Self-Regulatory Organizations; Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change Adopting Rule 971.1NY for an Electronic Price Improvement Auction for Single-Leg Orders, 13711-13726 [2014-05179]
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Federal Register / Vol. 79, No. 47 / Tuesday, March 11, 2014 / Notices
2. Pipe delimited with field name as
first record
F. Data set of order events received
during Limit States
G. Summary data on order flow of
arrivals and cancellations for each
15-second period for discrete time
periods and sample stocks to be
determined by the SEC in
subsequent data requests. Must
indicate side(s) of Limit State.
1. Market/marketable sell orders
arrivals and executions
a. Count
b. Shares
c. Shares executed
2. Market/marketable buy orders
arrivals and executions
a. Count
b. Shares
c. Shares executed
3. Count arriving, volume arriving and
shares executing in limit sell orders
above NBBO mid-point
4. Count arriving, volume arriving and
shares executing in limit sell orders
at or below NBBO mid-point (nonmarketable)
5. Count arriving, volume arriving and
shares executing in limit buy orders
at or above NBBO mid-point (nonmarketable)
6. Count arriving, volume arriving and
shares executing in limit buy orders
below NBBO mid-point
7. Count and volume arriving of limit
sell orders priced at or above NBBO
mid-point plus $0.05
8. Count and volume arriving of limit
buy orders priced at or below NBBO
mid-point minus $0.05
9. Count and volume of (3–8) for
cancels
10. Include: ticker, date, time at start,
time of Limit State, all data item
fields in 1, last sale prior to 15second period (null if no trades
today), range during 15-second
period, last trade during 15-second
period
emcdonald on DSK67QTVN1PROD with NOTICES
III. [At least two months prior to the
end of the Pilot Period,] By September
30, 2014, all Participants shall provide
to the SEC assessments relating to the
impact of the Plan and calibration of
the Percentage Parameters as follows:
A. Assess the statistical and economic
impact on liquidity of approaching Price
Bands.
B. Assess the statistical and economic
impact of the Price Bands on erroneous
trades.
C. Assess the statistical and economic
impact of the appropriateness of the
Percentage Parameters used for the Price
Bands.
D. Assess whether the Limit State is
the appropriate length to allow for
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liquidity replenishment when a Limit
State is reached because of a temporary
liquidity gap.
E. Evaluate concerns from the options
markets regarding the statistical and
economic impact of Limit States on
liquidity and market quality in the
options markets. (Participants that
operate options exchange should also
prepare such assessment reports.)
F. Assess whether the process for
entering a Limit State should be
adjusted and whether Straddle States
are problematic.
G. Assess whether the process for
exiting a Limit State should be adjusted.
H. Assess whether the Trading Pauses
are too long or short and whether the
reopening procedures should be
adjusted.
[FR Doc. 2014–05175 Filed 3–10–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–71655; File No. SR–
NYSEMKT–2014–17]
Self-Regulatory Organizations; SelfRegulatory Organizations; Notice of
Filing of Proposed Rule Change
Adopting Rule 971.1NY for an
Electronic Price Improvement Auction
for Single-Leg Orders
March 5, 2014.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on February
21, 2014, NYSE MKT LLC (the
‘‘Exchange’’ or ‘‘NYSE MKT’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the selfregulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to adopt Rule
971.1NY for an electronic price
improvement auction for single-leg
orders. The text of the proposed rule
change is available on the Exchange’s
Web site at www.nyse.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
1 15
U.S.C. 78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
2 15
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13711
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to adopt new
Rule 971.1NY that sets forth an
electronic crossing mechanism with a
price improvement auction on the
Exchange to be referred to as the CUBE
Auction, which stands for Customer
Best Execution. Proposed Rule 971.1NY
provides for a CUBE Auction for singleleg orders. The CUBE Auction may also
be referred to herein simply as the
Auction. The Exchange notes that the
CUBE Auction, as proposed, would
operate in a manner consistent with—
but not identical to—the operation of
electronic price improvement auctions
available on other options markets.4
As proposed, the CUBE Auction
would be available to ATP Holders both
on and off the Trading Floor of the
Exchange, subject to the requirements of
Section 11(a) of the Act (discussed
below). In addition to the CUBE
Auction, Floor-based ATP Holders may
continue to use existing Floor-based
crossing rules.
CUBE Overview
As described below, the CUBE
Auction is designed to work seamlessly
with the Exchange’s Consolidated Book,
which is the Exchange’s single
electronic order book where all quotes
4 See Chicago Board Options Exchange, Inc.
(‘‘CBOE’’) Rule 6.74A—Automated Improvement
Mechanism (‘‘AIM’’); NASDAQ OMX PHLX, INC.
(‘‘PHLX’’) Rule 1080—Price Improvement XL
(‘‘PIXL’’); BOX Options Exchange LLC (‘‘BOX’’)
Rule 7150—Price Improvement Period (‘‘PIP’’);
International Securities Exchange (‘‘ISE’’) Rule
723—Price Improvement Mechanism (‘‘PIM’’). In
general, the AIM, PIXL, PIP and PIM have features
similar to those proposed in the Auction including:
(a) Providing the opportunity for price
improvement; (b) delineating an exposure period
for original agency order; (c) setting guidelines for
the types of orders eligible for participation; and (d)
setting allocation rules for orders considered by the
mechanism.
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emcdonald on DSK67QTVN1PROD with NOTICES
and limit orders sent to the Exchange
are placed and reside as a file on the
NYSE Amex System. Under proposed
Rule 971.1NY(a), an ATP Holder may
seek to guarantee the execution of a
limit order it represents as agent on
behalf of a public customer, broker
dealer, or any other entity via the CUBE
Auction. As proposed, this agency order
would be referred to as the CUBE Order.
The ATP Holder that submits the CUBE
Order (the ‘‘Initiating Participant’’)
would agree to guarantee the execution
of the CUBE Order by submitting a
contra-side order (‘‘Contra Order’’)
representing principal interest or
interest it has solicited to trade with the
CUBE Order at a specified price (‘‘single
stop price’’) or by utilizing auto-match
or auto-match limit features as
described in proposed Rule
971.1NY(c)(1). The Initiating
Participant’s manner of guaranteeing the
CUBE Order and the price(s) at which
the CUBE Order is stopped would not
be displayed.
Although the Contra Order would
guarantee the CUBE Order an execution,
the purpose of the Auction is to provide
the opportunity for price improvement
for the CUBE Order as well as the
opportunity for other market
participants to interact with the CUBE
Order. Accordingly, the Exchange will
notify market participants when an
Auction is occurring so that they may
have an opportunity to participate. And
as discussed in more detail below, if,
during an Auction, the Exchange
receives quotes or orders that are
marketable, the Auction will conclude
and those marketable orders or quotes
would have an opportunity to interact
with interest in the Auction and then
will continue with regular order
processing, without delay. So from the
perspective of ATP Holders entering
orders or quotes, the fact that an
Auction may be occurring will not
impact their order or quote processing,
other than the possibility of additional
trading opportunities by virtue of
trading with interest that is designated
for the Auction.
Criteria for Starting a CUBE Auction
As set forth in proposed Rule 971.1(a),
an Auction begins with an ‘‘initiating
price,’’ which for a CUBE Order to buy
(sell) shall be the lower (higher) of the
CUBE Order’s limit price or the National
Best Offer (‘‘NBO’’) (National Best Bid)
(‘‘NBB’’), except as provided for in
paragraph (b)(1)(B) of the proposed Rule
(discussed below). For example, if both
National Best Bid or Offer (‘‘NBBO’’) or
Exchange Best Bid or Offer (‘‘BBO’’) are
$2.00 × $2.05, and there is no Customer
interest in the BBO, a CUBE Order to
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buy 60 contracts with a limit price of
$2.06 would have an initiating price of
$2.05 (the NBO).5 However, if the limit
price of the CUBE Order to buy were
$2.04, the initiating price would be
$2.04 (the CUBE Order to buy’s limit
price is lower than the NBO). The
initiating price of the CUBE Order, as
well as the Contra Order and any
responsive GTX Orders (discussed
below) may be priced in $0.01
increments, regardless of the Minimum
Price Variation (‘‘MPV’’) applicable to
the series.6 For example, in a series with
a $0.05 MPV, if a CUBE Order to buy 10
contracts with a limit price of $2.05 is
entered when both the NBBO and BBO
throughout the Auction are $2.00 ×
$2.05, with no Customer interest in the
BBO, the initiating price could be $2.04
if the Contra Order guarantees the
execution of the CUBE Order with a
single stop price at or below $2.04 or
utilizes auto-match or auto-match limit
(discussed below). At the conclusion of
the CUBE Auction, the CUBE Order may
execute at multiple prices within a
permissible range but would always
execute at the best-priced interest in the
Auction.
Proposed Rule 971.1NY(b) sets forth
the eligibility requirements for initiating
a CUBE Auction. As proposed, the time
at which the Auction is initiated would
be considered the time of execution for
the CUBE Order, and therefore even
though the execution will print after the
Auction has completed, the Exchange
acknowledges that the Auction would
qualify as an exception to the general
prohibition against Trade-Throughs,
pursuant to Rule 991NY(b)(9).7
Similarly, because the Auction has a
maximum duration of 750 milliseconds
(as discussed below), the Auction also
qualifies as an exception to TradeThrough Liability to the extent that the
5 See proposed Rule 971.1NY (b)(1). For purposes
of this Rule, the term ‘‘Customer’’ shall have the
definition set forth in Rule 900.2NY(18). As
proposed in amended Rule 900.2NY(18A), for
purposes of the proposed CUBE Auction,
Professional Customers as defined in that Rule shall
be treated as broker dealers. Treatment of
Professional Customers as broker dealers for
purposes of the CUBE Auction is consistent with
the approved rules of the CBOE. See CBOE Rule
1.1(ggg). The Exchange notes that it also proposes
to make a technical, non-substantive amendment to
Rule 900.2NY(18A) to delete the cross reference to
Rule 963.1NY, which was deleted when the
Exchange revised various rules relating to Complex
Order trading (see Securities Exchange Act Release
No. 64558 (Dec. 16, 2010), 75 FR 80552 (Dec. 22,
2010).
6 See proposed Rule 971.1NY(b)(7).
7 See Rule 991NY(b)(9) (Order Protection,
Exceptions to Trade-Through Liability) (‘‘The
transaction that constituted the Trade-Through was
the execution of an order that was stopped at a
price that did not Trade-Through an Eligible
Exchange at the time of the stop’’).
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NBBO may improve during the Auction,
pursuant to Rule 991NY(b)(5).8 The
Exchange notes that the proposed
Auction is consistent with how the
electronic price improvement auctions
of other markets operate.9
As stated above, pursuant to proposed
Rule 971.1NY(a), an Auction begins
with an ‘‘initiating price,’’ which for a
CUBE Order to buy (sell) shall be the
lower (higher) of the CUBE Order’s limit
price or the NBO (NBB), except as
provided for in paragraph (b)(1)(B) of
the proposed Rule (discussed below).
And, at the conclusion of the CUBE
Auction, the CUBE Order may execute
at multiple prices within a permissible
range.
To assure that a CUBE Auction does
not result in a Trade-Through of the
NBBO or execute ahead of Customer
interest with priority that may be
present in the Consolidated Book at the
initiation of an Auction, the Exchange
proposes that a CUBE Auction have a
defined range of permissible executions
that are based on a snapshot of the
market at the initiation of the Auction.
This range of permissible executions
may change, however, if the BBO on the
same side as the CUBE Order updates
during the Auction, as provided in
proposed paragraph (b)(1)(C) (discussed
below).
As set forth in proposed Rule
971.1NY(b)(1), a CUBE Order to buy
(sell) would generally have a proposed
permissible range of executions with an
upper (lower) bound equal to the
initiating price and the lower (upper)
bound equal to the NBB (NBO).
However, pursuant to proposed
paragraphs (b)(1)(A) and (b)(1)(B), the
Exchange proposes tighter ranges of
executions for when there is Customer
interest in the BBO for orders of 50
contracts or more or for when there are
orders for fewer than 50 contracts,
which is consistent with how electronic
price improvement auctions of other
markets operate.10
First, pursuant to proposed Rule
971.1NY(b)(1)(A), if the CUBE Order to
buy (sell) is for 50 contracts or more and
there is Customer interest in the
Consolidated Book at the Exchange Best
Bid (‘‘BB’’) (Exchange Best Offer
(‘‘BO’’)), the lower (upper) bound of
8 See Rule 991NY(b)(5) (Order Protection,
Exceptions to Trade-Through Liability) (‘‘The
Eligible Exchange displaying the Protected
Quotation that was traded through had displayed,
within one second prior to execution of the TradeThrough, a Best bid or Best offer, as applicable, for
the options series with a price that was equal or
inferior to the price of the Trade-Through
transaction’’).
9 See, e.g., CBOE Rule 6.74A; PHLX Rule 1080;
BOX Rule 7150; ISE Rule 723.
10 See, e.g., CBOE Rule 6.74A(a)(3).
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executions shall be the higher (lower) of
the BB plus one cent (BO minus one
cent) or the NBB (NBO).11 The Exchange
believes that this is appropriate to
assure that any Customer interest at the
BB (BO) retains priority at that price.
Second, pursuant to proposed Rule
971.1NY(b)(1)(B), if the CUBE Order to
buy (sell) is for fewer than 50 contracts,
the initiating price shall be the lower
(higher) of the CUBE Order’s limit price,
the NBO (NBB), or the BO minus one
cent (BB plus one cent) and the lower
(upper) bound of executions shall be the
higher (lower) of the NBB (NBO) or the
BB plus one cent (BO minus one cent).12
Consistent with rules of other
exchanges, and as discussed in further
detail below, the Exchange proposes
paragraph (b)(1)(B) of the proposed Rule
be adopted on a pilot basis.13
The following examples show the
initiating price and the permissible
range of executions for various potential
CUBE Orders, pursuant to proposed
paragraphs (b)(1)(A) and (b)(1)(B) of
Rule 971.1NY.
Examples of CUBE Orders Subject to
Proposed Rule 971.1(NY)(b)(1)(A)
Example #1 (Customer interest on
BB):
NBBO = $2.00 × $2.05
BBO= $2.00 × 2.05, Customer interest
$2.00 bid
CUBE Order $2.05 bid for 60 contracts
Initiating Price is $2.05. Permissible
range of execution: $2.01 to $2.05
Example #2 (Customer interest on
BB):
NBBO = $2.00 × $2.05
BBO= $2.00 × 2.05, Customer interest
$2.00 bid
CUBE Order $2.03 bid for 60 contracts
Initiating Price is $2.03. Permissible
range of execution: $2.01 to $2.03
Examples of CUBE Orders Subject to
Proposed Rule 971.1(NY)(b)(1)(B)
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Example #3 (No Customer interest on
BB):
NBBO = $2.00 × $2.05
BBO= $2.00 × 2.05
CUBE Order $2.05 bid for 10 contracts
Initiating Price is $2.04. Permissible
range of execution: $2.01 to $2.04
Example #4 (No Customer interest on
BB):
11 The Auction is similar to CBOE Rule
6.74A(a)(2) and ISE Rule 723(b)(1), to the extent
that it has an upper bound of permissible
executions, whereas the CBOE and ISE Rules cited
have a lower bound.
12 The Auction is consistent with CBOE
6.74A(a)(3), to the extent that it has an upper bound
of permissible executions.
13 See, e.g., CBOE Rule 6.74A Interpretation and
Policies .03; PHLX Rule 1080(n)(vii); ISE Rule 723
Supplementary Material .03; BOX IM–7150–1.
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NBBO = $2.00 × $2.05
BBO= $1.95 × 2.10
CUBE Order $2.05 bid for 10 contracts
Initiating Price is $2.05. Permissible
range of execution: $2.00 to $2.05
Pursuant to proposed Rule
971.1NY(b)(1)(C), if the BBO on the
same side as the CUBE Order updates
during the Auction, the range of
permissible executions will adjust in
accordance with the updated BBO,
unless the Auction concludes early
pursuant to paragraph (c)(4)(D) (as
discussed below). The Exchange
believes that this practice of honoring
the updated BBO would help ensure a
fair and orderly market by maintaining
the priority of quotes and orders on the
Consolidated Book as they update.
Example #4a (With No Customer
interest on BBO):
NBBO = $1.00 × $1.20
BBO= $1.00 × $1.20
CUBE Order $1.10 bid for 100 contracts
Initiating Price is $1.10. Permissible
range of execution: $1.00 to $1.10
BB updates during Auction to $1.04 (No
Customer interest in BB); Updated
permissible range of executions:
$1.04–$1.10 14
Example #4b (With Customer interest
in the updated BBO):
NBBO = $1.00 × $1.20
BBO= $1.00 × $1.20
CUBE Order $1.10 bid for 100 contracts
Initiating Price is $1.10. Permissible
range of execution: $1.00 to $1.10
BB updates during Auction to $1.04
(Customer interest in BB); Updated
permissible range of executions:
$1.05–$1.10 (BB plus one penny)
To mitigate the risk of advancing too
far through the Consolidated Book
during periods of increased volatility or
reduced liquidity, the Exchange utilizes
price protection mechanisms, including
Trade Collar Protection, as defined in
Rule 967NY(a).15 A Marketable Order
held at a Trading Collar represents
interest that is eligible to trade at a
specific price, even though that price is
not displayed, and therefore must be
taken into consideration when
14 The update to the BB in this example would
not cause an early conclusion of the Auction
because the updated BB does not improve the
initiating price. See, e.g., proposed Rule
971.1NY(c)(4)(D).
15 See Rule 967NY(a)(1) (‘‘The Exchange will not
immediately execute (i) incoming Market Orders or
marketable Limit Orders (‘Marketable Orders’) if the
width of the NBBO is greater than one Trading
Collar, as defined in paragraph (a)(2) below or, (ii)
the balance of an incoming Marketable Order to buy
(sell) that would execute at a price that exceeds the
[NBO] ([NBB]) plus (minus) the value of one
Trading Collar.’’). See also Rule 967NY(a)(4)(A)
(‘‘An incoming Marketable Order to buy (sell) will
be displayed at a price equal to the NBB (NBO) plus
(minus) one Trading Collar (the ‘collared order’)’’).
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determining the range of permissible
executions. Thus, if, at the time a CUBE
Order is submitted, there are orders
subject to Trade Collar Protection, i.e.,
collared orders, the range of permissible
executions for the CUBE Order will be
narrowed to ensure the priority of the
collared order(s). Specifically, pursuant
to proposed Rule 971.1NY(b)(1)(D), if at
the time the Auction is initiated, there
is a Marketable Order to sell (buy) that
has been displayed pursuant to Rule
967NY(a)(4)(A), the displayed price of
the collared order minus (plus) one
Trading Collar would be considered the
BO (BB) when determining the range of
permissible executions.16 For example,
if the NBBO and BBO at the beginning
of an Auction for a CUBE Order to buy
60 contracts is $1.00 × $2.00, and the
$2.00 BO is a marketable sell order
(non-Customer) that has been displayed
pursuant to Rule 967NY(a), the upper
bound of the range of executions would
be the price at which the Marketable
Order would be eligible to trade, which
in this example, would be $1.75.
Accordingly, the permissible range of
executions for this CUBE Order to buy
would be $1.00 × $1.75. The inclusion
of collared orders when determining the
range of permissible executions will
help ensure a fair and orderly market by
maintaining the priority of orders and
quotes on the Consolidated Book, while
still affording the opportunity for price
improvement on each Auction
commenced on the Exchange.
Paragraphs (b)(2)–(9) of proposed Rule
971.1NY set forth the various reasons
that a proposed CUBE Order would be
rejected—and deemed ineligible to
commence an Auction.
First, pursuant to proposed Rule
971.1NY(b)(2), a CUBE Order to buy
(sell) with a limit price below (above)
the lower (upper) bound of the
permissible range of executions
specified in paragraph (b)(1) of the
proposed Rule would not be eligible to
initiate an Auction and would be
rejected along with the Contra Order.
For example, if both the NBBO and the
BBO were $2.00 × $2.05 and there is a
proposed CUBE Order to buy for $1.99
for 60 contracts, this CUBE Order would
be rejected because the limit price is
below the lower bound of permissible
executions, which here would have
been $2.00. The Exchange believes that
16 See Rule 967NY(a)(2) (‘‘A ‘Trading Collar’ shall
be determined by the Exchange on a class-by-class
basis and, unless announced otherwise via Trader
Update, shall be the same value as the bid-ask
differential guidelines established pursuant to Rule
925NY(b)(4). To preserve a fair and orderly market,
the Exchange may, with the approval of two
Trading Officials, grant intra-day relief to widen or
narrow the Trading Collar for one or more option
series’’).
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Federal Register / Vol. 79, No. 47 / Tuesday, March 11, 2014 / Notices
it is appropriate to reject CUBE Orders
to buy (sell) that are priced below
(above) the lower (upper) bound
because they are not the best-priced
interest available and should not trade
ahead of better-priced interest on the
same side of the market.
