Self-Regulatory Organizations; New York Stock Exchange LLC; NYSE MKT LLC; Order Approving Proposed Rule Changes Amending NYSE Rule 104 and NYSE MKT Rule 104-Equities, Each as Modified by an Amendment No. 1, To Codify Certain Traditional Trading Floor Functions That May Be Performed by Designated Market Makers, To Make Exchange Systems Available to DMMs That Would Provide DMMs With Certain Market Information, To Amend the Exchanges' Rules Governing the Ability of DMMs To Provide Market Information to Floor Brokers, and To Make Conforming Amendments to Other Rules, 79534-79539 [2013-31130]

Download as PDF 79534 Federal Register / Vol. 78, No. 250 / Monday, December 30, 2013 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–71177; File No. SR–Phlx– 2013–106] Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Designation of a Longer Period for Commission Action on Proposed Rule Change To Amend Rules 1064 and 1080 to More Specifically Address the Number and Size of Counterparties to a Qualified Contingent Cross Order December 23, 2013. On October 23, 2013, NASDAQ OMX PHLX LLC (‘‘Phlx’’ or ‘‘Exchange’’) 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 Rules 1064 and 1080 to more specifically address the number and size of counterparties to a Qualified Contingent Cross Order (‘‘QCC Order’’). The proposed rule change was published for comment in the Federal Register on November 13, 2013.3 The Commission received two comment letters on this proposal.4 Section 19(b)(2) of the Act 5 provides that within 45 days of the publication of notice of the filing of a proposed rule change, or within such longer period up to 90 days as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or as to which the self-regulatory organization consents, the Commission shall either approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether the proposed rule change should be disapproved. The 45th day for this filing is December 28, 2013. The Commission is extending this 45-day time period. The Commission finds it appropriate to designate a longer period within which to take action on the proposed rule change, so that it has sufficient time to consider this proposed rule change, including the Comment Letters that have been submitted in connection with this proposed rule change. 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 70821 (November 6, 2013), 78 FR 68126. 4 See letters to Elizabeth M. Murphy, Secretary, Commission, from Benjamin R. Londergan, Chief Executive Officer, Group One Trading, L.P., dated December 2, 2013 (‘‘Group One Letter’’) and Angelo Evangelou, Associate General Counsel, Chicago Board Options Exchange Incorporated, dated December 13, 2013 (‘‘CBOE Letter’’) (collectively, the ‘‘Comment Letters’’). 5 15 U.S.C. 78s(b)(2). maindgalligan on DSK5TPTVN1PROD with NOTICES 2 17 VerDate Mar<15>2010 17:15 Dec 27, 2013 Jkt 232001 Accordingly, the Commission, pursuant to Section 19(b)(2) of the Act,6 designates February 11, 2013, as the date by which the Commission should either approve or disapprove, or institute proceedings to determine whether to disapprove, the proposed rule change (File No. SR–Phlx–2013– 106). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.7 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–31132 Filed 12–27–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–71178; File No. SR–CBOE– 2013–107] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Designation of a Longer Period for Commission Action on Proposed Rule Change To Amend Its Rules Regarding Option Orders That Include a Stock Component reasons for so finding or as to which the self-regulatory organization consents, the Commission shall either approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether the proposed rule change should be disapproved. The 45th day for this filing is January 3, 2014. The Commission is extending this 45-day time period. The Commission finds it appropriate to designate a longer period within which to take action on the proposed rule change so that it has sufficient time to consider this proposed rule change and the comment letters that have been submitted in connection with this proposed rule change. Accordingly, the Commission, pursuant to Section 19(b)(2) of the Act,6 designates February 17, 2014, as the date by which the Commission should either approve or disapprove, or institute proceedings to determine whether to disapprove, the proposed rule change (File No. SR–CBOE–2013– 107). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.7 Kevin M. O’Neill, Deputy Secretary. December 23, 2013. [FR Doc. 2013–31133 Filed 12–27–13; 8:45 am] On October 31, 2013, the Chicago Board Options Exchange, Incorporated (the ‘‘Exchange’’ or ‘‘CBOE’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend CBOE’s rules regarding option orders that include a stock component. The proposed rule change was published for comment in the Federal Register on November 19, 2013.3 The Commission received two comment letters regarding the proposed rule change.4 Section 19(b)(2) of the Act 5 provides that within 45 days of the publication of notice of the filing of a proposed rule change, or within such longer period up to 90 days as the Commission may designate if it finds such longer period to be appropriate and publishes its BILLING CODE 8011–01–P 6 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(31). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 70857 (November 13, 2013), 78 FR 69487. 4 See letters to Elizabeth M. Murphy, Secretary, Commission, from Manisha Kimmel, Executive Director, Financial Information Forum, dated December 10, 2013; and Ellen Greene, Vice President, Securities Industry and Financial Markets Association, dated December 16, 2013. 5 15 U.S.C. 78s(b)(2). 7 17 PO 00000 Frm 00145 Fmt 4703 Sfmt 4703 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–71175; File Nos. SR–NYSE– 2013–21; SR–NYSEMKT–2013–25] Self-Regulatory Organizations; New York Stock Exchange LLC; NYSE MKT LLC; Order Approving Proposed Rule Changes Amending NYSE Rule 104 and NYSE MKT Rule 104—Equities, Each as Modified by an Amendment No. 1, To Codify Certain Traditional Trading Floor Functions That May Be Performed by Designated Market Makers, To Make Exchange Systems Available to DMMs That Would Provide DMMs With Certain Market Information, To Amend the Exchanges’ Rules Governing the Ability of DMMs To Provide Market Information to Floor Brokers, and To Make Conforming Amendments to Other Rules December 23, 2013. I. Introduction On April 9, 2013, the New York Stock Exchange LLC (‘‘NYSE’’) and NYSE MKT LLC (‘‘NYSE MKT’’) (collectively, ‘‘Exchanges’’) each filed with the 6 15 7 17 E:\FR\FM\30DEN1.SGM U.S.C. 78s(b)(2). CFR 200.30–3(a)(31). 30DEN1 Federal Register / Vol. 78, No. 250 / Monday, December 30, 2013 / Notices 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 proposed rule changes (‘‘Proposals’’) to amend certain of their respective rules relating to Designated Market Makers (‘‘DMMs’’) 3 and Floor brokers. The Proposals were published for comment in the Federal Register on April 29, 2013.4 The Commission received two comment letters on the NYSE proposal.5 On June 11, 2013, the Commission extended until July 26, 2013 the time period in which to approve, to disapprove, or to institute proceedings to determine whether to disapprove the Proposals.6 On July 26, 2013, the Commission instituted proceedings under Section 19(b)(2)(B) of the Act to determine whether to approve or disapprove the Proposals.7 During the course of these proceedings, the Commission received one additional 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 NYSE Rule 98(b)(1) defines the term ‘‘DMM’’ to mean any individual qualified to act as a DMM on the floor of the Exchange under NYSE Rule 103. ‘‘DMM unit’’ means any member organization, aggregation unit within a member organization, or division or department within an integrated proprietary aggregation unit of a member organization that (i) has been approved by NYSE Regulation pursuant to section (c) of NYSE Rule 98, (ii) is eligible for allocations under NYSE Rule 103B as a DMM unit in a security listed on the Exchange, and (iii) has met all registration and qualification requirements for DMM units assigned to such unit. NYSE Rule 98(b)(2). See also NYSE MKT Rule 2(i)—Equities (defining the term ‘‘DMM’’ to mean an individual member, officer, partner, employee, or associated person of a DMM unit who is approved by the Exchange to act in the capacity of a DMM); NYSE MKT Rule 2(j)—Equities (defining the term ‘‘DMM unit’’ as a member organization or unit within a member organization that has been approved to act as a DMM unit under NYSE MKT Rule 98—Equities). 4 See Securities Exchange Act Release Nos. 69427 (Apr. 23, 2013), 78 FR 25118 (SR–NYSE–2013–21) (‘‘NYSE Notice’’) and 69428 (Apr. 23, 2013), 78 FR 25102 (SR–NYSEMKT–2013–25) (‘‘NYSE MKT Notice’’) (collectively ‘‘Notices’’). On April 18, 2013, each of the Exchanges filed a Partial Amendment No. 1 to its Proposal. The purpose of the amendments was to file Exhibit 3, which was not included in the Notices. 5 See Letter to Elizabeth M. Murphy, Secretary, Commission, from Daniel Buenza, Lecturer in Management, London School of Economics, and Yuval Millo, Professor of Social Studies of Finance, University of Leicester (May 20, 2013) (‘‘LSE Letter I’’); Letter to Commission from James J. Angel, Ph.D., CFA, Associate Professor of Finance, Georgetown University, McDonough School of Business (May 14, 2013) (‘‘Angel Letter’’). Although these comment letters addressed only the NYSE proposal explicitly, the Proposals are nearly identical. For this reason, this order addresses both Proposals when discussing these comment letters. 6 See Securities Exchange Act Release Nos. 69736, 78 FR 36284 (June 17, 2013) (SR–NYSE–2013–21); and 69733, 78 FR 36284 (June 17, 2013) (SR– NYSEMKT–2012–25). 7 See Securities Exchange Act Release No. 70047, 78 FR 46661 (Aug. 1, 2013). comment letter 8 and two responses from the Exchanges.9 This order approves the Proposals. II. Background The Proposals seek to amend the Exchanges’ rules in four ways. First, the Exchanges propose to codify certain trading floor functions that may be performed by DMMs. Second, the Exchanges propose to allow DMMs to access Exchange systems that would provide DMMs with additional order information about the securities in which they are registered. Third, the Exchanges propose to make certain conforming amendments to their rules to reflect the additional order information that would be available to DMMs through Exchange systems and to specify what information about Floor broker agency interest files (‘‘e-Quotes’’) is available to the DMM. Finally, the Exchanges propose to modify the terms under which DMMs would be permitted to provide market information to Floor brokers and others.10 maindgalligan on DSK5TPTVN1PROD with NOTICES 2 17 VerDate Mar<15>2010 17:15 Dec 27, 2013 Jkt 232001 8 See Letter to Elizabeth M. Murphy, Secretary, Commission, from Daniel Buenza, Lecturer in Management, London School of Economics, and Yuval Millo, Professor of Social Studies of Finance, University of Leicester (Aug. 22, 2013) (‘‘LSE Letter II’’). 