Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval to Proposed Rule Change To Establish a Retail Liquidity Program on a Pilot Basis for a Period of One Year From the Date of Implementation and Granting Request for a Limited Exemption From Rule 612 of Regulation NMS, 79524-79530 [2013-31131]
Download as PDF
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79524
Federal Register / Vol. 78, No. 250 / Monday, December 30, 2013 / Notices
Underwritings are in the best interest of
shareholders.
7. Each Unaffiliated Investment
Company will maintain and preserve
permanently, in an easily accessible
place, a written copy of the procedures
described in the preceding condition,
and any modifications to such
procedures, and will maintain and
preserve for a period of not less than six
years from the end of the fiscal year in
which any purchase in an Affiliated
Underwriting occurred, the first two
years in an easily accessible place, a
written record of each purchase of
securities in an Affiliated Underwriting
once an investment by a Fund of Funds
in the securities of an Unaffiliated
Investment Company exceeds the limit
of section 12(d)(1)(A)(i) of the 1940 Act,
setting forth (1) the party from whom
the securities were acquired, (2) the
identity of the underwriting syndicate’s
members, (3) the terms of the purchase,
and (4) the information or materials
upon which the determinations of the
Board of the Unaffiliated Investment
Company were made.
8. Prior to its investment in shares of
an Unaffiliated Investment Company in
excess of the limit set forth in section
12(d)(1)(A)(i) of the 1940 Act, the Fund
of Funds and the Unaffiliated
Investment Company will execute a
Participation Agreement stating,
without limitation, that their Boards and
their investment advisers understand
the terms and conditions of the order
and agree to fulfill their responsibilities
under the order. At the time of its
investment in shares of an Unaffiliated
Investment Company in excess of the
limit set forth in section 12(d)(1)(A)(i),
a Fund of Funds will notify the
Unaffiliated Investment Company of the
investment. At such time, the Fund of
Funds will also transmit to the
Unaffiliated Investment Company a list
of the names of each Fund of Funds
Affiliate and Underwriting Affiliate. The
Fund of Funds will notify the
Unaffiliated Investment Company of any
changes to the list as soon as reasonably
practicable after a change occurs. The
Unaffiliated Investment Company and
the Fund of Funds will maintain and
preserve a copy of the order, the
Participation Agreement, and the list
with any updated information for the
duration of the investment and for a
period of not less than six years
thereafter, the first two years in an
easily accessible place.
9. Before approving any advisory
contract under section 15 of the 1940
Act, the Board of each Fund of Funds,
including a majority of the Independent
Trustees, shall find that the advisory
fees charged under the advisory contract
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17:15 Dec 27, 2013
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are based on services provided that are
in addition to, rather than duplicative
of, services provided under the advisory
contract(s) of any Underlying Fund in
which the Fund of Funds may invest.
Such finding, and the basis upon which
the finding was made, will be recorded
fully in the minute books of the
appropriate Fund of Funds.
10. IndexIQ Advisors will waive fees
otherwise payable to it by a Fund of
Funds in an amount at least equal to any
compensation (including fees received
pursuant to any plan adopted by an
Unaffiliated Investment Company
pursuant to rule 12b–1 under the 1940
Act) received from an Unaffiliated Fund
by IndexIQ Advisors, or an affiliated
person of IndexIQ Advisors, other than
any advisory fees paid to IndexIQ
Advisors or its affiliated person by the
Unaffiliated Investment Company, in
connection with the investment by the
Fund of Funds in the Unaffiliated Fund.
Any Sub-Adviser will waive fees
otherwise payable to the Sub-Adviser,
directly or indirectly, by the Fund of
Funds in an amount at least equal to any
compensation received by the SubAdviser, or an affiliated person of the
Sub-Adviser, from an Unaffiliated Fund,
other than any advisory fees paid to the
Sub-Adviser or its affiliated person by
the Unaffiliated Investment Company,
in connection with the investment by
the Fund of Funds in the Unaffiliated
Fund made at the direction of the SubAdviser. In the event that the SubAdviser waives fees, the benefit of the
waiver will be passed through to the
Fund of Funds.
11. Any sales charges and/or service
fees charged with respect to shares of a
Fund of Funds will not exceed the
limits applicable to funds of funds set
forth in NASD Conduct Rule 2830.
12. No Underlying Fund will acquire
securities of any other investment
company or company relying on section
3(c)(1) or 3(c)(7) of the 1940 Act, in
excess of the limits contained in section
12(d)(1)(A) of the 1940 Act, except to
the extent that such Underlying Fund:
(a) acquires such securities in
compliance with section 12(d)(1)(E) of
the 1940 Act and is either an Affiliated
Fund or is in the same ‘‘group of
investment companies’’ as its
corresponding master fund; (b) receives
securities of another investment
company as a dividend or as a result of
a plan of reorganization of a company
(other than a plan devised for the
purpose of evading section 12(d)(1) of
the 1940 Act); or (c) acquires (or is
deemed to have acquired) securities of
another investment company pursuant
to exemptive relief from the
Commission permitting such
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Underlying Fund to: (i) acquire
securities of one or more investment
companies for short-term cash
management purposes or (ii) engage in
inter-fund borrowing and lending
transactions.
B. Other Investments by Section
12(d)(1)(G) Funds of Funds
In addition, Applicants agree that the
order granting the requested relief to
permit Section 12(d)(1)(G) Funds of
Funds to invest in Other Investments
shall be subject to the following
condition:
1. Applicants will comply with all
provisions of rule 12d1–2 under the
1940 Act, except for paragraph (a)(2) to
the extent that it restricts any Section
12(d)(1)(G) Fund of Funds from
investing in Other Investments as
described in the application.
For the Commission, by the Division of
Investment Management, pursuant to
delegated authority.
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–31137 Filed 12–27–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–71176; File No. SR–
NYSEArca–2013–107]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Granting Approval to
Proposed Rule Change To Establish a
Retail Liquidity Program on a Pilot
Basis for a Period of One Year From
the Date of Implementation and
Granting Request for a Limited
Exemption From Rule 612 of
Regulation NMS
December 23, 2013.
I. Introduction
On October 22, 2013, NYSE Arca, Inc.
(‘‘NYSE Arca’’ 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 establish a Retail Liquidity
Program (‘‘Program’’) on a pilot basis for
a period of one year from the date of
implementation. The proposed rule
change was published for comment in
the Federal Register on November 13,
2013.3 The Commission did not receive
any comments on the proposed rule
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 70824
(Nov. 6, 2013), 78 FR 68116 (‘‘Notice’’).
2 17
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change. In connection with the
proposal, the Exchange requested
exemptive relief from Rule 612 of
Regulation NMS,4 which, among other
things, prohibits a national securities
exchange from accepting or ranking
orders priced greater than $1.00 per
share in an increment smaller than
$0.01.5
This order approves the proposed rule
change and grants the exemption from
the Sub-Penny Rule sought by the
Exchange in relation to the proposed
rule change.
II. Description of the Proposals
Overview
The Exchange is proposing a 12month pilot program to attract
additional retail order flow to the
Exchange, while also providing the
potential for price improvement to this
order flow. The Program would be
limited to trades occurring at prices
equal to or greater than $1.00 per share.6
The Program would include NYSE Arcalisted securities and UTP Securities, but
it would exclude NYSE-listed securities.
Under the proposed Program, a new
class of market participants called Retail
Liquidity Providers (‘‘RLPs’’) would be
able to provide potential price
improvement to designated retail orders
by submitting a Retail Price
Improvement Order (‘‘RPI Order’’),
which would be a non-displayed order
that is priced better than the Exchange’s
best protected bid or offer (‘‘PBBO’’).7
RLPs could receive special execution
fees for executing against retail orders in
exchange for satisfying certain specified
quoting obligations.8 Other Exchange
4 17
CFR 242.612 (‘‘Sub-Penny Rule’’).
Letter from Janet McGinness, EVP &
Corporate Secretary, NYSE Euronext, to Elizabeth
M. Murphy, Secretary, Commission (Oct. 11, 2013)
(‘‘Request for Sub-Penny Rule Exemption’’).
6 The Exchange notes that certain orders
submitted to the Program designated as eligible to
interact with liquidity outside of the Program—
Type 2 Retail Orders, which are discussed below—
could execute at prices below $1.00 if they do in
fact execute against liquidity outside of the
Program.
7 The terms protected bid and protected offer
would have the same meaning as defined in Rule
600(b)(57) of Regulation NMS. Rule 600(b)(57) of
Regulation NMS defines ‘‘protected bid’’ and
‘‘protected offer’’ as ‘‘a quotation in an NMS stock
that: (i) [i]s displayed by an automated trading
center; (ii) [i]s disseminated pursuant to an effective
national market system plan; and (iii) [i]s an
automated quotation that is the best bid or best offer
of a national securities exchange, the best bid or
best offer of the Nasdaq Stock Market, Inc., or the
best bid or best offer of a national securities
association other than the best bid or best offer of
the Nasdaq Stock Market, Inc.’’ 17 CFR
242.600(b)(57).
8 The Exchange stated in its filing that it would
submit a separate proposal to amend its Price List
to reflect the fees and credits connected to the
program.
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5 See
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member organizations 9 would be
allowed, but not required, to submit RPI
Orders. When there is an RPI Order in
a particular security, the Exchange
would disseminate an indicator, called
the Retail Liquidity Identifier, to
indicate that such interest exists. In
response to the indicator, a new class of
market participants known as Retail
Member Organizations (‘‘RMOs’’) could
submit a new type of order, called a
Retail Order, to the Exchange. A Retail
Order would interact, to the extent
possible, with available contra-side RPI
Orders and then may interact with other
liquidity on the Exchange or elsewhere,
depending on the Retail Order’s
instructions. The Exchange would
approve ETP Holders to be RLPs or
RMOs.
Types of Orders and the Retail Liquidity
Identifier
An RPI Order would be non-displayed
interest in NYSE Arca-listed securities
and UTP Securities, excluding NYSElisted (Tape A) securities, that is priced
more aggressively than the PBBO by at
least $0.001 per share and that is
identified as an RPI Order in a manner
prescribed by the Exchange. RPI Orders
would be entered at a single limit price,
rather than being pegged to the PBBO,
although an RPI Order could also be
designated as a Mid-Point Passive
Liquidity (‘‘MPL’’) Order, in which case
the order would re-price as the PBBO
changes.10 RPI Orders would remain
non-displayed and could only execute
against Retail Orders.