Consistent with proposed Rule
971.1NY(b)(2), a CUBE Order to buy
would be rejected if its limit price were
below the lower bound of the
permissible range of executions that has
been calculated based on the presence
of a marketable buy order subject to
Rule 967NY(a). For example, if the
NBBO and BBO at the beginning of an
Auction for a CUBE Order to buy 60
contracts is $1.00 × $2.00, and the $1.00
BB represents a marketable buy order
that has been displayed pursuant to
Rule 967NY(a), a CUBE Order to buy
with an initiating price of $1.15 will be
rejected because it falls below the lower
bound of permissible executions, which
here would have been $1.25 (the BB
plus one trading collar of $0.25).
Pursuant to proposed paragraph
(b)(3), a CUBE Order, once accepted,
will never execute outside the range of
permissible executions and will never
trade through its own limit price or the
price of an unrelated quote or order. For
example, if during the Auction, the
NBB, but not BB, improved (to a price
better than the CUBE Order to buy) and
an unrelated order that was marketable
against the updated NBB caused the
Auction to conclude early, per proposed
paragraph (c)(4) of this Rule (as
discussed below), the CUBE Order
would not trade through its own limit
price to trade at the price of the updated
NBB. Likewise, although the Auction
would have concluded early, the
incoming marketable sell order would
not participate in the Auction and
therefore would not trade through the
updated NBB price. As discussed above,
the CUBE Auction ignores updates to
the NBBO during the Auction, per Rule
991NY(b)(5). Thus, as discussed below,
the CUBE Order would trade with any
interest received during the Auction, or
if no interest was received during the
Auction, with the Contra Order, at
prices equal to or at prices that
improved the CUBE Order’s limit price.
The following are additional reasons
that a proposed CUBE Order would be
deemed ineligible to commence an
Auction and therefore rejected, as set
forth in proposed Rule 971.1NY(b)(4)–
(6) and (b)(9).
1. CUBE Orders submitted before the
opening of trading would not be eligible
to initiate an Auction and would be
rejected, along with the Contra Order.
Because a CUBE Order is deemed
executed at the time of entry, any CUBE
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Orders entered before the opening of
trading would not be able to execute,
and therefore the Exchange believes it
would be appropriate to reject these
CUBE Orders.
2. CUBE Orders submitted during the
final second of the trading session in the
affected series would not be eligible to
initiate an Auction and would be
rejected, along with the Contra Order.
As discussed below, the length of the
Auction would be at least 500
milliseconds and the Exchange believes
it would be appropriate to reject CUBE
Orders submitted during the final
second of the trading session to assure
that the processing of a CUBE Order
may be complete
3. CUBE Orders for fewer than 50
contracts submitted when the BBO is
$0.01 wide would likewise be rejected.
For example, if both the NBBO and BBO
were $2.00 × $2.01, and Customer
interest may or may not be part of the
BBO, a CUBE Order to buy 10 contracts
for $2.01 would reject, because the
market is only $0.01 wide. The
Exchange believes it is appropriate to
reject CUBE Orders in this scenario
because these CUBE Orders would not
be able to meet the permissible range of
executions as specified in proposed
Rule 971.1NY(b)(1).
4. CUBE Orders submitted when the
NBBO is crossed would result in the
CUBE Order being rejected. The
Exchange believes that this is
appropriate because the Exchange
would not be able to determine a
permissible range of executions if the
NBBO is crossed.
The Exchange proposes that CUBE
Orders may be entered in $.01
increments regardless of the MPV of the
series involved.17 To assure that the
CUBE Order can receive price
improvement, the Exchange also
proposes that Contra Orders may be
priced in one cent increments when
specifying the stop price or the automatch limit price pursuant to
paragraphs (c)(1)(A) and (c)(1)(C) of the
proposed Rule.18 This practice is
consistent with the rules of other
exchanges operating electronic price
improvement auctions.19 In addition,
the Exchange proposes that the
minimum size requirement for a CUBE
Order is one contract, which, as
discussed below, would be adopted on
a pilot basis.20
The Exchange believes that the abovedescribed restrictions and requirements
would ensure that the existing priority
17 See
proposed Rule 971.1NY(b)(7).
and display rules for the Consolidated
Book 21 are preserved, while still
providing ATP Holders an opportunity
to guarantee either price improvement,
more liquidity beyond the displayed
size, or both, for orders they represent
as agent.
CUBE Auction Process: Initiation of
Auction
Proposed Rule 971.1NY(c) sets forth
the Auction process. As described in
more detail below, once initiated, a
CUBE Auction is announced via a
broadcast message, known as a Request
For Response (‘‘RFR’’), and market
participants indicate their interest in the
Auction by submitting acceptable RFR
Responses. To initiate a CUBE Auction,
pursuant to proposed Rule
971.1NY(c)(1), the Initiating Participant
can elect one of three ways in which it
would guarantee the execution of a
CUBE Order—a single stop price, ‘‘automatch’’, or ‘‘auto-match limit’’, which is
consistent with the rules of other
options exchanges that offer electronic
price improvement auctions.22 The
Exchange believes that these three
options afford the Initiating Participant
flexibility and control over the price(s)
at which it would be willing to
guarantee the execution of a CUBE
Order.
First, pursuant to proposed Rule
971.1NY(c)(1)(A), the Initiating
Participant can elect to specify a single
stop price at which it would participate
in the Auction. If elected, under this
option, the Initiating Participant will
only participate in the Auction at a
single price, regardless of the prices of
other responses to the Auction. For a
CUBE Order to buy (sell), an Initiating
Participant may specify a single stop
price that is at or below (above) the
initiating price of the Auction. A stop
price specified for a CUBE Order to buy
(sell) that is below (above) the lower
(upper) bound of the range of
permissible executions will be repriced
to the lower (upper) bound (the bestpriced interest). In this instance, the
stop price is below the lower bound of
permissible execution prices, and thus
the execution can be priced back to
within the permissible execution range.
However, a stop price specified for a
CUBE Order to buy (sell) that is above
(below) the initiating price is not
eligible to initiate an Auction because it
would be priced higher—and therefore
at a worse price—than pre-existing
trading interest and both the CUBE
Order and the Contra Order would be
rejected. In this instance, the stop price
18 Id.
19 See,
21 See
20 See
22 See,
PO 00000
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proposed Rule 971.1NY(b)(8).
Frm 00105
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Rule 964NY.
e.g., CBOE Rule 6.74A(b)(1)(A).
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is inferior to the pre-existing trading
interest, and thus it would not result in
an execution within the permissible
range. The following example shows the
impact of various single stop prices on
a CUBE Order.
emcdonald on DSK67QTVN1PROD with NOTICES
Example of Single Stop Price, per
proposed Rule 971.1(NY)(c)(1)(A)
Example #5 (No Customer interest on
BB):
NBBO = $2.00 × $2.05
BBO = $2.00 × $2.05
CUBE Order $2.06 bid for 60 contracts
Initiating Price is $2.05. Permissible
Range of Executions is $2.00–$2.05
Stop price $2.06 and above = CUBE
Order and Contra Order rejected
(because exceeds the initiating
price)
Stop Price $2.00 ¥ $2.05 = CUBE Order
and Contra Order accepted
Stop Price $1.99 and below = CUBE
Order accepted, Contra Order
repriced to $2.00
Rather than opt for a single stop price,
an Initiating Participant may, pursuant
to proposed Rule 971.1NY(c)(1)(B), elect
the ‘‘auto-match’’ option, which would
automatically match both the price and
size of all RFR Responses. Accordingly,
the Initiating Participant may receive
executions at multiple prices. Where the
auto-match option is selected for a
CUBE Order to buy (sell), the Initiating
Participant would automatically match
as principal or as agent on behalf of a
Contra Order the price and size of all
RFR Responses that are lower (higher)
than the initiating price and within the
range of permissible executions. For
example, if both the NBBO and the BBO
were $2.00 × $2.05 and the CUBE Order
is to buy for $2.06 for 60 contracts, with
no Customer interest at the BBO, and
the RFR Responses are to sell 10
contracts at $2.01, and 10 contacts at
$2.02, then the Contra Order would
auto-match these Responses by likewise
selling 10 contracts to the CUBE Order
at $2.01, and 10 contracts at $2.02.
Thus, a total of 20 contracts would be
sold to the CUBE Order at $2.01 and 20
contracts would be sold at $2.02. The
remaining 20 contracts in the CUBE
Order would trade against the Contra
Order at $2.05 (the initiating price/the
NBO), assuming no other RFR
Responses were received. If, in the
preceding example, the CUBE Order
limit price was instead $2.03 (not
$2.06), the initiating price would be
$2.03 (lower than the NBO at $2.05) and
the CUBE Order would execute against
the Responses and the Contra Order in
exactly the same manner (i.e., a total of
20 contracts at $2.01 and 20 contracts at
$2.02); however, the remaining 20
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contracts would trade against the Contra
Order at $2.03 limit price.
Finally, pursuant to proposed Rule
971.1NY(c)(1)(C), ATP Holders may
guarantee the execution of a CUBE
Order by electing the ‘‘auto-match
limit’’ option, which would
automatically match the price and size
of all RFR Responses at each price to
match the trading interest up or down
to the limit price specified, referred to
as the ‘‘auto-match limit price.’’ Thus,
for a CUBE Order to buy (sell), the
Initiating Participant would
automatically match, as principal or as
agent on behalf of a Contra Order, the
price and size of RFR Responses that are
lower (higher) than the initiating price
down (up) to the auto-match limit price.
Assume, for example, that both the
NBBO and the BBO were $2.00 × $2.05
and the CUBE Order is to buy for $2.06
for 60 contracts, with no Customer
interest at the BBO, and the Contra
Order selects an auto-match limit price
of $2.03.23 If the RFR Responses are to
sell at or between $2.00 and $2.02, the
CUBE Order would execute with those
better-priced RFR Responses, but the
Contra Order would not. Instead, the
Contra Order would only match those
RFR Responses, if any, priced $2.03 or
higher.
Once a CUBE Order has been
submitted for processing, the CUBE
Order (as well as the Contra Order) may
not be cancelled or modified.24 This is
consistent with the rules of other
options exchanges that operate
electronic price improvement
auctions.25 The Exchange believes that
this requirement reduces the potential
for misuse of the Auction by ATP
Holders that are not legitimately
interested in making a bona fide trade
in the Auction.
CUBE Auction Process: RFRs, Response
Time Interval and Responses
As noted above, upon receipt of a
valid CUBE Order, the Exchange would
announce the Auction by disseminating
an RFR to all participants who subscribe
to Auction messages over ArcaBook for
options.26 The RFR would identify the
23 In this example, the initiating price is $2.05
and the permissible range of executions is $2.00–
$2.05.
24 See proposed Rule 971.1NY(c).
25 See, e.g., CBOE Rule 6.74A(b); ISE Rule
723(b)(3); ISE Rule 723 Supplementary Material .04.
26 ArcaBook is a proprietary data feed offered by
the Exchange and available to anyone (including all
ATP Holders) by subscription. The RFRs for CUBE
Auctions would be included in the options data
feed at no incremental cost to the ArcaBook
subscriber. Thus, any subscriber that opts to receive
the options data, including any ATP Holder
subscriber, has the ability to enter an order in
response to those RFRs (i.e., the election to receive
RFRs would not be on a case-by-case basis).
PO 00000
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Fmt 4703
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13715
following characteristics of a CUBE
Order: The series, the side of the market,
the size, and the initiating price, which
is consistent with the practice of other
options exchanges.27 The Exchange
believes that including this level of
detail in each RFR may lead to better
prices for the CUBE Order.
After the RFR is disseminated, the
Exchange would begin a random timer
for the duration of the Auction, referred
to as the Response Time Interval, which
would last between 500 and 750
milliseconds. As proposed, the length of
the Response Time Interval would be
determined by the CUBE Auction
mechanism following the receipt of a
valid CUBE Order and
contemporaneously with the
dissemination of the RFR. The Exchange
believes that the use of an undisclosed
random Response Time Interval of
between 500 and 750 milliseconds
would provide the CUBE Auction with
a functional difference to distinguish it
from similar price improvement
mechanisms offered by other
exchanges.28 The Exchange believes that
the length of time allotted on the
proposed Auction timer would provide
ATP Holders with sufficient time to
submit RFR Responses and would
encourage competition among
participants, thereby enhancing the
potential for price improvement for the
CUBE Order.29
During the Response Time Interval,
any ATP Holder may respond to the
RFR, either as principal or as agent on
behalf of customers, provided such
response is properly marked specifying
price, size, and side of the market (each,
an ‘‘RFR Response’’ or ‘‘Response’’).
The Exchange proposes to add the
‘‘GTX Order,’’ which is a non-routable
order with a time-in-force contingency
for the Response Time Interval, and thus
would be considered an RFR Response.
As an RFR Response, the GTX Order
must specify price, size, and side of the
27 See, e.g., CBOE Rule 6.74A(b)(1)(B); ISE Rule
723(c).
28 See, e.g., CBOE Rule 6.74A(b)(2)(A); PHLX Rule
1080(n)(ii)(B)(1); ISE Rule 723(c)(5)(I).
29 In December 2013, to determine whether the
proposed Auction timer would provide sufficient
time to respond to an RFR, the Exchange asked ATP
Holders that both subscribe to ArcaBook and act as
Market Makers on the Exchange (the ‘‘Relevant ATP
Holders’’) whether their firms ‘‘could respond to an
Auction with a random duration of 500–750
milliseconds.’’ Of the 21 Relevant ATP Holders that
responded to the question, 100% (n = 21) indicated
that their firm could respond in this time frame.
Thus, the Exchange believes that the proposed
Auction duration of at least 500 milliseconds,
which is the mid-range of approved mechanisms at
other market centers, would provide a meaningful
opportunity for participants on NYSE Amex to
respond to an Auction while at the same time
facilitating the prompt execution of orders.
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market. As proposed in Rule
971.1NY(c)(2)(C)(i):
• GTX Orders would not be displayed
to the Consolidated Book or
disseminated to any participants, i.e.,
not sent to OPRA as these orders would
only interact with liquidity available
during the Auction;
• Any portion of a GTX Order that is
not executed in the CUBE Auction
would be cancelled at the conclusion of
the Auction because a GTX order would
only interact with liquidity available
during the Auction—including any
unrelated order that is marketable
against a GTX Order that causes the
early conclusion of the Auction per
paragraph (c)(4) of this Rule;
• The minimum price increment for a
GTX Order would be one cent,
regardless of the MPV for the series
involved in the Auction, to maximize
opportunities for price improvement in
the Auction;
• GTX Orders with a size greater than
the CUBE Order, would be capped at the
size of the CUBE Order, to enable
interaction with the CUBE Order and to
discourage manipulation of the Auction
process;
• GTX Orders may be cancelled,
which would afford ATP Holders opting
to utilize this order type additional
flexibility and control; and
• GTX Orders on the same side of the
market as the CUBE Order will be
rejected. Because GTX Orders can only
trade against a CUBE Order or an
unrelated order on the same side as a
CUBE Order, same-side GTX Orders are
unnecessary to the CUBE Auction
process. Therefore, the Exchange
proposes that same-side GTX Responses
will be rejected. Rejecting same-side
GTX Orders is consistent with the
processing of same-side RFR Responses
to the Exchange’s Complex Order
Auction.30
• For a CUBE Order to buy (sell), GTX
Orders priced below (above) the lower
(upper) bound of executions shall be
repriced to the lower (upper) bound of
executions, as specified in proposed
paragraph (b)(1) of this Rule. For
example, assuming the facts of Example
4a above, if before the BB is updated to
$1.04, the Exchange receives a GTX
Order to sell priced at $1.02, because
the new lower bound is $1.04, that GTX
Order would be repriced to $1.04. The
Exchange believes that this practice will
ensure that GTX Orders eligible to
participate in the Auction will not be
excluded if they are priced more
aggressively than the lower (upper)
bound of execution.
30 See
Rule 980NY(e)(4).
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The Exchange believes that adding the
GTX Order, which is good only for the
duration of the Auction, would
encourage participation in the Auction
and would further enhance the
opportunity for price improvement on
the CUBE Order. The Exchange notes
that the electronic price improvement
auctions of other markets similarly
utilize non-displayed trade interest in
response to those auctions to enable
market participants to enter nondisplayed interest that would only
participate in the auction. This type of
non-displayed interest generally
operates in the same manner as the
Exchange’s proposed GTX Order.31
The CUBE Auction would also
consider any other unrelated orders and
quotes (‘‘unrelated orders’’) received
during an Auction that are priced
within the permissible range of
executions as eligible to participate in
the Auction. Because such unrelated
orders would be eligible to participate
in the Auction, the Exchange proposes
to include these orders in the definition
of RFR Responses, even if such
unrelated orders were submitted
coincidentally during an Auction, as
opposed to purposefully in response to
an RFR. Specifically, pursuant to
proposed Rule 971.1NY(c)(2)(C)(ii), the
Exchange would consider unrelated
orders on the opposite side of the
market and in the same series as the
CUBE Order to be RFR Responses
provided that the orders were received
during the Response Time Interval; were
not marked as GTX; and would be
eligible to participate within the range
of permissible executions specified by
proposed paragraph (b)(1). The
Exchange believes that considering
these unrelated orders as RFR
Responses should increase the number
of participants against which the CUBE
Order may be executed, and should thus
maximize opportunities for price
improvement on the CUBE Order.
However, the Exchange would not
consider as RFR Responses those
unrelated orders that either would not
provide an opportunity for price
improvement on the CUBE Order or
would not trade at the initiating price of
the CUBE Order. Specifically, pursuant
to proposed Rule 971.1NY(c)(2)(C)(ii)(a),
unrelated orders received during the
Response Time Interval that are not
marketable against the NBBO, not
marked GTX, or are otherwise unable to
participate in the Auction, would be
posted to the Consolidated Book. In
31 See, e.g., CBOE Rule 6.74A(b)(1) (nondisplayed interest intended only for the auction
may be cancelled); ISE Rule 723(c)(3) (nondisplayed interest intended only for the auction
may be modified, but not cancelled).
PO 00000
Frm 00107
Fmt 4703
Sfmt 4703
addition, unrelated orders received
during the Response Time Interval that
are on the same side of the market as the
CUBE Order to buy (sell) and that are
priced higher (lower) than the initiating
price, and therefore would create a new
BBO on the same side as the CUBE
Order, shall be posted to the
Consolidated Book and would result in
an early conclusion of the Auction
pursuant to paragraph (c)(4) of the
proposed Rule. In both cases, as
discussed further below, such unrelated
orders would cause the Auction to
conclude early. The Exchange believes
that early conclusion would avoid
disturbing priority in the Consolidated
Book, in accordance with Rule 964NY,
which dictates the priority of bids
within the NYSE Amex System, and
would allow the Exchange to
appropriately handle unrelated orders
without the Auction impacting that
handling, while at the same time
allowing the CUBE Order to execute
against the Contra Order and any RFR
Responses that may have been entered
up to that point.
To be eligible to participate in the
Auction, unrelated orders must be
priced in the MPV for the series in the
Auction. Only CUBE Orders, GTX
Orders and Contra Orders—which are
specifically slated for the Auction—
would be permitted to be priced in one
cent increments, regardless of the MPV
for that option. The Exchange believes
that it is appropriate to allow such
orders to trade in one cent increments
to enhance the opportunity for price
improvement during the Auction. Thus,
a quote or order other than a CUBE
Order, GTX Order or Contra Order
submitted in a one cent increment when
the series has either a $0.05 or $0.10
MPV would be rejected as invalid.
Rejecting quotes and orders with invalid
prices submitted during an Auction is
consistent with the treatment of invalid
priced quote and orders entered at all
other times.
Conclusion of the CUBE Auction and
Order Allocation
As proposed in Rule 971.1NY(c)(3),
and similar to the operation of price
improvement mechanisms offered by
other exchanges, the CUBE Auction
would conclude at the end of the
Response Time Interval.32 However, as
described in proposed Rule
971.1NY(c)(4) (and discussed below),
certain events may result in the early
conclusion of the CUBE Auction.
Consistent with the rules of other
exchanges that operate electronic price
32 See, e.g., CBOE Rule 6.74A(b)(2)(A); PHLX Rule
1080(n)(ii)(B)(1); ISE Rule 723(c)(5)(I).
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emcdonald on DSK67QTVN1PROD with NOTICES
improvement auctions, the Auction
would conclude in the event of a trading
halt in the affected series 33 and the
CUBE Order would be executed per
proposed Rule 971.1NY(c)(5).34
Proposed Rule 971.1NY(c)(5) sets
forth the order allocation procedures for
the CUBE Auction. Pursuant to
proposed Rule 971.1NY(c)(5)(A), at each
price level, any Customer orders resting
on the Consolidated Book at the start of
the CUBE Auction shall have first
priority, followed by Customer orders
that arrived during the CUBE Auction as
RFR Responses. The Exchange notes,
however, that pursuant to proposed
paragraph (b)(1)(B), the permissible
range of executions for a CUBE Order
would have already preserved the
integrity of the priority of any Customer
orders resting at the start of the Auction.
Generally, at the conclusion of the
CUBE Auction, the Auction mechanism
would determine whether the total RFR
Responses can fill the CUBE Order at a
price or prices better than the initiating
price. If so, the CUBE Order is matched
against the better-priced RFR Responses
granting the CUBE Order the maximum
amount of price improvement possible.
