Self-Regulatory Organizations; New York Stock Exchange LLC; NYSE MKT LLC; Order Instituting Proceedings to Determine Whether To Disapprove Proposed Rule Changes To Establish an Institutional Liquidity Program on a One-Year Pilot Basis, 11849-11852 [2014-04552]

Download as PDF Federal Register / Vol. 79, No. 41 / Monday, March 3, 2014 / Notices Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NYSEMKT–2014–06. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR– NYSEMKT–2014–06, and should be submitted on or before March 24, 2014. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.18 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–04553 Filed 2–28–14; 8:45 am] mstockstill on DSK4VPTVN1PROD with NOTICES BILLING CODE 8011–01–P 18 17 CFR 200.30–3(a)(12). VerDate Mar<15>2010 19:40 Feb 28, 2014 Jkt 232001 SECURITIES AND EXCHANGE COMMISSION 11849 whether to disapprove the proposed rule changes. II. Description of the Proposals [Release No. 34–71609; File Nos. SR–NYSE– 2013–72; SR–NYSEMKT–2013–91] Self-Regulatory Organizations; New York Stock Exchange LLC; NYSE MKT LLC; Order Instituting Proceedings to Determine Whether To Disapprove Proposed Rule Changes To Establish an Institutional Liquidity Program on a One-Year Pilot Basis February 25, 2014. I. Introduction On November 7, 2013, New York Stock Exchange LLC (‘‘NYSE’’) and NYSE MKT LLC (‘‘NYSE MKT’’ and together with NYSE, the ‘‘Exchanges’’) each 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 an Institutional Liquidity Program (‘‘ILP’’ or ‘‘Program’’) on one-year pilot basis. The proposed rule changes were published for comment in the Federal Register on November 27, 2013.3 The Commission received three comments on the NYSE Proposal.4 On January 9, 2014, the Commission designated a longer period for Commission action on the proposed rule changes, until February 25, 2014.5 The Exchanges submitted a consolidated response letter on January 14, 2014.6 This order institutes proceedings under Section 19(b)(2)(B) of the Act to determine 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release Nos. 70909 (November 21, 2013), 78 FR 71002 (SR–NYSE– 2013–72) (‘‘NYSE Proposal’’); and 70910 (November 21, 2013), 78 FR 70992 (SR–NYSEMKT–2013–91) (‘‘NYSE MKT Proposal’’) (collectively, the ‘‘Proposals’’). 4 See Letters to the Commission from James Allen, Head, and Rhodri Pierce, Director, Capital Markets Policy, CFA Institute (Dec. 18, 2013) (‘‘CFA Letter’’); Clive Williams, Vice President and Global Head of Trading, Andrew M. Brooks, Vice President and Head of U.S. Equity Trading, and Christopher P. Hayes, Vice President and Legal Counsel, T. Rowe Price Associates, Inc. (Dec. 18, 2013) (‘‘T. Rowe Price Letter’’); and Theodore R. Lazo, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association (Dec. 20, 2013) (‘‘SIFMA Letter’’). The Commission notes that these comment letters address the NYSE Proposal only. However, since the Proposals are nearly identical, the Commission will consider the letters to address the NYSE MKT Proposal as well. 5 See Securities Exchange Act Release No. 71267, 79 FR 2738 (January 15, 2014). 6 See Letter to the Commission from Janet McGinnis, EVP & Corporate Secretary, NYSE Euronext (Jan. 14, 2014) (‘‘Response Letter’’). 2 17 PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 A. Overview Each Exchange is proposing to establish, for a pilot term of one year, an Institutional Liquidity Program intended to attract buying and selling interest in greater size to the NYSE for NYSE-listed securities and to NYSE MKT for NYSE MKT-listed securities and securities listed on the Nasdaq Stock Market and traded pursuant to unlisted trading privileges. To do so, the Program would introduce two new order types to facilitate interactions between market participants with blocksize trading interest and liquidity providers that submit orders that meet certain size thresholds. The Exchanges have characterized the Program as a ‘‘targeted size discovery mechanism’’ that would enable market participants to execute trades that are larger than the average size of trades executed on the Exchanges or in most dark pools.7 B. Proposed New Order Types—ILOs and OLOs The two proposed order types are the ‘‘Institutional Liquidity Order’’ (‘‘ILO’’) and the ‘‘Oversize Liquidity Order’’ (‘‘OLO’’). Generally, ILOs would represent non-displayed block-size interest: a limit order of at least 5,000 shares with a market value of at least $50,000 or a ‘‘child’’ order of an original ‘‘parent order’’ meeting these size requirements.8 OLOs would represent non-displayed orders of at least 500 shares (or at least 300 shares for less liquid securities) submitted to provide liquidity to ILOs. ILOs could be submitted with a Minimum Triggering Volume (‘‘MTV’’) instruction and would interact first with displayed interest at the Exchanges before interacting with other interest in the Program (i.e., OLOs and other resting ILOs) or routing to other markets. OLOs would interact only with ILOs. Orders within the Program would be executed according to price-size-time priority, rather than the Exchanges’ parity allocation. To qualify as an ILO, an order would need to be submitted to establish, increase, liquidate, or decrease a position in the subject security and could not be part of an expression of two-sided (i.e., market making) interest 7 See, e.g., NYSE Proposal, 78 FR at 71002. an ILO represented the child order of recorded parent instructions, the parent instruction would not need to be submitted in whole to the Program; instead, parts of the recorded parent order instruction could be executed in the Program, on the Exchanges outside of the Program, or at other venues. 8 Where E:\FR\FM\03MRN1.SGM 03MRN1 11850 Federal Register / Vol. 79, No. 41 / Monday, March 3, 2014 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES on the part of the account that originated the order. An ILO, or the recorded parent instruction of a child order, would need to satisfy applicable size requirements independently, meaning that interest could not be aggregated across multiple member organizations 9 to become eligible for participation in the Program. An ILO, or recorded parent order instruction, that initially met the minimum size requirements would not become ineligible to stay in the Program if it received a partial execution that reduced its size below the minimum size requirements. If an ILO or its recorded parent instruction were partially cancelled so that it became smaller than the Program’s minimum size requirements, the ILO would no longer be eligible to participate in the Program but would maintain its time priority in the Exchanges’ systems. An ILO could be designated Immediate-or-Cancel or entered as a Reserve Order, in which