9 See Letter to Elizabeth M. Murphy, Secretary, Commission, from Janet McGinness, EVP and Corporate Secretary, General Counsel, NYSE Markets, NYSE Euronext (Sept. 5, 2013) (‘‘Response Letter I’’); Letter to Elizabeth M. Murphy, Secretary, Commission, from Janet McGinness, EVP and Corporate Secretary, General Counsel, NYSE Markets, NYSE Euronext (Dec. 6, 2013) (‘‘Response Letter II’’) (together with Response Letter I, the ‘‘Response Letters’’). 10 On October 31, 2011, NYSE and NYSE Amex LLC (the predecessor entity of NYSE MKT) (‘‘NYSE Amex’’) each filed with the Commission a proposed rule change to amend the exchange’s Rule 104 (‘‘2011 Proposals’’) that proposed similar changes to the relevant rules as the Proposals. The 2011 Proposals were published for comment in the Federal Register on November 17, 2011. See Securities Exchange Act Release Nos. 65735 (Nov. 10, 2011), 76 FR 71405 (SR–NYSEAmex–2011–86) (‘‘NYSE Amex Notice’’) and 65736 (Nov. 10, 2011), 76 FR 71399 (SR–NYSE–2011–56) (‘‘NYSE Notice’’). The Commission received no comment letters on the Proposals. On December 22, 2011, the Commission extended to February 15, 2012 the time period in which to approve, disapprove, or institute proceedings to determine whether to approve or disapprove the 2011 Proposals. See Securities Exchange Act Release No. 66036, 76 FR 82011 (Dec. 29, 2011). The Commission received no comment letters on the 2011 Proposals during the extension. On February 15, 2012, the Commission issued an order instituting proceedings to determine whether to approve or disapprove the 2011 Proposals. See Securities Exchange Act Release No. 66397, 77 FR 10586 (Feb. 22, 2012). After instituting proceedings, the Commission received six comment letters supporting the 2011 Proposals. After the Commission issued a notice of designation of longer period for Commission action on May 14, 2012, see Securities Exchange Act Release No. 66981, 77 FR 29730 (May 18, 2012), the Commission disapproved the 2011 Proposals on July 13, 2012. See Securities Exchange Act Release No. 67437, 77 FR 42525 (July 13, 2012) (‘‘Disapproval Order’’). PO 00000 Frm 00146 Fmt 4703 Sfmt 4703 79535 A. Trading Floor Functions The Exchanges propose to codify certain traditional Trading Floor functions that were formerly performed by specialists and were described in each Exchange’s respective Floor Official Manual.11 The proposed rules would specify four categories of trading floor functions that DMMs could perform: (1) Maintaining order among Floor brokers manually trading at the DMM’s assigned panel, including managing trading crowd activity and facilitating Floor broker executions at the post; 12 (2) facilitating Floor broker interactions, including either participating as a buyer or seller, and appropriately communicating to Floor brokers the availability of other Floor broker contra-side interest; 13 (3) assisting Floor brokers with respect to their orders by providing information regarding the status of a Floor broker’s orders, helping to resolve errors or questioned trades, adjusting errors, and cancelling or inputting Floor broker agency interest on behalf of a Floor broker; 14 and (4) researching the status of orders or questioned trades.15 B. DMM Access to Additional Order Information Each Exchange proposes to make available to a DMM at his or her post Exchange systems that display the following types of information about securities in which the DMM is registered: (1) Aggregated information 11 NYSE 2004 Floor Official Manual, Market Surveillance, Chapter Two, Sec. I. at 7–12 (June ed. 2004). Relevant excerpts of the 2004 Floor Official Manual are attached as Exhibit 3 to the Exchanges’ filings. 12 See id. at Sec. I.A., p. 7 (noting that ‘‘specialist helps ensure that such markets are fair, orderly, operationally efficient and competitive with all other markets in those securities’’). 13 See id. at Sec. I.B.3., pp. 10–11 (‘‘In opening and reopening trading in a listed security, a specialist should . . . [s]erve as the market coordinator for the securities in which the specialist is registered by exercising leadership and managing trading crowd activity and promptly identifying unusual market conditions that may affect orderly trading in those securities, seeking the advice and assistance of Floor Officials when appropriate’’ and ‘‘[a]ct as a catalyst in the markets for the securities in which the specialist is registered, making all reasonable efforts to bring buyers and sellers together to facilitate the public pricing of orders, without acting as principal unless reasonably necessary.’’). 14 See id. at Sec. I.B.4., p. 11 (‘‘In view of the specialist’s central position in the Exchange’s continuous two-way agency auction market, a specialist should . . . [e]qually and impartially provide accurate and timely market information to all inquiring members in a professional and courteous manner.’’). 15 See id. at Sec. I.B.5., p. 12 (providing that a specialist should ‘‘[p]romptly provide information when necessary to research the status of an order or a questioned trade and cooperate with other members in resolving and adjusting errors’’). E:\FR\FM\30DEN1.SGM 30DEN1 79536 Federal Register / Vol. 78, No. 250 / Monday, December 30, 2013 / Notices about buying and selling interest; 16 (2) disaggregated information about the price and size of any individual order or e-Quote and the entering and clearing firm information for these orders, except that Exchange systems would not make available to DMMs any disaggregated information about an order or e-Quote that a market participant has elected not to display to a DMM; and (3) post-trade information.17 The disaggregated information to be made available to each DMM concerning the securities in which the DMM is registered would include: (a) The price and size of all displayable interest submitted by offFloor participants (although off-Floor participants may submit nondisplayable interest that is hidden from the DMM); 18 and (b) all e-Quotes, including reserve e-Quotes, that the Floor broker has not elected to exclude from availability to the DMM.19 According to the Exchanges, the systems would not contain any information about the ultimate customer (i.e., the name of the member or member organization’s customer) in an order or transaction. maindgalligan on DSK5TPTVN1PROD with NOTICES C. Conforming Amendments To Reflect the Additional Order Information To Be Made Available to DMMs Through Exchange Systems and to Specify Floor Broker e-Quote Information To Be Made Available to DMMs The Exchanges also propose to make conforming amendments to their rules to reflect the additional order information that would be available to DMMs through Exchange systems and to specify what information about eQuotes is available to the DMM in a given security. Specifically, the Exchanges propose to revise NYSE Rule 70 and NYSE MKT Rule 70—Equities governing e-Quotes to reflect that 16 Exchange systems currently make available to DMMs aggregate information about the following interest in securities in which the DMM is registered: (a) All displayable interest submitted by off-floor participants; (b) all Minimum Display Reserve orders, including the reserve portion; (c) all displayable floor broker agency interest files (‘‘eQuotes’’); (d) all Minimum Display Reserve eQuotes, including the reserve portion; and (e) the reserve quantity of Non-Display Reserve e-Quotes, unless the floor broker elects to exclude that reserve quantity from availability to the DMM. 17 For the latter two categories, the DMM also would have access to entering and clearing firm information for each order and, as applicable, the badge number of the floor broker representing the order. 18 See NYSE Rule 13 and NYSE MKT Rule 13— Equities, defining non-displayed order types. 19 The Exchanges previously permitted DMMs to have access to Exchange systems that contained the disaggregated order information described above. The Exchanges stopped making such information available to DMMs in January 2011. See NYSE and NYSE Amex Information Memo 11–03 (Jan. 19, 2011). VerDate Mar<15>2010 17:15 Dec 27, 2013 Jkt 232001 disaggregated order information regarding a given security would be available to the DMM for that security except as elected otherwise. The Exchanges would allow a Floor broker to enter an e-Quote with reserve interest (‘‘Reserve e-Quote’’) with or without a displayable portion. A Reserve e-Quote with a displayable portion would participate in manual and automatic executions. Trading interest at each price point, including the reserve portion of the Reserve eQuote, would be included in the aggregate interest available to the DMM. This trading interest at each price point would also be available to the DMM on a disaggregated basis, unless the Floor broker chooses to exclude the Reserve eQuote with a displayable portion from the DMM. A Reserve e-Quote with an undisplayable portion would also participate in manual and automatic executions. As with the Reserve e-Quote with a displayable portion, trading interest at each price point represented by the Reserve e-Quote with an undisplayable portion would be included in the aggregated and disaggregated interest available to the DMM, unless the Floor broker chooses to exclude the Reserve e-Quote from the DMM. If, however, the Floor broker chooses to exclude the Reserve e-Quote with an undisplayable portion from the DMM, then the DMM would not have access to the trading interest represented by the Reserve e-Quote on either an aggregated or disaggregated basis, and the Reserve e-Quote would not participate in manual executions. In addition, the Exchanges propose to delete their existing rules that currently prohibit DMMs from using the Display Book system to access information about e-Quotes excluded from the aggregated agency interest and Minimum Display Reserve Order information except for the purpose of effecting transactions that are reasonably imminent and where the Floor broker agency and Minimum Display Reserve Order interest information is necessary to effect the transactions.20 D. Ability of DMMs To Provide Market Information on the Trading Floor The Exchanges also propose to modify the circumstances under which DMMs would be permitted to provide market 20 The rule provisions proposed to be deleted are NYSE Rule 104(a)(6) and NYSE MKT Rule 104(a)(b)—Equities. For the text to be deleted, see, e.g., Form 19b–4, SR–NYSE–2013–21, at 73 (Apr. 9, 2013), http://www.nyse.com/nysenotices/nyse/rulefilings/pdf;jsessionid=3D35E4095153B77CA82 FA0BB9EBE1BC2?file-_no=SR-NYSE-2013-21& seqnum=1. PO 00000 Frm 00147 Fmt 4703 Sfmt 4703 information to Floor brokers and visitors on the trading floor. Specifically, the proposed rules would permit a DMM to provide such information to: (1) A Floor broker in response to an inquiry in the normal course of business; or (2) a visitor to the trading floor for the purpose of demonstrating methods of