When an RPI Order priced at least
$0.001 better than the Exchange’s PBBO
for a particular security is available in
the System, the Exchange would
disseminate an identifier, known as the
Retail Liquidity Identifier, indicating
that such interest exists. The identifier
would be disseminated through the
Consolidated Quotation System
(‘‘CQS’’), the UTP Quote Data Feed, and
the Exchange’s proprietary data feed.
The identifier would reflect the symbol
for a particular security and the side
(buy or sell) of the RPI Order, but it
would not include the price or size of
such interest.
A Retail Order would be an agency or
riskless principal 11 order that originates
9 NYSE
Arca refers to its members as Equity
Trading Permit (‘‘ETP’’) Holders.
10 RPI Orders not designated as MPL Orders
would alternatively need to be designated as a PL
Order. As noted above, supra note 12, MPL and PL
Orders are defined in Exchange Rule 7.31(h).
11 In order to qualify as a ‘‘Retail Order,’’ a
‘‘riskless principal’’ order must satisfy the criteria
set forth in FINRA Rule 5320.03. RMOs that submit
riskless principal orders as Retail Orders must
maintain supervisory systems to reconstruct such
orders in a time-sequenced manner, and the RMOs
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79525
from a natural person and is submitted
to the Exchange by an RMO, provided
that no change is made to the terms of
the order with respect to price (except
in the case of a market order being
changed to a marketable limit order) or
side of market and provided that the
order does not originate from a trading
algorithm or any other computerized
methodology. Retail Orders could be
entered in sizes that are odd lots, rounds
lots, or mixed lots.
Under the proposal, an RMO that
submits a Retail Order could choose one
of two designations to dictate how that
order would interact with available
contra-side interest.
First, a Retail Order could interact
only with available contra-side RPI
Orders, as well as other non-displayed
liquidity 12 and displayable odd-lot
interest priced better than the PBBO on
the opposite side of the Retail Order,
excluding contra-side Retail Orders. The
Exchange would label this a Type 1
Retail Order, and such an order would
not interact with available non-priceimproving, contra-side interest in
Exchange systems or route to other
markets. Portions of a Type 1 Retail
Order that are not executed would be
cancelled immediately and
automatically.
Second, a Retail Order could interact
first with available contra-side RPI
Orders and other price-improving
liquidity, and any remaining portion
would be eligible to interact with other
interest in the System and, if designated
as eligible for routing, would route to
other markets in compliance with
Regulation NMS. The Exchange would
label this a Type 2 Retail Order. Type
2 orders could be marked as Immediate
or Cancel, Day, or Market. A Type 2 IOC
order would interact first with available
contra-side RPI Orders and other price
improving liquidity, excluding contraside Retail Orders, and then any
remaining portion of the Retail Order
would be executed as a limit order
marked as an IOC, pursuant to Exchange
Rule 7.31(e)(2). For Type 2 Day orders,
any shares that remain after executing
against contra-side RPI Orders or other
price-improving liquidity would
must submit reports, contemporaneously with the
execution of the facilitated orders, that identify
such trades as riskless principal.
12 Such other non-displayed liquidity would
include, for example, Passive Liquidity (‘‘PL’’)
Orders and Mid-Point Passive Liquidity (‘‘MPL’’)
Orders. These orders are defined in Exchange Rule
7.31(h). However, any Retail Order could be
designated with a ‘‘No Midpoint Execution’’
modifier, pursuant to existing Exchange Rule
7.31(h)(5); an order so designated would not
execute against resting MPL Orders but would
execute against eligible RPIs that are also
designated as MPL Orders.
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Federal Register / Vol. 78, No. 250 / Monday, December 30, 2013 / Notices
execute against other liquidity available
on the Exchange or be routed to other
market centers for execution; any
remaining portion of the order would
thereafter post to the NYSE Arca Book.13
Type 2 Market orders would execute
first against RPI Orders or other priceimproving liquidity, and they would
then be executed as a typical Exchange
Market Order.14
Priority and Allocation
Under proposed NYSE Arca Equities
Rule 7.44(l), the Exchange would rank
and allocate RPI Orders in a particular
security together with all other nondisplayed interest according to their
price first and then, at any given price
point, by their time of entry into the
system.15 Any displayable odd-lot
interest priced between the PBBO
would be ranked ahead of any RPIs and
other non-displayed interest at a given
price point.
Following execution against a Retail
Order, any remaining unexecuted
portion of an RPI Order would remain
available to interact with other
incoming Retail Orders if the remainder
of the RPI Order were at an eligible
price, i.e., better than the PBBO by at
least $0.001. Any remaining unexecuted
portion of a Retail Order would cancel,
execute, or post to the NYSE Arca Book
in accordance with its order type
designation, as explained above and set
forth in proposed Exchange Rule
7.44(k).
Retail Member Organizations
In order to become an RMO, an ETP
Holder must conduct a retail business or
handle retail orders on behalf of another
broker-dealer. Any ETP Holder that
wishes to obtain RMO status would be
required to submit: (1) An application
form; (2) an attestation, in a form
prescribed by the Exchange, that
substantially all orders submitted by the
ETP Holder as Retail Orders would meet
the qualifications for such orders under
proposed Exchange Rule 7.44; and (3)
supporting documentation sufficient to
demonstrate the retail nature and
characteristics of the applicant’s order
flow.16 If the Exchange disapproves the
maindgalligan on DSK5TPTVN1PROD with NOTICES
13 Exchange
Rule 1.1(a) defines the ‘‘NYSE Arca
Book’’ as ‘‘the NYSE Arca Marketplace’s electronic
file of orders, which contains all the User’s orders
in each of the Directed Order, Display Order,
Working Order and Tracking Order Processes.’’
14 The Exchange noted that Type 2 Market orders
would be subject to the Exchange’s trading collars.
See NYSE Arca Equities Rule 7.31(a).
15 The Exchange sets forth its price-time priority
scheme in its Rule 7.36.
16 For example, a prospective RMO could be
required to provide sample marketing literature,
Web site screenshots, other publicly disclosed
materials describing the retail nature of its order
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17:15 Dec 27, 2013
Jkt 232001
application, it would provide written
notice to the ETP Holder. The
disapproved applicant could appeal the
disapproval as provided below or reapply 90 days after the disapproval
notice is issued by the Exchange. An
RMO also could voluntarily withdraw
from RMO status at any time by giving
written notice to the Exchange.
The Exchange would require an RMO
to have written policies and procedures
reasonably designed to assure that it
will only designate orders as Retail
Orders if all the requirements of a Retail
Order are met. Such written policies
and procedures would have to require
the ETP Holder to exercise due
diligence before entering a Retail Order
to assure that entry as a Retail Order is
in compliance with the proposed rule
and to require the ETP Holder to
monitor whether orders entered as
Retail Orders meet the applicable
requirements. If an RMO represents
Retail Orders from another broker-dealer
customer, the RMO’s supervisory
procedures must be reasonably designed
to assure that the Retail Orders it
receives from the broker-dealer
customer meet the definition of a Retail
Order. The RMO must obtain an annual
written representation, in a form
acceptable to the Exchange, from each
broker-dealer customer that sends it
orders to be designated as Retail Orders.
The representation must state that entry
of Retail Orders will be in compliance
with the requirements of this rule. The
RMO must also monitor whether its
broker-dealer customer’s Retail Order
flow continues to meet the applicable
requirements.17
Retail Liquidity Provider Qualifications
and Admission
To qualify as an RLP under proposed
Exchange Rule 7.44(c), an ETP Holder
must be approved as a Market Maker or
Lead Market Maker 18 on the Exchange
and demonstrate an ability to meet the
requirements of a being an RLP
(discussed below). Moreover, the ETP
Holder must have the ability to
accommodate Exchange-supplied
designations that identify to the
flow, and such other documentation and
information as the Exchange may require to obtain
reasonable assurance that the applicant’s order flow
would meet the requirements of the Retail Order
definition.
17 The Exchange represents that it or another selfregulatory organization on behalf of the Exchange
will review an RMO’s compliance with these
requirements through an exam-based review of the
RMO’s internal controls. See Notice, supra note 3,
78 FR at 68117 n.10.
18 The requirements for Market Makers are
generally set forth in NYSE Arca Equities Rule 7.
The terms ‘‘Market Maker’’ and ‘‘Lead Market
Maker’’ are defined in NYSE Arca Equities Rule 1.1
(v) and (ccc), respectively.
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Fmt 4703
Sfmt 4703
Exchange RLP trading activity in
assigned RLP securities and must have
adequate trading infrastructure and
technology to support electronic
trading.
An ETP Holder must submit an
application with supporting
documentation to the Exchange.
Thereafter, the Exchange would notify
the ETP Holder as to whether it was
approved as an RLP. More than one
member organization could act as an
RLP for a security, and an ETP Holder
could act as an RLP for more than one
security. An ETP Holder could ask to be
assigned certain securities. Once
approved, an RLP must establish
connectivity with relevant Exchange
systems prior to trading.
The Exchange would notify an ETP
Holder in writing if the Exchange does
not approve that firm’s application to
become an RLP. The ETP Holder could
then request an appeal as provided
below. The ETP Holder could also
reapply 90 days after the Exchange
issues the disapproval notice.
Once approved, an RLP could
withdraw by providing notice to the
Exchange. The withdrawal would
become effective when the Exchange
reassigns the securities to another RLP,
but no later than 30 days after the
Exchange receives the withdrawal
notice. In the event that the Exchange
takes longer than 30 days to reassign the
securities, the withdrawing RLP would
have no further obligations.
Retail Liquidity Provider Requirements
The proposed rule changes would
impose several requirements on RLPs.
First, under proposed Rule 7.44(f), an
RLP could enter, in its role as an RLP,
an RPI Order electronically into
Exchange systems only in its assigned
securities.19 In order to be eligible for
special execution fees,20 an RLP must
maintain RPI Orders that are better than
the PBBO at least 5% of the trading day
for each assigned security. An RLP
would not receive special execution fees
during a month in which it had not
satisfied its 5% quoting requirement.
To calculate the 5% quoting
requirement, the Exchange would
determine the average percentage of
time an RLP maintains an RPI Order in
each assigned security during the
regular trading day on a daily and
19 An RLP could enter RPI Orders into Exchange
systems and facilities for securities to which it was
not assigned; however, it would be not be doing so
in its role as RLP and thus would not be eligible
for execution fees that are lower than non-RLP rates
for securities to which it was not assigned.
