, non-public
information, which are set forth in
Exchange Rule 5.5. Second, the Member
would have to provide, at account
opening and annually thereafter, a
written description of how it handles
customer orders and the circumstances
under which it may trade proprietarily,
including in a market-making capacity,
at prices that would satisfy the customer
order. A Member must maintain records
indicating which orders rely on the NoKnowledge Exception and produce
these records to the Exchange upon
request. Under the proposed exception,
the onus would be on the Member to
produce sufficient documentation
justifying reliance on the No-Knowledge
Exception for any given trade. To ensure
clarity and transparency regarding this
exception and others, the Exchange will
issue a regulatory notice informing
Members of the proposed revisions to
Rule 12.6. The Exchange will include in
the regulatory notice the effective date
for the rule as amended, which shall be
at least 30 days after Commission
approval of the proposed amendments
to Rule 12.6 in order to allow Members
to make any necessary changes to their
internal policies or processes.
Riskless Principal Exception
Another proposed amendment to Rule
12.6 would not apply to a proprietary
trade made by the Member to facilitate
the execution, on a riskless principal
basis, of another order from a customer
(whether its own customer or the
customer of another broker-dealer). To
take advantage of this exception, the
Member would have to: (a) Submit a
report, contemporaneously with the
execution of the facilitated order,
identifying the trade as riskless
principal to the Exchange; and (b) have
written policies and procedures to
ensure that riskless principal
transactions relied upon for this
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17:09 Dec 03, 2013
Jkt 232001
exception comply with applicable
Exchange rules. At a minimum, these
policies and procedures would have to
require: (1) Receipt of the customer
order before execution of the offsetting
principal transaction; and (2) execution
of the offsetting principal transaction at
the same price as the customer order,
exclusive of any markup or markdown,
commission equivalent, or other fee and
allocation to a riskless principal or
customer account in a consistent
manner and within 60 seconds of
execution.
Members would have to have
supervisory systems in place that
produce records that enable the Member
and the Exchange to reconstruct
accurately, readily, and in a timesequenced manner all orders on which
a Member relies in claiming this
exception.
ISO Exception
A further proposed amendment to
Rule 12.6 would exempt a Member from
the obligation to execute a customer
order in a manner consistent with Rule
12.6 with regard to trading for its own
account when the Member routed an
ISO in compliance with Rule
600(b)(30)(ii) of Regulation NMS, if the
customer order is received after the
Member routed the ISO. If a Member
routes an ISO to facilitate a customer
order, and that customer has consented
to not receiving the better prices
obtained by the ISO, the Member would
also be exempt with respect to any
trading for its own account that is the
result of the ISO with respect to the
consenting customer’s order.
Odd Lot and Bona Fide Error Exception
The Exchange also proposes to except
a Member’s proprietary trade that: (1)
Offsets a customer odd lot order (i.e., an
order less than one round lot, which is
typically 100 shares); or (2) corrects a
bona fide error. With respect to bona
fide errors, the Member would be
required to demonstrate and document
the basis upon which a transaction
meets the bona fide error exception. For
purposes of this proposed exception, the
Exchange would adopt the definition of
‘‘bona fide error’’ found in Regulation
NMS’s exemption for error correction
transactions.7 Thus, a bona fide error
would be:
(i) The inaccurate conveyance or
execution of any term of an order
including, but not limited to, price,
number of shares or other unit of
7 Securities Exchange Act Release No. 55884
(June 8, 2007), 72 FR 32926, 32927 (June 14, 2007)
(Order Exempting Certain Error Correction
Transactions from Rule 611 of Regulation NMS
under the Securities Exchange Act of 1934).
PO 00000
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Fmt 4703
Sfmt 4703
72945
trading; identification of the security;
identification of the account for which
securities are purchased or sold; lost or
otherwise misplaced order tickets; short
sales that were instead sold long or vice
versa; or the execution of an order on
the wrong side of a market; (ii) the
unauthorized or unintended purchase
sale or allocation of securities or the
failure to follow specific client
instructions; (iii) the incorrect entry of
data into relevant systems, including
reliance on incorrect cash positions,
withdrawals, or securities positions
reflected in an account; or (iv) a delay,
outage, or failure of a communication
system used to transmit market data
prices or to facilitate the delivery or
execution of an order.8
Minimum Price Improvement Standards
The proposed rule change also would
establish the minimum amount of price
improvement necessary for a Member to
execute an order on a proprietary basis
when holding an unexecuted limit order
in that same security without being
required to execute the held limit order.