trading. Accordingly, a Floor broker would be able to ask a DMM for disaggregated order information that market participants have not otherwise elected to be hidden from the DMM. A Floor broker would not be able to submit such an inquiry by electronic means, and the DMM’s response containing market information could not be delivered through electronic means. Because the Proposals expand on and incorporate the Exchanges’ current rules regarding the disclosure of order information by DMMs, the Exchanges are proposing to delete those rules.21 The current rules provide that a DMM may disclose market information for three purposes. First, a DMM may disclose market information for the purpose of demonstrating the methods of trading to visitors to the trading floor. This aspect of the current rules is replicated in the proposed rules. Second, a DMM may disclose market information to other market centers in order to facilitate the operation of the Intermarket Trading System (‘‘ITS’’). According to the Exchanges, this text is obsolete, as the ITS Plan has been eliminated, and therefore the Exchanges are proposing to delete it. Third, a DMM may, while acting in a market-making capacity and in response to an inquiry from a member conducting a market probe in the normal course of business, provide information about buying or selling interest in the market, including (a) aggregated buying or selling interest contained in Floor broker agency interest files, other than interest the broker has chosen to exclude from the aggregated buying and selling interest, (b) aggregated interest of Minimum Display Reserve Orders, and (c) the interest included in DMM interest files, excluding Capital Commitment Schedule (‘‘CCS’’) interest as described in Rule 1000(c). The proposed rules would permit DMMs to provide Floor brokers not only with the same aggregated order information that DMMs are permitted to provide under current rules, but also with the disaggregated and post-trade 21 The Exchanges are also proposing conforming amendments to correct cross-references to the former rules. E:\FR\FM\30DEN1.SGM 30DEN1 Federal Register / Vol. 78, No. 250 / Monday, December 30, 2013 / Notices order information described above.22 The proposed rules would permit a DMM to provide market information to a Floor broker in response to a specific request by the Floor broker to the DMM at the post, rather than specifying that the information must be provided ‘‘in response to an inquiry from a member conducting a market probe in the normal course of business,’’ as currently provided in the Exchanges’ rules. Under the Proposals, Floor brokers would not have access to Exchange systems that provide disaggregated order information, and Floor brokers would only be able to access such information through a direct manual interaction with a DMM at the post. III. Initial Comment Letters and Responses maindgalligan on DSK5TPTVN1PROD with NOTICES Following publication of the Proposals in the Federal Register, the Commission received two comment letters.23 The first commenter offered several arguments in support of the Proposals. First, the commenter stated that, by permitting DMMs to use both pre- and post-trade information that is already present on the Exchanges’ systems, the Proposals promote the legitimate Floor function of matching buyers and sellers,24 which could promote just and equitable principles of trade and would be in the public interest.25 According to this commenter, the Proposals would enable market participants to trade larger blocks of stock with minimal market impact and could improve execution quality, especially for large buy-side institutions such as mutual funds that trade on behalf of retail investors.26 The commenter also stated that the Proposals contained sufficient safeguards to protect investors.27 Specifically, the commenter stated that institutional investors monitor execution quality very closely and that, if the Proposals were to hurt execution quality on the Exchanges, market participants would migrate to other exchanges.28 The commenter also stated that the Proposals do not permit unfair discrimination, as any market participant that wanted to avail itself of the sharing of order information on the 22 Because DMMs on the trading floor do not have access to CCS interest information, the proposed rule does not specify that DMMs would not be disseminating such information. 23 See supra note 5. 24 See Angel Letter, supra note 5. 25 See id. at 7–8. 26 Id. at 2. 27 Id. at 7. 28 Id. at 5. VerDate Mar<15>2010 17:15 Dec 27, 2013 Jkt 232001 Floor of the exchanges could route its orders to a Floor broker.29 The second commenter expressed qualified support for the proposal.30 Citing its research, this commenter stated that communicating partially disaggregated order information from DMMs to Floor brokers would have a positive effect on price discovery, as it would assist DMMs and Floor brokers in finding the counterparties for certain trades.31 In this way, the commenter believed, the Proposals could incentivize transactions and contribute to greater liquidity in the market.32 However, the commenter also noted the importance of maintaining controls on the dissemination of such information, as the dissemination of excessive information may be detrimental to the investor that originated the order.33 In that regard, the commenter noted that NYSE maintains a system of formal rules and sanctions, in addition to the informal discipline that exists on the Floor, to safeguard the disclosure of order information.34 In contrast, however, the commenter noted that such controls did not exist outside the Floor.35 Therefore, the commenter stated, disaggregated order information should not be made available to market participants outside the floor of the NYSE, as there would ‘‘be no means to control the use that this information is put to.’’ 36 IV. Institution of Proceedings to Determine Whether to Approve or Disapprove the Proposals On July 26, 2013, the Commission instituted proceedings to determine whether to approve or disapprove the Proposals, raising concerns with respect to the Proposals.37 Specifically, the Commission’s Order Instituting Proceedings expressed concern that the Proposals would permit disaggregated order information to be made available to off-Floor market participants (i.e., Floor broker customers) and stated that: The Exchanges * * * do not address why the dangers that would arise if disaggregated information were made available generally to off-floor market participants are not present when this same information is made available to off-floor market participants that are Floor broker customers. Nor have the Exchanges described any mechanism by 29 Id. at 6–7. LSE Letter I, supra note 5. 31 Id. at 2–3. 32 Id. at 1–2. 33 Id. at 2. 34 Id. 35 Id. 36 Id. 37 Securities Exchange Act Release No. 70047, supra note 7. 30 See PO 00000 Frm 00148 Fmt 4703 Sfmt 4703 79537 which they would be able to assure that disaggregated information is not misused by Floor broker customers. Accordingly, the Commission is concerned that the Exchanges have not demonstrated why this aspect of the Proposals is designed to protect investors and [the] public interest, and is not designed to permit unfair discrimination, or impose an unnecessary or inappropriate burden on competition.38 After the institution of proceedings, the Commission received an additional comment letter from one of the commenters 39 and two responses from the Exchanges.40 The commenter stated its unqualified support for the Proposals. The commenter noted that a Floor broker provides a substantial measure of control over the use that brokers and off-Floor members make of the information. The commenter also noted that direct electronic dissemination of disaggregated order information, which is not proposed by the Exchanges, would reach numerous off-Floor participants instantaneously and systemically, while manual dissemination of disaggregated order information, as proposed by the Exchanges, would be slower and would reach a selected number of off-Floor participants. The commenter stated its belief that the sharing of disaggregated order information by DMMs with Floor brokers would be superior to systematic electronic dissemination because it would be more targeted, more limited in reach, and less timely. In Response Letter I, the Exchanges stated that dissemination of disaggregated order information under the Proposal would be practically useless to market participants employing high-speed, automated trading strategies because the proposed manner of dissemination is manual and occurs one stock at a time. The Exchanges stated their belief that the Proposals are designed to benefit only market participants looking to source large amounts of liquidity, not traders employing predatory trading strategies, because the dissemination of information is manual and thus slower than electronic dissemination. The Exchanges further stated their belief that competition among market venues would ensure that the disclosure of disaggregated order information would not be abused, as market participants concerned about possible misuse of such information could designate their orders as hidden from DMMs and Floor brokers or could route their orders to other venues. 38 Id. at 11–12, 78 FR at 46664. LSE Letter II, supra note 8. 40 See the Response Letters, supra note 9. 39 See E:\FR\FM\30DEN1.SGM 30DEN1 79538 Federal Register / Vol. 78, No. 250 / Monday, December 30, 2013 / Notices In Response Letter II, the Exchanges supplemented their initial response and more directly addressed the specific concerns raised by the Commission in the Order Instituting Proceedings. As to articulating a legitimate rationale for making disaggregated order information available to Floor broker customers, the Exchanges stated: [M]aking the disaggregated order information available to Floor brokers’ customers would expand the possible points of contact with member organizations representing block trading interest since the customers may have networks of relationships that differ from and may extend beyond those of Floor brokers, thereby increasing opportunities for order interaction and reduced transaction costs for the investing public.41 maindgalligan on DSK5TPTVN1PROD with NOTICES As to the potential for misuse of disaggregated order information that is shared off the Floor, the Exchanges represented that they would address this concern in three ways. First, each Exchange would issue a Member Education Bulletin to its Floor brokers that would (1) underscore that the purpose of sharing disaggregated order information is to increase the potential points of contact for those seeking to source block trading interest and to increase the opportunities for interaction of larger orders and (2) stress the existing requirement that Floor brokers who share ‘‘market look’’ information with a customer have a reasonable belief that the customer is receiving the information in consideration of a transaction or potential transaction. Second, the Exchanges represent