20 As noted above, supra note 8, the Exchange
plans to submit a separate filing to establish the
levels of fees and credits associated with the
program.
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maindgalligan on DSK5TPTVN1PROD with NOTICES
monthly basis. The Exchange would use
the following definitions. The ‘‘Daily
Bid Percentage’’ would be calculated by
determining the percentage of time an
RLP maintains an RPI Order priced
higher than the best protected bid
during each trading day for a calendar
month. The ‘‘Daily Offer Percentage’’
would be calculated by determining the
percentage of time an RLP maintains an
RPI Order priced lower than the best
protected offer during each trading day
for a calendar month. The ‘‘Monthly
Average Bid Percentage’’ would be
calculated for each security by summing
the security’s ‘‘Daily Bid Percentages’’
for each trading day in a calendar
month, then dividing the resulting sum
by the total number of trading days in
that month. The ‘‘Monthly Average
Offer Percentage’’ would be calculated
for each security by summing the
security’s ‘‘Daily Offer Percentages’’ for
each trading day in a calendar month,
then dividing the resulting sum by the
total number of trading days in that
month.
The proposal specifies that only RPI
Orders entered through the trading day
would be used when determining
compliance with the 5% quoting
requirements. Further, an RLP would
have an initial two-month grace period,
so that the Exchange would impose the
5% quoting requirements on the first
day of the third consecutive calendar
month after the member organization
began operation as an RLP.
RMO status if the Retail Orders
submitted by the RMO did not comply
with the requirements of the proposed
rule. The Exchange would have sole
discretion to make such a
determination. The Exchange would
provide written notice to the RMO when
a disqualification determination was
made. Similar to a disqualified RLP, a
disqualified RMO could appeal as
provided below or reapply for RMO
status.
Penalties for Failure To Meet
Requirements
The proposal provides for penalties
when an RLP or RMPO fails to meet the
requirements of the rule.
If an RLP fails to meet the 5% quoting
requirements in any assigned security
for three consecutive months, the
Exchange, in its sole discretion, may: (1)
Revoke the assignment of any or all of
the affected securities; (2) revoke the
assignment of unaffected securities; or
(3) disqualify the ETP Holder from its
status as an RLP.21 If the Exchange
moves to disqualify an ETP Holder as an
RLP, then the Exchange would notify
the ETP Holder in writing one calendar
month prior to the determination.
Likewise, the Exchange would notify
the ETP Holder in writing if the
Exchange ultimately determined to
disqualify the ETP Holder as an RLP. An
RLP that is disqualified may appeal as
provided below or reapply.
With respect to RMOs, the Exchange
could disqualify an ETP Holder from its
Comparison With Existing Retail
Programs on Other Markets
21 Additionally, as noted above, an RLP that failed
to meet its quoting obligations in a given month
would not be eligible to receive special execution
fees for its RPI Orders for that month.
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Jkt 232001
Appeal Process
Under the proposal, the Exchange
would establish a Retail Liquidity
Program Panel to review disapproval or
disqualification decisions. An affected
ETP Holder would have five business
days after notice to request review. If an
ETP Holder is disqualified as an RLP
and has appealed, the Exchange would
stay the reassignment of securities
pending completion of the appeal
process.
The Panel would consist of the
NYSE’s Chief Regulatory Officer, or his
or her designee, and two officers of the
Exchange as designated by the co-head
of U.S. Listings and Cash Execution.
The Panel would review the appeal and
issue a decision within a time frame
prescribed by the Exchange. The Panel’s
decision would constitute final action
by the Exchange, and the Panel could
modify or overturn any Exchange
determinations made under the
proposed rule.
As the Exchange noted in its filing,
the proposal is based on the New York
Stock Exchange’s Retail Liquidity
Program.22 It is also shares features with
similar retail programs adopted by
BATS Y-Exchange (‘‘BYX’’) 23 and The
NASDAQ Stock Market (‘‘NASDAQ’’).24
The Exchange’s proposal differs from
the NYSE RLP in three key ways. First,
the Exchange’s proposal would allow all
incoming Retail Orders to execute
22 See Securities Exchange Act Release No. 67347
(July 3, 2012), 77 FR 40673 (July 10, 2012) (SR–
NYSE–2011–55; SR–NYSEAmex–2011–84) (‘‘NYSE
RLP Approval Order’’). In the same order, the
Commission also approved a nearly identical Retail
Liquidity Program for NYSE MKT LLC (which was
known as NYSE Amex LLC at the time it filed its
proposal). The initial one-year term of the NYSE
RLP pilot came to an end on July 31, 2013, and it
was extended for a second pilot year, until July 31,
2014. See Securities Exchange Act Release No.
70096 (August 2, 2013), 78 FR 48535 (August 8,
2013).
23 See Securities Exchange Act Release No. 68303
(Nov. 27, 2012), 77 FR 71652 (Dec. 3, 2012) (‘‘BYX
RPI Approval Order’’).
24 See Securities Exchange Act Release No. 69837
(Feb. 15, 2013), 78 FR 12397 (Feb. 22, 2013)
(‘‘NASDAQ RPI Approval Order’’).
PO 00000
Frm 00138
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79527
against resting RPI Orders and other
resting price improving liquidity, just as
the BYX and NASDAQ retail programs
do.25 With the NYSE RLP, in contrast,
a Type 1 Retail Order, will interact only
with available contra-side RPI Orders
and will not interact with other
available contra-side interest in the
NYSE’s systems.26 Second, the
Exchange could provide price
improvement to an incoming Retail
Order at multiple price levels. This is
similar to how the BYX and NASDAQ
programs operate, and it differs from the
NYSE RLP, which executes an incoming
Retail Order at a single clearing price
level.27 Finally, because of
technological limitations, the Exchange
would not offer the ability for RLPs to
enter RPI Orders that track the PBBO, as
they often do in the NYSE RLP.28
III. Discussion and Commission
Findings
After careful review of the proposal,
the Commission finds that the proposed
rule changes are consistent with the
requirements of the Act and the rules
and regulations thereunder that are
applicable to a national securities
exchange. In particular, the Commission
finds that the proposed rule change,
subject to its term as a pilot, is
consistent with Section 6(b)(5) of the
Act,29 which requires, among other
things, that the rules of a national
securities exchange be designed to
prevent fraudulent and manipulative
acts and practices; to promote just and
equitable principles of trade; to foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities; to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system; and, in general, to protect
25 See BYX Rules 11.24(f)(1) and (2) and
NASDAQ Rules 4780(f)(1) and (2) (providing that
Retail Orders may execute against both RPIs and
other price improving interest).
26 See NYSE Rule 107C(k)(1). Additionally,
pursuant to NYSE Rules 107C(k)(2) and 107C(k)(3),
a Type 2 Retail Order and a Type 3 Retail Order
can interact with other non-RPI interest in the
NYSE systems; however, such interaction only
occurs after a Retail Order first executes against RPI
Orders.
27 See Notice, supra note 3, 78 FR at 68121
(explaining this distinction from the NYSE RLP and
referencing the similarity with BYX); see also
Nasdaq RPI Approval Order, supra note 24, 78 FR
at 12398 (explaining that NASDAQ’s program
would execute potentially at multiple price levels,
unlike the NYSE RLP).
28 See Notice, supra note 3, 78 FR at 68121
(discussing the three key distinctions in greater
detail). See also supra note 12 and accompanying
text (noting that RPI Orders also designated as MPL
Orders would re-price as the PBBO changes).
29 15 U.S.C. 78f(b)(5).
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investors and the public interest; and
not be designed to permit unfair
discrimination between customers,
issuers, brokers or dealers.
The Commission finds that the
Program, as it is proposed on a pilot
basis, is consistent with the
requirements of the Act because the
Program is reasonably designed to
benefit retail investors by providing
price improvement to retail order
flow.30 The Commission also believes
that the Program could promote
competition for retail order flow among
execution venues and that this could
benefit retail investors by creating
additional price improvement
opportunities for their order flow.
Currently, most marketable retail
order flow is executed in the OTC
markets, pursuant to bilateral
agreements, without ever reaching a
public exchange. The Commission
recently noted that ‘‘a very large
percentage of marketable (immediately
executable) order flow of individual
investors’’ is executed, or
‘‘internalized,’’ by broker-dealers in the
OTC markets.31 A recent review of the
order flow of eight retail brokers
revealed that nearly 100% of their
customer market orders were routed to
OTC market makers.32 The same review
found that such routing is often done
pursuant to arrangements under which
retail brokers route their order flow to
certain OTC market makers in exchange
for payment.33
To the extent that the Program may
provide price improvement to retail
orders that equals what would be
provided under OTC internalization
arrangements, the Program could benefit
retail investors. To better understand
the Program’s potential impact, data
concerning investor benefits, including
the level of price improvement provided
by the Program, will be submitted by the
Exchange 34 and would be reviewed by
the Commission prior to any extension
of the Program beyond the proposed
one-year pilot term, or any permanent
approval of the Program.
30 As discussed above, supra notes 22 to 28 and
accompanying text, the Commission recently
approved similar programs for NYSE, NYSE MKT,
BATS–Y Exchange, and The NASDAQ Stock
Market.
31 See Securities Exchange Act Release No. 61358
(Jan. 14, 2010), 75 FR 3594, 3600 (Jan. 21, 2010)
(‘‘Concept Release on Equity Market Structure’’).
32 See id.
33 See id.
34 The Exchange committed in the proposal to
‘‘produce data throughout the pilot, which would
include statistics about participation, the frequency
and level of price improvement provided by the
Program, and any effects on the broader market
structure.’’ See Notice, supra note 3, 78 FR at
68120.
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The Program proposes to create
additional price improvement
opportunities for retail investors by
segmenting order flow on the Exchange
and requiring liquidity providers that
want to interact with such retail order
flow to do so at a price at least $0.001
per share better than the PBBO. The
Commission finds that, while the
Program would treat retail order flow
differently from order flow submitted by
other market participants, such
segmentation would not be inconsistent
with Section 6(b)(5) of the Act, which
requires that the rules of an exchange
are not designed to permit unfair
discrimination. The Commission
previously has recognized that the
markets generally distinguish between
individual retail investors, whose orders
are considered desirable by liquidity
providers because such investors are
presumed on average to be less
informed about short-term price
movements, and professional traders,
whose orders are presumed on average
to be more informed.35 The Commission
has further recognized that, because of
this distinction, liquidity providers are
generally more inclined to offer price
improvement to less-informed retail
orders than to more-informed
professional orders.36
Absent opportunities for price
improvement, retail investors may
encounter wider spreads that are a
consequence of liquidity providers
interacting with informed order flow. By
creating additional competition for
retail order flow, the Program is
reasonably designed to attract retail
order flow to the exchange environment,
while helping to ensure that retail
investors benefit from the better price
that liquidity providers are willing to
give their orders.