case the order or any residual unexecuted portion would remain executable against contraside interest in accordance with the Program’s rules. An ILO could also be submitted with an MTV requirement that would be a necessary condition for the order’s execution. ILOs could be submitted with one of two designations to dictate how and where they could execute. A Type-1 designated ILO would interact with other interest at the Exchange to which it was submitted, but it would not route to other markets. A Type-1 ILO would interact, at each price level, first with displayed interest in the respective Exchange’s systems, then available contra-side OLOs and ILOs in size-time priority, and then with any remaining non-displayed interest in the Exchange’s systems—except that a Type 1designated ILO would not trade through a protected quotation.10 A Type-2 ILO would interact with other interest at the Exchange to which it was submitted, but it could also route to away markets. The Type-2 ILO would interact, at each price level, first with displayed interest in the respective Exchange’s systems, then available 9 The term ‘‘member organization’’ is defined in NYSE Rule 2(b) and NYSE MKT Rule 2(b)— Equities, respectively, and includes Floor brokers acting as agents. 10 Any remaining portion of a Type-1 ILO would be cancelled if designated as a Regulation NMScompliant Immediate or Cancel Order pursuant to NYSE Rule 13 or NYSE MKT Rule 13—Equities, or if it were designated as a Reserve Order, it would rest on the Exchange’s book and be available to interact with other incoming contra-side OLOs, ILOs, and other available interest in the Exchange’s systems, provided it does not trade through a protected quotation. VerDate Mar<15>2010 19:40 Feb 28, 2014 Jkt 232001 contra-side OLOs and ILOs in size-time priority, and then with any remaining non-displayed interest in the Exchange’s systems; it would then route to away markets as necessary to avoid trading through a protected quotation.11 The Program would require member organizations that submit ILOs to maintain policies and procedures reasonably designed to ensure that applicable Program requirements are satisfied. The member organizations would further need to maintain records sufficient to reconstruct, in a timesequenced manner, all orders routed to the Exchanges as ILOs, including how parent order instructions from which child-order ILOs were derived met the Program’s size requirements and related to the child-order ILOs. The Exchanges would allow a member organization to presume that an account’s intent to establish, increase, liquidate, or decrease a position was bona fide, absent concrete indications to the contrary. According to the Exchanges, examples of such contrary indications include: (1) An account attempting to enter contemporaneous orders in the same security on both sides of the market; (2) An account entering a pattern of orders and cancellations apparently designed to implement a market-making or spreadtrading strategy; and (3) An account entering a pattern of cancellations that consistently produced positions that were smaller that the Program’s minimum size requirements. In addition to the ILO, the Program would create a second new order type, the OLO. The OLO would be a nondisplayed limit order with a minimum size of 500 shares, except for securities that trade with an Average Daily Volume of less than one million shares, in which case the minimum size would be 300 shares. An OLO that met the minimum size requirement and received a partial execution that reduced its size below the size requirement would still be eligible to interact with incoming ILOs. An OLO would become size ineligible if the size of the OLO was reduced below the minimum size requirement because of a partial cancellation. An OLO could be priced at, inside, or outside the Exchange’s protected best bid or offer (‘‘PBBO’’), or as non-displayed Primary Pegging Interest pursuant to NYSE Rule 13 or 11 Any remaining portion of a Type-2 ILO would be cancelled if designated as an Immediate or Cancel Order pursuant to NYSE Rule 13 or NYSE MKT Rule 13—Equities, or if designated as a Reserve Order, rest on the Exchange’s book and be available to interact with other incoming contraside OLOs, ILOs, and other available interest in the Exchange’s systems. PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 NYSE MKT Rule 13—Equities. As noted above, OLOs would be eligible to interact only with ILOs. The Exchanges, along with the Financial Industry Regulatory Authority (‘‘FINRA’’), would monitor activity in the Program and conduct surveillance for non-compliance with Program rules. The Exchanges would exclude noncompliant member organizations from participation in the Program when necessary to ensure that the Program functions properly. C. Proposed Priority and Allocation of Proposed Order Types The Exchanges have proposed that, in the Program, competing OLOs and ILOs would be ranked and allocated according to price, then size, then the time of their entry into each Exchange’s systems. The size priority of OLOs and ILOs would be based upon their initial size at time of entry, but any partial cancellations of OLOs or ILOs would reduce their original size for priority purposes. Displayed orders would have priority over equally priced ILOs and OLOs. An incoming ILO would execute first against displayed interest, then against contra-side ILOs and OLOs, and finally against any non-displayed interest in Exchange systems. Any remaining unexecuted ILO interest would remain available to interact with other incoming OLOs or ILOs if that ILO interest were at an eligible price, unless that interest were designated IOC. D. Proposed Liquidity Identifier The presence of OLOs or the remainder of partially executed ILOs in Exchange systems would be advertised with a new indicator, the Liquidity Identifier (‘‘Identifier’’), which would be disseminated through the Consolidated Quotation System. The Identifier would communicate only the presence of liquidity in a symbol and would not state the side, size, or price. The Exchanges have stated that the Identifier would be disseminated first by the Exchanges’ proprietary data feeds. The Exchanges have represented that the Identifier would be disseminated through the publicly-available Consolidated Quotation System as soon as practicable. E. Fees for the Program The Exchanges have represented that, after approval of the Program by the Commission, they would each submit a proposed rule filing to set fees for the Program. The Exchanges have represented that the anticipated fee schedule would charge member organizations for executions of their E:\FR\FM\03MRN1.SGM 03MRN1 Federal Register / Vol. 79, No. 41 / Monday, March 3, 2014 / Notices