In addition, if the minimum price
improvement standards set forth in
proposed Interpretation and Policy .06,
paragraphs (a) through (g) would trigger
the protection of a pending customer
limit order, any better-priced customer
limit order(s) must also be protected
under the amended Rule, even if those
better-priced limit orders would not be
directly triggered under these minimum
price improvement standards.
Order Handling Procedures
The proposed rule change would
provide that a Member must make every
effort to execute a marketable customer
order that it receives fully and
promptly. A Member holding a
marketable customer order that has not
been immediately executed would have
to make every effort to cross such order
with any other order received by the
Member on the other side of the market,
up to the size of such order at a price
that is no less than the best bid and no
greater than the best offer at the time
that the subsequent order is received by
the Member and that is consistent with
the terms of the orders. If a Member
were holding multiple orders on both
sides of the market that have not been
executed, the Member would have to
make every effort to cross or otherwise
execute such orders in a manner
reasonable and consistent with the
objectives of Rule 12.6, as amended, and
with the terms of the orders. A Member
could satisfy the crossing requirement
by contemporaneously buying from the
8 Id.
E:\FR\FM\04DEN1.SGM
04DEN1
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Federal Register / Vol. 78, No. 233 / Wednesday, December 4, 2013 / Notices
seller and selling to the buyer at the
same price.
Trading Outside Normal Market Hours
Under the proposed amendments to
Rule 12.6, a Member generally could
limit the life of a customer order to the
period of normal market hours of 9:30
a.m. to 4:00 p.m. Eastern Time.
However, if the customer and Member
agreed to the processing of the
customer’s order outside normal market
hours, the protections of Rule 12.6, as
amended, would apply to that
customer’s order at all times the
customer order is executable by the
Member.
EMCDONALD on DSK67QTVN1PROD with NOTICES
III. Discussion and Commission
Findings
After careful review of the proposed
rule change, the Commission finds that
the Exchange’s proposal is consistent
with the Act and the rules and
regulations thereunder applicable to a
national securities exchange.9 In
particular, the Commission finds that
the proposed rule change is consistent
with Section 6(b)(5) of the Act,10 which
requires that the rules of a national
securities exchange be designed, among
other things, to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
The Commission believes that the
proposed rule change, which is
designed to establish a single standard
to protect customer orders from member
firms trading ahead of those orders, will
help assure the protection of customer
orders without imposing undue
regulatory costs on industry
participants. Moreover, the Commission
believes that the proposed rule change
will define important parameters by
which Members must abide when
trading proprietarily while holding
customer orders. In addition, because
the Exchange is proposing to make its
customer order protection rule
substantially similar to the customer
order protection rules of FINRA 11 and
other exchanges,12 the Commission
9 In approving the BYX proposed rule change, the
Commission has considered its impact on
efficiency, competition and capital formation. 15
U.S.C. 78c(f).
10 15 U.S.C. 78f(b)(5).
11 See FINRA Rule 5320, supra note 5.
12 Several national securities exchanges
submitted proposed rule changes to adopt customer
order protection rules that are substantially similar
to FINRA Rule 5320. See, e.g., Securities Exchange
Act Release No. 64418 (May 6, 2011), 76 FR 27735
(May 12, 2011) (SR–CHX–2011–08); Securities
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17:09 Dec 03, 2013
Jkt 232001
believes that the proposed rule change
will help reduce the complexity of the
customer order protection rules for
those firms subject to these rules. Taken
together, the proposed rule change
should provide Members with clarity
and guidance and thereby promote the
efficient functioning of the securities
markets.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,13 that the
proposed rule change (SR–BYX–2013–
036) be, and it hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–28968 Filed 12–3–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70957; File No. SR–FINRA–
2013–037]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed
Rule Change, as Modified by
Amendment No. 1, To Amend FINRA
Rule 5131 (New Issue Allocations and
Distributions)
November 27, 2013.
I. Introduction
On August 23, 2013, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to amend FINRA
Rule 5131 (New Issue Allocations and
Distributions) to provide a limited
exception to allow members to rely on
written representations from certain
accounts to comply with Rule 5131(b).
The proposed rule change was
Exchange Act Release No. 65165 (August 18, 2011),
76 FR 53009 (August 24, 2011) (SR–NYSEAmex–
2011–59); Securities Exchange Act Release No.