The Commission notes that the
Program might also create a desirable
opportunity for institutional investors to
interact with retail order flow that they
are not able to reach currently. ETP
Holders that are not RLPs can seek to
interact with Retail Orders by
submitting RPI Orders. Today,
institutional investors often do not have
the chance to interact with marketable
retail orders that are executed pursuant
to internalization arrangements. Thus,
by submitting RPI Orders, institutional
investors may be able to reduce their
possible adverse selection costs by
interacting with retail order flow.
When the Commission is engaged in
rulemaking or the review of a rule filed
35 See, e.g., Nasdaq RPI Approval Order, supra
note 24; BATS RPI Approval Order, supra note 23;
and NYSE RLP Approval Order, supra note 22.
36 See, e.g., id.
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Sfmt 4703
by a self-regulatory organization and is
required to consider or determine
whether an action is necessary or
appropriate in the public interest, the
Commission shall also consider, in
addition to the protection of investors,
whether the action will promote
efficiency, competition, and capital
formation.37 As discussed above, the
Commission believes this Program will
promote competition for retail order
flow by allowing ETP Holders, either as
RLPs, or on an ad hoc basis, to submit
RPI Orders to interact with Retail
Orders. Such competition may promote
efficiency by facilitating the price
discovery process. Moreover, the
Commission does not believe that the
Program will have a significant effect
on, or create any new inefficiencies in,
current market structure. Finally, to the
extent the Program is successful in
attracting retail order flow, it may
generate additional investor interest in
trading securities, which may promote
capital formation.
The Commission also believes that the
Program is sufficiently tailored to
provide the benefits of potential price
improvement only to bona fide retail
order flow originating from natural
persons.38 The Commission finds that
the Program provides an objective
process by which an ETP Holder could
become an RMO and that it provides for
appropriate oversight by the Exchange
to monitor for continued compliance
with the terms of these provisions. The
Exchange has limited the definition of
Retail Order to an agency or riskless
principal order that originates from a
natural person and not from a trading
algorithm or any other computerized
methodology. Furthermore, a Retail
Order must be submitted by an RMO
that is approved by the Exchange. In
addition, RMOs would be required to
maintain written policies and
procedures to help ensure that they
designate as Retail Orders only those
orders that qualify under the Program. If
an ETP Holder’s application to become
an RMO is denied by the Exchange, that
member may appeal the determination
or re-apply. The Commission believes
that these standards should help ensure
that order flow submitted into the
Program is retail order flow, thereby
promoting just and equitable principles
of trade and protecting investors and the
public interest, while also providing an
37 See
15 U.S.C. 78c(f).
addition, the Commission believes that the
Program’s provisions concerning the approval and
potential disqualification of RMOs are not
inconsistent with the Act. See, e.g., NYSE RLP
Approval Order, supra note 22, 77 FR at 40680 &
n.77.
38 In
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objective process through which ETP
Holders may become RMOs.
In addition, the Commission finds
that the Program’s proposed
dissemination of a Retail Liquidity
Identifier would increase the amount of
pricing information available to the
marketplace and is consistent with the
Act. The identifier would be
disseminated through the consolidated
public market data stream to advertise
the presence of an RPI Order with
which Retail Orders could interact. The
identifier would reflect the symbol for a
particular security and the side of the
RPI Order interest, but it would not
include the price or size of such
interest. The identifier would alert
market participants to the existence of
an RPI Order priced better than the
PBBO and should provide market
participants with more information
about the availability of price
improvement opportunities for retail
orders than is currently available.39
The Exchange stated that the
proposed Program, which will operate
similar to the retail programs in place at
the NYSE, NYSE MKT, BYX, and
NASDAQ, should encourage additional
liquidity and competition among
exchange venues, while providing the
potential for price improvement to retail
investors.40 The Exchange also noted
that the Program would differ from the
existing NYSE RLP in that it would
provide the maximum price
improvement available to incoming
Retail Orders by allowing them to
interact with available contra-side RPI
Orders and other price-improving,
contra-side interest. Moreover, the
Exchange’s Program would allow Retail
Orders to execute at multiple price
levels, as opposed to a single clearing
price level. The Commission finds that
the Program is reasonably designed to
enhance competition among market
participants and encourage competition
among exchange venues. The
Commission finds further that the
distinctions between the Exchange’s
Program and the other approved retail
programs are reasonably designed to
39 As the Commission noted when approving the
comparable retail programs of other exchanges, the
Commission believes that the Program will not
create any best execution challenges for brokers that
are not already present in today’s markets. A
broker’s best execution obligations are determined
by a number of facts and circumstances, including:
(1) the character of the market for the security (e.g.,
price, volatility, relative liquidity, and pressure on
available communications); (2) the size and type of
transaction; (3) the number of markets checked; (4)
accessibility of the quotation; and (5) the terms and
conditions of the order which result in the
transaction. See, e.g., NYSE RLP Approval Order,
supra note 22, 77 FR at 40680 n.75 (citing FINRA
Rule 5310).
40 See notice, supra note 3, 78 FR at 68122.
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enhance the Program’s priceimprovement benefits to retail investors
and, therefore, are consistent with the
Act.
The Commission notes that it is
approving the Program on a pilot basis.
Approving the Program on a pilot basis
will allow the Exchange and market
participants to gain valuable practical
experience with the Program during the
pilot period. This experience should
allow the Exchange and the Commission
to determine whether modifications to
the Program are necessary or
appropriate prior to any Commission
decision to approve the Program on a
permanent basis. The Exchange also has
agreed to provide the Commission with
a significant amount of data that should
assist the Commission in its evaluation
of the Program. Specifically, the
Exchange has represented that it ‘‘will
produce data throughout the pilot,
which will include statistics about
participation, the frequency and level of
price improvement provided by the
Program, and any effects on the broader
market structure.’’ 41 The Commission
expects that the Exchange will monitor
the scope and operation of the Program
and study the data produced during that
time with respect to such issues and
that the Exchange will propose any
modifications to the Program that may
be necessary or appropriate.
The Commission also welcomes
comments, and empirical evidence, on
the Program during the pilot period to
further assist the Commission in its
evaluation of the Program. The
Commission notes that any permanent
approval of the Program would require
a proposed rule change by the
Exchange, and that the filing of a
proposed rule change would provide an
opportunity for public comment prior to
further Commission action.
V. Exemption From the Sub-Penny Rule
Pursuant to its authority under Rule
612(c) of Regulation NMS,42 the
Commission hereby grants the Exchange
a limited exemption from the SubPenny Rule to operate the Program. For
the reasons discussed below, the
Commission determines that such
action is necessary or appropriate in the
public interest and that it is consistent
with the protection of investors. The
exemption shall operate for a period of
12 months, beginning with the
effectiveness of the proposed rule
change approved today.
When the Commission adopted the
Sub-Penny Rule in 2005, it identified a
variety of problems caused by sub41 See
42 17
PO 00000
supra note 34.
CFR 242.612(c).
Frm 00140
Fmt 4703
79529
penny prices that the Sub-Penny Rule
was designed to address:
• If investors’ limit orders lose
execution priority for a nominal
amount, investors may over time
decline to use them, thus depriving the
markets of liquidity.
• When market participants can gain
execution priority for a nominal
amount, important customer protection
rules such as exchange priority rules
and the Manning Rule could be
undermined.
• Flickering quotations that can result
from widespread sub-penny pricing
could make it more difficult for brokerdealers to satisfy their best execution
obligations and other regulatory
responsibilities.
• Widespread sub-penny quoting
could decrease market depth and lead to
higher transaction costs.
• Decreasing depth at the inside
could cause institutions to rely more on
execution alternatives away from the
exchanges, potentially increasing
fragmentation in the securities
markets.43
At the same time, the Commission
‘‘acknowledge[d] the possibility that the
balance of costs and benefits could shift
in a limited number of cases or as the
markets continue to evolve.’’ 44
Therefore, the Commission also adopted
Rule 612(c), which provides that the
Commission may grant exemptions from
the Sub-Penny Rule, either
unconditionally or on specified terms
and conditions, if it determined that
such an exemption is necessary or
appropriate in the public interest and is
consistent with the protection of
investors.
The Commission believes that the
Exchange’s proposal is such a case. As
described above, under the current
market structure, few marketable retail
orders in equity securities are routed to
exchanges. The vast majority of
marketable retail orders are internalized
by OTC market makers, who typically
pay retail brokers for their order flow.
Retail investors can benefit from such
arrangements to the extent that OTC
market makers offer them price
improvement over the NBBO. Price
improvement is typically offered in subpenny amounts.45 An internalizing
43 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496, 37551–52 (June 29,
2005).
44 Id. at 37553.
45 When adopting the Sub-Penny Rule, the
Commission considered certain comments that
asked the Commission to prohibit broker-dealers
from offering sub-penny price improvement to their
customers, but declined to do so. The Commission
stated that ‘‘trading in sub-penny increments does
not raise the same concerns as sub-penny quoting’’
Continued
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79530
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broker-dealer can offer sub-penny
executions, provided that such
executions do not result from
impermissible sub-penny orders or
quotations. Accordingly, OTC market
makers typically select a sub-penny
price for a trade without quoting at that
exact amount or accepting orders from
retail customers seeking that exact price.
Exchanges—and exchange member
firms that submit orders and quotations
to exchanges—cannot compete for
marketable retail order flow on the same
basis, because it would be impractical
for exchange electronic systems to
generate sub-penny executions without
exchange liquidity providers or retail
brokerage firms having first submitted
sub-penny orders or quotations, which
the Sub-Penny Rule expressly prohibits.
The limited exemption granted today
should promote competition between
exchanges and OTC market makers in a
manner that is reasonably designed to
minimize the problems that the
Commission identified when adopting
the Sub-Penny Rule. Under the Program,
sub-penny prices will not be
disseminated through the consolidated
quotation data stream, which should
avoid quote flickering and associated
reduced depth at the inside quotation.