As noted above, certain unrelated orders
may be considered RFR Responses and
may interact with the CUBE Order (thus
maximizing opportunities for price
improvement) and any portion of these
unrelated orders remaining thereafter
would be placed on the Consolidated
Book.
When there are multiple RFR
Responses at a given price, the CUBE
Order would be executed against the
RFR Responses on a pro-rata basis
pursuant to the size pro rata algorithm
set forth in Rule 964NY(b)(3), except
that Customers at a given price are
executed first in priority. The Exchange
believes that, as proposed, the Auction
maximizes the opportunity for price
improvement while maintaining the
priority of Customer orders. In addition,
per proposed paragraph (c)(5), any
single RFR Response that has a contract
size that exceeds the size of the CUBE
Order would be treated as if it were the
same size as (i.e., would be capped at)
the size of the CUBE Order for
allocation purposes, per Rule
964NY(b)(3). The Exchange believes that
this would encourage participation in
the Auction (by not rejecting these
33 See, e.g., CBOE Rule 6.75A(b)(2)(F); PHLX Rule
1080(n)(ii)(B)(3).
34 Because the execution of the CUBE Auction is
deemed to have occurred at the time the CUBE
Auction is initiated, if a trading halt occurs in the
series during the Response Time Interval causing
the Auction to conclude early, the Exchange does
not believe that such execution needs to be
nullified pursuant to Rule 953NY Commentary .03.
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Responses) and would assist in avoiding
the opportunity for an ATP Holder to
subvert the size pro rata allocation
method by submitting outsized trading
interest.
The Exchange proposes that the
Contra Order, having guaranteed the
execution of the CUBE Order, should be
entitled to a certain level of
participation in the Auction, provided
there is sufficient size remaining after
better-priced interest and Customer
interest has been satisfied. As proposed,
assuming sufficient interest in the CUBE
Order remains after executing against
Customer interest or better-priced
interest, the Contra Order would then be
entitled to a participation guarantee
equal to the greater of one contract or
either (a) 40% of the size of the initial
CUBE Order (if there are multiple RFR
Responses to the Auction) or (b) 50% of
the size of the initial CUBE Order (if
there is only one RFR Response to the
Auction). The Exchange believes that
the proposed participation guarantee,
which is consistent with the rules of
this and other option exchanges, is a fair
inducement in exchange for
guaranteeing the entire size of the
Initiating Participant’s agency order
(i.e., the CUBE Order).35 As discussed
above, and similar to the operation of
electronic auctions on other options
exchanges, an Initiating Participant can
opt to guarantee the execution of a
CUBE Order via a single stop price, by
auto-match or by specifying an automatch limit price.36
Proposed paragraphs (b)(i)–(iii) to the
proposed Rule set forth how a CUBE
Order would trade with Responses and/
or the Contra Order, which depends
upon the RFR Responses, if any, and
how the Contra Order guaranteed the
execution of the CUBE Order. Pursuant
to proposed Rule 971.1NY(c)(5)(B)(i), a
CUBE Order guaranteed by a single stop
price would first execute against betterpriced Responses or Customer interest,
and, if there is sufficient size remaining,
the CUBE Order would then execute
against the Contra Order at the stop
price. It is possible, however, that after
the CUBE Order executes against the
better-priced RFR Responses, the Contra
Order would not receive the full extent
(or, perhaps, any) of its participation
35 See, e.g., Rule 934.1NY(4)(A) (providing for a
40% allocation for facilitation orders in facilitation
cross transactions). See also PHLX Rule
1080(n)(2)(E)(2)(a) (providing up to 50% allocation
with participation guarantees); ISE Rule 713
Commentary .03 (providing up to 60% allocation
for participation guarantees); CBOE Rule
6.74A(b)(3)(F).
36 See, e.g., CBOE Rule 6.74A(b)(3); PHLX Rule
1080(n)(ii)(E); ISE Rule 723(d)(4); BOX Rule
7150(g)(1).
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13717
guarantee at the stop price, as shown in
the second example below.
Examples of Trade Allocation—Single
Stop Price
Example #6 (No Customer interest on
BB):
NBBO = $1.15–$1.25 200 × 200
BBO = $1.15–$1.25 100 × 100
CUBE Order to buy 50 contracts with a
limit price of $1.20
Contra Order selling 50 contracts with a
single stop price of $1.20
Permissible range of executions is $1.15
to $1.20
RFR sent identifying the series, side and
size, with initiating price of $1.20
(Auction Starts)
MM1GTX Order received @ 410
milliseconds Sell 5 at $1.17
MM4 GTX Order received @ 530
milliseconds Sell 10 at $1.18
MM3 GTX Order received @ 650
milliseconds Sell 40 at $1.20
651 milliseconds (Auction Ends)
Under this scenario the CUBE Order
would be executed as follows:
5 contracts trade with MM1 @ $1.17
10 contracts trade with MM4 @ $1.18
20 contracts trade with the Contra Order
@ $1.20 (This satisfies their 40%
participation guarantee)
15 contracts trade with MM3 @ $1.20
(This fills the entire CUBE Order)
Example #7 (No Customer interest on
BB):
NBBO = $1.15–$1.25 200 × 200
BBO = $1.15–$1.25 100 × 100
CUBE Order to buy 50 contracts with a
limit price of $1.20
Contra Order selling 50 contracts with a
single stop price of $1.20
Permissible range of executions is $1.15
to $1.20
RFR sent identifying the series, side and
size, with initiating price of $1.20
(Auction Starts)
MM1GTX Order received @ 410
milliseconds Sell 20 at $1.17
MM4 GTX Order received @ 430
milliseconds Sell 20 at $1.18
MM3 GTX Order received @ 450
milliseconds Sell 40 at $1.20
557 milliseconds (Auction Ends)
Under this scenario, the CUBE Order
would be executed as follows:
20 contracts trade with MM1 @ $1.17
20 contracts trade with MM4 @ $1.18
10 contracts trade with the Contra Order
@ $1.20 (Contra Order does not
receive 40% participation guarantee
because there is not sufficient size
available)
(This fills the entire CUBE Order)
MM3 does not trade any contracts
Example of Trade Allocation—Single
Stop Price & Unrelated Order
Example #8 (No Customer interest on
BB):
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NBBO = $1.20–$1.24 200 × 100
BBO = $1.20–$1.24 100 × 100
CUBE Order to buy 20 contracts with a
limit of $1.22
Contra Order selling 20 contracts with a
single stop price of $1.22
Permissible range of executions is $1.20
to $1.22
RFR sent identifying the series, side and
size, with initiating price of $1.22
(Auction Starts)
MM3 GTX Order received @ 200
milliseconds Sell 20 at $1.22
MM1GTX Order received @ 210
milliseconds Sell 20 at $1.22
MM4 GTX Order received @ 230
milliseconds Sell 20 at $1.22
F1 Unrelated Order received @ 400
milliseconds Sell 50 at $1.21
523 milliseconds (Auction concludes)
Under this scenario the CUBE Order
would be executed as follows:
20 contracts trade with the unrelated
order for F1 @ $1.21 (the best-priced
Response)
(This fills the CUBE Order in its entirety
and the Contra Order does not
receive an execution)
GTX responses cancel
30 contracts remaining from the
unrelated order for F1 post to the
Consolidated Book resulting in new
BBO
BBO = $1.20–$1.21 100 × 30
Where the Initiating Participant elects
auto-match or auto-match limit to
guarantee the execution of a CUBE
Order, the Contra Order would be
allocated size equal to all other RFR
Responses at each price point or at each
price point within the limit price
range—if a limit is specified—until a
price point is reached where the balance
of the CUBE Order could be fully
executed (the ‘‘clean-up price’’). At the
clean-up price, if there is sufficient
interest in the CUBE Order remaining
after better-priced interest and Customer
interest has been executed, the Contra
Order would be allocated additional
contracts to ensure its guaranteed
participation rate—the greater of one
contract or 40% (or 50%, if only one
Response) of the size of the initial CUBE
Order. If the Contra Order meets its
allocation guarantee at a price below
(above) the clean-up price, it will cease
matching RFR Responses that may be
priced above (below) the price at which
the Contra Order received its allocation
guarantee. In addition, if there are other
RFR Responses at the clean-up price,
the remaining CUBE Order contracts
will be allocated pursuant to the size
pro rata algorithm set forth in Rule
964NY(b)(3) and any remaining CUBE
Order contracts shall be allocated to the
Contra Order at the initiating price. In
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the event that there are no RFR
Responses to the Auction and an automatch feature is selected, the CUBE
Order shall execute against the Contra
Order at the initiating price.
Examples of Trade Allocation—AutoMatch and Auto-Match limit
Example #9 (No Customer interest on
BB):
NBBO = $1.15–$1.25 200 × 200
BBO = $1.15–$1.25 100 × 100
CUBE Order to buy 50 contracts with a
limit price of $1.24
Contra Order selling 50 contracts automatch
Permissible range of executions is $1.15
to $1.24
RFR sent identifying the series, side and
size, with initiating price of $1.24
(Auction Starts)
MM2 GTX Order received @ 350
milliseconds Sell 5 at $1.17
MM4 GTX Order received @ 430
milliseconds Sell 10 at $1.18
MM3 GTX Order received @ 450
milliseconds Sell 40 at $1.21
623 milliseconds (Auction Ends)
Under this scenario the CUBE Order
would be executed as follows:
5 contracts trade with MM2 @ $1.17
5 contracts trade with Contra Order @
$1.17 (due to auto-match)
10 contracts trade with MM4 @ $1.18
10 contracts trade with Contra Order @
$1.18 (due to auto-match)
5 contracts trade with Contra Order @
$1.21 (due to auto-match capped at
40% participation guarantee)
15 contracts trade with MM3 @ $1.21
(the Contra Order trades zero
contracts at this price having
already received their 40%
participation guarantee at $1.21)
(This fills the entire CUBE Order)
Example #10 (No Customer interest
on BB):
NBBO = $1.15–$1.25 200 × 200
BBO = $1.15–$1.25 100 × 100
CUBE Order to buy 51 contracts with a
limit price of $1.25
Contra Order selling 51 contracts automatch limit at $1.17
Permissible range of executions is $1.15
to $1.25
RFR sent identifying the series, side and
size, with initiating price of $1.25
(Auction Starts)
MM2 GTX Order received @ 150
milliseconds Sell 20 at $1.16
MM5 GTX Order received @ 200
milliseconds Sell 5 at $1.19
MM4 GTX Order received @ 230
milliseconds Sell 10 at $1.18
MM3 GTX Order received @ 450
milliseconds Sell 50 at $1.19
623 milliseconds (Auction Ends)
Under this scenario the CUBE Order
would be executed as follows:
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20 contracts trade with MM2 @ $1.16
10 contracts trade with MM4 @ $1.18
10 contracts trade with Contra Order @
$1.18 (due to auto-match limit)
10 contracts trade with Contra Order @
$1.19 (due to auto-match limit and
fulfills their 40% guarantee)
1 contract trades with MM3 @ $1.19
(This fills the entire CUBE Order)
Early Conclusion of a CUBE Auction
As noted earlier, the CUBE Auction is
integrated seamlessly within the
Exchange’s Consolidated Book and is
designed to maintain the priority of all
resting quotes and orders and any
timely RFR Responses, as well as
unrelated orders that are marketable at
the time of arrival. Thus, as proposed,
a CUBE Auction would conclude early
(i.e., before the end of the Response
Time Interval) as a result of certain
events that would otherwise disrupt the
priority of the Auction within the
Consolidated Book. The Exchange notes
that this is consistent with how the
electronic price improvement auctions
of other markets operate.37
Proposed Rule 971.1NY(c)(4),
explains how a CUBE Order would be
allocated as a result of each of the
events that would cause the early
conclusion of an Auction.38 First,
pursuant to proposed Rule
971.1NY(c)(4)(A), if, during a CUBE
Auction, a new CUBE Auction in the
same series is received by the Exchange,
the original CUBE Order would
conclude and execute pursuant to
proposed Rule 971.1NY(c)(5) and the
new CUBE Auction would proceed as
described in proposed Rule 971.1NY(c).
The Exchange believes that this practice
is consistent with the rules of other
exchanges operating electronic auctions,
which would ensure a fair and orderly
market by maintaining the priority of
the Consolidated Book while still
affording the opportunity for price
improvement on each Auction
commenced on the Exchange.39
Second, pursuant to proposed Rule
971.1NY(c)(4)(B), if, during a CUBE
Auction the Exchange receives an
unrelated quote or order that is on the
37 See, e.g., CBOE 6.74A(b); PHLX 1080(n)(ii); ISE
Rule 723 Supplementary Material .04; BOX Rule
7150(i).
38 Pursuant to proposed Rule 971.1NY(c)(3), and
as discussed herein, a trading halt in the affected
series would also result in the early conclusion of
an Auction and contracts would be allocated
pursuant to proposed paragraph (c)(5).
39 See, e.g., CBOE Rule 6.74A(b); ISE Rule
723(b)(3); ISE Rule 723 Supplementary Material .04.
The Exchange notes that although these rules
specify that auctions may not overlap or queue in
any manner, the rules are nonetheless silent on how
this is enforced (i.e., by rejecting new auction orders
or by concluding an ongoing auction early).
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same side of the market as the CUBE
Order, that is marketable against any
RFR Response or the NBBO (or BBO, if
a non-routable order) 40 at the time of
arrival, the Auction will conclude early
so that this incoming order may be
executed following the execution of the
CUBE Order (which has priority),
consistent with the terms of the
unrelated incoming order. The CUBE
Order, upon its early conclusion, will
execute pursuant to proposed paragraph
(c)(5). The Exchange notes that this
practice is consistent with how the
electronic price improvement auctions
of other markets operate.41 If there is
sufficient size to the RFR Responses
remaining after executing against the
CUBE Order, the order that caused the
early conclusion of the Auction would
trade with the remaining RFR Responses
at the best available prices, which may
be better than the NBBO (or BBO for
non-routable orders).42
The Exchange believes the early
conclusion of the Auction in this
instance would ensure that the priority
of quotes and orders on the
Consolidated Book would not be
disrupted. In this circumstance, those
GTX Orders that do not execute in the
CUBE Auction would execute against
the unrelated order that caused the
CUBE Auction to conclude early to the
extent possible (maximizing price
improvement for the incoming sameside marketable quote or order that
caused the early conclusion to the
Auction) and would then cancel. Any
contracts remaining from any unrelated
order when the RFR Responses have
been exhausted would be processed in
accordance with Rule 964NY Order
Display and Priority.
Example of Early Conclusion of
Auction—Same Side Marketable
Against NBBO at the Time of Arrival
emcdonald on DSK67QTVN1PROD with NOTICES
Example #11 (No Customer interest
on BB):
NBBO = $1.20–$1.24 200 × 200
BBO = $1.20–$1.24 100 × 100
CUBE Order to buy 20 contracts for
$1.23
40 The Exchange notes that an order that has been
designated as an order type that is not eligible to
be routed away will either be placed on the
Consolidated Book or cancelled if such order would
lock or cross the NBBO. See Rule 964NY(c)(2)(E).
If an incoming non-routable order is marketable
against the NBBO, but not the BBO, and by its
terms, such order would cancel, e.g., an IOC Order,
it would not cause an early conclusion to an
Auction. However, if such an order were marketable
against the BBO, i.e., if the BBO equaled the NBBO,
it would cause an early conclusion to the Auction.
41 See, e.g., CBOE Rule 6.74A(b)(2)(B); PHLX Rule
1080(n)(ii)(B)(2); ISE Rule 723(c)(5); BOX Rule
7150(i).
42 See, e.g., CBOE Rule 6.74A(b)(3)(J).
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Contra Order selling 20 contracts automatch limit at $1.22
Permissible range of executions is $1.21
to $1.23
RFR sent, identifying the series, side
and size, initiating price of $1.23
(Auction Starts)
MM3 GTX Order received @ 200
milliseconds Sell 20 at $1.23
MM1GTX Order received @ 210
milliseconds Sell 20 at $1.22
MM4 GTX Order received @ 230
milliseconds Sell 20 at $1.22
C1 Unrelated Order received @ 250
milliseconds Buy 100 at the
market
(Same-side order marketable against the
NBO causes an early conclusion to
the Auction)
Under this scenario, the CUBE Order
would be executed as follows:
8 contracts trade with the Contra Order
@ $1.22 (This satisfies their 40%
participation guarantee)
6 contract trades with MM1 @ $1.22
6 contract trades with
MM4 @ $1.22
(This fills the entire CUBE Order)
C1 unrelated order to buy 100 at the
market then executes as follows:
14 contracts trade with MM1 @ $1.22
14 contracts trade with MM4 @ $1.22
20 contracts trade with MM3 @ $1.23
The remaining 52 contracts from C1
unrelated order are handled
pursuant to existing Rule 964NY(in
this case, that means the 52
contracts would trade with the
interest comprising the BO, which
was offering 100 contracts at $1.24)
The third scenario that would result
in the early conclusion of a CUBE
Auction would be if, during a CUBE
Auction, the Exchange receives any RFR
Response that is marketable against the
NBBO (or BBO, if a non-routable order)
at the time of arrival. The RFR Response
could be a GTX Order or an unrelated
order that is a marketable limit order or
a market order. While the incoming
order that is on the opposite side of the
CUBE Order may be marketable against
the updated NBBO, as noted above, the
fact that the NBBO updated during the
Response Time Interval in of itself does
not cause an early conclusion to the
Auction.
Pursuant to proposed Rule
971.1NY(c)(4)(i), if the CUBE Auction
concludes early because the Exchange
receives during the Response Time
Interval an unrelated marketable limit
order or quote on the opposite side of
the CUBE Order, the CUBE Order would
execute pursuant to proposed paragraph
(c)(5). Contracts remaining, if any, from
unrelated quotes or orders at the time
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13719
the Auction concludes would be
processed in accordance with Rule
964NY Order Display and Priority. Any
unfilled GTX Orders would cancel. The
Exchange believes that early conclusion
in this circumstance would ensure that
the Auction interacts seamlessly with
the Consolidated Book so as not to
disturb the priority of orders on the
Book. The unrelated order or quote that
caused the Auction to end early would
be considered an RFR Response for
purposes of allocation pursuant to
proposed paragraph (c)(5), and thus
would participate in the Auction
consistent with its limit price and order
instructions. The Exchange also notes
that concluding the Auction early under
this circumstance is consistent with
how the electronic price improvement
auctions of other markets operate.43
Example of Early Conclusion of
Auction—Opposite Side Limit Order
Marketable Against NBBO at the Time
of Arrival
Example #12a (No Customer interest
on BB):
NBBO = $1.20–$1.24 200 × 100
BBO = $1.20–$1.24 100 × 100
CUBE Order to buy 50 contracts with a
limit of $1.24
Contra Order selling 50 contracts with a
stop price of $1.24
Permissible range of executions $1.20–
$1.24
RFR sent identifying the series, side and
size, initiating price of $1.24
(Auction Starts)
MM3 GTX Order received @ 200
milliseconds Sell 50 at $1.22
MM1 GTX Order received @ 210
milliseconds Sell 50 at $1.22
MM4 GTX Order received @ 230
milliseconds Sell 50 at $1.23
BD1 Unrelated Order received @ 400
milliseconds Sell 10 at $1.20
(Opposite-side order marketable against
the NBB causes an early conclusion
to the Auction)
Under this scenario, the CUBE Order
would be executed as follows:
10 contracts trade with the unrelated
order for BD1 @ $1.20
20 contracts trade with MM3 @ $1.22
20 contracts trade with MM1 @ $1.22
(This fills the entire CUBE Order)
MM4 does not trade any contracts
Contra Order does not trade any
contracts
Example #12b: (Customer interest on
BB):
NBBO = $1.20–$1.24 200 × 100
BBO = $1.20–$1.24 100 × 100
CUBE Order to buy 50 contracts with a
limit of $1.24
43 See, e.g., CBOE 6.74A(b)(2)(B); ISE Rule
723(c)(5); BOX 7150(j).