ILOs against OLOs and, conversely, would provide credits or free executions to member organizations for executions of their OLOs against the ILOs of other member organizations. If two ILOs executed against each other, the Exchanges expect that they would charge both member organizations. III. Comments Letters and the Exchanges’ Response As noted above, the Commission has received three comment letters on the proposed Program. One commenter was supportive of the Proposals.12 This commenter stated its belief that the Program should improve the executions of institutional investors trading in large size and reduce transaction costs in such trades.13 Additionally, the commenter stated its belief that the ability of ILOs to interact with displayed orders should not negatively affect, and may even positively affect, the incentives to use displayed markets.14 The two remaining commenters expressed concern with the Program. Both commenters suggested that the Program would add undue complexity to the public equity markets. For instance, one commenter argued that the Program’s introduction of new order types would create another layer of quoting, additional messaging, and undue complexity to order routing.15 The other commenter questioned whether it is appropriate to add additional message traffic to the Securities Information Processor, particularly message traffic that serves only one market and not the investing public at large.16 The two commenters also argued that the Program could segment order flow in a way that is inconsistent with the role that public exchanges are supposed to play in the marketplace. One commenter stated its belief that the Proposals would further chip away at the statutory mandate that exchanges provide fair, equal, non-discriminatory, and open access and that the Program would reflect a departure from the idea that exchanges are meant to provide interaction among all types of orders.17 12 See 13 Id. CFA Letter. at 2. 14 Id. 15 See T. Rowe Price Letter at 1. SIFMA Letter at 5. This commenter also took the position that the Program’s use of the Liquidity Identifier could implicate the same concerns that the Commission voiced in 2009 when it proposed a rule that would, among other things, address the use of privately transmitted actionable ‘‘indications of interest.’’ See id. at 4 (citing Securities Exchange Act Release No. 60997 (November 13, 2009), 74 FR 61208 (November 23, 2009) (‘‘Regulation of Non-Public Trading Interest’’)). 17 See T. Rowe Price Letter at 1–2. mstockstill on DSK4VPTVN1PROD with NOTICES 16 See VerDate Mar<15>2010 19:40 Feb 28, 2014 Jkt 232001 In this commenter’s view, exchanges and dark pools serve distinct purposes and the Program could ‘‘further blur the lines’’ between exchanges and dark pools in a way that ‘‘will unnecessarily increase market fragmentation and dilute an investor’s ability to gauge best execution.’’ 18 The other commenter raised similar issues and stated its belief that the Commission should address how permitting an exchange to segment order flow is consistent with the exchanges’ obligation under Section 6(b)(5) of the Act to prevent unfair discrimination among market participants.19 Additionally, both commenters disagreed with the Exchanges about the extent to which the Program could provide public benefit. One commenter questioned whether the Program would in fact encourage lit markets and increased price discovery, since the new order types would not be displayed.20 The other commenter expressed doubt that the Program could attract block-size interest and instead thought it was more likely that the Program would only receive child orders from larger blocksize parent orders.21 The commenter then stated its belief that the goal of increasing exchange execution volumes does not support a change in legal and regulatory policy.22 In response to these comments, the Exchanges’ Response Letter contended that the Program is justified by the potential benefits it could provide to the public markets. According to the Exchanges, the Program would improve market structure by addressing three concerns: (1) The migration toward dark venues of orders entered by investors who are less informed with respect to short-term price movements; (2) The related isolation of such orders from displayed liquidity; and (3) The selective pre-trade transparency and inadequate post-trade transparency of broker internalization venues and dark pools.23 The Response Letter asserted that competition with dark pools would provide a more transparent and pricecompetitive environment for the interaction of large orders and would reduce transaction costs; in the Exchanges’ view, Section 11A of the Act promotes such competition. Additionally, the Exchanges noted that the dissemination of the Identifier could bolster pre-trade transparency and stimulate further the expression of 18 Id. at 1. SIFMA Letter at 3. 20 See T. Rowe Price Letter at 2. 21 See SIFMA Letter at 3. 22 See id. 23 See Response Letter at 5. 19 See PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 11851 institutional interest and the interest of liquidity providers that seek to interact with institutional orders.24 The Exchanges further argued that, because ILO’s must first interact with displayed orders, ‘‘the Program offers balanced and limited segmentation to enhance the discovery of size on the Exchanges and potentially increases the incentives for public price discovery.’’ 25 Ultimately, the Exchanges argued, the Program ‘‘has the potential to enhance the transparency and price competition associated with the execution of larger orders and should be considered in the current competitive and regulatory context rather than deferred until the fundamental structural issues referenced [by the commenters] are addressed.’’ 26 IV. Proceedings To Determine Whether to Disapprove SR–NYSE–2013–72 and SR–NYSEMKT–2013–91 and Grounds for Disapproval Under Consideration The Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Act 27 to determine whether the Proposals should be disapproved. Institution of such proceedings is appropriate at this time in view of the legal and policy issues raised by the Proposals. Institution of disapproval proceedings does not indicate that the Commission has reached any conclusions with respect to any of the issues involved. Rather, as described in greater detail below, the Commission seeks and encourages interested persons to provide additional comment on the Proposals. Pursuant to Section 19(b)(2)(B),28 the Commission is providing notice of the grounds for disapproval under consideration. The Commission believes that the Program, which would seek to attract larger trading interest to the Exchanges, raises important marketstructure issues that warrant further public comment and Commission consideration. The Program would create a separate liquidity pool within 24 See id. at 1. at 5–6. 