Furthermore, while the Commission
remains concerned about providing
enough incentives for market
participants to display limit orders, the
Commission does not believe that
granting this exemption (and approving
the accompanying proposed rule
change) will reduce such incentives.
Market participants that display limit
orders currently are not able to interact
with marketable retail order flow
because it is almost entirely routed to
internalizing OTC market makers that
offer sub-penny executions.
Consequently, enabling the Exchange to
compete for this retail order flow
through the Program should not
materially detract from the current
incentives to display limit orders, while
potentially resulting in greater order
interaction and price improvement for
marketable retail orders. To the extent
that the Program may raise Manning and
best execution issues for broker-dealers,
these issues are already presented by the
existing practices of OTC market
makers.
The exemption being granted today is
limited to a one-year pilot. The
Exchange has stated that ‘‘sub-penny
trading and pricing could potentially
result in undesirable market behavior,’’
and, therefore, it will ‘‘monitor the
and that ‘‘sub-penny executions due to price
improvement are generally beneficial to retail
investors.’’ Id. at 37556.
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Program in an effort to identify and
address any such behavior.’’ 46
Furthermore, the Exchange has
represented that it ‘‘will produce data
throughout the pilot, which will include
statistics about participation, the
frequency and level of price
improvement provided by the Program,
and any effects on the broader market
structure.’’ 47 The Commission expects
to review the data and observations of
the Exchange before determining
whether and, if so, how to extend the
exemption from the Sub-Penny Rule.48
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,49 that the
proposed rule change (SR–NYSEArca–
2013–107) be, and hereby is, approved
on a one-year pilot basis.
It is also hereby ordered that,
pursuant to Rule 612(c) of Regulation
NMS, the Exchange is given a limited
exemption from Rule 612 of Regulation
NMS to allow it to accept and rank
orders priced equal to or greater than
$1.00 per share in increments of $0.001,
in the manner described in the proposed
rule changes above, on a one-year pilot
basis beginning with the effectiveness of
the proposed rule change.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.50
Kevin O’Neill,
Deputy Secretary.
[FR Doc. 2013–31131 Filed 12–27–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–71172; File No. SR–MIAX–
2013–58]
Self-Regulatory Organizations; Miami
International Securities Exchange LLC;
Notice of Filing of a Proposed Rule
Change To Amend the Exchange’s ByLaws
December 23, 2013.
Pursuant to the provisions of Section
19(b)(1) of the Securities Exchange Act
46 See Request for Sub-Penny Rule Exemption,
supra note 5, at 3, n.5.
47 See supra note 34 and accompanying text.
48 In particular, the Commission expects the
Exchange to observe how maker/taker transaction
charges, whether imposed by the Exchange or by
other markets, might impact the use of the Program.
Market distortions could arise where the size of a
transaction rebate, whether for providing or taking
liquidity, is greater than the size of the minimum
increment permitted by the Program ($0.001 per
share).
49 15 U.S.C. 78s(b)(2).
50 17 CFR 200.30–3(a)(12); 17 CFR 200.30–
3(a)(83).
PO 00000
Frm 00141
Fmt 4703
Sfmt 4703
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on December 9, 2013, Miami
International Securities Exchange LLC
(‘‘MIAX’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) a 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 the Substance
of the Proposed Rule Change
The Exchange is filing a proposal to
amend the Exchange’s By-Laws.
The text of the proposed rule change
is available on the Exchange’s Web site
at https://www.miaxoptions.com/filter/
wotitle/rule_filing, at MIAX’s principal
office, and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to: (i) Amend
certain sections of its By-Laws to
correspond with an Equity Rights
Program (‘‘ERP’’) recently established by
the Exchange; 3 and (ii) make other nonsubstantive revisions to reflect changes
since the Commission granted the
Exchange’s registration as a national
securities exchange on December 3,
2012.4
The filing corresponds with the
recently implemented ERP, pursuant to
which units representing the right to
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 70498
(September 25, 2013), 78 FR 60348 (October 1,
2013) (SR–MIAX–2013–43).
4 See Securities Exchange Act Release No. 68341
(December 3, 2012), 77 FR 73089 (December 7,
2012) (File No. 10–207).
2 17
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Agencies
[Federal Register Volume 78, Number 250 (Monday, December 30, 2013)]
[Notices]
[Pages 79524-79530]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-31131]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71176; File No. SR-NYSEArca-2013-107]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval to Proposed Rule Change To Establish a Retail Liquidity
Program on a Pilot Basis for a Period of One Year From the Date of
Implementation and Granting Request for a Limited Exemption From Rule
612 of Regulation NMS
December 23, 2013.
I. Introduction
On October 22, 2013, NYSE Arca, Inc. (``NYSE Arca'' 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 establish a Retail Liquidity Program
(``Program'') on a pilot basis for a period of one year from the date
of implementation. The proposed rule change was published for comment
in the Federal Register on November 13, 2013.\3\ The Commission did not
receive any comments on the proposed rule
[[Page 79525]]
change. In connection with the proposal, the Exchange requested
exemptive relief from Rule 612 of Regulation NMS,\4\ which, among other
things, prohibits a national securities exchange from accepting or
ranking orders priced greater than $1.00 per share in an increment
smaller than $0.01.\5\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 70824 (Nov. 6,
2013), 78 FR 68116 (``Notice'').
\4\ 17 CFR 242.612 (``Sub-Penny Rule'').
\5\ See Letter from Janet McGinness, EVP & Corporate Secretary,
NYSE Euronext, to Elizabeth M. Murphy, Secretary, Commission (Oct.
11, 2013) (``Request for Sub-Penny Rule Exemption'').
---------------------------------------------------------------------------
This order approves the proposed rule change and grants the
exemption from the Sub-Penny Rule sought by the Exchange in relation to
the proposed rule change.
II. Description of the Proposals
Overview
The Exchange is proposing a 12-month pilot program to attract
additional retail order flow to the Exchange, while also providing the
potential for price improvement to this order flow. The Program would
be limited to trades occurring at prices equal to or greater than $1.00
per share.\6\ The Program would include NYSE Arca-listed securities and
UTP Securities, but it would exclude NYSE-listed securities.
---------------------------------------------------------------------------
\6\ The Exchange notes that certain orders submitted to the
Program designated as eligible to interact with liquidity outside of
the Program--Type 2 Retail Orders, which are discussed below--could
execute at prices below $1.00 if they do in fact execute against
liquidity outside of the Program.
---------------------------------------------------------------------------
Under the proposed Program, a new class of market participants
called Retail Liquidity Providers (``RLPs'') would be able to provide
potential price improvement to designated retail orders by submitting a
Retail Price Improvement Order (``RPI Order''), which would be a non-
displayed order that is priced better than the Exchange's best
protected bid or offer (``PBBO'').\7\ RLPs could receive special
execution fees for executing against retail orders in exchange for
satisfying certain specified quoting obligations.\8\ Other Exchange
member organizations \9\ would be allowed, but not required, to submit
RPI Orders. When there is an RPI Order in a particular security, the
Exchange would disseminate an indicator, called the Retail Liquidity
Identifier, to indicate that such interest exists. In response to the
indicator, a new class of market participants known as Retail Member
Organizations (``RMOs'') could submit a new type of order, called a
Retail Order, to the Exchange. A Retail Order would interact, to the
extent possible, with available contra-side RPI Orders and then may
interact with other liquidity on the Exchange or elsewhere, depending
on the Retail Order's instructions. The Exchange would approve ETP
Holders to be RLPs or RMOs.
---------------------------------------------------------------------------
\7\ The terms protected bid and protected offer would have the
same meaning as defined in Rule 600(b)(57) of Regulation NMS. Rule
600(b)(57) of Regulation NMS defines ``protected bid'' and
``protected offer'' as ``a quotation in an NMS stock that: (i) [i]s
displayed by an automated trading center; (ii) [i]s disseminated
pursuant to an effective national market system plan; and (iii) [i]s
an automated quotation that is the best bid or best offer of a
national securities exchange, the best bid or best offer of the
Nasdaq Stock Market, Inc., or the best bid or best offer of a
national securities association other than the best bid or best
offer of the Nasdaq Stock Market, Inc.'' 17 CFR 242.600(b)(57).
\8\ The Exchange stated in its filing that it would submit a
separate proposal to amend its Price List to reflect the fees and
credits connected to the program.
\9\ NYSE Arca refers to its members as Equity Trading Permit
(``ETP'') Holders.
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Types of Orders and the Retail Liquidity Identifier
An RPI Order would be non-displayed interest in NYSE Arca-listed
securities and UTP Securities, excluding NYSE-listed (Tape A)
securities, that is priced more aggressively than the PBBO by at least
$0.001 per share and that is identified as an RPI Order in a manner
prescribed by the Exchange. RPI Orders would be entered at a single
limit price, rather than being pegged to the PBBO, although an RPI
Order could also be designated as a Mid-Point Passive Liquidity
(``MPL'') Order, in which case the order would re-price as the PBBO
changes.\10\ RPI Orders would remain non-displayed and could only
execute against Retail Orders.
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\10\ RPI Orders not designated as MPL Orders would alternatively
need to be designated as a PL Order. As noted above, supra note 12,
MPL and PL Orders are defined in Exchange Rule 7.31(h).
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When an RPI Order priced at least $0.001 better than the Exchange's
PBBO for a particular security is available in the System, the Exchange
would disseminate an identifier, known as the Retail Liquidity
Identifier, indicating that such interest exists. The identifier would
be disseminated through the Consolidated Quotation System (``CQS''),
the UTP Quote Data Feed, and the Exchange's proprietary data feed. The
identifier would reflect the symbol for a particular security and the
side (buy or sell) of the RPI Order, but it would not include the price
or size of such interest.
A Retail Order would be an agency or riskless principal \11\ order
that originates from a natural person and is submitted to the Exchange
by an RMO, provided that no change is made to the terms of the order
with respect to price (except in the case of a market order being
changed to a marketable limit order) or side of market and provided
that the order does not originate from a trading algorithm or any other
computerized methodology. Retail Orders could be entered in sizes that
are odd lots, rounds lots, or mixed lots.
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\11\ In order to qualify as a ``Retail Order,'' a ``riskless
principal'' order must satisfy the criteria set forth in FINRA Rule
5320.03. RMOs that submit riskless principal orders as Retail Orders
must maintain supervisory systems to reconstruct such orders in a
time-sequenced manner, and the RMOs must submit reports,
contemporaneously with the execution of the facilitated orders, that
identify such trades as riskless principal.