65166 (August 18, 2011), 76 FR 53012 (August 24,
2011) (SR–NYSEArca–2011–57); Securities
Exchange Act Release No. 69504 (May 2, 2013), 78
FR 26828 (May 8, 2013) (SR–CBOE–2013–027); and
Securities Exchange Act Release No. 70011 (July 19,
2013), 78 FR 44994 (July 25, 2013) (SR–CBOE–
2013–074).
13 15 U.S.C. 78s(b)(2).
14 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
PO 00000
Frm 00088
Fmt 4703
Sfmt 4703
published for comment in the Federal
Register on September 10, 2013.3 The
Commission received two comment
letters in response to the proposed rule
change.4 On November 22, 2013, FINRA
filed Amendment No. 1 with the
Commission to respond to the comment
letters and to propose a clarifying
modification to the proposed exception
regarding the eligibility of an
unaffiliated private fund where a
control person of the fund’s investment
adviser also is a beneficial owner in the
fund. The Commission is publishing
this notice and order to solicit
comments on Amendment No. 1 and to
approve the proposed rule change, as
modified by Amendment No. 1, on an
accelerated basis.
II. Description of Proposal
On August 23, 2013, FINRA filed the
Original Proposal to amend FINRA Rule
5131 to provide a limited exception to
allow members to rely on written
representations from certain accounts in
complying with FINRA Rule 5131(b)
(the ‘‘spinning provision’’).5
FINRA Rule 5131 addresses abuses in
the allocation and distribution of ‘‘new
issues,’’ 6 and paragraph (b) prohibits
the practice of ‘‘spinning,’’ which refers
to an underwriter’s allocation of new
issue shares to executive officers and
directors of a company as an
inducement to award the underwriter
with investment banking business, or as
consideration for investment banking
business previously awarded.
The spinning provision generally
provides that no member or person
associated with a member may allocate
shares of a new issue to any account in
which an executive officer or director of
a public company 7 or a covered nonpublic company,8 or a person materially
3 See Securities Exchange Act Release No. 70312
(Sept. 4, 2013), 78 FR 55322 (Sept. 10, 2013) (Notice
of Filing of SR–FINRA–2013–037) (‘‘Original
Proposal’’). The comment period ended on October
1, 2013.
4 See letter to Elizabeth M. Murphy, Secretary,
Commission, from William G. Mulligan, CEO,
Cordium US., dated Oct. 1, 2013 (‘‘Cordium letter’’);
and letter to Elizabeth M. Murphy, Secretary,
Commission, from Stuart J. Kaswell, Executive Vice
President & Managing Director, Managed Funds
Association, dated Sept. 30, 2013 (‘‘MFA letter’’).
The letters are available on the Commission’s Web
site at https://www.sec.gov/comments/sr-finra-2013037/finra2013037.shtml.
5 See supra note 3.
6 The term ‘‘new issue’’ has the same meaning as
in Rule 5130(i)(9). See Rule 5130(i)(9).
7 A ‘‘public company’’ is any company that is
registered under Section 12 of the Act or files
periodic reports pursuant to Section 15(d) thereof.
See Rule 5131(e)(1).
8 The term ‘‘covered non-public company’’ means
any non-public company satisfying the following
criteria: (i) Income of at least $1 million in the last
fiscal year or in two of the last three fiscal years
E:\FR\FM\04DEN1.SGM
04DEN1
]]>Agencies
[Federal Register Volume 78, Number 233 (Wednesday, December 4, 2013)]
[Notices]
[Pages 72944-72946]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-28968]
[[Page 72944]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70951; File No. SR-BYX-2013-036]
Self-Regulatory Organizations; BATS Y-Exchange, Inc.; Order
Approving a Proposed Rule Change To Amend BYX Rule 12.6 To Conform to
FINRA Rule 5320 Relating to Trading Ahead of Customer Orders
November 27, 2013.
I. Introduction
On October 3, 2013, BATS Y-Exchange, Inc. (the ``Exchange'' or
``BYX'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend BYX Rule 12.6 (``Rule
12.6'') to make it substantially similar to Financial Industry
Regulatory Authority (``FINRA'') Rule 5320. The proposed rule change
was published for comment in the Federal Register on October 22,
2013.\3\ The Commission received no comments on the proposal. This
order approves the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 70663 (October 11,
2013), 78 FR 62896 (SR-BYX-2013-036) (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
The Exchange proposes to amend Rule 12.6, which limits trading
ahead of customer orders by Members,\4\ to have the rule substantially
conform to FINRA Rule 5320.\5\ As with FINRA Rule 5320, the proposed
amendments to Rule 12.6 would prohibit Members from trading ahead of
customer orders, subject to specified exceptions. Rule 12.6, as
proposed to be amended, would include exceptions for large orders and
institutional accounts, proprietary transactions effected by a trading
unit of a Member with no knowledge of customer orders held by another
trading unit of the Member, riskless principal transactions,
intermarket sweep orders (``ISOs''), and odd lot and bona fide error
transactions, described below. Rule 12.6 also would provide the same
guidance as FINRA Rule 5320 with respect to minimum price improvement
standards, order handling procedures, and trading outside normal market
hours.