26 Id. at 8. The Exchanges also responded to the point raised in the SIFMA Letter about whether the Liquidity Identifier could implicate the same concerns that the Commission has raised with respect to privately transmitted actionable indications of interest. The Exchanges noted that the Identifier is different than an actionable indication of interest because it communicates only the symbol, not the side, size or price of an OLO or ILO. Furthermore, the Exchanges noted that the identifier would not be private or limited to select market participants; rather, the Exchanges noted their intent to disseminate the identifier through the publicly available Consolidated Quotation System. See id. at 6–7. 27 15 U.S.C. 78s(b)(2)(B). 28 See id. 25 Id. E:\FR\FM\03MRN1.SGM 03MRN1 11852 Federal Register / Vol. 79, No. 41 / Monday, March 3, 2014 / Notices each Exchange that would not be accessible to all market participants, and the Commission believes that proceedings are appropriate to consider (1) Whether the Program’s segmentation of order flow would inhibit price discovery and order interaction on an exchange, (2) Whether the potential complexity of the Program would detract from the efficient execution of securities transactions or the maintenance of fair and orderly markets, (3) Whether the Program would permit unfair discrimination, and (4) Whether the Program would create an unnecessary or inappropriate burden on competition. Accordingly, the Commission is instituting proceedings to allow for additional analysis of the proposed rule changes’ consistency with Section 6(b)(5) of the Act,29 which requires that the rules of a national securities exchange promote just and equitable principles of trade, perfect the mechanism of a free and open market and a national market system, protect investors and the public interest, and not permit unfair discrimination, and with Section 6(b)(8) of the Act,30 which requires that the rules of an exchange not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. V. Procedure: Request for Written Comments The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to the concerns identified above, as well as any others they may have with the Proposals. In particular, the Commission invites the written views of interested persons concerning whether the proposed rule changes are inconsistent with Section 6(b)(5) or any other provision of the Act, or the rules and regulation thereunder. Although there do not appear to be any issues relevant to approval or disapproval which would be facilitated by an oral presentation of views, data, and arguments, the Commission will consider, pursuant to Rule 19b-4, any request for an opportunity to make an oral presentation.31 29 15 U.S.C. 78f(b)(5). U.S.C. 78f(b)(8). 31 Section 19(b)(2) of the Act, as amended by the Securities Act Amendments of 1975, Public Law 94–29 (June 4, 1975), grants the Commission flexibility to determine what type of proceeding— either oral or notice and opportunity for written comments—is appropriate for consideration of a particular proposal by a self-regulatory organization. See Securities Act Amendments of 1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975). mstockstill on DSK4VPTVN1PROD with NOTICES 30 15 VerDate Mar<15>2010 19:40 Feb 28, 2014 Jkt 232001 Interested persons are invited to submit written data, views, and arguments regarding whether the proposed rule changes should be disapproved by March 24, 2014. Any person who wishes to file a rebuttal to any other person’s submission must file that rebuttal by April 7, 2014. Comments may be submitted by any of the following methods: For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.32 Kevin M. O’Neill, Deputy Secretary. Electronic Comments Agency Information Collection Activities: Proposed Request and Comment Request • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml ); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NYSE–2013–72 or SR–NYSEMKT– 2013–91 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NYSE–2013–72 or SR– NYSEMKT–2013–91. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make publicly available. All submissions should refer to File Number SR–NYSE– 2013–72 or SR–NYSEMKT–2013–91 and should be submitted on or before March 24, 2014. Rebuttal comments should be submitted by April 7, 2014. PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 [FR Doc. 2014–04552 Filed 2–28–14; 8:45 am] BILLING CODE 8011–01–P SOCIAL SECURITY ADMINISTRATION The Social Security Administration (SSA) publishes a list of information collection packages requiring clearance by the Office of Management and Budget (OMB) in compliance with Public Law 104–13, the Paperwork Reduction Act of 1995, effective October 1, 1995. This notice includes revisions of OMB-approved information collections. SSA is soliciting comments on the accuracy of the agency’s burden estimate; the need for the information; its practical utility; ways to enhance its quality, utility, and clarity; and ways to minimize burden on respondents, including the use of automated collection techniques or other forms of information technology. Mail, email, or fax your comments and recommendations on the information collection(s) to the OMB Desk Officer and SSA Reports Clearance Officer at the following addresses or fax numbers. (OMB) Office of Management and Budget, Attn: Desk Officer for SSA, Fax: 202–395–6974, Email address: OIRA_Submission@omb.eop.gov. (SSA) Social Security Administration, OLCA, Attn: Reports Clearance Director, 3100 West High Rise, 6401 Security Blvd., Baltimore, MD 21235, Fax: 410–966–2830, Email address: OR.Reports.Clearance@ssa.gov. I. The information collections below are pending at SSA. SSA will submit them to OMB within 60 days from the date of this notice. To be sure we consider your comments, we must receive them no later than May 2, 2014. Individuals can obtain copies of the collection instruments by writing to the above email address. 1. Disability Update Report—20 CFR 404.1589–404.1595 and 416.988– 416.996—0960–0511. As part of our statutory requirements, SSA periodically uses Form SSA–455, the Disability Update Report, to evaluate current Title II disability beneficiaries’ and Title XVI disability payment recipients’ continued eligibility for 32 17 E:\FR\FM\03MRN1.SGM CFR 200.30–3(a)(57). 03MRN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 79, Number 41 (Monday, March 3, 2014)]
[Notices]
[Pages 11849-11852]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-04552]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71609; File Nos. SR-NYSE-2013-72; SR-NYSEMKT-2013-91]