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Under the proposal, an RMO that submits a Retail Order could choose
one of two designations to dictate how that order would interact with
available contra-side interest.
First, a Retail Order could interact only with available contra-
side RPI Orders, as well as other non-displayed liquidity \12\ and
displayable odd-lot interest priced better than the PBBO on the
opposite side of the Retail Order, excluding contra-side Retail Orders.
The Exchange would label this a Type 1 Retail Order, and such an order
would not interact with available non-price-improving, contra-side
interest in Exchange systems or route to other markets. Portions of a
Type 1 Retail Order that are not executed would be cancelled
immediately and automatically.
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\12\ Such other non-displayed liquidity would include, for
example, Passive Liquidity (``PL'') Orders and Mid-Point Passive
Liquidity (``MPL'') Orders. These orders are defined in Exchange
Rule 7.31(h). However, any Retail Order could be designated with a
``No Midpoint Execution'' modifier, pursuant to existing Exchange
Rule 7.31(h)(5); an order so designated would not execute against
resting MPL Orders but would execute against eligible RPIs that are
also designated as MPL Orders.
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Second, a Retail Order could interact first with available contra-
side RPI Orders and other price-improving liquidity, and any remaining
portion would be eligible to interact with other interest in the System
and, if designated as eligible for routing, would route to other
markets in compliance with Regulation NMS. The Exchange would label
this a Type 2 Retail Order. Type 2 orders could be marked as Immediate
or Cancel, Day, or Market. A Type 2 IOC order would interact first with
available contra-side RPI Orders and other price improving liquidity,
excluding contra-side Retail Orders, and then any remaining portion of
the Retail Order would be executed as a limit order marked as an IOC,
pursuant to Exchange Rule 7.31(e)(2). For Type 2 Day orders, any shares
that remain after executing against contra-side RPI Orders or other
price-improving liquidity would
[[Page 79526]]
execute against other liquidity available on the Exchange or be routed
to other market centers for execution; any remaining portion of the
order would thereafter post to the NYSE Arca Book.\13\ Type 2 Market
orders would execute first against RPI Orders or other price-improving
liquidity, and they would then be executed as a typical Exchange Market
Order.\14\
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\13\ Exchange Rule 1.1(a) defines the ``NYSE Arca Book'' as
``the NYSE Arca Marketplace's electronic file of orders, which
contains all the User's orders in each of the Directed Order,
Display Order, Working Order and Tracking Order Processes.''
\14\ The Exchange noted that Type 2 Market orders would be
subject to the Exchange's trading collars. See NYSE Arca Equities
Rule 7.31(a).
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Priority and Allocation
Under proposed NYSE Arca Equities Rule 7.44(l), the Exchange would
rank and allocate RPI Orders in a particular security together with all
other non-displayed interest according to their price first and then,
at any given price point, by their time of entry into the system.\15\
Any displayable odd-lot interest priced between the PBBO would be
ranked ahead of any RPIs and other non-displayed interest at a given
price point.
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\15\ The Exchange sets forth its price-time priority scheme in
its Rule 7.36.
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Following execution against a Retail Order, any remaining
unexecuted portion of an RPI Order would remain available to interact
with other incoming Retail Orders if the remainder of the RPI Order
were at an eligible price, i.e., better than the PBBO by at least
$0.001. Any remaining unexecuted portion of a Retail Order would
cancel, execute, or post to the NYSE Arca Book in accordance with its
order type designation, as explained above and set forth in proposed
Exchange Rule 7.44(k).
Retail Member Organizations
In order to become an RMO, an ETP Holder must conduct a retail
business or handle retail orders on behalf of another broker-dealer.
Any ETP Holder that wishes to obtain RMO status would be required to
submit: (1) An application form; (2) an attestation, in a form
prescribed by the Exchange, that substantially all orders submitted by
the ETP Holder as Retail Orders would meet the qualifications for such
orders under proposed Exchange Rule 7.44; and (3) supporting
documentation sufficient to demonstrate the retail nature and
characteristics of the applicant's order flow.\16\ If the Exchange
disapproves the application, it would provide written notice to the ETP
Holder. The disapproved applicant could appeal the disapproval as
provided below or re-apply 90 days after the disapproval notice is
issued by the Exchange. An RMO also could voluntarily withdraw from RMO
status at any time by giving written notice to the Exchange.
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\16\ For example, a prospective RMO could be required to provide
sample marketing literature, Web site screenshots, other publicly
disclosed materials describing the retail nature of its order flow,
and such other documentation and information as the Exchange may
require to obtain reasonable assurance that the applicant's order
flow would meet the requirements of the Retail Order definition.
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The Exchange would require an RMO to have written policies and
procedures reasonably designed to assure that it will only designate
orders as Retail Orders if all the requirements of a Retail Order are
met. Such written policies and procedures would have to require the ETP
Holder to exercise due diligence before entering a Retail Order to
assure that entry as a Retail Order is in compliance with the proposed
rule and to require the ETP Holder to monitor whether orders entered as
Retail Orders meet the applicable requirements. If an RMO represents
Retail Orders from another broker-dealer customer, the RMO's
supervisory procedures must be reasonably designed to assure that the
Retail Orders it receives from the broker-dealer customer meet the
definition of a Retail Order. The RMO must obtain an annual written
representation, in a form acceptable to the Exchange, from each broker-
dealer customer that sends it orders to be designated as Retail Orders.
The representation must state that entry of Retail Orders will be in
compliance with the requirements of this rule. The RMO must also
monitor whether its broker-dealer customer's Retail Order flow
continues to meet the applicable requirements.\17\
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\17\ The Exchange represents that it or another self-regulatory
organization on behalf of the Exchange will review an RMO's
compliance with these requirements through an exam-based review of
the RMO's internal controls. See Notice, supra note 3, 78 FR at
68117 n.10.
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Retail Liquidity Provider Qualifications and Admission
To qualify as an RLP under proposed Exchange Rule 7.44(c), an ETP
Holder must be approved as a Market Maker or Lead Market Maker \18\ on
the Exchange and demonstrate an ability to meet the requirements of a
being an RLP (discussed below). Moreover, the ETP Holder must have the
ability to accommodate Exchange-supplied designations that identify to
the Exchange RLP trading activity in assigned RLP securities and must
have adequate trading infrastructure and technology to support
electronic trading.
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\18\ The requirements for Market Makers are generally set forth
in NYSE Arca Equities Rule 7. The terms ``Market Maker'' and ``Lead
Market Maker'' are defined in NYSE Arca Equities Rule 1.1 (v) and
(ccc), respectively.
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An ETP Holder must submit an application with supporting
documentation to the Exchange. Thereafter, the Exchange would notify
the ETP Holder as to whether it was approved as an RLP. More than one
member organization could act as an RLP for a security, and an ETP
Holder could act as an RLP for more than one security. An ETP Holder
could ask to be assigned certain securities. Once approved, an RLP must
establish connectivity with relevant Exchange systems prior to trading.
The Exchange would notify an ETP Holder in writing if the Exchange
does not approve that firm's application to become an RLP. The ETP
Holder could then request an appeal as provided below. The ETP Holder
could also reapply 90 days after the Exchange issues the disapproval
notice.
Once approved, an RLP could withdraw by providing notice to the
Exchange. The withdrawal would become effective when the Exchange
reassigns the securities to another RLP, but no later than 30 days
after the Exchange receives the withdrawal notice. In the event that
the Exchange takes longer than 30 days to reassign the securities, the
withdrawing RLP would have no further obligations.
Retail Liquidity Provider Requirements
The proposed rule changes would impose several requirements on
RLPs. First, under proposed Rule 7.44(f), an RLP could enter, in its
role as an RLP, an RPI Order electronically into Exchange systems only
in its assigned securities.\19\ In order to be eligible for special
execution fees,\20\ an RLP must maintain RPI Orders that are better
than the PBBO at least 5% of the trading day for each assigned
security. An RLP would not receive special execution fees during a
month in which it had not satisfied its 5% quoting requirement.
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\19\ An RLP could enter RPI Orders into Exchange systems and
facilities for securities to which it was not assigned; however, it
would be not be doing so in its role as RLP and thus would not be
eligible for execution fees that are lower than non-RLP rates for
securities to which it was not assigned.
\20\ As noted above, supra note 8, the Exchange plans to submit
a separate filing to establish the levels of fees and credits
associated with the program.
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To calculate the 5% quoting requirement, the Exchange would
determine the average percentage of time an RLP maintains an RPI Order
in each assigned security during the regular trading day on a daily and
[[Page 79527]]
monthly basis. The Exchange would use the following definitions. The
``Daily Bid Percentage'' would be calculated by determining the
percentage of time an RLP maintains an RPI Order priced higher than the
best protected bid during each trading day for a calendar month. The
``Daily Offer Percentage'' would be calculated by determining the
percentage of time an RLP maintains an RPI Order priced lower than the
best protected offer during each trading day for a calendar month. The
``Monthly Average Bid Percentage'' would be calculated for each
security by summing the security's ``Daily Bid Percentages'' for each
trading day in a calendar month, then dividing the resulting sum by the
total number of trading days in that month. The ``Monthly Average Offer
Percentage'' would be calculated for each security by summing the
security's ``Daily Offer Percentages'' for each trading day in a
calendar month, then dividing the resulting sum by the total number of
trading days in that month.
The proposal specifies that only RPI Orders entered through the
trading day would be used when determining compliance with the 5%
quoting requirements. Further, an RLP would have an initial two-month
grace period, so that the Exchange would impose the 5% quoting
requirements on the first day of the third consecutive calendar month
after the member organization began operation as an RLP.
Penalties for Failure To Meet Requirements
The proposal provides for penalties when an RLP or RMPO fails to
meet the requirements of the rule.
If an RLP fails to meet the 5% quoting requirements in any assigned
security for three consecutive months, the Exchange, in its sole
discretion, may: (1) Revoke the assignment of any or all of the
affected securities; (2) revoke the assignment of unaffected
securities; or (3) disqualify the ETP Holder from its status as an
RLP.\21\ If the Exchange moves to disqualify an ETP Holder as an RLP,
then the Exchange would notify the ETP Holder in writing one calendar
month prior to the determination. Likewise, the Exchange would notify
the ETP Holder in writing if the Exchange ultimately determined to
disqualify the ETP Holder as an RLP. An RLP that is disqualified may
appeal as provided below or reapply.