---------------------------------------------------------------------------
\4\ Members are registered brokers or dealers that have been
admitted to membership at the Exchange. BYX Rule 1.5(n).
\5\ See Securities Exchange Act Release No. 63895 (February 11,
2011), 76 FR 9386 (February 17, 2011) (SR-FINRA-2009-90).
---------------------------------------------------------------------------
Background
Current Rule 12.6, the customer order protection rule, generally
prohibits Members from trading on a proprietary basis ahead of, or
along with, customer orders that are executable at the same price as
the proprietary order. The current rule contains several exceptions
that make it permissible for a Member to enter a proprietary order
while representing a customer order that could be executed at the same
price, including permitting transactions for the purpose of
facilitating the execution, on a riskless principal basis, of one or
more customer orders.
Proposal To Adopt Text of FINRA Rule 5320
To harmonize its rules with FINRA, the Exchange proposes to delete
the current text of Rule 12.6 and its supplementary material and adopt
the text and supplementary material of FINRA Rule 5320, with certain
changes, as Rule 12.6. FINRA Rule 5320 generally provides that a FINRA
member that accepts and holds an order in an equity security for its
own customer, or a customer of another broker-dealer, without
immediately executing the order is prohibited from trading that
security on the same side of the market for its own account at a price
that would satisfy the customer order, unless it immediately thereafter
executes the customer order up to the size and at the same or better
price at which it traded for its own account.
Exceptions
The proposed amendments to Rule 12.6 would include exceptions to
the prohibition against trading ahead of customer orders. A Member that
meets the conditions of an exception would be permitted to trade a
security on the same side of the market for its own account at a price
that would satisfy a customer order in certain circumstances. The
exceptions are set forth below.
Large Orders and Institutional Accounts
One exception would permit a Member to negotiate terms and
conditions with respect to the acceptance of certain large-sized orders
(orders of 10,000 shares or more unless such orders are less than
$100,000 in value) or orders from institutional accounts. The term
``institutional account'' would be defined in accordance with FINRA
Rule 4512(c). Accordingly, an institutional account would be defined as
the account of: (1) A bank savings and loan association, insurance
company or registered investment company; (2) an investment adviser
registered either with the SEC under Section 203 of the Investment
Advisers Act or with a state securities commission (or any agency or
office performing like functions); or (3) any other person (whether a
natural person, corporation, partnership, trust or otherwise) with
total assets of at least $50 million. This exception to Rule 12.6, as
amended, would require the Member to provide clear and comprehensive
written disclosure to each customer at account opening and annually
thereafter that: (a) States that the Member may trade proprietarily at
prices that would satisfy the customer order; and (b) provides the
customer with a meaningful opportunity to opt in to the Rule 12.6
protections with respect to all or any portion of its order. In
addition, if a customer does not opt in to the protections with respect
to all or any portion of its order, the Member may reasonably conclude
that such customer has consented to the Member trading a security on
the same side of the market for its own account at a price that would
satisfy the customer's order.\6\
---------------------------------------------------------------------------
\6\ A customer would retain the right to withdraw consent at any
time. Therefore, a Member's reasonable conclusion that a customer
has consented to the Member trading along with such customer's order
would be subject to further instruction and modification from the
customer.
---------------------------------------------------------------------------
In lieu of providing written disclosure to customers at account
opening and annually thereafter, Rule 12.6 would permit Members to
provide clear and comprehensive oral disclosure to, and obtain consent
from, a customer on an order-by-order basis. Under Rule 12.6, the
Member would be required to document who provided such consent and that
such consent evidences the customer's understanding of the terms and
conditions of the order. If a customer opted in to the protections of
Rule 12.6, a Member could still obtain consent on an order-by-order
basis to trade ahead of or along with an order from that customer,
provided that the Member documented who provided such consent and that
such consent evidenced the customer's understanding of the terms and
conditions of the order.