that they have engaged in extensive discussions with FINRA regarding the Proposals and the use of cross-market surveillance to detect the misuse of disaggregated order information by off-Floor market participants. Finally, each Exchange would issue an Information Memo to its member organizations providing notice of the proposed rule changes and what they mean for orders that are entered on the Exchange, and each Exchange would develop and provide notice of a complaint mechanism to report any potential misuse of disaggregated order information provided to a Floor broker customer. V. Discussion and Findings The Commission has carefully reviewed the Proposals, the comment letters, and the Response Letters, and finds that the Proposals are consistent with the requirements of the Act and the rules and regulations thereunder applicable to national securities 41 See Response Letter II, supra, note 9. VerDate Mar<15>2010 17:15 Dec 27, 2013 Jkt 232001 exchanges. In particular, Section 6(b)(5) of the Act 42 requires, among other things, that the rules of an exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and in general, to protect investors and the public interest and that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. Additionally, Section 6(b)(8) of the Act 43 requires that the rules of an exchange not impose any burden on competition that is not necessary or appropriate in furtherance of the Act. The Proposals would allow a DMM at his or her post to have access to: (1) Aggregated buying and selling interest; (2) disaggregated information about the price and size of any individual order or e-Quote and the entering and clearing firm for such orders; and (3) post-trade information. The Proposals would further allow a DMM to disclose disaggregated order information to Floor brokers in response to an inquiry in the normal course of business,44 and a Floor broker in receipt of such information would be able to transmit that information to his or her customer for the purpose of facilitating order interaction. If a market participant has elected not to display an order to a DMM, however, the DMM would not have access to information about that order. As noted above, in its Order Instituting Proceedings to determine whether to approve or disapprove the Proposals, the Commission expressed concerns with the dissemination of disaggregated order information off the trading Floor. In Response Letter II, the Exchange made representations in response to these concerns. The Exchanges set forth their rationale for permitting such information sharing, arguing that the customers of Floor brokers may have networks of relationships that would increase interaction among large orders and decrease transaction costs. The Exchanges also made representations concerning the potential misuse of disaggregated order information that has been shared off the Floor. The 42 15 U.S.C. 78f(b)(5). In approving the proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 43 15 U.S.C. 78f(b)(8). 44 A DMM would also be permitted to provide order information to visitors to the trading Floor for the purpose of demonstrating methods of trading. PO 00000 Frm 00149 Fmt 4703 Sfmt 4703 Exchanges represented (1) that they would stress to Floor brokers that, in order to share disaggregated order information with customers, Floor brokers must have a reasonable belief that the customer is receiving the information in furtherance of a transaction or a potential transaction; (2) that trading will be monitored for evidence of front-running and that surveillance could potentially identify the misuse of disaggregated order information by off-Floor market participants,45 and (3) that the Exchanges will educate their member organizations about the operation of the Proposals, the ability of member organizations to submit orders that would not be visible to DMMs or Floor brokers, and the existence of a complaint mechanism, to be established by the Exchanges, through which member organizations could report suspect misuse of order information. The Commission believes that, on balance, the Exchanges have articulated in Response Letter II colorable arguments in response to the concerns expressed by the Commission in the Order Instituting Proceedings. The Commission believes that the Exchanges have met their burden to demonstrate that the Proposals are adequately designed to protect investors and the public interest and that the Proposals are not designed to permit unfair discrimination or to impose an unnecessary or inappropriate burden on competition. VI. Conclusion For the foregoing reasons, the Commission finds that the Proposals are consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange, and, in particular, with Section 6(b)(5) of the Act 46 and Section 6(b)(8) of the Act.47 It is therefore ordered, pursuant the Section 19(b)(2) of the Act, that the Proposals (SR–NYSE–2013–21 and SR– NYSEMKT–2013–25), are hereby approved. 45 The Exchanges represented in Response Letter II that a Floor broker’s wireless device and Exchange-provided portable phones would generate a record of outgoing messages and calls and that this information would be made available for investigations of suspected misuse of order information. 46 15 U.S.C. 78f(b)(5). 47 15 U.S.C. 78f(b)(8). E:\FR\FM\30DEN1.SGM 30DEN1 79539 Federal Register / Vol. 78, No. 250 / Monday, December 30, 2013 / Notices For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.48 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–31130 Filed 12–27–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–71173; File No. SR– NASDAQ–2013–156] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt a New Options Execution Algorithm With Priority Overlays December 23, 2013. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on December 16, 2013, The NASDAQ Stock Market LLC (‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Chapter VI, Section 10, of the Rules of the NASDAQ Options Market (‘‘NOM’’). Specifically, NASDAQ proposes to add an additional execution algorithm and priority overlays to govern the priority of orders, as explained more fully below. The text of the proposed rule change is below; proposed new language is in italics. * * * * * Chapter VI * * maindgalligan on DSK5TPTVN1PROD with NOTICES Sec. 10 * Trading Systems * * Book Processing System orders shall be executed through the Nasdaq Book Process set forth below: (1) Execution Algorithm—The Exchange will determine to apply, for each option, one of the following execution algorithms described in 48 See 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Mar<15>2010 17:15 Dec 27, 2013 Jkt 232001 paragraphs (A) or (B). The Exchange will issue an Options Alert specifying which execution algorithm will govern which options any time it is modified. (A) Price/Time—The System shall execute trading interest within the System in price/time priority, meaning it will execute all trading interest at the best price level within the System before executing trading interest at the next best price. Within each price level, if there are two or more quotes or orders at the best price, trading interest will be executed in time priority. (B) Size Pro-Rata—The System shall execute trading interest within the System in price priority, meaning it will execute all trading interest at the best price level within the System before executing trading interest at the next best price. Within each price level, if there are two or more quotes or orders at the best price, trading interest will be executed based on the size of each Participant’s quote or order as a percentage of the total size of all orders and quotes resting at that price. If the result is not a whole number, it will be rounded down to the nearest whole number. If there are residual contracts remaining after rounding, such contracts will be distributed one contract at a time to the remaining Participants in time priority. (C) Priority Overlays Applicable to Size Pro-Rata Execution Algorithm: The Exchange will apply the following designated Participant priority overlays, which are always in effect when the Size Pro-Rata execution algorithm is in effect. (i) Public Customer Priority: the highest bid and lowest offer shall have priority except that Public Customer orders shall have priority over nonPublic Customer orders at the same price. If there are two or more Public Customer orders for the same options series at the same price, priority shall be afforded to such Public Customer orders in the sequence in which they are received by the System. For purposes of this Rule, a Public Customer order does not include a Professional Order. (ii) Market Maker Priority: After all Public Customer orders have been fully executed, Options Market Makers shall have priority over all other Participant orders at the same price. If there are two or more Options Market Maker quotes and orders for the same options series at the same price, those shall be executed based on the Size Pro-Rata execution algorithm. If there are contracts remaining after all Market Maker interest has been fully executed, such contracts shall be executed based on the Size Pro-Rata execution algorithm. PO 00000 Frm 00150 Fmt 4703 Sfmt 4703 (2)–(7) No change. * * * * * II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. (A) Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose NOM operates as an all-electronic system (‘‘System’’ or ‘‘Trading System’’) with no physical trading floor and provides for the electronic display and execution of orders in price/time priority without regard to the status of the entities that are entering orders. NOM now seeks to introduce a different priority rule in certain options in order to create additional incentives for firms to provide liquidity on NOM. Currently, Chapter VI, Section 10, Book Processing, provides that the System will have a single execution algorithm based on price/time priority. The System and rules provide for the ranking, display, and execution of all orders in price/time priority without regard to the status of the entity entering an order. For each order, among equallypriced or better-priced trading interest, the System currently executes against available contra-side displayed contract amounts in full, in price/time priority. At this time, the Exchange proposes to amend Chapter VI, Section 10, to provide for a Size Pro-Rata execution algorithm. In order to make clear that only one of the two execution algorithms is applicable to a particular option, NASDAQ proposes to add introductory language to Section 10(1) to state that the Exchange will determine to apply, for each option, one of the execution algorithms described in subparagraphs (A) 3 or (B). The 3 NASDAQ is also proposing to amend subparagraph (A) to provide that, respecting the price/time execution algorithm, within each price level, if there are two or more quotes or orders at the best price, trading interest will be executed in time priority. This is intended to be clearer and match the new language in subparagraph (B). E:\FR\FM\30DEN1.SGM 30DEN1