Self-Regulatory Organizations; New York Stock Exchange LLC; NYSE
MKT LLC; Order Instituting Proceedings to Determine Whether To
Disapprove Proposed Rule Changes To Establish an Institutional
Liquidity Program on a One-Year Pilot Basis

February 25, 2014.

I. Introduction

On November 7, 2013, New York Stock Exchange LLC (``NYSE'') and
NYSE MKT LLC (``NYSE MKT'' and together with NYSE, the ``Exchanges'')
each 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 an Institutional Liquidity Program (``ILP'' or ``Program'')
on one-year pilot basis. The proposed rule changes were published for
comment in the Federal Register on November 27, 2013.\3\ The Commission
received three comments on the NYSE Proposal.\4\ On January 9, 2014,
the Commission designated a longer period for Commission action on the
proposed rule changes, until February 25, 2014.\5\ The Exchanges
submitted a consolidated response letter on January 14, 2014.\6\ This
order institutes proceedings under Section 19(b)(2)(B) of the Act to
determine whether to disapprove the proposed rule changes.
---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release Nos. 70909 (November 21,
2013), 78 FR 71002 (SR-NYSE-2013-72) (``NYSE Proposal''); and 70910
(November 21, 2013), 78 FR 70992 (SR-NYSEMKT-2013-91) (``NYSE MKT
Proposal'') (collectively, the ``Proposals'').
\4\ See Letters to the Commission from James Allen, Head, and
Rhodri Pierce, Director, Capital Markets Policy, CFA Institute (Dec.
18, 2013) (``CFA Letter''); Clive Williams, Vice President and
Global Head of Trading, Andrew M. Brooks, Vice President and Head of
U.S. Equity Trading, and Christopher P. Hayes, Vice President and
Legal Counsel, T. Rowe Price Associates, Inc. (Dec. 18, 2013) (``T.
Rowe Price Letter''); and Theodore R. Lazo, Managing Director and
Associate General Counsel, Securities Industry and Financial Markets
Association (Dec. 20, 2013) (``SIFMA Letter''). The Commission notes
that these comment letters address the NYSE Proposal only. However,
since the Proposals are nearly identical, the Commission will
consider the letters to address the NYSE MKT Proposal as well.
\5\ See Securities Exchange Act Release No. 71267, 79 FR 2738
(January 15, 2014).
\6\ See Letter to the Commission from Janet McGinnis, EVP &
Corporate Secretary, NYSE Euronext (Jan. 14, 2014) (``Response
Letter'').
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II. Description of the Proposals

A. Overview

Each Exchange is proposing to establish, for a pilot term of one
year, an Institutional Liquidity Program intended to attract buying and
selling interest in greater size to the NYSE for NYSE-listed securities
and to NYSE MKT for NYSE MKT-listed securities and securities listed on
the Nasdaq Stock Market and traded pursuant to unlisted trading
privileges. To do so, the Program would introduce two new order types
to facilitate interactions between market participants with block-size
trading interest and liquidity providers that submit orders that meet
certain size thresholds. The Exchanges have characterized the Program
as a ``targeted size discovery mechanism'' that would enable market
participants to execute trades that are larger than the average size of
trades executed on the Exchanges or in most dark pools.\7\
---------------------------------------------------------------------------

\7\ See, e.g., NYSE Proposal, 78 FR at 71002.
---------------------------------------------------------------------------

B. Proposed New Order Types--ILOs and OLOs

The two proposed order types are the ``Institutional Liquidity
Order'' (``ILO'') and the ``Oversize Liquidity Order'' (``OLO'').
Generally, ILOs would represent non-displayed block-size interest: a
limit order of at least 5,000 shares with a market value of at least
$50,000 or a ``child'' order of an original ``parent order'' meeting
these size requirements.\8\ OLOs would represent non-displayed orders
of at least 500 shares (or at least 300 shares for less liquid
securities) submitted to provide liquidity to ILOs. ILOs could be
submitted with a Minimum Triggering Volume (``MTV'') instruction and
would interact first with displayed interest at the Exchanges before
interacting with other interest in the Program (i.e., OLOs and other
resting ILOs) or routing to other markets. OLOs would interact only
with ILOs. Orders within the Program would be executed according to
price-size-time priority, rather than the Exchanges' parity allocation.
---------------------------------------------------------------------------