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\21\ Additionally, as noted above, an RLP that failed to meet
its quoting obligations in a given month would not be eligible to
receive special execution fees for its RPI Orders for that month.
---------------------------------------------------------------------------
With respect to RMOs, the Exchange could disqualify an ETP Holder
from its RMO status if the Retail Orders submitted by the RMO did not
comply with the requirements of the proposed rule. The Exchange would
have sole discretion to make such a determination. The Exchange would
provide written notice to the RMO when a disqualification determination
was made. Similar to a disqualified RLP, a disqualified RMO could
appeal as provided below or reapply for RMO status.
Appeal Process
Under the proposal, the Exchange would establish a Retail Liquidity
Program Panel to review disapproval or disqualification decisions. An
affected ETP Holder would have five business days after notice to
request review. If an ETP Holder is disqualified as an RLP and has
appealed, the Exchange would stay the reassignment of securities
pending completion of the appeal process.
The Panel would consist of the NYSE's Chief Regulatory Officer, or
his or her designee, and two officers of the Exchange as designated by
the co-head of U.S. Listings and Cash Execution. The Panel would review
the appeal and issue a decision within a time frame prescribed by the
Exchange. The Panel's decision would constitute final action by the
Exchange, and the Panel could modify or overturn any Exchange
determinations made under the proposed rule.
Comparison With Existing Retail Programs on Other Markets
As the Exchange noted in its filing, the proposal is based on the
New York Stock Exchange's Retail Liquidity Program.\22\ It is also
shares features with similar retail programs adopted by BATS Y-Exchange
(``BYX'') \23\ and The NASDAQ Stock Market (``NASDAQ'').\24\
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\22\ See Securities Exchange Act Release No. 67347 (July 3,
2012), 77 FR 40673 (July 10, 2012) (SR-NYSE-2011-55; SR-NYSEAmex-
2011-84) (``NYSE RLP Approval Order''). In the same order, the
Commission also approved a nearly identical Retail Liquidity Program
for NYSE MKT LLC (which was known as NYSE Amex LLC at the time it
filed its proposal). The initial one-year term of the NYSE RLP pilot
came to an end on July 31, 2013, and it was extended for a second
pilot year, until July 31, 2014. See Securities Exchange Act Release
No. 70096 (August 2, 2013), 78 FR 48535 (August 8, 2013).
\23\ See Securities Exchange Act Release No. 68303 (Nov. 27,
2012), 77 FR 71652 (Dec. 3, 2012) (``BYX RPI Approval Order'').
\24\ See Securities Exchange Act Release No. 69837 (Feb. 15,
2013), 78 FR 12397 (Feb. 22, 2013) (``NASDAQ RPI Approval Order'').
---------------------------------------------------------------------------
The Exchange's proposal differs from the NYSE RLP in three key
ways. First, the Exchange's proposal would allow all incoming Retail
Orders to execute against resting RPI Orders and other resting price
improving liquidity, just as the BYX and NASDAQ retail programs do.\25\
With the NYSE RLP, in contrast, a Type 1 Retail Order, will interact
only with available contra-side RPI Orders and will not interact with
other available contra-side interest in the NYSE's systems.\26\ Second,
the Exchange could provide price improvement to an incoming Retail
Order at multiple price levels. This is similar to how the BYX and
NASDAQ programs operate, and it differs from the NYSE RLP, which
executes an incoming Retail Order at a single clearing price level.\27\
Finally, because of technological limitations, the Exchange would not
offer the ability for RLPs to enter RPI Orders that track the PBBO, as
they often do in the NYSE RLP.\28\
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\25\ See BYX Rules 11.24(f)(1) and (2) and NASDAQ Rules
4780(f)(1) and (2) (providing that Retail Orders may execute against
both RPIs and other price improving interest).
\26\ See NYSE Rule 107C(k)(1). Additionally, pursuant to NYSE
Rules 107C(k)(2) and 107C(k)(3), a Type 2 Retail Order and a Type 3
Retail Order can interact with other non-RPI interest in the NYSE
systems; however, such interaction only occurs after a Retail Order
first executes against RPI Orders.
\27\ See Notice, supra note 3, 78 FR at 68121 (explaining this
distinction from the NYSE RLP and referencing the similarity with
BYX); see also Nasdaq RPI Approval Order, supra note 24, 78 FR at
12398 (explaining that NASDAQ's program would execute potentially at
multiple price levels, unlike the NYSE RLP).
\28\ See Notice, supra note 3, 78 FR at 68121 (discussing the
three key distinctions in greater detail). See also supra note 12
and accompanying text (noting that RPI Orders also designated as MPL
Orders would re-price as the PBBO changes).
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III. Discussion and Commission Findings
After careful review of the proposal, the Commission finds that the
proposed rule changes are consistent with the requirements of the Act
and the rules and regulations thereunder that are applicable to a
national securities exchange. In particular, the Commission finds that
the proposed rule change, subject to its term as a pilot, is consistent
with Section 6(b)(5) of the Act,\29\ which requires, among other
things, that the rules of a national securities exchange be designed to
prevent fraudulent and manipulative acts and practices; to promote just
and equitable principles of trade; to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities; to remove impediments to and perfect the mechanism of a
free and open market and a national market system; and, in general, to
protect
[[Page 79528]]
investors and the public interest; and not be designed to permit unfair
discrimination between customers, issuers, brokers or dealers.
---------------------------------------------------------------------------
\29\ 15 U.S.C. 78f(b)(5).
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The Commission finds that the Program, as it is proposed on a pilot
basis, is consistent with the requirements of the Act because the
Program is reasonably designed to benefit retail investors by providing
price improvement to retail order flow.\30\ The Commission also
believes that the Program could promote competition for retail order
flow among execution venues and that this could benefit retail
investors by creating additional price improvement opportunities for
their order flow.
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\30\ As discussed above, supra notes 22 to 28 and accompanying
text, the Commission recently approved similar programs for NYSE,
NYSE MKT, BATS-Y Exchange, and The NASDAQ Stock Market.
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Currently, most marketable retail order flow is executed in the OTC
markets, pursuant to bilateral agreements, without ever reaching a
public exchange. The Commission recently noted that ``a very large
percentage of marketable (immediately executable) order flow of
individual investors'' is executed, or ``internalized,'' by broker-
dealers in the OTC markets.\31\ A recent review of the order flow of
eight retail brokers revealed that nearly 100% of their customer market
orders were routed to OTC market makers.\32\ The same review found that
such routing is often done pursuant to arrangements under which retail
brokers route their order flow to certain OTC market makers in exchange
for payment.\33\
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\31\ See Securities Exchange Act Release No. 61358 (Jan. 14,
2010), 75 FR 3594, 3600 (Jan. 21, 2010) (``Concept Release on Equity
Market Structure'').
\32\ See id.
\33\ See id.
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To the extent that the Program may provide price improvement to
retail orders that equals what would be provided under OTC
internalization arrangements, the Program could benefit retail
investors. To better understand the Program's potential impact, data
concerning investor benefits, including the level of price improvement
provided by the Program, will be submitted by the Exchange \34\ and
would be reviewed by the Commission prior to any extension of the
Program beyond the proposed one-year pilot term, or any permanent
approval of the Program.
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\34\ The Exchange committed in the proposal to ``produce data
throughout the pilot, which would include statistics about
participation, the frequency and level of price improvement provided
by the Program, and any effects on the broader market structure.''
See Notice, supra note 3, 78 FR at 68120.
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The Program proposes to create additional price improvement
opportunities for retail investors by segmenting order flow on the
Exchange and requiring liquidity providers that want to interact with
such retail order flow to do so at a price at least $0.001 per share
better than the PBBO. The Commission finds that, while the Program
would treat retail order flow differently from order flow submitted by
other market participants, such segmentation would not be inconsistent
with Section 6(b)(5) of the Act, which requires that the rules of an
exchange are not designed to permit unfair discrimination. The
Commission previously has recognized that the markets generally
distinguish between individual retail investors, whose orders are
considered desirable by liquidity providers because such investors are
presumed on average to be less informed about short-term price
movements, and professional traders, whose orders are presumed on
average to be more informed.\35\ The Commission has further recognized
that, because of this distinction, liquidity providers are generally
more inclined to offer price improvement to less-informed retail orders
than to more-informed professional orders.\36\
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\35\ See, e.g., Nasdaq RPI Approval Order, supra note 24; BATS
RPI Approval Order, supra note 23; and NYSE RLP Approval Order,
supra note 22.
\36\ See, e.g., id.
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Absent opportunities for price improvement, retail investors may
encounter wider spreads that are a consequence of liquidity providers
interacting with informed order flow. By creating additional
competition for retail order flow, the Program is reasonably designed
to attract retail order flow to the exchange environment, while helping
to ensure that retail investors benefit from the better price that
liquidity providers are willing to give their orders.
The Commission notes that the Program might also create a desirable
opportunity for institutional investors to interact with retail order
flow that they are not able to reach currently. ETP Holders that are
not RLPs can seek to interact with Retail Orders by submitting RPI
Orders. Today, institutional investors often do not have the chance to
interact with marketable retail orders that are executed pursuant to
internalization arrangements. Thus, by submitting RPI Orders,
institutional investors may be able to reduce their possible adverse
selection costs by interacting with retail order flow.
When the Commission is engaged in rulemaking or the review of a
rule filed by a self-regulatory organization and is required to
consider or determine whether an action is necessary or appropriate in
the public interest, the Commission shall also consider, in addition to
the protection of investors, whether the action will promote
efficiency, competition, and capital formation.\37\ As discussed above,
the Commission believes this Program will promote competition for
retail order flow by allowing ETP Holders, either as RLPs, or on an ad
hoc basis, to submit RPI Orders to interact with Retail Orders. Such
competition may promote efficiency by facilitating the price discovery
process. Moreover, the Commission does not believe that the Program
will have a significant effect on, or create any new inefficiencies in,
current market structure. Finally, to the extent the Program is
successful in attracting retail order flow, it may generate additional
investor interest in trading securities, which may promote capital
formation.
---------------------------------------------------------------------------
\37\ See 15 U.S.C. 78c(f).