Agencies

[Federal Register Volume 78, Number 250 (Monday, December 30, 2013)]
[Notices]
[Pages 79534-79539]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-31130]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71175; File Nos. SR-NYSE-2013-21; SR-NYSEMKT-2013-25]


Self-Regulatory Organizations; New York Stock Exchange LLC; NYSE 
MKT LLC; Order Approving Proposed Rule Changes Amending NYSE Rule 104 
and NYSE MKT Rule 104--Equities, Each as Modified by an Amendment No. 
1, To Codify Certain Traditional Trading Floor Functions That May Be 
Performed by Designated Market Makers, To Make Exchange Systems 
Available to DMMs That Would Provide DMMs With Certain Market 
Information, To Amend the Exchanges' Rules Governing the Ability of 
DMMs To Provide Market Information to Floor Brokers, and To Make 
Conforming Amendments to Other Rules

December 23, 2013.

I. Introduction

    On April 9, 2013, the New York Stock Exchange LLC (``NYSE'') and 
NYSE MKT LLC (``NYSE MKT'') (collectively, ``Exchanges'') each filed 
with the

[[Page 79535]]

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\ proposed rule changes (``Proposals'') to 
amend certain of their respective rules relating to Designated Market 
Makers (``DMMs'') \3\ and Floor brokers.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ NYSE Rule 98(b)(1) defines the term ``DMM'' to mean any 
individual qualified to act as a DMM on the floor of the Exchange 
under NYSE Rule 103. ``DMM unit'' means any member organization, 
aggregation unit within a member organization, or division or 
department within an integrated proprietary aggregation unit of a 
member organization that (i) has been approved by NYSE Regulation 
pursuant to section (c) of NYSE Rule 98, (ii) is eligible for 
allocations under NYSE Rule 103B as a DMM unit in a security listed 
on the Exchange, and (iii) has met all registration and 
qualification requirements for DMM units assigned to such unit. NYSE 
Rule 98(b)(2). See also NYSE MKT Rule 2(i)--Equities (defining the 
term ``DMM'' to mean an individual member, officer, partner, 
employee, or associated person of a DMM unit who is approved by the 
Exchange to act in the capacity of a DMM); NYSE MKT Rule 2(j)--
Equities (defining the term ``DMM unit'' as a member organization or 
unit within a member organization that has been approved to act as a 
DMM unit under NYSE MKT Rule 98--Equities).
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    The Proposals were published for comment in the Federal Register on 
April 29, 2013.\4\ The Commission received two comment letters on the 
NYSE proposal.\5\ On June 11, 2013, the Commission extended until July 
26, 2013 the time period in which to approve, to disapprove, or to 
institute proceedings to determine whether to disapprove the 
Proposals.\6\ On July 26, 2013, the Commission instituted proceedings 
under Section 19(b)(2)(B) of the Act to determine whether to approve or 
disapprove the Proposals.\7\ During the course of these proceedings, 
the Commission received one additional comment letter \8\ and two 
responses from the Exchanges.\9\ This order approves the Proposals.
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    \4\ See Securities Exchange Act Release Nos. 69427 (Apr. 23, 
2013), 78 FR 25118 (SR-NYSE-2013-21) (``NYSE Notice'') and 69428 
(Apr. 23, 2013), 78 FR 25102 (SR-NYSEMKT-2013-25) (``NYSE MKT 
Notice'') (collectively ``Notices''). On April 18, 2013, each of the 
Exchanges filed a Partial Amendment No. 1 to its Proposal. The 
purpose of the amendments was to file Exhibit 3, which was not 
included in the Notices.
    \5\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Daniel Buenza, Lecturer in Management, London School of 
Economics, and Yuval Millo, Professor of Social Studies of Finance, 
University of Leicester (May 20, 2013) (``LSE Letter I''); Letter to 
Commission from James J. Angel, Ph.D., CFA, Associate Professor of 
Finance, Georgetown University, McDonough School of Business (May 
14, 2013) (``Angel Letter''). Although these comment letters 
addressed only the NYSE proposal explicitly, the Proposals are 
nearly identical. For this reason, this order addresses both 
Proposals when discussing these comment letters.
    \6\ See Securities Exchange Act Release Nos. 69736, 78 FR 36284 
(June 17, 2013) (SR-NYSE-2013-21); and 69733, 78 FR 36284 (June 17, 
2013) (SR-NYSEMKT-2012-25).
    \7\ See Securities Exchange Act Release No. 70047, 78 FR 46661 
(Aug. 1, 2013).
    \8\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Daniel Buenza, Lecturer in Management, London School of 
Economics, and Yuval Millo, Professor of Social Studies of Finance, 
University of Leicester (Aug. 22, 2013) (``LSE Letter II'').
    \9\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Janet McGinness, EVP and Corporate Secretary, General Counsel, 
NYSE Markets, NYSE Euronext (Sept. 5, 2013) (``Response Letter I''); 
Letter to Elizabeth M. Murphy, Secretary, Commission, from Janet 
McGinness, EVP and Corporate Secretary, General Counsel, NYSE 
Markets, NYSE Euronext (Dec. 6, 2013) (``Response Letter II'') 
(together with Response Letter I, the ``Response Letters'').
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II. Background