\8\ Where an ILO represented the child order of recorded parent
instructions, the parent instruction would not need to be submitted
in whole to the Program; instead, parts of the recorded parent order
instruction could be executed in the Program, on the Exchanges
outside of the Program, or at other venues.
---------------------------------------------------------------------------

To qualify as an ILO, an order would need to be submitted to
establish, increase, liquidate, or decrease a position in the subject
security and could not be part of an expression of two-sided (i.e.,
market making) interest

[[Page 11850]]

on the part of the account that originated the order. An ILO, or the
recorded parent instruction of a child order, would need to satisfy
applicable size requirements independently, meaning that interest could
not be aggregated across multiple member organizations \9\ to become
eligible for participation in the Program. An ILO, or recorded parent
order instruction, that initially met the minimum size requirements
would not become ineligible to stay in the Program if it received a
partial execution that reduced its size below the minimum size
requirements. If an ILO or its recorded parent instruction were
partially cancelled so that it became smaller than the Program's
minimum size requirements, the ILO would no longer be eligible to
participate in the Program but would maintain its time priority in the
Exchanges' systems.
---------------------------------------------------------------------------

\9\ The term ``member organization'' is defined in NYSE Rule
2(b) and NYSE MKT Rule 2(b)--Equities, respectively, and includes
Floor brokers acting as agents.
---------------------------------------------------------------------------

An ILO could be designated Immediate-or-Cancel or entered as a
Reserve Order, in which case the order or any residual unexecuted
portion would remain executable against contra-side interest in
accordance with the Program's rules. An ILO could also be submitted
with an MTV requirement that would be a necessary condition for the
order's execution.
ILOs could be submitted with one of two designations to dictate how
and where they could execute. A Type-1 designated ILO would interact
with other interest at the Exchange to which it was submitted, but it
would not route to other markets. A Type-1 ILO would interact, at each
price level, first with displayed interest in the respective Exchange's
systems, then available contra-side OLOs and ILOs in size-time
priority, and then with any remaining non-displayed interest in the
Exchange's systems--except that a Type 1-designated ILO would not trade
through a protected quotation.\10\
---------------------------------------------------------------------------

\10\ Any remaining portion of a Type-1 ILO would be cancelled if
designated as a Regulation NMS-compliant Immediate or Cancel Order
pursuant to NYSE Rule 13 or NYSE MKT Rule 13--Equities, or if it
were designated as a Reserve Order, it would rest on the Exchange's
book and be available to interact with other incoming contra-side
OLOs, ILOs, and other available interest in the Exchange's systems,
provided it does not trade through a protected quotation.
---------------------------------------------------------------------------

A Type-2 ILO would interact with other interest at the Exchange to
which it was submitted, but it could also route to away markets. The
Type-2 ILO would interact, at each price level, first with displayed
interest in the respective Exchange's systems, then available contra-
side OLOs and ILOs in size-time priority, and then with any remaining
non-displayed interest in the Exchange's systems; it would then route
to away markets as necessary to avoid trading through a protected
quotation.\11\
---------------------------------------------------------------------------

\11\ Any remaining portion of a Type-2 ILO would be cancelled if
designated as an Immediate or Cancel Order pursuant to NYSE Rule 13
or NYSE MKT Rule 13--Equities, or if designated as a Reserve Order,
rest on the Exchange's book and be available to interact with other
incoming contra-side OLOs, ILOs, and other available interest in the
Exchange's systems.
---------------------------------------------------------------------------

The Program would require member organizations that submit ILOs to
maintain policies and procedures reasonably designed to ensure that
applicable Program requirements are satisfied. The member organizations
would further need to maintain records sufficient to reconstruct, in a
time-sequenced manner, all orders routed to the Exchanges as ILOs,
including how parent order instructions from which child-order ILOs
were derived met the Program's size requirements and related to the
child-order ILOs.
The Exchanges would allow a member organization to presume that an
account's intent to establish, increase, liquidate, or decrease a
position was bona fide, absent concrete indications to the contrary.
According to the Exchanges, examples of such contrary indications
include: (1) An account attempting to enter contemporaneous orders in
the same security on both sides of the market; (2) An account entering
a pattern of orders and cancellations apparently designed to implement
a market-making or spread-trading strategy; and (3) An account entering
a pattern of cancellations that consistently produced positions that
were smaller that the Program's minimum size requirements.
In addition to the ILO, the Program would create a second new order
type, the OLO. The OLO would be a non-displayed limit order with a
minimum size of 500 shares, except for securities that trade with an
Average Daily Volume of less than one million shares, in which case the
minimum size would be 300 shares. An OLO that met the minimum size
requirement and received a partial execution that reduced its size
below the size requirement would still be eligible to interact with
incoming ILOs. An OLO would become size ineligible if the size of the
OLO was reduced below the minimum size requirement because of a partial
cancellation. An OLO could be priced at, inside, or outside the
Exchange's protected best bid or offer (``PBBO''), or as non-displayed
Primary Pegging Interest pursuant to NYSE Rule 13 or NYSE MKT Rule 13--
Equities. As noted above, OLOs would be eligible to interact only with
ILOs.
The Exchanges, along with the Financial Industry Regulatory
Authority (``FINRA''), would monitor activity in the Program and
conduct surveillance for non-compliance with Program rules. The
Exchanges would exclude non-compliant member organizations from
participation in the Program when necessary to ensure that the Program
functions properly.