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The Commission also believes that the Program is sufficiently
tailored to provide the benefits of potential price improvement only to
bona fide retail order flow originating from natural persons.\38\ The
Commission finds that the Program provides an objective process by
which an ETP Holder could become an RMO and that it provides for
appropriate oversight by the Exchange to monitor for continued
compliance with the terms of these provisions. The Exchange has limited
the definition of Retail Order to an agency or riskless principal order
that originates from a natural person and not from a trading algorithm
or any other computerized methodology. Furthermore, a Retail Order must
be submitted by an RMO that is approved by the Exchange. In addition,
RMOs would be required to maintain written policies and procedures to
help ensure that they designate as Retail Orders only those orders that
qualify under the Program. If an ETP Holder's application to become an
RMO is denied by the Exchange, that member may appeal the determination
or re-apply. The Commission believes that these standards should help
ensure that order flow submitted into the Program is retail order flow,
thereby promoting just and equitable principles of trade and protecting
investors and the public interest, while also providing an
[[Page 79529]]
objective process through which ETP Holders may become RMOs.
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\38\ In addition, the Commission believes that the Program's
provisions concerning the approval and potential disqualification of
RMOs are not inconsistent with the Act. See, e.g., NYSE RLP Approval
Order, supra note 22, 77 FR at 40680 & n.77.
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In addition, the Commission finds that the Program's proposed
dissemination of a Retail Liquidity Identifier would increase the
amount of pricing information available to the marketplace and is
consistent with the Act. The identifier would be disseminated through
the consolidated public market data stream to advertise the presence of
an RPI Order with which Retail Orders could interact. The identifier
would reflect the symbol for a particular security and the side of the
RPI Order interest, but it would not include the price or size of such
interest. The identifier would alert market participants to the
existence of an RPI Order priced better than the PBBO and should
provide market participants with more information about the
availability of price improvement opportunities for retail orders than
is currently available.\39\
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\39\ As the Commission noted when approving the comparable
retail programs of other exchanges, the Commission believes that the
Program will not create any best execution challenges for brokers
that are not already present in today's markets. A broker's best
execution obligations are determined by a number of facts and
circumstances, including: (1) the character of the market for the
security (e.g., price, volatility, relative liquidity, and pressure
on available communications); (2) the size and type of transaction;
(3) the number of markets checked; (4) accessibility of the
quotation; and (5) the terms and conditions of the order which
result in the transaction. See, e.g., NYSE RLP Approval Order, supra
note 22, 77 FR at 40680 n.75 (citing FINRA Rule 5310).
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The Exchange stated that the proposed Program, which will operate
similar to the retail programs in place at the NYSE, NYSE MKT, BYX, and
NASDAQ, should encourage additional liquidity and competition among
exchange venues, while providing the potential for price improvement to
retail investors.\40\ The Exchange also noted that the Program would
differ from the existing NYSE RLP in that it would provide the maximum
price improvement available to incoming Retail Orders by allowing them
to interact with available contra-side RPI Orders and other price-
improving, contra-side interest. Moreover, the Exchange's Program would
allow Retail Orders to execute at multiple price levels, as opposed to
a single clearing price level. The Commission finds that the Program is
reasonably designed to enhance competition among market participants
and encourage competition among exchange venues. The Commission finds
further that the distinctions between the Exchange's Program and the
other approved retail programs are reasonably designed to enhance the
Program's price-improvement benefits to retail investors and,
therefore, are consistent with the Act.
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\40\ See notice, supra note 3, 78 FR at 68122.
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The Commission notes that it is approving the Program on a pilot
basis. Approving the Program on a pilot basis will allow the Exchange
and market participants to gain valuable practical experience with the
Program during the pilot period. This experience should allow the
Exchange and the Commission to determine whether modifications to the
Program are necessary or appropriate prior to any Commission decision
to approve the Program on a permanent basis. The Exchange also has
agreed to provide the Commission with a significant amount of data that
should assist the Commission in its evaluation of the Program.
Specifically, the Exchange has represented that it ``will produce data
throughout the pilot, which will include statistics about
participation, the frequency and level of price improvement provided by
the Program, and any effects on the broader market structure.'' \41\
The Commission expects that the Exchange will monitor the scope and
operation of the Program and study the data produced during that time
with respect to such issues and that the Exchange will propose any
modifications to the Program that may be necessary or appropriate.
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\41\ See supra note 34.
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The Commission also welcomes comments, and empirical evidence, on
the Program during the pilot period to further assist the Commission in
its evaluation of the Program. The Commission notes that any permanent
approval of the Program would require a proposed rule change by the
Exchange, and that the filing of a proposed rule change would provide
an opportunity for public comment prior to further Commission action.
V. Exemption From the Sub-Penny Rule
Pursuant to its authority under Rule 612(c) of Regulation NMS,\42\
the Commission hereby grants the Exchange a limited exemption from the
Sub-Penny Rule to operate the Program. For the reasons discussed below,
the Commission determines that such action is necessary or appropriate
in the public interest and that it is consistent with the protection of
investors. The exemption shall operate for a period of 12 months,
beginning with the effectiveness of the proposed rule change approved
today.
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\42\ 17 CFR 242.612(c).
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When the Commission adopted the Sub-Penny Rule in 2005, it
identified a variety of problems caused by sub-penny prices that the
Sub-Penny Rule was designed to address:
If investors' limit orders lose execution priority for a
nominal amount, investors may over time decline to use them, thus
depriving the markets of liquidity.
When market participants can gain execution priority for a
nominal amount, important customer protection rules such as exchange
priority rules and the Manning Rule could be undermined.
Flickering quotations that can result from widespread sub-
penny pricing could make it more difficult for broker-dealers to
satisfy their best execution obligations and other regulatory
responsibilities.
Widespread sub-penny quoting could decrease market depth
and lead to higher transaction costs.
Decreasing depth at the inside could cause institutions to
rely more on execution alternatives away from the exchanges,
potentially increasing fragmentation in the securities markets.\43\
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\43\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37551-52 (June 29, 2005).
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At the same time, the Commission ``acknowledge[d] the possibility
that the balance of costs and benefits could shift in a limited number
of cases or as the markets continue to evolve.'' \44\ Therefore, the
Commission also adopted Rule 612(c), which provides that the Commission
may grant exemptions from the Sub-Penny Rule, either unconditionally or
on specified terms and conditions, if it determined that such an
exemption is necessary or appropriate in the public interest and is
consistent with the protection of investors.
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\44\ Id. at 37553.
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The Commission believes that the Exchange's proposal is such a
case. As described above, under the current market structure, few
marketable retail orders in equity securities are routed to exchanges.
The vast majority of marketable retail orders are internalized by OTC
market makers, who typically pay retail brokers for their order flow.
Retail investors can benefit from such arrangements to the extent that
OTC market makers offer them price improvement over the NBBO. Price
improvement is typically offered in sub-penny amounts.\45\ An
internalizing
[[Page 79530]]
broker-dealer can offer sub-penny executions, provided that such
executions do not result from impermissible sub-penny orders or
quotations. Accordingly, OTC market makers typically select a sub-penny
price for a trade without quoting at that exact amount or accepting
orders from retail customers seeking that exact price. Exchanges--and
exchange member firms that submit orders and quotations to exchanges--
cannot compete for marketable retail order flow on the same basis,
because it would be impractical for exchange electronic systems to
generate sub-penny executions without exchange liquidity providers or
retail brokerage firms having first submitted sub-penny orders or
quotations, which the Sub-Penny Rule expressly prohibits.
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\45\ When adopting the Sub-Penny Rule, the Commission considered
certain comments that asked the Commission to prohibit broker-
dealers from offering sub-penny price improvement to their
customers, but declined to do so. The Commission stated that
``trading in sub-penny increments does not raise the same concerns
as sub-penny quoting'' and that ``sub-penny executions due to price
improvement are generally beneficial to retail investors.'' Id. at
37556.
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The limited exemption granted today should promote competition
between exchanges and OTC market makers in a manner that is reasonably
designed to minimize the problems that the Commission identified when
adopting the Sub-Penny Rule. Under the Program, sub-penny prices will
not be disseminated through the consolidated quotation data stream,
which should avoid quote flickering and associated reduced depth at the
inside quotation. Furthermore, while the Commission remains concerned
about providing enough incentives for market participants to display
limit orders, the Commission does not believe that granting this
exemption (and approving the accompanying proposed rule change) will
reduce such incentives. Market participants that display limit orders
currently are not able to interact with marketable retail order flow
because it is almost entirely routed to internalizing OTC market makers
that offer sub-penny executions. Consequently, enabling the Exchange to
compete for this retail order flow through the Program should not
materially detract from the current incentives to display limit orders,
while potentially resulting in greater order interaction and price
improvement for marketable retail orders. To the extent that the
Program may raise Manning and best execution issues for broker-dealers,
these issues are already presented by the existing practices of OTC
market makers.
The exemption being granted today is limited to a one-year pilot.
The Exchange has stated that ``sub-penny trading and pricing could
potentially result in undesirable market behavior,'' and, therefore, it
will ``monitor the Program in an effort to identify and address any
such behavior.'' \46\ Furthermore, the Exchange has represented that it
``will produce data throughout the pilot, which will include statistics
about participation, the frequency and level of price improvement
provided by the Program, and any effects on the broader market
structure.'' \47\ The Commission expects to review the data and
observations of the Exchange before determining whether and, if so, how
to extend the exemption from the Sub-Penny Rule.\48\
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\46\ See Request for Sub-Penny Rule Exemption, supra note 5, at
3, n.5.
\47\ See supra note 34 and accompanying text.
\48\ In particular, the Commission expects the Exchange to
observe how maker/taker transaction charges, whether imposed by the
Exchange or by other markets, might impact the use of the Program.
Market distortions could arise where the size of a transaction
rebate, whether for providing or taking liquidity, is greater than
the size of the minimum increment permitted by the Program ($0.001
per share).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\49\ that the proposed rule change (SR-NYSEArca-2013-107) be, and
hereby is, approved on a one-year pilot basis.
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\49\ 15 U.S.C. 78s(b)(2).
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It is also hereby ordered that, pursuant to Rule 612(c) of
Regulation NMS, the Exchange is given a limited exemption from Rule 612
of Regulation NMS to allow it to accept and rank orders priced equal to
or greater than $1.00 per share in increments of $0.001, in the manner
described in the proposed rule changes above, on a one-year pilot basis
beginning with the effectiveness of the proposed rule change.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\50\
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\50\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(83).
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Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2013-31131 Filed 12-27-13; 8:45 am]
BILLING CODE 8011-01-P