    The Proposals seek to amend the Exchanges' rules in four ways. 
First, the Exchanges propose to codify certain trading floor functions 
that may be performed by DMMs. Second, the Exchanges propose to allow 
DMMs to access Exchange systems that would provide DMMs with additional 
order information about the securities in which they are registered. 
Third, the Exchanges propose to make certain conforming amendments to 
their rules to reflect the additional order information that would be 
available to DMMs through Exchange systems and to specify what 
information about Floor broker agency interest files (``e-Quotes'') is 
available to the DMM. Finally, the Exchanges propose to modify the 
terms under which DMMs would be permitted to provide market information 
to Floor brokers and others.\10\
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    \10\ On October 31, 2011, NYSE and NYSE Amex LLC (the 
predecessor entity of NYSE MKT) (``NYSE Amex'') each filed with the 
Commission a proposed rule change to amend the exchange's Rule 104 
(``2011 Proposals'') that proposed similar changes to the relevant 
rules as the Proposals. The 2011 Proposals were published for 
comment in the Federal Register on November 17, 2011. See Securities 
Exchange Act Release Nos. 65735 (Nov. 10, 2011), 76 FR 71405 (SR-
NYSEAmex-2011-86) (``NYSE Amex Notice'') and 65736 (Nov. 10, 2011), 
76 FR 71399 (SR-NYSE-2011-56) (``NYSE Notice''). The Commission 
received no comment letters on the Proposals. On December 22, 2011, 
the Commission extended to February 15, 2012 the time period in 
which to approve, disapprove, or institute proceedings to determine 
whether to approve or disapprove the 2011 Proposals. See Securities 
Exchange Act Release No. 66036, 76 FR 82011 (Dec. 29, 2011). The 
Commission received no comment letters on the 2011 Proposals during 
the extension. On February 15, 2012, the Commission issued an order 
instituting proceedings to determine whether to approve or 
disapprove the 2011 Proposals. See Securities Exchange Act Release 
No. 66397, 77 FR 10586 (Feb. 22, 2012). After instituting 
proceedings, the Commission received six comment letters supporting 
the 2011 Proposals. After the Commission issued a notice of 
designation of longer period for Commission action on May 14, 2012, 
see Securities Exchange Act Release No. 66981, 77 FR 29730 (May 18, 
2012), the Commission disapproved the 2011 Proposals on July 13, 
2012. See Securities Exchange Act Release No. 67437, 77 FR 42525 
(July 13, 2012) (``Disapproval Order'').
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A. Trading Floor Functions

    The Exchanges propose to codify certain traditional Trading Floor 
functions that were formerly performed by specialists and were 
described in each Exchange's respective Floor Official Manual.\11\ The 
proposed rules would specify four categories of trading floor functions 
that DMMs could perform: (1) Maintaining order among Floor brokers 
manually trading at the DMM's assigned panel, including managing 
trading crowd activity and facilitating Floor broker executions at the 
post; \12\ (2) facilitating Floor broker interactions, including either 
participating as a buyer or seller, and appropriately communicating to 
Floor brokers the availability of other Floor broker contra-side 
interest; \13\ (3) assisting Floor brokers with respect to their orders 
by providing information regarding the status of a Floor broker's 
orders, helping to resolve errors or questioned trades, adjusting 
errors, and cancelling or inputting Floor broker agency interest on 
behalf of a Floor broker; \14\ and (4) researching the status of orders 
or questioned trades.\15\
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    \11\ NYSE 2004 Floor Official Manual, Market Surveillance, 
Chapter Two, Sec. I. at 7-12 (June ed. 2004). Relevant excerpts of 
the 2004 Floor Official Manual are attached as Exhibit 3 to the 
Exchanges' filings.
    \12\ See id. at Sec. I.A., p. 7 (noting that ``specialist helps 
ensure that such markets are fair, orderly, operationally efficient 
and competitive with all other markets in those securities'').
    \13\ See id. at Sec. I.B.3., pp. 10-11 (``In opening and 
reopening trading in a listed security, a specialist should . . . 
[s]erve as the market coordinator for the securities in which the 
specialist is registered by exercising leadership and managing 
trading crowd activity and promptly identifying unusual market 
conditions that may affect orderly trading in those securities, 
seeking the advice and assistance of Floor Officials when 
appropriate'' and ``[a]ct as a catalyst in the markets for the 
securities in which the specialist is registered, making all 
reasonable efforts to bring buyers and sellers together to 
facilitate the public pricing of orders, without acting as principal 
unless reasonably necessary.'').
    \14\ See id. at Sec. I.B.4., p. 11 (``In view of the 
specialist's central position in the Exchange's continuous two-way 
agency auction market, a specialist should . . . [e]qually and 
impartially provide accurate and timely market information to all 
inquiring members in a professional and courteous manner.'').
    \15\ See id. at Sec. I.B.5., p. 12 (providing that a specialist 
should ``[p]romptly provide information when necessary to research 
the status of an order or a questioned trade and cooperate with 
other members in resolving and adjusting errors'').
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B. DMM Access to Additional Order Information

    Each Exchange proposes to make available to a DMM at his or her 
post Exchange systems that display the following types of information 
about securities in which the DMM is registered: (1) Aggregated 
information

[[Page 79536]]

about buying and selling interest; \16\ (2) disaggregated information 
about the price and size of any individual order or e-Quote and the 
entering and clearing firm information for these orders, except that 
Exchange systems would not make available to DMMs any disaggregated 
information about an order or e-Quote that a market participant has 
elected not to display to a DMM; and (3) post-trade information.\17\ 
The disaggregated information to be made available to each DMM 
concerning the securities in which the DMM is registered would include: 
(a) The price and size of all displayable interest submitted by off-
Floor participants (although off-Floor participants may submit non-
displayable interest that is hidden from the DMM); \18\ and (b) all e-
Quotes, including reserve e-Quotes, that the Floor broker has not 
elected to exclude from availability to the DMM.\19\ According to the 
Exchanges, the systems would not contain any information about the 
ultimate customer (i.e., the name of the member or member 
organization's customer) in an order or transaction.
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    \16\ Exchange systems currently make available to DMMs aggregate 
information about the following interest in securities in which the 
DMM is registered: (a) All displayable interest submitted by off-
floor participants; (b) all Minimum Display Reserve orders, 
including the reserve portion; (c) all displayable floor broker 
agency interest files (``e-Quotes''); (d) all Minimum Display 
Reserve e-Quotes, including the reserve portion; and (e) the reserve 
quantity of Non-Display Reserve e-Quotes, unless the floor broker 
elects to exclude that reserve quantity from availability to the 
DMM.
    \17\ For the latter two categories, the DMM also would have 
access to entering and clearing firm information for each order and, 
as applicable, the badge number of the floor broker representing the 
order.
    \18\ See NYSE Rule 13 and NYSE MKT Rule 13--Equities, defining 
non-displayed order types.
    \19\ The Exchanges previously permitted DMMs to have access to 
Exchange systems that contained the disaggregated order information 
described above. The Exchanges stopped making such information 
available to DMMs in January 2011. See NYSE and NYSE Amex 
Information Memo 11-03 (Jan. 19, 2011).
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C. Conforming Amendments To Reflect the Additional Order Information To 
Be Made Available to DMMs Through Exchange Systems and to Specify Floor 
Broker e-Quote Information To Be Made Available to DMMs