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Contra Order selling 50 contracts with a
stop price of $1.24
Permissible range of executions is $1.21
to $1.24
RFR sent identifying the series, side and
size, initiating price of $1.24
(Auction Starts)
MM3 GTX Order received @ 200
milliseconds Sell 50 at $1.22
MM1 GTX Order received @ 210
milliseconds Sell 50 at $1.22
MM4 GTX Order received @ 230
milliseconds Sell 50 at $1.23
BD1 Unrelated Order received @ 400
milliseconds Sell 10 at $1.20
(Opposite-side order marketable against
the NBB causes an early conclusion
to the Auction)
Under this scenario, the CUBE Order
would be executed as follows:
10 contracts trade with the unrelated
order for BD1 @ $1.21 (Customer on
the BB, so allowable range must
improve BB by .01)
20 contracts trade with MM3 @ $1.22
20 contracts trade with MM1 @ $1.22
(This fills the entire CUBE Order)
MM4 does not trade any contracts
Contra Order does not trade any
contracts
Example #12c (No Customer interest
on BB and updated NBB during
Auction):
NBBO = $1.20–$1.24 200 × 100
BBO = $1.20–$1.24 100 × 100
CUBE Order to buy 50 contracts with a
limit of $1.24
Contra Order selling 50 contracts with a
stop price of $1.24
Permissible range of executions $1.20–
$1.24
RFR sent identifying the series, side and
size, initiating price of $1.24
(Auction Starts)
MM3 GTX Order received @ 200
milliseconds Sell 50 at $1.22
MM1 GTX Order received @ 210
milliseconds Sell 50 at $1.22
MM4 GTX Order received @ 230
milliseconds Sell 50 at $1.23
New NBB posted on an away market
$1.23
(New NBB does not cause early
conclusion) 44
BD1 Unrelated Order received @ 400
milliseconds Sell 10 at $1.21
(Opposite-side order marketable against
the updated NBB causes an early
conclusion to the Auction)
Under this scenario, the CUBE Order
would be executed as follows:
10 contracts trade with the unrelated
order for BD1 @ $1.21
20 contracts trade with MM3 @ $1.22
20 contracts trade with MM1 @ $1.22
(This fills the entire CUBE Order)
MM4 does not trade any contracts
Contra Order does not trade any
contracts
Example #12d (No Customer interest
on BB and updated BB during Auction):
NBBO = $1.20–$1.24 200 x 100
BBO = $1.20–$1.24 100 x 100
CUBE Order to buy 50 contracts with a
limit of $1.24
Contra Order selling 50 contracts with a
stop price of $1.24
Permissible range of executions $1.20–
$1.24
RFR sent identifying the series, side and
size, initiating price of $1.24
(Auction Starts)
MM3 GTX Order received @ 200
milliseconds Sell 50 at $1.24
MM1 GTX Order received @ 210
milliseconds Sell 50 at $1.22
MM4 GTX Order received @ 230
milliseconds Sell 50 at $1.22
MM5 unrelated quote received @500
milliseconds Buy 10 at $1.21
(New BB adjusts range of permissible
executions but does not cause early
conclusion) 45
MM6 GTX Order received @ 550
milliseconds Sell 10 at $1.20
(Opposite-side order marketable against
the updated BB causes an early
conclusion to the Auction) 46
Under this scenario, the CUBE Order
would be executed as follows:
10 contracts trade with MM6 @ $1.21
(the GTX order has been re-priced
to reflect the new BB 47
20 contracts trade with MM1 @ $1.22
20 contracts trade with MM4 @ $1.22
(This fills the entire CUBE Order)
MM3 does not trade any contracts
Contra Order does not trade any
contracts
If the order that causes the Auction to
conclude early is a market order on the
opposite side of the CUBE Order, the
allocation of the CUBE Order varies
depending on how the Contra Order
guaranteed the execution of the CUBE
Order and what, if any, RFR Responses
are received before the Auction
concludes early. Proposed paragraph
(c)(4)(C)(ii) provides that if auto-match
is selected and no RFR Responses have
arrived at the time the Auction
concludes early, if the CUBE Order is to
buy (sell) and the unrelated order that
caused the Auction to conclude early is
a market order to sell (buy), the CUBE
Order would execute against the
unrelated market order at the midpoint
of the initiating price and the lower
(upper) bound of the range of
permissible executions, as shown in the
Rule 991NY(b)(5).
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proposed Rule 971.1NY(b)(1)(C).
46 See
44 See
45 See
proposed Rule 971.1NY(c)(4)(C).
proposed Rule 971.1NY(c)(2)(C)(i)(f).
47 See
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example below.48 If no midpoint is
possible, the execution would be
rounded up (down) to the nearest whole
penny toward the initiating price. The
Exchange believes that rounding in this
manner ensures not only that the CUBE
Order is afforded price improvement,
but also that the priority of existing
interest in the Consolidated Book is
protected.
Example of Early Conclusion of
Auction—Opposite Side Market Order
w/Auto-Match and no Responses
Example #13 (No Customer interest
on BB):
NBBO = $1.15–$1.25 200 x 200
BBO = $1.15–$1.25 100 x 100
CUBE Order to buy 50 contracts with a
limit of $1.20
Contra Order selling 50 contracts with
Auto-match
Permissible range of executions $1.15—
$1.20
RFR sent identifying the series, side and
size, with initiating price of $1.20
(Auction Starts)
BD1 Order received @ 490 milliseconds
Sell 5 at the market
(Opposite-side market order causes an
early conclusion to the Auction)
Under this scenario, the CUBE Order
would be executed as follows:
5 contracts trade with BD1 @ $1.18
(midpoint of the initiating price and
the lower bound of the range of
permissible prices, here the NBB,
rounded up to nearest whole $.01
closer to the initiating price) 49
5 contracts with Contra Order at $1.18
(Auto-match)
40 contracts trade with Contra Order at
$1.20 (the initiating price)
(This fills the entire CUBE Order)
Example #13a (No Customer interest
on BB and update to BB):
NBBO = $1.15–$1.25 200 x 200
BBO = $1.15–$1.25 100 x 100
CUBE Order to buy 50 contracts with a
limit of $1.20
48 As noted above, the Auction may execute
orders in the Auction as exceptions to TradeThrough Liability pursuant to Rule 991NY(b)(5).
Accordingly, an opposite-side market order that
arrives during the Auction, which by definition is
less than a second, may trade through any updated
NBBO published by an away market. Because,
pursuant to proposed Rule 971.1NY(b)(3), an
update to the CUBE Order’s same-side BBO would
update the permissible range of executions, an
opposite-side market order would execute
consistent with that updated permissible range of
executions.
49 In this scenario, the execution between the
contra side market order and the CUBE Order
should occur at the midpoint of the CUBE Order
initiating price and the BBO on the same side of the
market as the CUBE Order. In this case, that is the
midpoint between $1.15 and $1.20 or $1.175. In
such situations, where the midpoint is less than a
full cent, the execution will round back towards the
CUBE Order initiating price—in this case, $1.18.
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emcdonald on DSK67QTVN1PROD with NOTICES
Contra Order selling 50 contracts with
Auto-match
Permissible range of executions $1.15–
$1.20
RFR sent identifying the series, side and
size, with initiating price of $1.20
(Auction Starts)
MM1 Quote received @ 200
milliseconds Buy 100 at $1.18
(New BB updates range of executions to
$1.18–$1.20)
BD1 Order received @ 490 milliseconds
Sell 5 at the market
(Opposite-side market order causes an
early conclusion to the Auction)
Under this scenario, the CUBE Order
would be executed as follows:
5 contracts trade with BD1 @ $1.19
(midpoint of the initiating price and
the lower bound of the range of
permissible prices)
5 contracts with Contra Order at $1.19
(Auto-match)
40 contracts trade with Contra Order at
$1.20 (the initiating price)
(This fills the entire CUBE Order)
Proposed paragraph (c)(4)(C)(iii)
provides that when auto-match is
selected and other RFR Responses are
received before the arrival of the market
order that caused the Auction to
conclude early, if the CUBE Order is to
buy (sell) and the market order is to sell
(buy), the CUBE Order would execute
against the unrelated market order at the
lowest (highest) RFR Response price
within the range of permissible
executions. The Exchange believes this
would maximize the opportunities for
price improvement, while maintaining
the priority of the Consolidated Book.
Example of Early Conclusion of
Auction—Opposite Side Market Order
w/Auto-Match and Responses before
Early Conclusion
Example #14 (No Customer interest
on BB):
NBBO = $1.15–$1.25 200 x 200
BBO = $1.15–$1.25 100 x 100
CUBE Order to buy 50 contracts with a
limit of $1.20
Contra Order selling 50 contracts with
Auto-match
Permissible range of executions $1.15–
$1.20
RFR sent identifying the series, side and
size, with initiating price of $1.20
(Auction Starts)
MM4 GTX Order received @ 230
milliseconds Sell 10 at $1.18
MM3 GTX Order received @ 450
milliseconds Sell 40 at $1.20
BD1 Order received @ 490 milliseconds
Sell 5 at the market
(Opposite-side market order causes an
early conclusion to the Auction)
Under this scenario, the CUBE Order
would be executed as follows:
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5 contracts trade with BD1 @ $1.18
(market order executes at lowest
RFR Response price within
permissible price range, which is
the $1.18 offer from MM4 received
at 230 milliseconds)
10 contracts trade with MM4 @ $1.18
15 contracts trade with Contra Order @
$1.18 (Auto-match other RFR
Response prices)
5 contracts trade with the Contra Order
@ $1.20 (This satisfies their 40%
participation guarantee)
15 contracts trade with MM3 @ $1.20
(This fills the entire CUBE Order)
Pursuant to proposed Rule
971.1NY(c)(4)(C)(iv), and as illustrated
by the examples that follow, if the
Initiating Participant has selected a
single stop price or auto-match limit to
guarantee the execution of a CUBE
Order to buy (sell), and the order that
caused the Auction to conclude early is
a market order to sell (buy), the CUBE
Order would execute against the
unrelated market order at the lowest
(highest) price at which an execution
could occur within the range of
permissible executions, which may be
either an RFR Response price, the single
stop price, or the auto-match limit price.
Example of Early Conclusion of
Auction—Opposite Side Market Order
w/Stop Price
Example #15 (No Customer interest
on BB):
NBBO = $1.15–$1.25 200 x 200
BBO = $1.15–$1.25 100 x 100
CUBE Order to buy 50 contracts with a
limit of $1.20
Contra Order selling 50 contracts with
single stop price of $1.20
Permissible range of executions $1.15$1.20
RFR sent identifying the series, side and
size, with initiating price of $1.20
(Auction Starts)
MM4 GTX Order received @ 230
milliseconds Sell 10 at $1.19
MM3 GTX Order received @ 450
milliseconds Sell 40 at $1.20
BD1 Order received @ 490 milliseconds
Sell 5 at the market
(Opposite-side market order causes an
early conclusion to the Auction)
Under this scenario, the CUBE Order
would be executed as follows:
5 contracts trade with BD1 @ $1.19
(lowest-priced Response received
during the Auction)
10 contracts trade with MM4 @ $1.19
20 contracts trade with the Contra Order
@ $1.20 (This satisfies their 40%
participation guarantee)
15 contracts trade with MM3 @ $1.20
(This fills the entire CUBE Order)
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Example of Early Conclusion of
Auction—Opposite Side Market Order
w/Auto-Match limit
Example #16 (No Customer interest
on BB):
NBBO = $1.20–$1.24 200 x 100
BBO = $1.20–$1.25 100 x 100
CUBE Order to buy 20 contracts with a
limit of $1.24
Contra Order selling 20 contracts with
an auto-match limit price of $1.23
Permissible range of executions $1.21–
$1.24
RFR sent identifying the series, side and
size, with initiating price of $1.24
(Auction Starts)
MM3 GTX Order received @ 200
milliseconds Sell 20 at $1.23
MM1GTX Order received @ 210
milliseconds Sell 20 at $1.23
MM4 GTX Order received @ 230
milliseconds Sell 20 at $1.23
BD1 Unrelated Order received @ 400
milliseconds Sell 10 at Market
(Opposite-side market order causes
early conclusion to the Auction)
Under this scenario, the CUBE Order
would be executed as follows:
10 contracts trade with the unrelated
order for BD1 @ $1.23 (the lowest
priced Response received during
the Auction.)
8 contracts trade with Contra Order @
$1.23 (this satisfies their 40%
participation guarantee)
1 contract trades with MM3 @ $1.23
1 contract trades with MM1 @ $1.23
(This fills the entire CUBE Order)
MM4 does not trade any contracts 50
The Auction would also conclude
early upon the arrival of an unrelated,
non-marketable quote or limit order,
that improves the CUBE Order’s
initiating price, pursuant to proposed
Rule 971.1NY(c)(4)(D). Specifically, if,
during a CUBE Auction where the CUBE
Order is to buy (sell), the Exchange
receives such a non-marketable
unrelated order that is on the same side
of the market as the CUBE Order that is
priced higher (lower) than the initiating
price, and therefore creates a new BB
(BO) that is higher (lower) than the
initiating price, the CUBE Order would
execute pursuant to proposed paragraph
(c)(5). Any unfilled GTX Orders would
be eligible to execute against the
unrelated order that caused the CUBE
Auction to conclude early and would
then cancel. Any contracts that remain
from the unrelated non-marketable
order after that order trades against
interest in the Auction would then be
processed in accordance with Rule
50 MM4 receives no allocation pursuant to Rule
964NY(b)(3), which defaults to time-priority
allocation when, as here, the bids are equal.
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964NY Order Display and Priority. The
Exchange believes that early conclusion
in this circumstance would ensure that
the Auction interacts seamlessly with
the Consolidated Book so as not to
disturb the priority of orders on the
Book, while affording the CUBE Order
(and the unrelated order) opportunities
for price improvement.
emcdonald on DSK67QTVN1PROD with NOTICES
Example of Early Conclusion of
Auction—Same Side New BBO
Improves Initiating Price
Example #17 (No Customer interest
on BB):
NBBO = $1.20–$1.24 200 x 200
BBO = $1.20–$1.24 100 x 100
CUBE Order to buy 20 contracts with a
limit price of $1.22
Contra Order selling 20 contracts at
$1.22
Permissible range of executions $1.21–
$1.22
RFR sent identifying the series, side and
size, with an initiating price of
$1.22
(Auction Starts)
MM3 GTX Order received @ 300
milliseconds Sell 20 at $1.22
MM1 GTX Order received @ 310
milliseconds Sell 20 at $1.22
MM4 GTX Order received @ 430
milliseconds Sell 20 at $1.22
C1 Unrelated Order received @ 550
milliseconds Buy 100 at $1.23
(Same side limit order to buy that
improves (i.e., is priced higher
than) the CUBE Order’s initiating
price causes the Auction to
conclude early)
Under this scenario, the CUBE Order
would be executed as follows:
8 contracts trade with the Contra Order
@ $1.22 (This satisfies their 40%
participation guarantee)
4 contract trades with MM3 @ $1.22
4 contract trades with MM1 @ $1.22
4 contracts trade with MM4 @ $1.22
(This fills the entire CUBE Order)
C1 unrelated order then executes as
follows:
16 contracts trade with MM3 @ $1.22
16 contracts trade with MM1 @ $1.22
16 contracts trade with MM4 @ $1.22
Remaining contracts post to the
Consolidated Book as new BB
paying $1.23 for 52 contracts
The final scenario that would result in
the early conclusion of an Auction,
pursuant to proposed Rule
971.1NY(c)(4)(E), would occur if, during
the Auction, the Exchange received
interest sufficient to fill a resting AON
order. After the early conclusion of the
Auction, the CUBE Order would execute
pursuant to paragraph (c)(5) and the
Exchange would then determine
whether the AON could be executed
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Conduct Inconsistent With Just and
Equitable Principles of Trade
the ATP Holder is the Initiating
Participant. The Exchange believes this
would prevent Initiating Participants
from submitting an inaccurate or
misleading stop price or trying to
improve their allocation entitlement by
participating with multiple expressions
of interest.
(b) Engaging in a pattern and practice
of entering unrelated orders and quotes
for the purpose of causing a CUBE
Auction to conclude early, i.e., before
the end of the Response Time Interval.
The Exchange believes this would
prevent an ATP Holder from shortening
the duration of the Auction thus
possibly reducing the number of
Responses to an Auction in order to gain
a higher contract allocation than the
percentage the ATP Holder may have
otherwise received had the Auction not
concluded early.
(c) An Initiating Participant that
breaks up an agency order into separate
CUBE Orders for the purpose of gaining
a higher allocation percentage than the
Initiating Participant would have
otherwise received in accordance with
the allocation procedures contained in
proposed paragraph (c)(5) to proposed
Rule 971.1NY. The Exchange believes
this would prevent Initiating
Participants from manipulating the
CUBE Orders size and number to gain
a higher guaranteed execution than the
Initiating Participant would have
otherwise received.
(d) Engaging in a pattern and practice
of sending multiple RFR Responses at
the same price that in the aggregate
exceed the size of the CUBE Order. The
Exchange believes this will prevent ATP
Holders from attempting to misuse or
manipulate the allocation process.
The Exchange is proposing
Commentary to the Rule to set forth that
certain activity in connection with the
CUBE Auction would be considered
conduct inconsistent with just and
equitable principles of trade to
discourage ATP Holders from
attempting to misuse or manipulate the
Auction process. This practice is
consistent with the rules of other
options exchanges that offer electronic
price improvement auction
mechanisms.51 Specifically, pursuant to
proposed Commentary .02 (a)–(d) to
Rule 971.1NY, the Exchange proposes
that the following conduct would be
considered conduct inconsistent with
just and equitable principles of trade:
(a) An ATP Holder entering RFR
Responses to a CUBE Auction for which
Order Exposure and Prohibited Conduct
Current Rule 935NY prohibits Users 52
from executing as principal any orders
they represent as agent unless (i) agency
orders are first exposed on the Exchange
for at least one (1) second or (ii) the User
has been bidding or offering on the
Exchange for at least one (1) second
prior to receiving an agency order that
is executable against such bid or offer.
This rule helps to ensure that orders are
properly exposed to market participants,
affording them a reasonable amount of
time in which to participate in the
execution of the agency order.
As previously stated in this filing, the
Exchange believes that the proposed
Response Time Interval, with a random
length of between 500 and 750
milliseconds, is of sufficient length so as
51 See, e.g., PHLX Rule 1080(n)(iii)–(v); ISE Rule
723 Supplementary Material .01; BOX IM–7150–
2(a) and (b).
52 Rule 900.2NY(87) defines User as any ATP
Holder that is authorized to obtain access to the
System.
against interest in the Auction. The
Exchange believes that early conclusion
in this circumstance would ensure that
the Auction interacts seamlessly with
the Consolidated Book so as not to
disturb the priority of orders on the
Book, while affording the CUBE Auction
opportunities for price improvement.
Example of Early Conclusion of
Auction—Sufficient Interest To Fill
AON Order Received During Response
Time Interval
Example #18 (No Customer interest
on BB):
NBBO = $1.20–$1.24 200 x 200
BBO = $1.20–$1.24 100 x 100
CUBE Order to buy with a limit price of
$1.22 for 20 contracts
Contra Order selling 20 contracts with a
single stop price of $1.22
Permissible range of executions $1.21–
$1.22
RFR sent identifying the series, side and
size, with initiating price of $1.22
Resting AON Order to buy 20 contracts
at $1.21
(Auction Starts)
MM3 GTX Order received @ 200
milliseconds Sell 20 at $1.21
(Arriving interest sufficient to fill
resting AON order to buy causes the
Auction to conclude early)
Under this scenario, the CUBE Order
would be executed as follows:
20 contracts trade with MM3 @ $1.21
(This fills the entire CUBE Order)
Contra Order does not trade
System reevaluates whether AON can be
executed and concludes cannot,
because interest executed with
CUBE Order.
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to permit ATP Holders time to respond
to a CUBE Auction thereby enhancing
opportunities for competition among
participants and increasing the
likelihood of price improvement for the
CUBE Order. Accordingly, the Exchange
proposes to amend Rule 935NY to
stipulate that a User may execute as
principal an order that the User
represents as agent, provided that the
User avails him or herself of the CUBE
Auction process, pursuant to Rule
971.1NY. Such CUBE Order would not
be subject to the one-second order
exposure requirement of Rule 935NY,
which exclusion from the one-second
order exposure requirement is
consistent with the treatment of similar
orders at BOX Options.53 Consistent
with Rule 935NY Commentary .01, ATP
Holders shall only utilize the Auction
where there is a genuine intention to
execute a bona fide transaction.54
emcdonald on DSK67QTVN1PROD with NOTICES
Proposed Pilot Period for Auctions of
Fewer Than 50 Contracts
The Exchange is proposing that
proposed Rules 971.1NY(b)(1)(B)
(regarding CUBE Auctions for fewer
than 50 contracts) and 971.1NY(b)(8)
(that the minimum size for an Auction
shall be one contract) be adopted for a
pilot period effective for one year
beginning on the approval date for this
rule proposal. During this Pilot Period,
the Exchange will submit certain data,
periodically as required by the
Commission, to provide supporting
evidence that, among other things, there
is meaningful competition for all size
orders and that there is an active and
liquid market functioning on the
Exchange outside of the CUBE Auction.
Any data that is submitted to the
Commission will be provided on a
confidential basis.
To aid the Commission in its
evaluation of the Pilot Program, the
Exchange will provide the following
additional information each month:
(1) The number of orders of 50
contracts or greater entered into the
CUBE Auction;
(2) The number of orders of fewer
than 50 contracts entered into the CUBE
Auction;
(3) The percentage of all orders of 50
contracts or greater sent to the Exchange
that are entered into the CUBE;
(4) The percentage of all orders of
fewer than 50 contracts sent to the
53 See
BOX IM–7140–2.
Rule 935NY Commentary .01 (‘‘Rule
935NY prevents a User from executing agency
orders to increase its economic gain from trading
against the order without first giving other trading
interest on the Exchange an opportunity to either
trade with the agency order or to trade at the
execution price when the User was already bidding
or offering on the book.’’)