C. Proposed Priority and Allocation of Proposed Order Types

The Exchanges have proposed that, in the Program, competing OLOs
and ILOs would be ranked and allocated according to price, then size,
then the time of their entry into each Exchange's systems. The size
priority of OLOs and ILOs would be based upon their initial size at
time of entry, but any partial cancellations of OLOs or ILOs would
reduce their original size for priority purposes.
Displayed orders would have priority over equally priced ILOs and
OLOs. An incoming ILO would execute first against displayed interest,
then against contra-side ILOs and OLOs, and finally against any non-
displayed interest in Exchange systems. Any remaining unexecuted ILO
interest would remain available to interact with other incoming OLOs or
ILOs if that ILO interest were at an eligible price, unless that
interest were designated IOC.

D. Proposed Liquidity Identifier

The presence of OLOs or the remainder of partially executed ILOs in
Exchange systems would be advertised with a new indicator, the
Liquidity Identifier (``Identifier''), which would be disseminated
through the Consolidated Quotation System. The Identifier would
communicate only the presence of liquidity in a symbol and would not
state the side, size, or price. The Exchanges have stated that the
Identifier would be disseminated first by the Exchanges' proprietary
data feeds. The Exchanges have represented that the Identifier would be
disseminated through the publicly-available Consolidated Quotation
System as soon as practicable.

E. Fees for the Program

The Exchanges have represented that, after approval of the Program
by the Commission, they would each submit a proposed rule filing to set
fees for the Program. The Exchanges have represented that the
anticipated fee schedule would charge member organizations for
executions of their

[[Page 11851]]

ILOs against OLOs and, conversely, would provide credits or free
executions to member organizations for executions of their OLOs against
the ILOs of other member organizations. If two ILOs executed against
each other, the Exchanges expect that they would charge both member
organizations.

III. Comments Letters and the Exchanges' Response

As noted above, the Commission has received three comment letters
on the proposed Program. One commenter was supportive of the
Proposals.\12\ This commenter stated its belief that the Program should
improve the executions of institutional investors trading in large size
and reduce transaction costs in such trades.\13\ Additionally, the
commenter stated its belief that the ability of ILOs to interact with
displayed orders should not negatively affect, and may even positively
affect, the incentives to use displayed markets.\14\
---------------------------------------------------------------------------

\12\ See CFA Letter.
\13\ Id. at 2.
\14\ Id.
---------------------------------------------------------------------------

The two remaining commenters expressed concern with the Program.
Both commenters suggested that the Program would add undue complexity
to the public equity markets. For instance, one commenter argued that
the Program's introduction of new order types would create another
layer of quoting, additional messaging, and undue complexity to order
routing.\15\ The other commenter questioned whether it is appropriate
to add additional message traffic to the Securities Information
Processor, particularly message traffic that serves only one market and
not the investing public at large.\16\
---------------------------------------------------------------------------

\15\ See T. Rowe Price Letter at 1.
\16\ See SIFMA Letter at 5. This commenter also took the
position that the Program's use of the Liquidity Identifier could
implicate the same concerns that the Commission voiced in 2009 when
it proposed a rule that would, among other things, address the use
of privately transmitted actionable ``indications of interest.'' See
id. at 4 (citing Securities Exchange Act Release No. 60997 (November
13, 2009), 74 FR 61208 (November 23, 2009) (``Regulation of Non-
Public Trading Interest'')).
---------------------------------------------------------------------------

The two commenters also argued that the Program could segment order
flow in a way that is inconsistent with the role that public exchanges
are supposed to play in the marketplace. One commenter stated its
belief that the Proposals would further chip away at the statutory
mandate that exchanges provide fair, equal, non-discriminatory, and
open access and that the Program would reflect a departure from the
idea that exchanges are meant to provide interaction among all types of
orders.\17\ In this commenter's view, exchanges and dark pools serve
distinct purposes and the Program could ``further blur the lines''
between exchanges and dark pools in a way that ``will unnecessarily
increase market fragmentation and dilute an investor's ability to gauge
best execution.'' \18\ The other commenter raised similar issues and
stated its belief that the Commission should address how permitting an
exchange to segment order flow is consistent with the exchanges'
obligation under Section 6(b)(5) of the Act to prevent unfair
discrimination among market participants.\19\
---------------------------------------------------------------------------

\17\ See T. Rowe Price Letter at 1-2.
\18\ Id. at 1.
\19\ See SIFMA Letter at 3.
---------------------------------------------------------------------------

Additionally, both commenters disagreed with the Exchanges about
the extent to which the Program could provide public benefit. One
commenter questioned whether the Program would in fact encourage lit
markets and increased price discovery, since the new order types would
not be displayed.\20\ The other commenter expressed doubt that the
Program could attract block-size interest and instead thought it was
more likely that the Program would only receive child orders from
larger block-size parent orders.\21\ The commenter then stated its
belief that the goal of increasing exchange execution volumes does not
support a change in legal and regulatory policy.\22\
---------------------------------------------------------------------------

\20\ See T. Rowe Price Letter at 2.
\21\ See SIFMA Letter at 3.
\22\ See id.
---------------------------------------------------------------------------