    The Exchanges also propose to make conforming amendments to their 
rules to reflect the additional order information that would be 
available to DMMs through Exchange systems and to specify what 
information about e-Quotes is available to the DMM in a given security. 
Specifically, the Exchanges propose to revise NYSE Rule 70 and NYSE MKT 
Rule 70--Equities governing e-Quotes to reflect that disaggregated 
order information regarding a given security would be available to the 
DMM for that security except as elected otherwise. The Exchanges would 
allow a Floor broker to enter an e-Quote with reserve interest 
(``Reserve e-Quote'') with or without a displayable portion.
    A Reserve e-Quote with a displayable portion would participate in 
manual and automatic executions. Trading interest at each price point, 
including the reserve portion of the Reserve e-Quote, would be included 
in the aggregate interest available to the DMM. This trading interest 
at each price point would also be available to the DMM on a 
disaggregated basis, unless the Floor broker chooses to exclude the 
Reserve e-Quote with a displayable portion from the DMM.
    A Reserve e-Quote with an undisplayable portion would also 
participate in manual and automatic executions. As with the Reserve e-
Quote with a displayable portion, trading interest at each price point 
represented by the Reserve e-Quote with an undisplayable portion would 
be included in the aggregated and disaggregated interest available to 
the DMM, unless the Floor broker chooses to exclude the Reserve e-Quote 
from the DMM. If, however, the Floor broker chooses to exclude the 
Reserve e-Quote with an undisplayable portion from the DMM, then the 
DMM would not have access to the trading interest represented by the 
Reserve e-Quote on either an aggregated or disaggregated basis, and the 
Reserve e-Quote would not participate in manual executions.
    In addition, the Exchanges propose to delete their existing rules 
that currently prohibit DMMs from using the Display Book system to 
access information about e-Quotes excluded from the aggregated agency 
interest and Minimum Display Reserve Order information except for the 
purpose of effecting transactions that are reasonably imminent and 
where the Floor broker agency and Minimum Display Reserve Order 
interest information is necessary to effect the transactions.\20\
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    \20\ The rule provisions proposed to be deleted are NYSE Rule 
104(a)(6) and NYSE MKT Rule 104(a)(b)--Equities. For the text to be 
deleted, see, e.g., Form 19b-4, SR-NYSE-2013-21, at 73 (Apr. 9, 
2013), http://www.nyse.com/nysenotices/nyse/rule-filings/pdf;jsessionid=3D35E4095153B77CA82FA0BB9EBE1BC2?file---no=SR-NYSE-
2013-21&seqnum=1.
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D. Ability of DMMs To Provide Market Information on the Trading Floor

    The Exchanges also propose to modify the circumstances under which 
DMMs would be permitted to provide market information to Floor brokers 
and visitors on the trading floor. Specifically, the proposed rules 
would permit a DMM to provide such information to: (1) A Floor broker 
in response to an inquiry in the normal course of business; or (2) a 
visitor to the trading floor for the purpose of demonstrating methods 
of trading. Accordingly, a Floor broker would be able to ask a DMM for 
disaggregated order information that market participants have not 
otherwise elected to be hidden from the DMM. A Floor broker would not 
be able to submit such an inquiry by electronic means, and the DMM's 
response containing market information could not be delivered through 
electronic means.
    Because the Proposals expand on and incorporate the Exchanges' 
current rules regarding the disclosure of order information by DMMs, 
the Exchanges are proposing to delete those rules.\21\ The current 
rules provide that a DMM may disclose market information for three 
purposes. First, a DMM may disclose market information for the purpose 
of demonstrating the methods of trading to visitors to the trading 
floor. This aspect of the current rules is replicated in the proposed 
rules. Second, a DMM may disclose market information to other market 
centers in order to facilitate the operation of the Intermarket Trading 
System (``ITS''). According to the Exchanges, this text is obsolete, as 
the ITS Plan has been eliminated, and therefore the Exchanges are 
proposing to delete it. Third, a DMM may, while acting in a market-
making capacity and in response to an inquiry from a member conducting 
a market probe in the normal course of business, provide information 
about buying or selling interest in the market, including (a) 
aggregated buying or selling interest contained in Floor broker agency 
interest files, other than interest the broker has chosen to exclude 
from the aggregated buying and selling interest, (b) aggregated 
interest of Minimum Display Reserve Orders, and (c) the interest 
included in DMM interest files, excluding Capital Commitment Schedule 
(``CCS'') interest as described in Rule 1000(c).
---------------------------------------------------------------------------

    \21\ The Exchanges are also proposing conforming amendments to 
correct cross-references to the former rules.
---------------------------------------------------------------------------

    The proposed rules would permit DMMs to provide Floor brokers not 
only with the same aggregated order information that DMMs are permitted 
to provide under current rules, but also with the disaggregated and 
post-trade

[[Page 79537]]

order information described above.\22\ The proposed rules would permit 
a DMM to provide market information to a Floor broker in response to a 
specific request by the Floor broker to the DMM at the post, rather 
than specifying that the information must be provided ``in response to 
an inquiry from a member conducting a market probe in the normal course 
of business,'' as currently provided in the Exchanges' rules. Under the 
Proposals, Floor brokers would not have access to Exchange systems that 
provide disaggregated order information, and Floor brokers would only 
be able to access such information through a direct manual interaction 
with a DMM at the post.
---------------------------------------------------------------------------

    \22\ Because DMMs on the trading floor do not have access to CCS 
interest information, the proposed rule does not specify that DMMs 
would not be disseminating such information.
---------------------------------------------------------------------------

III. Initial Comment Letters and Responses

    Following publication of the Proposals in the Federal Register, the 
Commission received two comment letters.\23\ The first commenter 
offered several arguments in support of the Proposals. First, the 
commenter stated that, by permitting DMMs to use both pre- and post-
trade information that is already present on the Exchanges' systems, 
the Proposals promote the legitimate Floor function of matching buyers 
and sellers,\24\ which could promote just and equitable principles of 
trade and would be in the public interest.\25\ According to this 
commenter, the Proposals would enable market participants to trade 
larger blocks of stock with minimal market impact and could improve 
execution quality, especially for large buy-side institutions such as 
mutual funds that trade on behalf of retail investors.\26\ The 
commenter also stated that the Proposals contained sufficient 
safeguards to protect investors.\27\ Specifically, the commenter stated 
that institutional investors monitor execution quality very closely and 
that, if the Proposals were to hurt execution quality on the Exchanges, 
market participants would migrate to other exchanges.\28\ The commenter 
also stated that the Proposals do not permit unfair discrimination, as 
any market participant that wanted to avail itself of the sharing of 
order information on the Floor of the exchanges could route its orders 
to a Floor broker.\29\
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    \23\ See supra note 5.
    \24\ See Angel Letter, supra note 5.
    \25\ See id. at 7-8.
    \26\ Id. at 2.
    \27\ Id. at 7.
    \28\ Id. at 5.
    \29\ Id. at 6-7.
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    The second commenter expressed qualified support for the 
proposal.\30\ Citing its research, this commenter stated that 
communicating partially disaggregated order information from DMMs to 
Floor brokers would have a positive effect on price discovery, as it 
would assist DMMs and Floor brokers in finding the counterparties for 
certain trades.\31\ In this way, the commenter believed, the Proposals 
could incentivize transactions and contribute to greater liquidity in 
the market.\32\ However, the commenter also noted the importance of 
maintaining controls on the dissemination of such information, as the 
dissemination of excessive information may be detrimental to the 
investor that originated the order.\33\ In that regard, the commenter 
noted that NYSE maintains a system of formal rules and sanctions, in 
addition to the informal discipline that exists on the Floor, to 
safeguard the disclosure of order information.\34\ In contrast, 
however, the commenter noted that such controls did not exist outside 
the Floor.\35\ Therefore, the commenter stated, disaggregated order 
information should not be made available to market participants outside 
the floor of the NYSE, as there would ``be no means to control the use 
that this information is put to.'' \36\
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    \30\ See LSE Letter I, supra note 5.
    \31\ Id. at 2-3.
    \32\ Id. at 1-2.
    \33\ Id. at 2.
    \34\ Id.
    \35\ Id.
    \36\ Id.
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IV. Institution of Proceedings to Determine Whether to Approve or 
Disapprove the Proposals

    On July 26, 2013, the Commission instituted proceedings to 
determine whether to approve or disapprove the Proposals, raising 
concerns with respect to the Proposals.\37\ Specifically, the 
Commission's Order Instituting Proceedings expressed concern that the 
Proposals would permit disaggregated order information to be made 
available to off-Floor market participants (i.e., Floor broker 
customers) and stated that:
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    \37\ Securities Exchange Act Release No. 70047, supra note 7.