54 See
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Exchange that are entered into the CUBE
Auction;
(5) The percentage of all Exchange
trades represented by orders of fewer
than 50 contracts;
(6) The percentage of all Exchange
trades effected through the CUBE
Auction represented by orders of fewer
than 50 contracts;
(7) The percentage of all contracts
traded on the Exchange represented by
orders of fewer than 50 contracts;
(8) The percentage of all contracts
effected through the CUBE Auction
represented by orders of fewer than 50
contracts;
(9) The spread in the option, at the
time an order of 50 contracts or greater
is submitted into the CUBE Auction;
(10) The spread in the option, at the
time an order of fewer than 50 contracts
is submitted into the CUBE Auction;
(11) Of CUBE Auction trades for
orders of fewer than 50 contracts, the
percentage of CUBE Auction trades
executed at the NBBO, NBBO plus $.01,
NBBO plus $.02, NBBO plus $.03, etc.;
(12) Of CUBE Auction trades for
orders of 50 contracts or greater, the
percentage of CUBE Auction trades
executed at the NBBO, NBBO plus $.01,
NBBO plus $.02, NBBO plus $.03, etc.;
(13) The number of orders submitted
by an ATP Holder when the bid-ask
spread was at a particular increment
(e.g., $.01, $.02, $.03, etc.).
Also, relative to Item 13, for each
spread, the Exchange will provide the
percentage of contracts in orders of
fewer than 50 contracts submitted to the
CUBE Auction where the contra-side
was: (a) The ATP Holder that submitted
the order to the CUBE Auction; (b)
market makers assigned to the class; (c)
other Exchange Participants; (d)
Customers; (e) Professional Customers
and (f) unrelated orders. For each
spread, also specify the percentage of
contracts in orders of 50 contracts or
greater submitted to the CUBE Auction
where the contra-side was: (a) The ATP
Holder that submitted the order to the
CUBE Auction; (b) market makers
assigned to the class; (c) other Exchange
Participants; (d) Customers; (e)
Professional Customers and (f) unrelated
orders.
Further, the Exchange will provide,
for the first and third Wednesday of
each month, the: (a) Total number of
CUBE Auctions on that date; (b) number
of CUBE Auctions where the order
submitted to the CUBE Auction was
fewer than 50 contracts; (c) number of
CUBE Auctions where the order
submitted to the CUBE Auction was 50
contracts or greater; (d) number of CUBE
Auctions (where the order submitted to
the CUBE Auction was fewer than 50
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13723
contracts and where the order submitted
was 50 contracts or greater) where the
number of Participants (excluding the
Contra Order) was zero, one, two, three,
four, etc.
The Exchange will also provide: The
percentage of all Exchange trades
effected through the CUBE Auction in
which the Initiating Participant has
elected to auto-match with a limit price
and the percentage of such trades in
which the Initiating Participant has
elected to auto-match without a limit
price, and the average amount of price
improvement provided to the CUBE
Order when the Initiating Participant
has elected to auto-match with a limit
price and the average without a limit
price, versus the average amount of
price improvement provided to the
CUBE Order when the Initiating
Participant has chosen a single stop
price.
Finally, during the Pilot Program, the
Exchange will provide information each
month with respect to situations in
which the CUBE Auction is terminated
prematurely or a market or marketable
limit order immediately executes with
an initiating order before the CUBE
Auction’s conclusion. The following
information will be provided:
(a) The number of times that the
Auction concluded early upon the
arrival of an unrelated quote or order
that is on the same side of the market
as the CUBE Order, that is marketable
against any RFR Responses or the NBBO
(or the BBO, for a non-routable order) at
the time of arrival, and at what time
such unrelated order/quote ended the
Auction. Also, (i) the number of times
such orders were entered by the same
(or affiliated) firm that initiated the
CUBE Auction that was concluded
early, and (ii) the number of times such
orders were entered by a firm (or an
affiliate of such firm) that participated
in the execution of the CUBE Order;
(b) For the orders addressed in each
of (a)(i) and (a)(ii) above, the percentage
of CUBE Auctions that concluded early
due to the receipt, during the CUBE
Auction, of an unrelated quote or order
on the same side of the market as the
CUBE Order, that is marketable against
any RFR Responses or the NBBO (or the
BBO, for a non-routable order) at the
time of arrival; and the average amount
of price improvement provided to the
CUBE Order where the CUBE Auction is
concluded early;
(c) The number of times that the
Auction concluded early upon the
arrival of any RFR Response that is
marketable against the NBBO (or the
BBO, for a non-routable order) at the
time of arrival, and at what time such
RFR Response ended the Auction. Also,
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(i) the number of times such RFR
Responses were entered by the same (or
affiliated) firm that initiated the CUBE
Auction, and (ii) the number of times
such RFR Responses were entered by a
firm (or an affiliate of such firm) that
participated in the execution of the
CUBE Order;
(d) For the orders addressed in each
of (c)(i) and (c)(ii) above, the percentage
of CUBE Auctions that concluded early
due to the receipt, during the CUBE
Auction, of any RFR Response that is
marketable against the NBBO (or the
BBO, for a non-routable order) at the
time of arrival; and the average amount
of price improvement provided to the
CUBE Order where the CUBE Order is
immediately executed;
(e) The number of times that the
Auction concluded early due to a
trading halt and at what time the trading
halt ended the CUBE Auction. Of the
CUBE Auctions that concluded early
due to a trading halt, the number that
resulted in price improvement over the
CUBE Order stop price, and the average
amount of price improvement provided
to the CUBE Order. Further, in the
Auctions that concluded early due to a
trading halt, the percentage of contracts
that received price improvement over
the CUBE Order stop price;
(f) The number of times that the
Auction concluded early upon the
initiation of a new CUBE Auction in the
same series and at what time the
initiation of a new CUBE Auction ended
the ongoing CUBE Auction.
(g) The number of times that the
Auction concluded early upon the
receipt of an order with either an IOC,
FOK or NOW contingency and at what
time the receipt of such order ended the
ongoing CUBE Auction
(h) The number of times that the
Auction concluded early because
sufficient interest to fill an entire AON
order is received during the Response
Time Interval and at what time the
ongoing CUBE Auction was completed;
and
(i) The average amount of price
improvement provided to the initiating
order when the CUBE Auction is not
concluded early.
emcdonald on DSK67QTVN1PROD with NOTICES
Section 11(a) of the Exchange Act
Section 11(a) of the Exchange Act
prohibits any member of a national
securities exchange from effecting
transactions on that exchange for its
own account, the account of an
associated person, or an account over
which it or its associated persons
exercises discretion (‘‘covered
accounts’’), unless an exception
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applies.55 Section 11(a)(1) contains a
number of exceptions for principal
transactions by members and their
associated persons. As set forth below,
the Exchange believes that the proposed
rules for the CUBE Auction are
consistent with the requirements of
Section 11(a) and the rules thereunder.
In this regard, Section 11(a)(1)(A)
provides an exception from the
prohibitions in Section 11(a) for dealers
acting in the capacity of market makers.
The Exchange believes that orders sent
by on- and off-floor market makers, for
covered accounts, to the proposed CUBE
Auction would qualify for this
exception from Section 11(a).
In addition to this market maker
exception, Rule 11a2–2(T) under the
Exchange Act, known as the ‘‘effect
versus execute’’ rule, provides exchange
members with an exception from
Section 11(a) by permitting them,
subject to certain conditions, to effect
transactions for covered accounts by
arranging for an unaffiliated member to
execute the transactions on the
exchange.56 To comply with the ‘‘effect
versus execute’’ rule’s conditions, a
member: (i) Must transmit the order
from off the exchange floor; (ii) may not
participate in the execution of the
transaction once it has been transmitted
to the member performing the
execution; 57 (iii) may not be affiliated
with the member executing the
transaction on the floor, or through the
facilities, of the Exchange; and (iv) with
respect to an account over which the
member has investment discretion,
neither the member nor its associated
person may retain any compensation in
connection with effecting the
transaction except as provided in the
rule.58
The Exchange believes that orders
sent by off-floor ATP Holders, for
covered accounts, to the proposed CUBE
Auction would qualify for this ‘‘effect
versus execute’’ exception from Section
11(a), as described below. In this regard,
the first condition of Rule 11a2–2(T) is
that orders for covered accounts be
transmitted from off the exchange floor.
The Exchange represents that orders for
covered accounts from off-floor ATP
Holders sent to the CUBE Auction
would be transmitted from remote
terminals that are off the Exchange floor
directly to the mechanisms by electronic
55 15
U.S.C. 78k(a)(1).
CFR 240.11a2–2(T).
57 The member, however, may participate in
clearing and settling the transaction. See Securities
Exchange Act Release No. 14563 (March 14, 1978),
43 FR 11542 (March 17, 1978).
58 17 CFR 240.11a2–2(T).
56 17
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means.59 In the context of other
automated trading systems, the
Commission has found that the off-floor
transmission requirement is met if a
covered account order is transmitted
from a remote location directly to an
exchange’s floor by electronic means.60
The second condition of Rule 11a2–
2(T) requires that the member not
participate in the execution of its order
once the order is transmitted to the floor
for execution.61 The Exchange
represents that, upon submission to the
CUBE Auction, an order will be
executed automatically pursuant to the
proposed rules set forth for the Auction.
In particular, execution of an order sent
to the Auction depends not on the ATP
Holder entering the order, but rather on
what other orders are present and the
priority of those orders. Thus, at no time
following the submission of an order is
an ATP Holder able to acquire control
or influence over the result or timing of
order execution.62
The third condition of Rule 11a2–2(T)
requires that the order be executed by
an exchange member who is unaffiliated
with the member initiating the order.
The Commission has stated that this
requirement is satisfied when
automated exchange facilities, such as
the CUBE Auction, are used, as long as
the design of these systems ensures that
members do not possess any special or
unique trading advantages in handling
59 In the alternative, orders for a covered account
may be sent by an off-floor ATP Holder to an
unaffiliated Floor Broker for entry into the CUBE
Auction mechanism. Floor Brokers, however, may
not enter orders for their own covered accounts into
the Auction mechanism from on the floor, or
transmit such orders from on the floor to off of the
floor for entry into the CUBE Auction mechanism.
60 See, e.g., Securities Exchange Act Release Nos.
59154 (December 23, 2008), 73 FR 80468 (December
31, 2008) (SR–BSE–2008–48) (approving, among
other things, the equity rules of the Boston Stock
Exchange (‘‘BSE’’)); 57478 (March 12, 2008), 73 FR
14521 (March 18, 2008) (SR–NASDAQ–2007–004
and SR–NASDAQ–2007–080) (approving rules
governing the trading of options on The NASDAQ
Options Market); 49068 (January 13, 2004), 69 FR
2775 (January 20, 2004) (SR–BSE–2002–15)
(approving the Boston Options Exchange as an
options trading facility of BSE); 15533 (January 29,
1979), 44 FR 6084 (January 31, 1979) (approving the
Amex Post Execution Reporting System, the Amex
Switching System, the Intermarket Trading System,
the Multiple Dealer Trading Facility of the
Cincinnati Stock Exchange, the PCX
Communications and Execution System, and the
Philadelphia Stock Exchange Automated
Communications and Execution System) (‘‘1979
Release’’); and 14563 (March 14, 1978), 43 FR 11542
(March 17, 1978) (approving NYSE’s Designated
Order Turnaround System) (‘‘1978 Release’’).
61 The description above covers the universe of
the types of ATP Holders (i.e., on- and off-floor
market makers, off-floor firms that are not market
makers, and Floor Brokers).
62 The Exchange notes that the Initiating
Participant may not cancel or modify a CUBE Order
once a CUBE Auction has started. See proposed
Rule 971.1NY(c).
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their orders after transmitting them to
the exchange.63 The Exchange
represents that the CUBE Auction is
designed so that no ATP Holder has any
special or unique trading advantage in
the handling of its orders after
transmitting its orders to the
mechanism.
The fourth condition of Rule 11a2–
2(T) requires that, in the case of a
transaction effected for an account with
respect to which the initiating member
or an associated person thereof exercises
investment discretion, neither the
initiating member, nor any associated
person thereof, may retain any
compensation in connection with
effecting the transaction, unless the
person authorized to transact business
for the account has expressly provided
otherwise by written contract, referring
to Section 11(a) of the Act and Rule
11a2–2(T) thereunder.64 The Exchange
recognizes that ATP Holders relying on
Rule 11a2–2(T) for transactions effected
through the CUBE Auction must comply
with this condition of the Rule.
emcdonald on DSK67QTVN1PROD with NOTICES
Implementation
The Exchange will announce the
implementation date of the proposed
rule change in a Trader Update to be
published no later than 60 days
following Commission approval. The
implementation date will be no later
than 60 days following publication of
the Trader Update announcing
Commission approval. The Exchange
believes that this implementation
schedule would provide ATP Holders
with adequate notice of the Auction and
63 In considering the operation of automated
execution systems operated by an exchange, the
Commission noted that, while there is not an
independent executing exchange member, the
execution of an order is automatic once it has been
transmitted into the system. Because the design of
these systems ensures that members do not possess
any special or unique trading advantages in
handling their orders after transmitting them to the
exchange, the Commission has stated that
executions obtained through these systems satisfy
the independent execution requirement of Rule
11a2–2(T). See 1979 Release.
64 See 17 CFR 240.11a2–2(T)(a)(2)(iv). In addition,
Rule 11a2–2(T)(d) requires a member or associated
person authorized by written contract to retain
compensation, in connection with effecting
transactions for covered accounts over which such
member or associated persons thereof exercises
investment discretion, to furnish, at least annually
to the person authorized to transact business for the
account, a statement setting forth the total amount
of compensation retained by the member in
connection with effecting transactions for the
account during the period covered by the statement,
which amount must be exclusive of all amounts
paid to others during that period for services
rendered to effect such transactions. See also 1978
Release (stating ‘‘[t]he contractual and disclosure
requirements are designed to assure that accounts
electing to permit transaction-related compensation
do so only after deciding that such arrangements are
suitable to their interests’’).
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17:22 Mar 10, 2014
Jkt 232001
would allow ample time for ATP
Holders to prepare their systems for
participation in the Auction process, if
such participation is desired.
2. Statutory Basis
For the reasons set forth above, the
Exchange believes the proposed rule
change is consistent with Section 6(b) of
the Act in general, and furthers the
objectives of Section 6(b)(5) of the Act,
in that it is designed to promote just and
equitable principles of trade, remove
impediments to and perfect the
mechanisms of a free and open market
and a national market system and, in
general, to protect investors and the
public interest. In particular, the
proposal would provide ATP Holders
and Customers with an electronic
Auction mechanism equipped to
electronically execute proposed crossing
transactions while affording
opportunities for price improvement
and helping to ensure equal access to
exposed orders. The Exchange believes
that the Auction would promote and
foster competition as it would provide
more options contracts with the
opportunity for price improvement. In
this regard, the CUBE Auction is
intended to be beneficial to investors
because the Auction may result in
increased liquidity available at
improved prices, with competitive final
pricing out of the Initiating Participant’s
complete control.
Moreover, the Exchange notes that
because the CUBE Auction is intended
to operate seamlessly with the
Consolidated Book, the proposed
Auction would promote just and
equitable principles of trade by
providing price improvement
opportunities for agency orders while at
the same time providing an opportunity
for such agency orders to interact with
orders or quotes received during the
Response Time Interval, including
unrelated orders. Specifically, the
Exchange notes that any ATP Holder
that elects to subscribe to ArcaBook,
including a broker dealer, is eligible to
respond to an RFR and may therefore
potentially participate in the Auction.
As a result, the Exchange believes that
the Auction will increase the number of
options orders that are provided with
the opportunity to receive price
improvement.
The Exchange believes that the
proposed guaranteed allocation of
contracts to the Contra Order removes
impediments to and perfects the
mechanism of a free and open market
because it should encourage ATP
Holders to guarantee the execution of
orders they may represent on an agency
basis by entering agency orders into the
PO 00000
Frm 00116
Fmt 4703
Sfmt 4703
13725
CUBE Auction. The Exchange notes that
the proposed guarantee would also
protect investors because the guaranteed
allocation is subject to there being
sufficient size remaining of the CUBE
Order after executing against betterpriced interest (thereby providing price
improvement to the CUBE Order) and
Customers (thereby protecting Customer
interest). In addition, the CUBE Auction
promotes equal access by providing any
ATP Holder that elects to subscribe to
ArcaBook with the opportunity to
interact with orders in the CUBE
Auction. In this regard, any ATP Holder
can subscribe to receive the options data
provided through ArcaBook. The CUBE
Auction is also non-discriminatory by
using a random timer for the exposure
period, which period is not disclosed to
any participants or Exchange staff, and
is not even determined until the RFR is
sent. The Exchange also believes that
the proposed amendment to Rule
900.2NY to exclude Professional
Customers from the definition of
‘‘Customer’’ for purposes of this rule is
consistent with just and equitable
principles of trade because it is
intended to protect investors that are
not broker dealers and ensure that their
orders are protected regardless of
whether there is an Auction.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange is proposing the Auction as a
market enhancement that should
increase competition for order flow on
the Exchange in a manner that would be
beneficial to investors. Specifically, the
Exchange believes that the CUBE
Auction would provide investors
seeking to effect options orders with an
opportunity for increased liquidity
available at improved prices, with
competitive final pricing out of the
Initiating Participant’s complete control.
The proposal is structured to offer the
same enhancement to all market
participants and would not impose a
competitive burden on any participant.
The Exchange notes that it operates in
a highly competitive market in which
market participants can readily direct
order flow to competing venues who
offer similar functionality. The
Exchange believes the proposed rule
change is pro-competitive because it
would enable the Exchange to provide
market participants with functionality
that is similar to that of other options
exchanges. The Exchange notes that not
having the CUBE Auction at the
E:\FR\FM\11MRN1.SGM
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Federal Register / Vol. 79, No. 47 / Tuesday, March 11, 2014 / Notices
Exchange places the Exchange at a
`
competitive disadvantage vis-a-vis other
exchanges that offer similar price
improvement mechanisms.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
emcdonald on DSK67QTVN1PROD with NOTICES
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–
NYSEMKT–2014–17 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NYSEMKT–2014–17. 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
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17:22 Mar 10, 2014
Jkt 232001
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 20549–1090, 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–2014–17, and should be
submitted on or before April 1, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.65
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–05179 Filed 3–10–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–71650; File No. SR–BOX–
2014–09]
Self-Regulatory Organizations; BOX
Options Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Clerical and NonControversial Rule Changes
March 5, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on February
26, 2014, BOX Options Exchange LLC
(‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the self-regulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
from interested persons.
65 17
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
PO 00000
Frm 00117
Fmt 4703
Sfmt 4703
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to make noncontroversial and clerical amendments
to its rules. The text of the proposed
rule change is available from the
principal office of the Exchange, at the
Commission’s Public Reference Room
and also on the Exchange’s Internet Web
site at https://boxexchange.com.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of these statements may be examined at
the places specified in Item IV below.
The self-regulatory organization 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 purpose of the proposed rule
change is to amend Rules 7130
(Execution and Price/Time Priority) and
7230 (Limitation on Liability) and
Interpretive Material to Rule 15010
(Order Protection) to make clerical
corrections to the BOX Rulebook.
Additionally, the Exchange proposes to
make non-controversial amendments to
Rules 7110 (Order Entry) and 8050
(Market Maker Quotations).
First, there is a numbering issue
within Rule 7130 which needs to be
corrected. Specifically, 7130(a)(4)(v) is
incorrectly numbered and needs to be
changed to 7130(a)(4)(iv). Although this
numbering issue has been in place since
the inception of the BOX Rulebook,3
BOX recently became aware of it.
Second, on May 9, 2012, BOX filed a
proposed rule change to amend BOX
Rule 7230 4 to clarify and codify certain
provisions within Rule 7230 and to
establish the maximum monthly
compensation amount. The changes to
that filing became operative on May 9,
2012. The purpose of this filing is to
correct clerical and grammatical errors
that were created by that filing.
3 See Securities Exchange Act Release No. 66871
(April 27, 2012) (File No. 10–206).
4 See Securities Exchange Act Release No. 66982
(May 14, 2012), 77 FR 29718 (May 18, 2012) (SR–
BOX–2012–001).
E:\FR\FM\11MRN1.SGM
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]]>Agencies
[Federal Register Volume 79, Number 47 (Tuesday, March 11, 2014)]
[Notices]
[Pages 13711-13726]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-05179]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71655; File No. SR-NYSEMKT-2014-17]
Self-Regulatory Organizations; Self-Regulatory Organizations;
Notice of Filing of Proposed Rule Change Adopting Rule 971.1NY for an
Electronic Price Improvement Auction for Single-Leg Orders
March 5, 2014.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on February 21, 2014, NYSE MKT LLC (the ``Exchange'' or
``NYSE MKT'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to adopt Rule 971.1NY for an electronic price
improvement auction for single-leg orders. The text of the proposed
rule change is available on the Exchange's Web site at www.nyse.com, at
the principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to adopt new Rule 971.1NY that sets forth an
electronic crossing mechanism with a price improvement auction on the
Exchange to be referred to as the CUBE Auction, which stands for
Customer Best Execution. Proposed Rule 971.1NY provides for a CUBE
Auction for single-leg orders. The CUBE Auction may also be referred to
herein simply as the Auction. The Exchange notes that the CUBE Auction,
as proposed, would operate in a manner consistent with--but not
identical to--the operation of electronic price improvement auctions
available on other options markets.\4\
---------------------------------------------------------------------------
\4\ See Chicago Board Options Exchange, Inc. (``CBOE'') Rule
6.74A--Automated Improvement Mechanism (``AIM''); NASDAQ OMX PHLX,
INC. (``PHLX'') Rule 1080--Price Improvement XL (``PIXL''); BOX
Options Exchange LLC (``BOX'') Rule 7150--Price Improvement Period
(``PIP''); International Securities Exchange (``ISE'') Rule 723--
Price Improvement Mechanism (``PIM''). In general, the AIM, PIXL,
PIP and PIM have features similar to those proposed in the Auction
including: (a) Providing the opportunity for price improvement; (b)
delineating an exposure period for original agency order; (c)
setting guidelines for the types of orders eligible for
participation; and (d) setting allocation rules for orders
considered by the mechanism.