No-Knowledge Exception
The Exchange also proposes to include in Interpretation and Policy
.02 a ``no-knowledge'' exception to Rule 12.6. The proposed exception
would allow one trading unit of a Member to trade in a proprietary
capacity and at prices that would satisfy customer orders held by
another, separate trading unit of the Member (``the No-Knowledge
[[Page 72945]]
Exception''). The No-Knowledge Exception would be applicable with
respect to NMS stocks, as defined in Rule 600 of Regulation NMS under
the Act.
To avail itself of the No-Knowledge Exception, a Member would be
required to meet certain conditions. First, it would have to implement
and utilize an effective system of internal controls (such as
appropriate information barriers) that operate to prevent the
proprietary trading unit from obtaining knowledge of the customer
orders held by a separate trading unit. As proposed, Interpretation and
Policy .02 would make clear that appropriate information barriers must,
at a minimum, comply with the Exchange's existing requirements
regarding the prevention of the misuse of material, non-public
information, which are set forth in Exchange Rule 5.5. Second, the
Member would have to provide, at account opening and annually
thereafter, a written description of how it handles customer orders and
the circumstances under which it may trade proprietarily, including in
a market-making capacity, at prices that would satisfy the customer
order. A Member must maintain records indicating which orders rely on
the No-Knowledge Exception and produce these records to the Exchange
upon request. Under the proposed exception, the onus would be on the
Member to produce sufficient documentation justifying reliance on the
No-Knowledge Exception for any given trade. To ensure clarity and
transparency regarding this exception and others, the Exchange will
issue a regulatory notice informing Members of the proposed revisions
to Rule 12.6. The Exchange will include in the regulatory notice the
effective date for the rule as amended, which shall be at least 30 days
after Commission approval of the proposed amendments to Rule 12.6 in
order to allow Members to make any necessary changes to their internal
policies or processes.
Riskless Principal Exception
Another proposed amendment to Rule 12.6 would not apply to a
proprietary trade made by the Member to facilitate the execution, on a
riskless principal basis, of another order from a customer (whether its
own customer or the customer of another broker-dealer). To take
advantage of this exception, the Member would have to: (a) Submit a
report, contemporaneously with the execution of the facilitated order,
identifying the trade as riskless principal to the Exchange; and (b)
have written policies and procedures to ensure that riskless principal
transactions relied upon for this exception comply with applicable
Exchange rules. At a minimum, these policies and procedures would have
to require: (1) Receipt of the customer order before execution of the
offsetting principal transaction; and (2) execution of the offsetting
principal transaction at the same price as the customer order,
exclusive of any markup or markdown, commission equivalent, or other
fee and allocation to a riskless principal or customer account in a
consistent manner and within 60 seconds of execution.
Members would have to have supervisory systems in place that
produce records that enable the Member and the Exchange to reconstruct
accurately, readily, and in a time-sequenced manner all orders on which
a Member relies in claiming this exception.
ISO Exception
A further proposed amendment to Rule 12.6 would exempt a Member
from the obligation to execute a customer order in a manner consistent
with Rule 12.6 with regard to trading for its own account when the
Member routed an ISO in compliance with Rule 600(b)(30)(ii) of
Regulation NMS, if the customer order is received after the Member
routed the ISO. If a Member routes an ISO to facilitate a customer
order, and that customer has consented to not receiving the better
prices obtained by the ISO, the Member would also be exempt with
respect to any trading for its own account that is the result of the
ISO with respect to the consenting customer's order.
Odd Lot and Bona Fide Error Exception
The Exchange also proposes to except a Member's proprietary trade
that: (1) Offsets a customer odd lot order (i.e., an order less than
one round lot, which is typically 100 shares); or (2) corrects a bona
fide error. With respect to bona fide errors, the Member would be
required to demonstrate and document the basis upon which a transaction
meets the bona fide error exception. For purposes of this proposed
exception, the Exchange would adopt the definition of ``bona fide
error'' found in Regulation NMS's exemption for error correction
transactions.\7\ Thus, a bona fide error would be:
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\7\ Securities Exchange Act Release No. 55884 (June 8, 2007), 72
FR 32926, 32927 (June 14, 2007) (Order Exempting Certain Error
Correction Transactions from Rule 611 of Regulation NMS under the
Securities Exchange Act of 1934).