In response to these comments, the Exchanges' Response Letter
contended that the Program is justified by the potential benefits it
could provide to the public markets. According to the Exchanges, the
Program would improve market structure by addressing three concerns:
(1) The migration toward dark venues of orders entered by investors who
are less informed with respect to short-term price movements; (2) The
related isolation of such orders from displayed liquidity; and (3) The
selective pre-trade transparency and inadequate post-trade transparency
of broker internalization venues and dark pools.\23\ The Response
Letter asserted that competition with dark pools would provide a more
transparent and price-competitive environment for the interaction of
large orders and would reduce transaction costs; in the Exchanges'
view, Section 11A of the Act promotes such competition. Additionally,
the Exchanges noted that the dissemination of the Identifier could
bolster pre-trade transparency and stimulate further the expression of
institutional interest and the interest of liquidity providers that
seek to interact with institutional orders.\24\
---------------------------------------------------------------------------

\23\ See Response Letter at 5.
\24\ See id. at 1.
---------------------------------------------------------------------------

The Exchanges further argued that, because ILO's must first
interact with displayed orders, ``the Program offers balanced and
limited segmentation to enhance the discovery of size on the Exchanges
and potentially increases the incentives for public price discovery.''
\25\ Ultimately, the Exchanges argued, the Program ``has the potential
to enhance the transparency and price competition associated with the
execution of larger orders and should be considered in the current
competitive and regulatory context rather than deferred until the
fundamental structural issues referenced [by the commenters] are
addressed.'' \26\
---------------------------------------------------------------------------

\25\ Id. at 5-6.
\26\ Id. at 8. The Exchanges also responded to the point raised
in the SIFMA Letter about whether the Liquidity Identifier could
implicate the same concerns that the Commission has raised with
respect to privately transmitted actionable indications of interest.
The Exchanges noted that the Identifier is different than an
actionable indication of interest because it communicates only the
symbol, not the side, size or price of an OLO or ILO. Furthermore,
the Exchanges noted that the identifier would not be private or
limited to select market participants; rather, the Exchanges noted
their intent to disseminate the identifier through the publicly
available Consolidated Quotation System. See id. at 6-7.
---------------------------------------------------------------------------

IV. Proceedings To Determine Whether to Disapprove SR-NYSE-2013-72 and
SR-NYSEMKT-2013-91 and Grounds for Disapproval Under Consideration

The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \27\ to determine whether the Proposals should
be disapproved. Institution of such proceedings is appropriate at this
time in view of the legal and policy issues raised by the Proposals.
Institution of disapproval proceedings does not indicate that the
Commission has reached any conclusions with respect to any of the
issues involved. Rather, as described in greater detail below, the
Commission seeks and encourages interested persons to provide
additional comment on the Proposals.
---------------------------------------------------------------------------

\27\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

Pursuant to Section 19(b)(2)(B),\28\ the Commission is providing
notice of the grounds for disapproval under consideration. The
Commission believes that the Program, which would seek to attract
larger trading interest to the Exchanges, raises important market-
structure issues that warrant further public comment and Commission
consideration. The Program would create a separate liquidity pool
within

[[Page 11852]]

each Exchange that would not be accessible to all market participants,
and the Commission believes that proceedings are appropriate to
consider (1) Whether the Program's segmentation of order flow would
inhibit price discovery and order interaction on an exchange, (2)
Whether the potential complexity of the Program would detract from the
efficient execution of securities transactions or the maintenance of
fair and orderly markets, (3) Whether the Program would permit unfair
discrimination, and (4) Whether the Program would create an unnecessary
or inappropriate burden on competition.
---------------------------------------------------------------------------

\28\ See id.
---------------------------------------------------------------------------

Accordingly, the Commission is instituting proceedings to allow for
additional analysis of the proposed rule changes' consistency with
Section 6(b)(5) of the Act,\29\ which requires that the rules of a
national securities exchange promote just and equitable principles of
trade, perfect the mechanism of a free and open market and a national
market system, protect investors and the public interest, and not
permit unfair discrimination, and with Section 6(b)(8) of the Act,\30\
which requires that the rules of an exchange not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act.
---------------------------------------------------------------------------

\29\ 15 U.S.C. 78f(b)(5).
\30\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

V. Procedure: Request for Written Comments

The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
concerns identified above, as well as any others they may have with the
Proposals. In particular, the Commission invites the written views of
interested persons concerning whether the proposed rule changes are
inconsistent with Section 6(b)(5) or any other provision of the Act, or
the rules and regulation thereunder. Although there do not appear to be
any issues relevant to approval or disapproval which would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\31\
---------------------------------------------------------------------------

\31\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
---------------------------------------------------------------------------

Interested persons are invited to submit written data, views, and
arguments regarding whether the proposed rule changes should be
disapproved by March 24, 2014. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by April 7,
2014.
Comments may be submitted by any of the following methods:

Electronic Comments

Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml ); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NYSE-2013-72 or SR-NYSEMKT-2013-91 on the subject line.

Paper Comments

Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSE-2013-72 or SR-
NYSEMKT-2013-91. This file number should be included on the subject
line if email is used. To help the Commission process and review your
comments more efficiently, please use only one method. The Commission
will post all comments on the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml ). Copies of the submission, all subsequent
amendments, all written statements with respect to the proposed rule
change that are filed with the Commission, and all written
communications relating to the proposed rule change between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for Web site viewing and printing in the Commission's Public
Reference Room, 100 F Street NE., Washington, DC 20549, on official
business days between the hours of 10:00 a.m. and 3:00 p.m. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make publicly available. All
submissions should refer to File Number SR-NYSE-2013-72 or SR-NYSEMKT-
2013-91 and should be submitted on or before March 24, 2014. Rebuttal
comments should be submitted by April 7, 2014.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
---------------------------------------------------------------------------

\32\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-04552 Filed 2-28-14; 8:45 am]
BILLING CODE 8011-01-P

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