---------------------------------------------------------------------------
As proposed, the CUBE Auction would be available to ATP Holders
both on and off the Trading Floor of the Exchange, subject to the
requirements of Section 11(a) of the Act (discussed below). In addition
to the CUBE Auction, Floor-based ATP Holders may continue to use
existing Floor-based crossing rules.
CUBE Overview
As described below, the CUBE Auction is designed to work seamlessly
with the Exchange's Consolidated Book, which is the Exchange's single
electronic order book where all quotes
[[Page 13712]]
and limit orders sent to the Exchange are placed and reside as a file
on the NYSE Amex System. Under proposed Rule 971.1NY(a), an ATP Holder
may seek to guarantee the execution of a limit order it represents as
agent on behalf of a public customer, broker dealer, or any other
entity via the CUBE Auction. As proposed, this agency order would be
referred to as the CUBE Order. The ATP Holder that submits the CUBE
Order (the ``Initiating Participant'') would agree to guarantee the
execution of the CUBE Order by submitting a contra-side order (``Contra
Order'') representing principal interest or interest it has solicited
to trade with the CUBE Order at a specified price (``single stop
price'') or by utilizing auto-match or auto-match limit features as
described in proposed Rule 971.1NY(c)(1). The Initiating Participant's
manner of guaranteeing the CUBE Order and the price(s) at which the
CUBE Order is stopped would not be displayed.
Although the Contra Order would guarantee the CUBE Order an
execution, the purpose of the Auction is to provide the opportunity for
price improvement for the CUBE Order as well as the opportunity for
other market participants to interact with the CUBE Order. Accordingly,
the Exchange will notify market participants when an Auction is
occurring so that they may have an opportunity to participate. And as
discussed in more detail below, if, during an Auction, the Exchange
receives quotes or orders that are marketable, the Auction will
conclude and those marketable orders or quotes would have an
opportunity to interact with interest in the Auction and then will
continue with regular order processing, without delay. So from the
perspective of ATP Holders entering orders or quotes, the fact that an
Auction may be occurring will not impact their order or quote
processing, other than the possibility of additional trading
opportunities by virtue of trading with interest that is designated for
the Auction.
Criteria for Starting a CUBE Auction
As set forth in proposed Rule 971.1(a), an Auction begins with an
``initiating price,'' which for a CUBE Order to buy (sell) shall be the
lower (higher) of the CUBE Order's limit price or the National Best
Offer (``NBO'') (National Best Bid) (``NBB''), except as provided for
in paragraph (b)(1)(B) of the proposed Rule (discussed below). For
example, if both National Best Bid or Offer (``NBBO'') or Exchange Best
Bid or Offer (``BBO'') are $2.00 x $2.05, and there is no Customer
interest in the BBO, a CUBE Order to buy 60 contracts with a limit
price of $2.06 would have an initiating price of $2.05 (the NBO).\5\
However, if the limit price of the CUBE Order to buy were $2.04, the
initiating price would be $2.04 (the CUBE Order to buy's limit price is
lower than the NBO). The initiating price of the CUBE Order, as well as
the Contra Order and any responsive GTX Orders (discussed below) may be
priced in $0.01 increments, regardless of the Minimum Price Variation
(``MPV'') applicable to the series.\6\ For example, in a series with a
$0.05 MPV, if a CUBE Order to buy 10 contracts with a limit price of
$2.05 is entered when both the NBBO and BBO throughout the Auction are
$2.00 x $2.05, with no Customer interest in the BBO, the initiating
price could be $2.04 if the Contra Order guarantees the execution of
the CUBE Order with a single stop price at or below $2.04 or utilizes
auto-match or auto-match limit (discussed below). At the conclusion of
the CUBE Auction, the CUBE Order may execute at multiple prices within
a permissible range but would always execute at the best-priced
interest in the Auction.
---------------------------------------------------------------------------
\5\ See proposed Rule 971.1NY (b)(1). For purposes of this Rule,
the term ``Customer'' shall have the definition set forth in Rule
900.2NY(18). As proposed in amended Rule 900.2NY(18A), for purposes
of the proposed CUBE Auction, Professional Customers as defined in
that Rule shall be treated as broker dealers. Treatment of
Professional Customers as broker dealers for purposes of the CUBE
Auction is consistent with the approved rules of the CBOE. See CBOE
Rule 1.1(ggg). The Exchange notes that it also proposes to make a
technical, non-substantive amendment to Rule 900.2NY(18A) to delete
the cross reference to Rule 963.1NY, which was deleted when the
Exchange revised various rules relating to Complex Order trading
(see Securities Exchange Act Release No. 64558 (Dec. 16, 2010), 75
FR 80552 (Dec. 22, 2010).
\6\ See proposed Rule 971.1NY(b)(7).
---------------------------------------------------------------------------
Proposed Rule 971.1NY(b) sets forth the eligibility requirements
for initiating a CUBE Auction. As proposed, the time at which the
Auction is initiated would be considered the time of execution for the
CUBE Order, and therefore even though the execution will print after
the Auction has completed, the Exchange acknowledges that the Auction
would qualify as an exception to the general prohibition against Trade-
Throughs, pursuant to Rule 991NY(b)(9).\7\ Similarly, because the
Auction has a maximum duration of 750 milliseconds (as discussed
below), the Auction also qualifies as an exception to Trade-Through
Liability to the extent that the NBBO may improve during the Auction,
pursuant to Rule 991NY(b)(5).\8\ The Exchange notes that the proposed
Auction is consistent with how the electronic price improvement
auctions of other markets operate.\9\
---------------------------------------------------------------------------
\7\ See Rule 991NY(b)(9) (Order Protection, Exceptions to Trade-
Through Liability) (``The transaction that constituted the Trade-
Through was the execution of an order that was stopped at a price
that did not Trade-Through an Eligible Exchange at the time of the
stop'').
\8\ See Rule 991NY(b)(5) (Order Protection, Exceptions to Trade-
Through Liability) (``The Eligible Exchange displaying the Protected
Quotation that was traded through had displayed, within one second
prior to execution of the Trade-Through, a Best bid or Best offer,
as applicable, for the options series with a price that was equal or
inferior to the price of the Trade-Through transaction'').
\9\ See, e.g., CBOE Rule 6.74A; PHLX Rule 1080; BOX Rule 7150;
ISE Rule 723.
---------------------------------------------------------------------------
As stated above, pursuant to proposed Rule 971.1NY(a), an Auction
begins with an ``initiating price,'' which for a CUBE Order to buy
(sell) shall be the lower (higher) of the CUBE Order's limit price or
the NBO (NBB), except as provided for in paragraph (b)(1)(B) of the
proposed Rule (discussed below). And, at the conclusion of the CUBE
Auction, the CUBE Order may execute at multiple prices within a
permissible range.
To assure that a CUBE Auction does not result in a Trade-Through of
the NBBO or execute ahead of Customer interest with priority that may
be present in the Consolidated Book at the initiation of an Auction,
the Exchange proposes that a CUBE Auction have a defined range of
permissible executions that are based on a snapshot of the market at
the initiation of the Auction. This range of permissible executions may
change, however, if the BBO on the same side as the CUBE Order updates
during the Auction, as provided in proposed paragraph (b)(1)(C)
(discussed below).
As set forth in proposed Rule 971.1NY(b)(1), a CUBE Order to buy
(sell) would generally have a proposed permissible range of executions
with an upper (lower) bound equal to the initiating price and the lower
(upper) bound equal to the NBB (NBO). However, pursuant to proposed
paragraphs (b)(1)(A) and (b)(1)(B), the Exchange proposes tighter
ranges of executions for when there is Customer interest in the BBO for
orders of 50 contracts or more or for when there are orders for fewer
than 50 contracts, which is consistent with how electronic price
improvement auctions of other markets operate.\10\
---------------------------------------------------------------------------
\10\ See, e.g., CBOE Rule 6.74A(a)(3).
---------------------------------------------------------------------------
First, pursuant to proposed Rule 971.1NY(b)(1)(A), if the CUBE
Order to buy (sell) is for 50 contracts or more and there is Customer
interest in the Consolidated Book at the Exchange Best Bid (``BB'')
(Exchange Best Offer (``BO'')), the lower (upper) bound of
[[Page 13713]]
executions shall be the higher (lower) of the BB plus one cent (BO
minus one cent) or the NBB (NBO).\11\ The Exchange believes that this
is appropriate to assure that any Customer interest at the BB (BO)
retains priority at that price. Second, pursuant to proposed Rule
971.1NY(b)(1)(B), if the CUBE Order to buy (sell) is for fewer than 50
contracts, the initiating price shall be the lower (higher) of the CUBE
Order's limit price, the NBO (NBB), or the BO minus one cent (BB plus
one cent) and the lower (upper) bound of executions shall be the higher
(lower) of the NBB (NBO) or the BB plus one cent (BO minus one
cent).\12\ Consistent with rules of other exchanges, and as discussed
in further detail below, the Exchange proposes paragraph (b)(1)(B) of
the proposed Rule be adopted on a pilot basis.\13\
---------------------------------------------------------------------------
\11\ The Auction is similar to CBOE Rule 6.74A(a)(2) and ISE
Rule 723(b)(1), to the extent that it has an upper bound of
permissible executions, whereas the CBOE and ISE Rules cited have a
lower bound.
\12\ The Auction is consistent with CBOE 6.74A(a)(3), to the
extent that it has an upper bound of permissible executions.
\13\ See, e.g., CBOE Rule 6.74A Interpretation and Policies .03;
PHLX Rule 1080(n)(vii); ISE Rule 723 Supplementary Material .03; BOX
IM-7150-1.
---------------------------------------------------------------------------
The following examples show the initiating price and the
permissible range of executions for various potential CUBE Orders,
pursuant to proposed paragraphs (b)(1)(A) and (b)(1)(B) of Rule
971.1NY.
Examples of CUBE Orders Subject to Proposed Rule 971.1(NY)(b)(1)(A)
Example #1 (Customer interest on BB):
NBBO = $2.00 x $2.05
BBO= $2.00 x 2.05, Customer interest $2.00 bid
CUBE Order $2.05 bid for 60 contracts
Initiating Price is $2.05. Permissible range of execution: $2.01 to
$2.05
Example #2 (Customer interest on BB):
NBBO = $2.00 x $2.05
BBO= $2.00 x 2.05, Customer interest $2.00 bid
CUBE Order $2.03 bid for 60 contracts
Initiating Price is $2.03. Permissible range of execution: $2.01 to
$2.03
Examples of CUBE Orders Subject to Proposed Rule 971.1(NY)(b)(1)(B)
Example #3 (No Customer interest on BB):
NBBO = $2.00 x $2.05
BBO= $2.00 x 2.05
CUBE Order $2.05 bid for 10 contracts
Initiating Price is $2.04. Permissible range of execution: $2.01 to
$2.04
Example #4 (No Customer interest on BB):
NBBO = $2.00 x $2.05
BBO= $1.95 x 2.10
CUBE Order $2.05 bid for 10 contracts
Initiating Price is $2.05. Permissible range of execution: $2.00 to
$2.05
Pursuant to proposed Rule 971.1NY(b)(1)(C), if the BBO on the same
side as the CUBE Order updates during the Auction, the range of
permissible executions will adjust in accordance with the updated BBO,
unless the Auction concludes early pursuant to paragraph (c)(4)(D) (as
discussed below). The Exchange believes that this practice of honoring
the updated BBO would help ensure a fair and orderly market by
maintaining the priority of quotes and orders on the Consolidated Book
as they update.
Example #4a (With No Customer interest on BBO):
NBBO = $1.00 x $1.20
BBO= $1.00 x $1.20
CUBE Order $1.10 bid for 100 contracts
Initiating Price is $1.10. Permissible range of execution: $1.00 to
$1.10
BB updates during Auction to $1.04 (No Customer interest in BB);
Updated permissible range of executions: $1.04-$1.10 \14\
---------------------------------------------------------------------------
\14\ The update to the BB in this example would not cause an
early conclusion of the Auction because the updated BB does not
improve the initiating price. See, e.g., proposed Rule
971.1NY(c)(4)(D).
---------------------------------------------------------------------------
Example #4b (With Customer interest in the updated BBO):
NBBO = $1.00 x $1.20
BBO= $1.00 x $1.20
CUBE Order $1.10 bid for 100 contracts
Initiating Price is $1.10. Permissible range of execution: $1.00 to
$1.10
BB updates during Auction to $1.04 (Customer interest in BB); Updated
permissible range of executions: $1.05-$1.10 (BB plus one penny)
To mitigate the risk of advancing too far through the Consolidated
Book during periods of increased volatility or reduced liquidity, the
Exchange utilizes price protection mechanisms, including Trade Collar
Protection, as defined in Rule 967NY(a).\15\ A Marketable Order held at
a Trading Collar represents interest that is eligible to trade at a
specific price, even though that price is not displayed, and therefore
must be taken into consideration when determining the range of
permissible executions. Thus, if, at the time a CUBE Order is
submitted, there are orders subject to Trade Collar Protection, i.e.,
collared orders, the range of permissible executions for the CUBE Order
will be narrowed to ensure the priority of the collared order(s).
Specifically, pursuant to proposed Rule 971.1NY(b)(1)(D), if at the
time the Auction is initiated, there is a Marketable Order to sell
(buy) that has been displayed pursuant to Rule 967NY(a)(4)(A), the
displayed price of the collared order minus (plus) one Trading Collar
would be considered the BO (BB) when determining the range of
permissible executions.\16\ For example, if the NBBO and BBO at the
beginning of an Auction for a CUBE Order to buy 60 contracts is $1.00 x
$2.00, and the $2.00 BO is a marketable sell order (non-Customer) that
has been displayed pursuant to Rule 967NY(a), the upper bound of the
range of executions would be the price at which the Marketable Order
would be eligible to trade, which in this example, would be $1.75.
Accordingly, the permissible range of executions for this CUBE Order to
buy would be $1.00 x $1.75. The inclusion of collared orders when
determining the range of permissible executions will help ensure a fair
and orderly market by maintaining the priority of orders and quotes on
the Consolidated Book, while still affording the opportunity for price
improvement on each Auction commenced on the Exchange.
---------------------------------------------------------------------------
\15\ See Rule 967NY(a)(1) (``The Exchange will not immediately
execute (i) incoming Market Orders or marketable Limit Orders
(`Marketable Orders') if the width of the NBBO is greater than one
Trading Collar, as defined in paragraph (a)(2) below or, (ii) the
balance of an incoming Marketable Order to buy (sell) that would
execute at a price that exceeds the [NBO] ([NBB]) plus (minus) the
value of one Trading Collar.''). See also Rule 967NY(a)(4)(A) (``An
incoming Marketable Order to buy (sell) will be displayed at a price
equal to the NBB (NBO) plus (minus) one Trading Collar (the
`collared order')'').
\16\ See Rule 967NY(a)(2) (``A `Trading Collar' shall be
determined by the Exchange on a class-by-class basis and, unless
announced otherwise via Trader Update, shall be the same value as
the bid-ask differential guidelines established pursuant to Rule
925NY(b)(4). To preserve a fair and orderly market, the Exchange
may, with the approval of two Trading Officials, grant intra-day
relief to widen or narrow the Trading Collar for one or more option
series'').
---------------------------------------------------------------------------
Paragraphs (b)(2)-(9) of proposed Rule 971.1NY set forth the
various reasons that a proposed CUBE Order would be rejected--and
deemed ineligible to commence an Auction.
First, pursuant to proposed Rule 971.1NY(b)(2), a CUBE Order to buy
(sell) with a limit price below (above) the lower (upper) bound of the
permissible range of executions specified in paragraph (b)(1) of the
proposed Rule would not be eligible to initiate an Auction and would be
rejected along with the Contra Order. For example, if both the NBBO and
the BBO were $2.00 x $2.05 and there is a proposed CUBE Order to buy
for $1.99 for 60 contracts, this CUBE Order would be rejected because
the limit price is below the lower bound of permissible executions,
which here would have been $2.00. The Exchange believes that
[[Page 13714]]
it is appropriate to reject CUBE Orders to buy (sell) that are priced
below (above) the lower (upper) bound because they are not the best-
priced interest available and should not trade ahead of better-priced
interest on the same side of the market.
Consistent with proposed Rule 971.1NY(b)(2), a CUBE Order to buy
would be rejected if its limit price were below the lower bound of the
permissible range of executions that has been calculated based on the
presence of a marketable buy order subject to Rule 967NY(a). For
example, if the NBBO and BBO at the beginning of an Auction for a CUBE
Order to buy 60 contracts is $1.00 x $2.00, and the $1.00 BB represents
a marketable buy order that has been displayed pursuant to Rule
967NY(a), a CUBE Order to buy with an initiating price of $1.15 will be
rejected because it falls below the lower bound of permissible
executions, which here would have been $1.25 (the BB plus one trading
collar of $0.25).
Pursuant to proposed paragraph (b)(3), a CUBE Order, once accepted,
will never execute outside the range of permissible executions and will
never trade through its own limit price or the price of an unrelated
quote or order. For example, if during the Auction, the NBB, but not
BB, improved (to a price better than the CUBE Order to buy) and an
unrelated order that was marketable against the updated NBB caused the
Auction to conclude early, per proposed paragraph (c)(4) of this Rule
(as discussed below), the CUBE Order would not trade through its own
limit price to trade at the price of the updated NBB. Likewise,
although the Auction would have concluded early, the incoming
marketable sell order would not participate in the Auction and
therefore would not trade through the updated NBB price. As discussed
above, the CUBE Auction ignores updates to the NBBO during the Auction,
per Rule 991NY(b)(5). Thus, as discussed below, the CUBE Order would
trade with any interest received during the Auction, or if no interest
was received during the Auction, with the Contra Order, at prices equal
to or at prices that improved the CUBE Order's limit price.
The following are additional reasons that a proposed CUBE Order
would be deemed ineligible to commence an Auction and therefore
rejected, as set forth in proposed Rule 971.1NY(b)(4)-(6) and (b)(9).
1. CUBE Orders submitted before the opening of trading would not be
eligible to initiate an Auction and would be rejected, along with the
Contra Order. Because a CUBE Order is deemed executed at the time of
entry, any CUBE Orders entered before the opening of trading would not
be able to execute, and therefore the Exchange believes it would be
appropriate to reject these CUBE Orders.
2. CUBE Orders submitted during the final second of the trading
session in the affected series would not be eligible to initiate an
Auction and would be rejected, along with the Contra Order. As
discussed below, the length of the Auction would be at least 500
milliseconds and the Exchange believes it would be appropriate to
reject CUBE Orders submitted during the final second of the trading
session to assure that the processing of a CUBE Order may be complete
3. CUBE Orders for fewer than 50 contracts submitted when the BBO
is $0.01 wide would likewise be rejected. For example, if both the NBBO
and BBO were $2.00 x $2.01, and Customer interest may or may not be
part of the BBO, a CUBE Order to buy 10 contracts for $2.01 would
reject, because the market is only $0.01 wide. The Exchange believes it
is appropriate to reject CUBE Orders in this scenario because these
CUBE Orders would not be able to meet the permissible range of
executions as specified in proposed Rule 971.1NY(b)(1).
4. CUBE Orders submitted when the NBBO is crossed would result in
the CUBE Order being rejected. The Exchange believes that this is
appropriate because the Exchange would not be able to determine a
permissible range of executions if the NBBO is crossed.
The Exchange proposes that CUBE Orders may be entered in $.01
increments regardless of the MPV of the series involved.\17\ To assure
that the CUBE Order can receive price improvement, the Exchange also
proposes that Contra Orders may be priced in one cent increments when
specifying the stop price or the auto-match limit price pursuant to
paragraphs (c)(1)(A) and (c)(1)(C) of the proposed Rule.\18\ This
practice is consistent with the rules of other exchanges operating
electronic price improvement auctions.\19\ In addition, the Exchange
proposes that the minimum size requirement for a CUBE Order is one
contract, which, as discussed below, would be adopted on a pilot
basis.\20\
---------------------------------------------------------------------------
\17\ See proposed Rule 971.1NY(b)(7).
\18\ Id.
\19\ See, e.g., ISE Rule 723(b)(2).
\20\ See proposed Rule 971.1NY(b)(8).
---------------------------------------------------------------------------
The Exchange believes that the above-described restrictions and
requirements would ensure that the existing priority and display rules
for the Consolidated Book \21\ are preserved, while still providing ATP
Holders an opportunity to guarantee either price improvement, more
liquidity beyond the displayed size, or both, for orders they represent
as agent.