    The Exchanges * * * do not address why the dangers that would 
arise if disaggregated information were made available generally to 
off-floor market participants are not present when this same 
information is made available to off-floor market participants that 
are Floor broker customers. Nor have the Exchanges described any 
mechanism by which they would be able to assure that disaggregated 
information is not misused by Floor broker customers. Accordingly, 
the Commission is concerned that the Exchanges have not demonstrated 
why this aspect of the Proposals is designed to protect investors 
and [the] public interest, and is not designed to permit unfair 
discrimination, or impose an unnecessary or inappropriate burden on 
competition.\38\
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    \38\ Id. at 11-12, 78 FR at 46664.

    After the institution of proceedings, the Commission received an 
additional comment letter from one of the commenters \39\ and two 
responses from the Exchanges.\40\ The commenter stated its unqualified 
support for the Proposals. The commenter noted that a Floor broker 
provides a substantial measure of control over the use that brokers and 
off-Floor members make of the information. The commenter also noted 
that direct electronic dissemination of disaggregated order 
information, which is not proposed by the Exchanges, would reach 
numerous off-Floor participants instantaneously and systemically, while 
manual dissemination of disaggregated order information, as proposed by 
the Exchanges, would be slower and would reach a selected number of 
off-Floor participants. The commenter stated its belief that the 
sharing of disaggregated order information by DMMs with Floor brokers 
would be superior to systematic electronic dissemination because it 
would be more targeted, more limited in reach, and less timely.
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    \39\ See LSE Letter II, supra note 8.
    \40\ See the Response Letters, supra note 9.
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    In Response Letter I, the Exchanges stated that dissemination of 
disaggregated order information under the Proposal would be practically 
useless to market participants employing high-speed, automated trading 
strategies because the proposed manner of dissemination is manual and 
occurs one stock at a time. The Exchanges stated their belief that the 
Proposals are designed to benefit only market participants looking to 
source large amounts of liquidity, not traders employing predatory 
trading strategies, because the dissemination of information is manual 
and thus slower than electronic dissemination. The Exchanges further 
stated their belief that competition among market venues would ensure 
that the disclosure of disaggregated order information would not be 
abused, as market participants concerned about possible misuse of such 
information could designate their orders as hidden from DMMs and Floor 
brokers or could route their orders to other venues.

[[Page 79538]]

    In Response Letter II, the Exchanges supplemented their initial 
response and more directly addressed the specific concerns raised by 
the Commission in the Order Instituting Proceedings. As to articulating 
a legitimate rationale for making disaggregated order information 
available to Floor broker customers, the Exchanges stated:

    [M]aking the disaggregated order information available to Floor 
brokers' customers would expand the possible points of contact with 
member organizations representing block trading interest since the 
customers may have networks of relationships that differ from and 
may extend beyond those of Floor brokers, thereby increasing 
opportunities for order interaction and reduced transaction costs 
for the investing public.\41\
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    \41\ See Response Letter II, supra, note 9.

    As to the potential for misuse of disaggregated order information 
that is shared off the Floor, the Exchanges represented that they would 
address this concern in three ways. First, each Exchange would issue a 
Member Education Bulletin to its Floor brokers that would (1) 
underscore that the purpose of sharing disaggregated order information 
is to increase the potential points of contact for those seeking to 
source block trading interest and to increase the opportunities for 
interaction of larger orders and (2) stress the existing requirement 
that Floor brokers who share ``market look'' information with a 
customer have a reasonable belief that the customer is receiving the 
information in consideration of a transaction or potential transaction. 
Second, the Exchanges represent that they have engaged in extensive 
discussions with FINRA regarding the Proposals and the use of cross-
market surveillance to detect the misuse of disaggregated order 
information by off-Floor market participants. Finally, each Exchange 
would issue an Information Memo to its member organizations providing 
notice of the proposed rule changes and what they mean for orders that 
are entered on the Exchange, and each Exchange would develop and 
provide notice of a complaint mechanism to report any potential misuse 
of disaggregated order information provided to a Floor broker customer.

V. Discussion and Findings

    The Commission has carefully reviewed the Proposals, the comment 
letters, and the Response Letters, and finds that the Proposals are 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to national securities exchanges. In 
particular, Section 6(b)(5) of the Act \42\ requires, among other 
things, that the rules of an exchange be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and in general, 
to protect investors and the public interest and that the rules of an 
exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers. Additionally, Section 6(b)(8) 
of the Act \43\ requires that the rules of an exchange not impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the Act.
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    \42\ 15 U.S.C. 78f(b)(5). In approving the proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \43\ 15 U.S.C. 78f(b)(8).
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    The Proposals would allow a DMM at his or her post to have access 
to: (1) Aggregated buying and selling interest; (2) disaggregated 
information about the price and size of any individual order or e-Quote 
and the entering and clearing firm for such orders; and (3) post-trade 
information. The Proposals would further allow a DMM to disclose 
disaggregated order information to Floor brokers in response to an 
inquiry in the normal course of business,\44\ and a Floor broker in 
receipt of such information would be able to transmit that information 
to his or her customer for the purpose of facilitating order 
interaction. If a market participant has elected not to display an 
order to a DMM, however, the DMM would not have access to information 
about that order.
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    \44\ A DMM would also be permitted to provide order information 
to visitors to the trading Floor for the purpose of demonstrating 
methods of trading.
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    As noted above, in its Order Instituting Proceedings to determine 
whether to approve or disapprove the Proposals, the Commission 
expressed concerns with the dissemination of disaggregated order 
information off the trading Floor. In Response Letter II, the Exchange 
made representations in response to these concerns. The Exchanges set 
forth their rationale for permitting such information sharing, arguing 
that the customers of Floor brokers may have networks of relationships 
that would increase interaction among large orders and decrease 
transaction costs. The Exchanges also made representations concerning 
the potential misuse of disaggregated order information that has been 
shared off the Floor. The Exchanges represented (1) that they would 
stress to Floor brokers that, in order to share disaggregated order 
information with customers, Floor brokers must have a reasonable belief 
that the customer is receiving the information in furtherance of a 
transaction or a potential transaction; (2) that trading will be 
monitored for evidence of front-running and that surveillance could 
potentially identify the misuse of disaggregated order information by 
off-Floor market participants,\45\ and (3) that the Exchanges will 
educate their member organizations about the operation of the 
Proposals, the ability of member organizations to submit orders that 
would not be visible to DMMs or Floor brokers, and the existence of a 
complaint mechanism, to be established by the Exchanges, through which 
member organizations could report suspect misuse of order information.
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    \45\ The Exchanges represented in Response Letter II that a 
Floor broker's wireless device and Exchange-provided portable phones 
would generate a record of outgoing messages and calls and that this 
information would be made available for investigations of suspected 
misuse of order information.
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    The Commission believes that, on balance, the Exchanges have 
articulated in Response Letter II colorable arguments in response to 
the concerns expressed by the Commission in the Order Instituting 
Proceedings. The Commission believes that the Exchanges have met their 
burden to demonstrate that the Proposals are adequately designed to 
protect investors and the public interest and that the Proposals are 
not designed to permit unfair discrimination or to impose an 
unnecessary or inappropriate burden on competition.

VI. Conclusion

    For the foregoing reasons, the Commission finds that the Proposals 
are consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, with Section 6(b)(5) of the Act \46\ and Section 
6(b)(8) of the Act.\47\
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    \46\ 15 U.S.C. 78f(b)(5).
    \47\ 15 U.S.C. 78f(b)(8).
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    It is therefore ordered, pursuant the Section 19(b)(2) of the Act, 
that the Proposals (SR-NYSE-2013-21 and SR-NYSEMKT-2013-25), are hereby 
approved.


[[Page 79539]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\48\
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    \48\ See 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-31130 Filed 12-27-13; 8:45 am]
BILLING CODE 8011-01-P