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(i) The inaccurate conveyance or execution of any term of an order
including, but not limited to, price, number of shares or other unit of
trading; identification of the security; identification of the account
for which securities are purchased or sold; lost or otherwise misplaced
order tickets; short sales that were instead sold long or vice versa;
or the execution of an order on the wrong side of a market; (ii) the
unauthorized or unintended purchase sale or allocation of securities or
the failure to follow specific client instructions; (iii) the incorrect
entry of data into relevant systems, including reliance on incorrect
cash positions, withdrawals, or securities positions reflected in an
account; or (iv) a delay, outage, or failure of a communication system
used to transmit market data prices or to facilitate the delivery or
execution of an order.\8\
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\8\ Id.
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Minimum Price Improvement Standards
The proposed rule change also would establish the minimum amount of
price improvement necessary for a Member to execute an order on a
proprietary basis when holding an unexecuted limit order in that same
security without being required to execute the held limit order.
In addition, if the minimum price improvement standards set forth
in proposed Interpretation and Policy .06, paragraphs (a) through (g)
would trigger the protection of a pending customer limit order, any
better-priced customer limit order(s) must also be protected under the
amended Rule, even if those better-priced limit orders would not be
directly triggered under these minimum price improvement standards.
Order Handling Procedures
The proposed rule change would provide that a Member must make
every effort to execute a marketable customer order that it receives
fully and promptly. A Member holding a marketable customer order that
has not been immediately executed would have to make every effort to
cross such order with any other order received by the Member on the
other side of the market, up to the size of such order at a price that
is no less than the best bid and no greater than the best offer at the
time that the subsequent order is received by the Member and that is
consistent with the terms of the orders. If a Member were holding
multiple orders on both sides of the market that have not been
executed, the Member would have to make every effort to cross or
otherwise execute such orders in a manner reasonable and consistent
with the objectives of Rule 12.6, as amended, and with the terms of the
orders. A Member could satisfy the crossing requirement by
contemporaneously buying from the
[[Page 72946]]
seller and selling to the buyer at the same price.
Trading Outside Normal Market Hours
Under the proposed amendments to Rule 12.6, a Member generally
could limit the life of a customer order to the period of normal market
hours of 9:30 a.m. to 4:00 p.m. Eastern Time. However, if the customer
and Member agreed to the processing of the customer's order outside
normal market hours, the protections of Rule 12.6, as amended, would
apply to that customer's order at all times the customer order is
executable by the Member.
III. Discussion and Commission Findings
After careful review of the proposed rule change, the Commission
finds that the Exchange's proposal is consistent with the Act and the
rules and regulations thereunder applicable to a national securities
exchange.\9\ In particular, the Commission finds that the proposed rule
change is consistent with Section 6(b)(5) of the Act,\10\ which
requires that the rules of a national securities exchange be designed,
among other things, to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest.
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\9\ In approving the BYX proposed rule change, the Commission
has considered its impact on efficiency, competition and capital
formation. 15 U.S.C. 78c(f).
\10\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the proposed rule change, which is
designed to establish a single standard to protect customer orders from
member firms trading ahead of those orders, will help assure the
protection of customer orders without imposing undue regulatory costs
on industry participants. Moreover, the Commission believes that the
proposed rule change will define important parameters by which Members
must abide when trading proprietarily while holding customer orders. In
addition, because the Exchange is proposing to make its customer order
protection rule substantially similar to the customer order protection
rules of FINRA \11\ and other exchanges,\12\ the Commission believes
that the proposed rule change will help reduce the complexity of the
customer order protection rules for those firms subject to these rules.
Taken together, the proposed rule change should provide Members with
clarity and guidance and thereby promote the efficient functioning of
the securities markets.
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\11\ See FINRA Rule 5320, supra note 5.
\12\ Several national securities exchanges submitted proposed
rule changes to adopt customer order protection rules that are
substantially similar to FINRA Rule 5320. See, e.g., Securities
Exchange Act Release No. 64418 (May 6, 2011), 76 FR 27735 (May 12,
2011) (SR-CHX-2011-08); Securities Exchange Act Release No. 65165
(August 18, 2011), 76 FR 53009 (August 24, 2011) (SR-NYSEAmex-2011-
59); Securities Exchange Act Release No. 65166 (August 18, 2011), 76
FR 53012 (August 24, 2011) (SR-NYSEArca-2011-57); Securities
Exchange Act Release No. 69504 (May 2, 2013), 78 FR 26828 (May 8,
2013) (SR-CBOE-2013-027); and Securities Exchange Act Release No.
70011 (July 19, 2013), 78 FR 44994 (July 25, 2013) (SR-CBOE-2013-
074).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-BYX-2013-036) be, and it
hereby is, approved.
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\13\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-28968 Filed 12-3-13; 8:45 am]
BILLING CODE 8011-01-P