---------------------------------------------------------------------------
\21\ See Rule 964NY.
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CUBE Auction Process: Initiation of Auction
Proposed Rule 971.1NY(c) sets forth the Auction process. As
described in more detail below, once initiated, a CUBE Auction is
announced via a broadcast message, known as a Request For Response
(``RFR''), and market participants indicate their interest in the
Auction by submitting acceptable RFR Responses. To initiate a CUBE
Auction, pursuant to proposed Rule 971.1NY(c)(1), the Initiating
Participant can elect one of three ways in which it would guarantee the
execution of a CUBE Order--a single stop price, ``auto-match'', or
``auto-match limit'', which is consistent with the rules of other
options exchanges that offer electronic price improvement auctions.\22\
The Exchange believes that these three options afford the Initiating
Participant flexibility and control over the price(s) at which it would
be willing to guarantee the execution of a CUBE Order.
---------------------------------------------------------------------------
\22\ See, e.g., CBOE Rule 6.74A(b)(1)(A).
---------------------------------------------------------------------------
First, pursuant to proposed Rule 971.1NY(c)(1)(A), the Initiating
Participant can elect to specify a single stop price at which it would
participate in the Auction. If elected, under this option, the
Initiating Participant will only participate in the Auction at a single
price, regardless of the prices of other responses to the Auction. For
a CUBE Order to buy (sell), an Initiating Participant may specify a
single stop price that is at or below (above) the initiating price of
the Auction. A stop price specified for a CUBE Order to buy (sell) that
is below (above) the lower (upper) bound of the range of permissible
executions will be repriced to the lower (upper) bound (the best-priced
interest). In this instance, the stop price is below the lower bound of
permissible execution prices, and thus the execution can be priced back
to within the permissible execution range. However, a stop price
specified for a CUBE Order to buy (sell) that is above (below) the
initiating price is not eligible to initiate an Auction because it
would be priced higher--and therefore at a worse price--than pre-
existing trading interest and both the CUBE Order and the Contra Order
would be rejected. In this instance, the stop price
[[Page 13715]]
is inferior to the pre-existing trading interest, and thus it would not
result in an execution within the permissible range. The following
example shows the impact of various single stop prices on a CUBE Order.
Example of Single Stop Price, per proposed Rule 971.1(NY)(c)(1)(A)
Example #5 (No Customer interest on BB):
NBBO = $2.00 x $2.05
BBO = $2.00 x $2.05
CUBE Order $2.06 bid for 60 contracts
Initiating Price is $2.05. Permissible Range of Executions is $2.00-
$2.05
Stop price $2.06 and above = CUBE Order and Contra Order rejected
(because exceeds the initiating price)
Stop Price $2.00 - $2.05 = CUBE Order and Contra Order accepted
Stop Price $1.99 and below = CUBE Order accepted, Contra Order repriced
to $2.00
Rather than opt for a single stop price, an Initiating Participant
may, pursuant to proposed Rule 971.1NY(c)(1)(B), elect the ``auto-
match'' option, which would automatically match both the price and size
of all RFR Responses. Accordingly, the Initiating Participant may
receive executions at multiple prices. Where the auto-match option is
selected for a CUBE Order to buy (sell), the Initiating Participant
would automatically match as principal or as agent on behalf of a
Contra Order the price and size of all RFR Responses that are lower
(higher) than the initiating price and within the range of permissible
executions. For example, if both the NBBO and the BBO were $2.00 x
$2.05 and the CUBE Order is to buy for $2.06 for 60 contracts, with no
Customer interest at the BBO, and the RFR Responses are to sell 10
contracts at $2.01, and 10 contacts at $2.02, then the Contra Order
would auto-match these Responses by likewise selling 10 contracts to
the CUBE Order at $2.01, and 10 contracts at $2.02. Thus, a total of 20
contracts would be sold to the CUBE Order at $2.01 and 20 contracts
would be sold at $2.02. The remaining 20 contracts in the CUBE Order
would trade against the Contra Order at $2.05 (the initiating price/the
NBO), assuming no other RFR Responses were received. If, in the
preceding example, the CUBE Order limit price was instead $2.03 (not
$2.06), the initiating price would be $2.03 (lower than the NBO at
$2.05) and the CUBE Order would execute against the Responses and the
Contra Order in exactly the same manner (i.e., a total of 20 contracts
at $2.01 and 20 contracts at $2.02); however, the remaining 20
contracts would trade against the Contra Order at $2.03 limit price.
Finally, pursuant to proposed Rule 971.1NY(c)(1)(C), ATP Holders
may guarantee the execution of a CUBE Order by electing the ``auto-
match limit'' option, which would automatically match the price and
size of all RFR Responses at each price to match the trading interest
up or down to the limit price specified, referred to as the ``auto-
match limit price.'' Thus, for a CUBE Order to buy (sell), the
Initiating Participant would automatically match, as principal or as
agent on behalf of a Contra Order, the price and size of RFR Responses
that are lower (higher) than the initiating price down (up) to the
auto-match limit price. Assume, for example, that both the NBBO and the
BBO were $2.00 x $2.05 and the CUBE Order is to buy for $2.06 for 60
contracts, with no Customer interest at the BBO, and the Contra Order
selects an auto-match limit price of $2.03.\23\ If the RFR Responses
are to sell at or between $2.00 and $2.02, the CUBE Order would execute
with those better-priced RFR Responses, but the Contra Order would not.
Instead, the Contra Order would only match those RFR Responses, if any,
priced $2.03 or higher.
---------------------------------------------------------------------------
\23\ In this example, the initiating price is $2.05 and the
permissible range of executions is $2.00-$2.05.
---------------------------------------------------------------------------
Once a CUBE Order has been submitted for processing, the CUBE Order
(as well as the Contra Order) may not be cancelled or modified.\24\
This is consistent with the rules of other options exchanges that
operate electronic price improvement auctions.\25\ The Exchange
believes that this requirement reduces the potential for misuse of the
Auction by ATP Holders that are not legitimately interested in making a
bona fide trade in the Auction.
---------------------------------------------------------------------------
\24\ See proposed Rule 971.1NY(c).
\25\ See, e.g., CBOE Rule 6.74A(b); ISE Rule 723(b)(3); ISE Rule
723 Supplementary Material .04.
---------------------------------------------------------------------------
CUBE Auction Process: RFRs, Response Time Interval and Responses
As noted above, upon receipt of a valid CUBE Order, the Exchange
would announce the Auction by disseminating an RFR to all participants
who subscribe to Auction messages over ArcaBook for options.\26\ The
RFR would identify the following characteristics of a CUBE Order: The
series, the side of the market, the size, and the initiating price,
which is consistent with the practice of other options exchanges.\27\
The Exchange believes that including this level of detail in each RFR
may lead to better prices for the CUBE Order.
---------------------------------------------------------------------------
\26\ ArcaBook is a proprietary data feed offered by the Exchange
and available to anyone (including all ATP Holders) by subscription.
The RFRs for CUBE Auctions would be included in the options data
feed at no incremental cost to the ArcaBook subscriber. Thus, any
subscriber that opts to receive the options data, including any ATP
Holder subscriber, has the ability to enter an order in response to
those RFRs (i.e., the election to receive RFRs would not be on a
case-by-case basis).
\27\ See, e.g., CBOE Rule 6.74A(b)(1)(B); ISE Rule 723(c).
---------------------------------------------------------------------------
After the RFR is disseminated, the Exchange would begin a random
timer for the duration of the Auction, referred to as the Response Time
Interval, which would last between 500 and 750 milliseconds. As
proposed, the length of the Response Time Interval would be determined
by the CUBE Auction mechanism following the receipt of a valid CUBE
Order and contemporaneously with the dissemination of the RFR. The
Exchange believes that the use of an undisclosed random Response Time
Interval of between 500 and 750 milliseconds would provide the CUBE
Auction with a functional difference to distinguish it from similar
price improvement mechanisms offered by other exchanges.\28\ The
Exchange believes that the length of time allotted on the proposed
Auction timer would provide ATP Holders with sufficient time to submit
RFR Responses and would encourage competition among participants,
thereby enhancing the potential for price improvement for the CUBE
Order.\29\
---------------------------------------------------------------------------
\28\ See, e.g., CBOE Rule 6.74A(b)(2)(A); PHLX Rule
1080(n)(ii)(B)(1); ISE Rule 723(c)(5)(I).
\29\ In December 2013, to determine whether the proposed Auction
timer would provide sufficient time to respond to an RFR, the
Exchange asked ATP Holders that both subscribe to ArcaBook and act
as Market Makers on the Exchange (the ``Relevant ATP Holders'')
whether their firms ``could respond to an Auction with a random
duration of 500-750 milliseconds.'' Of the 21 Relevant ATP Holders
that responded to the question, 100% (n = 21) indicated that their
firm could respond in this time frame. Thus, the Exchange believes
that the proposed Auction duration of at least 500 milliseconds,
which is the mid-range of approved mechanisms at other market
centers, would provide a meaningful opportunity for participants on
NYSE Amex to respond to an Auction while at the same time
facilitating the prompt execution of orders.
---------------------------------------------------------------------------
During the Response Time Interval, any ATP Holder may respond to
the RFR, either as principal or as agent on behalf of customers,
provided such response is properly marked specifying price, size, and
side of the market (each, an ``RFR Response'' or ``Response'').
The Exchange proposes to add the ``GTX Order,'' which is a non-
routable order with a time-in-force contingency for the Response Time
Interval, and thus would be considered an RFR Response. As an RFR
Response, the GTX Order must specify price, size, and side of the
[[Page 13716]]
market. As proposed in Rule 971.1NY(c)(2)(C)(i):
GTX Orders would not be displayed to the Consolidated Book
or disseminated to any participants, i.e., not sent to OPRA as these
orders would only interact with liquidity available during the Auction;
Any portion of a GTX Order that is not executed in the
CUBE Auction would be cancelled at the conclusion of the Auction
because a GTX order would only interact with liquidity available during
the Auction--including any unrelated order that is marketable against a
GTX Order that causes the early conclusion of the Auction per paragraph
(c)(4) of this Rule;
The minimum price increment for a GTX Order would be one
cent, regardless of the MPV for the series involved in the Auction, to
maximize opportunities for price improvement in the Auction;
GTX Orders with a size greater than the CUBE Order, would
be capped at the size of the CUBE Order, to enable interaction with the
CUBE Order and to discourage manipulation of the Auction process;
GTX Orders may be cancelled, which would afford ATP
Holders opting to utilize this order type additional flexibility and
control; and
GTX Orders on the same side of the market as the CUBE
Order will be rejected. Because GTX Orders can only trade against a
CUBE Order or an unrelated order on the same side as a CUBE Order,
same-side GTX Orders are unnecessary to the CUBE Auction process.
Therefore, the Exchange proposes that same-side GTX Responses will be
rejected. Rejecting same-side GTX Orders is consistent with the
processing of same-side RFR Responses to the Exchange's Complex Order
Auction.\30\
---------------------------------------------------------------------------
\30\ See Rule 980NY(e)(4).
---------------------------------------------------------------------------
For a CUBE Order to buy (sell), GTX Orders priced below
(above) the lower (upper) bound of executions shall be repriced to the
lower (upper) bound of executions, as specified in proposed paragraph
(b)(1) of this Rule. For example, assuming the facts of Example 4a
above, if before the BB is updated to $1.04, the Exchange receives a
GTX Order to sell priced at $1.02, because the new lower bound is
$1.04, that GTX Order would be repriced to $1.04. The Exchange believes
that this practice will ensure that GTX Orders eligible to participate
in the Auction will not be excluded if they are priced more
aggressively than the lower (upper) bound of execution.
The Exchange believes that adding the GTX Order, which is good only
for the duration of the Auction, would encourage participation in the
Auction and would further enhance the opportunity for price improvement
on the CUBE Order. The Exchange notes that the electronic price
improvement auctions of other markets similarly utilize non-displayed
trade interest in response to those auctions to enable market
participants to enter non-displayed interest that would only
participate in the auction. This type of non-displayed interest
generally operates in the same manner as the Exchange's proposed GTX
Order.\31\
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\31\ See, e.g., CBOE Rule 6.74A(b)(1) (non-displayed interest
intended only for the auction may be cancelled); ISE Rule 723(c)(3)
(non-displayed interest intended only for the auction may be
modified, but not cancelled).
---------------------------------------------------------------------------
The CUBE Auction would also consider any other unrelated orders and
quotes (``unrelated orders'') received during an Auction that are
priced within the permissible range of executions as eligible to
participate in the Auction. Because such unrelated orders would be
eligible to participate in the Auction, the Exchange proposes to
include these orders in the definition of RFR Responses, even if such
unrelated orders were submitted coincidentally during an Auction, as
opposed to purposefully in response to an RFR. Specifically, pursuant
to proposed Rule 971.1NY(c)(2)(C)(ii), the Exchange would consider
unrelated orders on the opposite side of the market and in the same
series as the CUBE Order to be RFR Responses provided that the orders
were received during the Response Time Interval; were not marked as
GTX; and would be eligible to participate within the range of
permissible executions specified by proposed paragraph (b)(1). The
Exchange believes that considering these unrelated orders as RFR
Responses should increase the number of participants against which the
CUBE Order may be executed, and should thus maximize opportunities for
price improvement on the CUBE Order.
However, the Exchange would not consider as RFR Responses those
unrelated orders that either would not provide an opportunity for price
improvement on the CUBE Order or would not trade at the initiating
price of the CUBE Order. Specifically, pursuant to proposed Rule
971.1NY(c)(2)(C)(ii)(a), unrelated orders received during the Response
Time Interval that are not marketable against the NBBO, not marked GTX,
or are otherwise unable to participate in the Auction, would be posted
to the Consolidated Book. In addition, unrelated orders received during
the Response Time Interval that are on the same side of the market as
the CUBE Order to buy (sell) and that are priced higher (lower) than
the initiating price, and therefore would create a new BBO on the same
side as the CUBE Order, shall be posted to the Consolidated Book and
would result in an early conclusion of the Auction pursuant to
paragraph (c)(4) of the proposed Rule. In both cases, as discussed
further below, such unrelated orders would cause the Auction to
conclude early. The Exchange believes that early conclusion would avoid
disturbing priority in the Consolidated Book, in accordance with Rule
964NY, which dictates the priority of bids within the NYSE Amex System,
and would allow the Exchange to appropriately handle unrelated orders
without the Auction impacting that handling, while at the same time
allowing the CUBE Order to execute against the Contra Order and any RFR
Responses that may have been entered up to that point.
To be eligible to participate in the Auction, unrelated orders must
be priced in the MPV for the series in the Auction. Only CUBE Orders,
GTX Orders and Contra Orders--which are specifically slated for the
Auction--would be permitted to be priced in one cent increments,
regardless of the MPV for that option. The Exchange believes that it is
appropriate to allow such orders to trade in one cent increments to
enhance the opportunity for price improvement during the Auction. Thus,
a quote or order other than a CUBE Order, GTX Order or Contra Order
submitted in a one cent increment when the series has either a $0.05 or
$0.10 MPV would be rejected as invalid. Rejecting quotes and orders
with invalid prices submitted during an Auction is consistent with the
treatment of invalid priced quote and orders entered at all other
times.
Conclusion of the CUBE Auction and Order Allocation
As proposed in Rule 971.1NY(c)(3), and similar to the operation of
price improvement mechanisms offered by other exchanges, the CUBE
Auction would conclude at the end of the Response Time Interval.\32\
However, as described in proposed Rule 971.1NY(c)(4) (and discussed
below), certain events may result in the early conclusion of the CUBE
Auction. Consistent with the rules of other exchanges that operate
electronic price
[[Page 13717]]
improvement auctions, the Auction would conclude in the event of a
trading halt in the affected series \33\ and the CUBE Order would be
executed per proposed Rule 971.1NY(c)(5).\34\
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\32\ See, e.g., CBOE Rule 6.74A(b)(2)(A); PHLX Rule
1080(n)(ii)(B)(1); ISE Rule 723(c)(5)(I).
\33\ See, e.g., CBOE Rule 6.75A(b)(2)(F); PHLX Rule
1080(n)(ii)(B)(3).
\34\ Because the execution of the CUBE Auction is deemed to have
occurred at the time the CUBE Auction is initiated, if a trading
halt occurs in the series during the Response Time Interval causing
the Auction to conclude early, the Exchange does not believe that
such execution needs to be nullified pursuant to Rule 953NY
Commentary .03.
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Proposed Rule 971.1NY(c)(5) sets forth the order allocation
procedures for the CUBE Auction. Pursuant to proposed Rule
971.1NY(c)(5)(A), at each price level, any Customer orders resting on
the Consolidated Book at the start of the CUBE Auction shall have first
priority, followed by Customer orders that arrived during the CUBE
Auction as RFR Responses. The Exchange notes, however, that pursuant to
proposed paragraph (b)(1)(B), the permissible range of executions for a
CUBE Order would have already preserved the integrity of the priority
of any Customer orders resting at the start of the Auction. Generally,
at the conclusion of the CUBE Auction, the Auction mechanism would
determine whether the total RFR Responses can fill the CUBE Order at a
price or prices better than the initiating price. If so, the CUBE Order
is matched against the better-priced RFR Responses granting the CUBE
Order the maximum amount of price improvement possible. As noted above,
certain unrelated orders may be considered RFR Responses and may
interact with the CUBE Order (thus maximizing opportunities for price
improvement) and any portion of these unrelated orders remaining
thereafter would be placed on the Consolidated Book.
When there are multiple RFR Responses at a given price, the CUBE
Order would be executed against the RFR Responses on a pro-rata basis
pursuant to the size pro rata algorithm set forth in Rule 964NY(b)(3),
except that Customers at a given price are executed first in priority.
The Exchange believes that, as proposed, the Auction maximizes the
opportunity for price improvement while maintaining the priority of
Customer orders. In addition, per proposed paragraph (c)(5), any single
RFR Response that has a contract size that exceeds the size of the CUBE
Order would be treated as if it were the same size as (i.e., would be
capped at) the size of the CUBE Order for allocation purposes, per Rule
964NY(b)(3). The Exchange believes that this would encourage
participation in the Auction (by not rejecting these Responses) and
would assist in avoiding the opportunity for an ATP Holder to subvert
the size pro rata allocation method by submitting outsized trading
interest.
The Exchange proposes that the Contra Order, having guaranteed the
execution of the CUBE Order, should be entitled to a certain level of
participation in the Auction, provided there is sufficient size
remaining after better-priced interest and Customer interest has been
satisfied. As proposed, assuming sufficient interest in the CUBE Order
remains after executing against Customer interest or better-priced
interest, the Contra Order would then be entitled to a participation
guarantee equal to the greater of one contract or either (a) 40% of the
size of the initial CUBE Order (if there are multiple RFR Responses to
the Auction) or (b) 50% of the size of the initial CUBE Order (if there
is only one RFR Response to the Auction). The Exchange believes that
the proposed participation guarantee, which is consistent with the
rules of this and other option exchanges, is a fair inducement in
exchange for guaranteeing the entire size of the Initiating
Participant's agency order (i.e., the CUBE Order).\35\ As discussed
above, and similar to the operation of electronic auctions on other
options exchanges, an Initiating Participant can opt to guarantee the
execution of a CUBE Order via a single stop price, by auto-match or by
specifying an auto-match limit price.\36\
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\35\ See, e.g., Rule 934.1NY(4)(A) (providing for a 40%
allocation for facilitation orders in facilitation cross
transactions). See also PHLX Rule 1080(n)(2)(E)(2)(a) (providing up
to 50% allocation with participation guarantees); ISE Rule 713
Commentary .03 (providing up to 60% allocation for participation
guarantees); CBOE Rule 6.74A(b)(3)(F).
\36\ See, e.g., CBOE Rule 6.74A(b)(3); PHLX Rule 1080(n)(ii)(E);
ISE Rule 723(d)(4); BOX Rule 7150(g)(1).
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Proposed paragraphs (b)(i)-(iii) to the proposed Rule set forth how
a CUBE Order would trade with Responses and/or the Contra Order, which
depends upon the RFR Responses, if any, and how the Contra Order
guaranteed the execution of the CUBE Order. Pursuant to proposed Rule
971.1NY(c)(5)(B)(i), a CUBE Order guaranteed by a single stop price
would first execute against better-priced Responses or Customer
interest, and, if there is sufficient size remaining, the CUBE Order
would then execute against the Contra Order at the stop price. It is
possible, however, that after the CUBE Order executes against the
better-priced RFR Responses, the Contra Order would not receive the
full extent (or, perhaps, any) of its participation guarantee at the
stop price, as shown in the second example below.
Examples of Trade Allocation--Single Stop Price
Example #6 (No Customer interest on BB):
NBBO = $1.15-$1.25 200 x 200
BBO = $1.15-$1.25 100 x 100
CUBE Order to buy 50 contracts with a limit price of $1.20
Contra Order selling 50 contracts with a single stop price of $1.20
Permissible range of executions is $1.15 to $1.20
RFR sent identifying the series, side and size, with initiating price
of $1.20
(Auction Starts)
MM1GTX Order received @ 410 milliseconds Sell 5 at $1.17
MM4 GTX Order received @ 530 milliseconds Sell 10 at $1.18
MM3 GTX Order received @ 650 milliseconds Sell 40 at $1.20
651 milliseconds (Auction Ends)
Under this scenario the CUBE Order would be executed as follows:
5 contracts trade with MM1 @ $1.17
10 contracts trade with MM4 @ $1.18
20 contracts trade with the Contra Order @ $1.20 (This satisfies their
40% participation guarantee)
15 contracts trade with MM3 @ $1.20
(This fills the entire CUBE Order)
Example #7 (No Customer interest on BB):
NBBO = $1.15-$1.25 200 x 200
BBO = $1.15-$1.25 100 x 100
CUBE Order to buy 50 contracts with a limit price of $1.20
Contra Order selling 50 contracts with a single stop price of $1.20
Permissible range of executions is $1.15 to $1.20
RFR sent identifying the series, side and size, with initiating price
of $1.20
(Auction Starts)
MM1GTX Order received @ 410 milliseconds Sell 20 at $1.17
MM4 GTX Order received @ 430 milliseconds Sell 20 at $1.18
MM3 GTX Order received @ 450 milliseconds Sell 40 at $1.20
557 milliseconds (Auction Ends)
Under this scenario, the CUBE Order would be executed as follows:
20 contracts trade with MM1 @ $1.17
20 contracts trade with MM4 @ $1.18
10 contracts trade with the Contra Order @ $1.20 (Contra Order does not
receive 40% participation guarantee because there is not sufficient
size available)
(This fills the entire CUBE Order)
MM3 does not trade any contracts
Example of Trade Allocation--Single Stop Price & Unrelated Order
Example #8 (No Customer interest on BB):
[[Page 13718]]
NBBO = $1.20-$1.24 200 x 100
BBO = $1.20-$1.24 100 x 100
CUBE Order to buy 20 contracts with a limit of $1.22
Contra Order selling 20 contracts with a single stop price of $1.22
Permissible range of executions is $1.20 to $1.22
RFR sent identifying the series, side and size, with initiating price
of $1.22
(Auction Starts)
MM3 GTX Order received @ 200 milliseconds Sell 20 at $1.22
MM1GTX Order received @ 210 milliseconds Sell 20 at $1.22
MM4 GTX Order received @ 230 milliseconds Sell 20 at $1.22
F1 Unrelated Order received @ 400 milliseconds Sell 50 at $1.21
523 milliseconds (Auction concludes)
Under this scenario the CUBE Order would be executed as follows:
20 contracts trade with the unrelated order for F1 @ $1.21 (the best-
priced Response)
(This fills the CUBE Order in its entirety and the Contra Order does
not receive an execution)
GTX responses cancel
30 contracts remaining from the unrelated order for F1 post to the
Consolidated Book resulting in new BBO
BBO = $1.20-$1.21 100 x 30
Where the Initiating Participant elects auto-match or auto-match
limit to guarantee the execution of a CUBE Order, the Contra Order
would be allocated size equal to all other RFR Responses at each price
point or at each price point within the limit price range--if a limit
is specified--until a price point is reached where the balance of the
CUBE Order could be fully executed (the ``clean-up price''). At the
clean-up price, if there is sufficient interest in the CUBE Order
remaining after better-priced interest and Customer interest has been
executed, the Contra Order would be allocated additional contracts to
ensure its guaranteed participation rate--the greater of one contract
or 40% (or 50%, if only one Response) of the size of the initial CUBE
Order. If the Contra Order meets its allocation guarantee at a price
below (above) the clean-up price, it will cease matching RFR Responses
that may be priced above (below) the price at which the Contra Order
received its allocation guarantee. In addition, if there are other RFR
Responses at the clean-up price, the remaining CUBE Order contracts
will be allocated pursuant to the size pro rata algorithm set forth in
Rule 964NY(b)(3) and any remaining CUBE Order contracts shall be
allocated to the Contra Order at the initiating price. In the event
that there are no RFR Responses to the Auction and an auto-match
feature is selected, the CUBE Order shall execute against the Contra
Order at the initiating price.
Examples of Trade Allocation--Auto-Match and Auto-Match limit
Example #9 (No Customer interest on BB):
NBBO = $1.15-$1.25 200 x 200
BBO = $1.15-$1.25 100 x 100
CUBE Order to buy 50 contracts with a limit price of $1.24
Contra Order selling 50 contracts auto-match
Permissible range of executions is $1.15 to $1.24
RFR sent identifying the series, side and size, with initiating price
of $1.24
(Auction Starts)
MM2 GTX Order received @ 350 milliseconds Sell 5 at $1.17
MM4 GTX Order received @ 430 milliseconds Sell 10 at $1.18
MM3 GTX Order received @ 450 milliseconds Sell 40 at $1.21
623 milliseconds (Auction Ends)
Under this scenario the CUBE Order would be executed as follows:
5 contracts trade with MM2 @ $1.17
5 contracts trade with Contra Order @ $1.17 (due to auto-match)
10 contracts trade with MM4 @ $1.18
10 contracts trade with Contra Order @ $1.18 (due to auto-match)
5 contracts trade with Contra Order @ $1.21 (due to auto-match capped
at 40% participation guarantee)
15 contracts trade with MM3 @ $1.21 (the Contra Order trades zero
contracts at this price having already received their 40% participation
guarantee at $1.21)
(This fills the entire CUBE Order)
Example #10 (No Customer interest on BB):
NBBO = $1.15-$1.25 200 x 200
BBO = $1.15-$1.25 100 x 100
CUBE Order to buy 51 contracts with a limit price of $1.25
Contra Order selling 51 contracts auto-match limit at $1.17
Permissible range of executions is $1.15 to $1.25
RFR sent identifying the series, side and size, with initiating price
of $1.25
(Auction Starts)
MM2 GTX Order received @ 150 milliseconds Sell 20 at $1.16
MM5 GTX Order received @ 200 milliseconds Sell 5 at $1.19
MM4 GTX Order received @ 230 milliseconds Sell 10 at $1.18
MM3 GTX Order received @ 450 milliseconds Sell 50 at $1.19
623 milliseconds (Auction Ends)
Under this scenario the CUBE Order would be executed as follows:
20 contracts trade with MM2 @ $1.16
10 contracts trade with MM4 @ $1.18
10 contracts trade with Contra Order @ $1.18 (due to auto-match limit)
10 contracts trade with Contra Order @ $1.19 (due to auto-match limit
and fulfills their 40% guarantee)
1 contract trades with MM3 @ $1.19
(This fills the entire CUBE Order)
Early Conclusion of a CUBE Auction
As noted earlier, the CUBE Auction is integrated seamlessly within
the Exchange's Consolidated Book and is designed to maintain the
priority of all resting quotes and orders and any timely RFR Responses,
as well as unrelated orders that are marketable at the time of arrival.
Thus, as proposed, a CUBE Auction would conclude early (i.e., before
the end of the Response Time Interval) as a result of certain events
that would otherwise disrupt the priority of the Auction within the
Consolidated Book. The Exchange notes that this is consistent with how
the electronic price improvement auctions of other markets operate.\37\
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\37\ See, e.g., CBOE 6.74A(b); PHLX 1080(n)(ii); ISE Rule 723
Supplementary Material .04; BOX Rule 7150(i).
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Proposed Rule 971.1NY(c)(4), explains how a CUBE Order would be
allocated as a result of each of the events that would cause the early
conclusion of an Auction.\38\ First, pursuant to proposed Rule
971.1NY(c)(4)(A), if, during a CUBE Auction, a new CUBE Auction in the
same series is received by the Exchange, the original CUBE Order would
conclude and execute pursuant to proposed Rule 971.1NY(c)(5) and the
new CUBE Auction would proceed as described in proposed Rule
971.1NY(c). The Exchange believes that this practice is consistent with
the rules of other exchanges operating electronic auctions, which would
ensure a fair and orderly market by maintaining the priority of the
Consolidated Book while still affording the opportunity for price
improvement on each Auction commenced on the Exchange.\39\
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\38\ Pursuant to proposed Rule 971.1NY(c)(3), and as discussed
herein, a trading halt in the affected series would also result in
the early conclusion of an Auction and contracts would be allocated
pursuant to proposed paragraph (c)(5).
\39\ See, e.g., CBOE Rule 6.74A(b); ISE Rule 723(b)(3); ISE Rule
723 Supplementary Material .04. The Exchange notes that although
these rules specify that auctions may not overlap or queue in any
manner, the rules are nonetheless silent on how this is enforced
(i.e., by rejecting new auction orders or by concluding an ongoing
auction early).
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Second, pursuant to proposed Rule 971.1NY(c)(4)(B), if, during a
CUBE Auction the Exchange receives an unrelated quote or order that is
on the
[[Page 13719]]
same side of the market as the CUBE Order, that is marketable against
any RFR Response or the NBBO (or BBO, if a non-routable order) \40\ at
the time of arrival, the Auction will conclude early so that this
incoming order may be executed following the execution of the CUBE
Order (which has priority), consistent with the terms of the unrelated
incoming order. The CUBE Order, upon its early conclusion, will execute
pursuant to proposed paragraph (c)(5). The Exchange notes that this
practice is consistent with how the electronic price improvement
auctions of other markets operate.\41\ If there is sufficient size to
the RFR Responses remaining after executing against the CUBE Order, the
order that caused the early conclusion of the Auction would trade with
the remaining RFR Responses at the best available prices, which may be
better than the NBBO (or BBO for non-routable orders).\42\
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\40\ The Exchange notes that an order that has been designated
as an order type that is not eligible to be routed away will either
be placed on the Consolidated Book or cancelled if such order would
lock or cross the NBBO. See Rule 964NY(c)(2)(E). If an incoming non-
routable order is marketable against the NBBO, but not the BBO, and
by its terms, such order would cancel, e.g., an IOC Order, it would
not cause an early conclusion to an Auction. However, if such an
order were marketable against the BBO, i.e., if the BBO equaled the
NBBO, it would cause an early conclusion to the Auction.
\41\ See, e.g., CBOE Rule 6.74A(b)(2)(B); PHLX Rule
1080(n)(ii)(B)(2); ISE Rule 723(c)(5); BOX Rule 7150(i).
\42\ See, e.g., CBOE Rule 6.74A(b)(3)(J).
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The Exchange believes the early conclusion of the Auction in this
instance would ensure that the priority of quotes and orders on the
Consolidated Book would not be disrupted. In this circumstance, those
GTX Orders that do not execute in the CUBE Auction would execute
against the unrelated order that caused the CUBE Auction to conclude
early to the extent possible (maximizing price improvement for the
incoming same-side marketable quote or order that caused the early
conclusion to the Auction) and would then cancel. Any contracts
remaining from any unrelated order when the RFR Responses have been
exhausted would be processed in accordance with Rule 964NY Order
Display and Priority.
Example of Early Conclusion of Auction--Same Side Marketable Against
NBBO at the Time of Arrival
Example #11 (No Customer interest on BB):
NBBO = $1.20-$1.24 200 x 200
BBO = $1.20-$1.24 100 x 100
CUBE Order to buy 20 contracts for $1.23
Contra Order selling 20 contracts auto-match limit at $1.22
Permissible range of executions is $1.21 to $1.23
RFR sent, identifying the series, side and size, initiating price of
$1.23
(Auction Starts)
MM3 GTX Order received @ 200 milliseconds Sell 20 at $1.23
MM1GTX Order received @ 210 milliseconds Sell 20 at $1.22
MM4 GTX Order received @ 230 milliseconds Sell 20 at $1.22
C1 Unrelated Order received @ 250 milliseconds Buy 100 at the market
(Same-side order marketable against the NBO causes an early conclusion
to the Auction)
Under this scenario, the CUBE Order would be executed as follows:
8 contracts trade with the Contra Order @ $1.22 (This satisfies their
40% participation guarantee)
6 contract trades with MM1 @ $1.22
6 contract trades with
MM4 @ $1.22
(This fills the entire CUBE Order)
C1 unrelated order to buy 100 at the market then executes as
follows:
14 contracts trade with MM1 @ $1.22
14 contracts trade with MM4 @ $1.22
20 contracts trade with MM3 @ $1.23
The remaining 52 contracts from C1 unrelated order are handled pursuant
to existing Rule 964NY(in this case, that means the 52 contracts would
trade with the interest comprising the BO, which was offering 100
contracts at $1.24)
The third scenario that would result in the early conclusion of a
CUBE Auction would be if, during a CUBE Auction, the Exchange receives
any RFR Response that is marketable against the NBBO (or BBO, if a non-
routable order) at the time of arrival. The RFR Response could be a GTX
Order or an unrelated order that is a marketable limit order or a
market order. While the incoming order that is on the opposite side of
the CUBE Order may be marketable against the updated NBBO, as noted
above, the fact that the NBBO updated during the Response Time Interval
in of itself does not cause an early conclusion to the Auction.
Pursuant to proposed Rule 971.1NY(c)(4)(i), if the CUBE Auction
concludes early because the Exchange receives during the Response Time
Interval an unrelated marketable limit order or quote on the opposite
side of the CUBE Order, the CUBE Order would execute pursuant to
proposed paragraph (c)(5). Contracts remaining, if any, from unrelated
quotes or orders at the time the Auction concludes would be processed
in accordance with Rule 964NY Order Display and Priority. Any unfilled
GTX Orders would cancel. The Exchange believes that early conclusion in
this circumstance would ensure that the Auction interacts seamlessly
with the Consolidated Book so as not to disturb the priority of orders
on the Book. The unrelated order or quote that caused the Auction to
end early would be considered an RFR Response for purposes of
allocation pursuant to proposed paragraph (c)(5), and thus would
participate in the Auction consistent with its limit price and order
instructions. The Exchange also notes that concluding the Auction early
under this circumstance is consistent with how the electronic price
improvement auctions of other markets operate.\43\
---------------------------------------------------------------------------
\43\ See, e.g., CBOE 6.74A(b)(2)(B); ISE Rule 723(c)(5); BOX
7150(j).
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Example of Early Conclusion of Auction--Opposite Side Limit Order
Marketable Against NBBO at the Time of Arrival
Example #12a (No Customer interest on BB):
NBBO = $1.20-$1.24 200 x 100
BBO = $1.20-$1.24 100 x 100
CUBE Order to buy 50 contracts with a limit of $1.24
Contra Order selling 50 contracts with a stop price of $1.24
Permissible range of executions $1.20-$1.24
RFR sent identifying the series, side and size, initiating price of
$1.24
(Auction Starts)
MM3 GTX Order received @ 200 milliseconds Sell 50 at $1.22
MM1 GTX Order received @ 210 milliseconds Sell 50 at $1.22
MM4 GTX Order received @ 230 milliseconds Sell 50 at $1.23
BD1 Unrelated Order received @ 400 milliseconds Sell 10 at $1.20
(Opposite-side order marketable against the NBB causes an early
conclusion to the Auction)
Under this scenario, the CUBE Order would be executed as follows:
10 contracts trade with the unrelated order for BD1 @ $1.20
20 contracts trade with MM3 @ $1.22
20 contracts trade with MM1 @ $1.22
(This fills the entire CUBE Order)
MM4 does not trade any contracts
Contra Order does not trade any contracts
Example #12b: (Customer interest on BB):
NBBO = $1.20-$1.24 200 x 100
BBO = $1.20-$1.24 100 x 100
CUBE Order to buy 50 contracts with a limit of $1.24
[[Page 13720]]
Contra Order selling 50 contracts with a stop price of $1.24
Permissible range of executions is $1.21 to $1.24
RFR sent identifying the series, side and size, initiating price of
$1.24
(Auction Starts)
MM3 GTX Order received @ 200 milliseconds Sell 50 at $1.22
MM1 GTX Order received @ 210 milliseconds Sell 50 at $1.22
MM4 GTX Order received @ 230 milliseconds Sell 50 at $1.23
BD1 Unrelated Order received @ 400 milliseconds Sell 10 at $1.20
(Opposite-side order marketable against the NBB causes an early
conclusion to the Auction)
Under this scenario, the CUBE Order would be executed as follows:
10 contracts trade with the unrelated order for BD1 @ $1.21 (Customer
on the BB, so allowable range must improve BB by .01)
20 contracts trade with MM3 @ $1.22
20 contracts trade with MM1 @ $1.22
(This fills the entire CUBE Order)
MM4 does not trade any contracts
Contra Order does not trade any contracts
Example #12c (No Customer interest on BB and updated NBB during
Auction):
NBBO = $1.20-$1.24 200 x 100
BBO = $1.20-$1.24 100 x 100
CUBE Order to buy 50 contracts with a limit of $1.24
Contra Order selling 50 contracts with a stop price of $1.24
Permissible range of executions $1.20-$1.24
RFR sent identifying the series, side and size, initiating price of
$1.24
(Auction Starts)
MM3 GTX Order received @ 200 milliseconds Sell 50 at $1.22
MM1 GTX Order received @ 210 milliseconds Sell 50 at $1.22
MM4 GTX Order received @ 230 milliseconds Sell 50 at $1.23
New NBB posted on an away market $1.23
(New NBB does not cause early conclusion) \44\
---------------------------------------------------------------------------
\44\ See Rule 991NY(b)(5).
---------------------------------------------------------------------------
BD1 Unrelated Order received @ 400 milliseconds Sell 10 at $1.21
(Opposite-side order marketable against the updated NBB causes an early
conclusion to the Auction)
Under this scenario, the CUBE Order would be executed as follows:
10 contracts trade with the unrelated order for BD1 @ $1.21
20 contracts trade with MM3 @ $1.22
20 contracts trade with MM1 @ $1.22
(This fills the entire CUBE Order)
MM4 does not trade any contracts
Contra Order does not trade any contracts
Example #12d (No Customer interest on BB and updated BB during
Auction):
NBBO = $1.20-$1.24 200 x 100
BBO = $1.20-$1.24 100 x 100
CUBE Order to buy 50 contracts with a limit of $1.24
Contra Order selling 50 contracts with a stop price of $1.24
Permissible range of executions $1.20-$1.24
RFR sent identifying the series, side and size, initiating price of
$1.24
(Auction Starts)
MM3 GTX Order received @ 200 milliseconds Sell 50 at $1.24
MM1 GTX Order received @ 210 milliseconds Sell 50 at $1.22
MM4 GTX Order received @ 230 milliseconds Sell 50 at $1.22
MM5 unrelated quote received @500 milliseconds Buy 10 at $1.21
(New BB adjusts range of permissible executions but does not cause
early conclusion) \45\
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\45\ See proposed Rule 971.1NY(b)(1)(C).
---------------------------------------------------------------------------
MM6 GTX Order received @ 550 milliseconds Sell 10 at $1.20
(Opposite-side order marketable against the updated BB causes an early
conclusion to the Auction) \46\
\46\ See proposed Rule 971.1NY(c)(4)(C).
---------------------------------------------------------------------------
Under this scenario, the CUBE Order would be executed as follows:
10 contracts trade with MM6 @ $1.21 (the GTX order has been re-priced
to reflect the new BB \47\
---------------------------------------------------------------------------
\47\ See proposed Rule 971.1NY(c)(2)(C)(i)(f).
---------------------------------------------------------------------------
20 contracts trade with MM1 @ $1.22
20 contracts trade with MM4 @ $1.22
(This fills the entire CUBE Order)
MM3 does not trade any contracts
Contra Order does not trade any contracts
If the order that causes the Auction to conclude early is a market
order on the opposite side of the CUBE Order, the allocation of the
CUBE Order varies depending on how the Contra Order guaranteed the
execution of the CUBE Order and what, if any, RFR Responses are
received before the Auction concludes early. Proposed paragraph
(c)(4)(C)(ii) provides that if auto-match is selected and no RFR
Responses have arrived at the time the Auction concludes early, if the
CUBE Order is to buy (sell) and the unrelated order that caused the
Auction to conclude early is a market order to sell (buy), the CUBE
Order would execute against the unrelated market order at the midpoint
of the initiating price and the lower (upper) bound of the range of
permissible executions, as shown in the example below.\48\ If no
midpoint is possible, the execution would be rounded up (down) to the
nearest whole penny toward the initiating price. The Exchange believes
that rounding in this manner ensures not only that the CUBE Order is
afforded price improvement, but also that the priority of existing
interest in the Consolidated Book is protected.
---------------------------------------------------------------------------
\48\ As noted above, the Auction may execute orders in the
Auction as exceptions to Trade-Through Liability pursuant to Rule
991NY(b)(5). Accordingly, an opposite-side market order that arrives
during the Auction, which by definition is less than a second, may
trade through any updated NBBO published by an away market. Because,
pursuant to proposed Rule 971.1NY(b)(3), an update to the CUBE
Order's same-side BBO would update the permissible range of
executions, an opposite-side market order would execute consistent
with that updated permissible range of executions.
---------------------------------------------------------------------------
Example of Early Conclusion of Auction--Opposite Side Market Order w/
Auto-Match and no Responses
Example #13 (No Customer interest on BB):
NBBO = $1.15-$1.25 200 x 200
BBO = $1.15-$1.25 100 x 100
CUBE Order to buy 50 contracts with a limit of $1.20
Contra Order selling 50 contracts with Auto-match
Permissible range of executions $1.15--$1.20
RFR sent identifying the series, side and size, with initiating price
of $1.20
(Auction Starts)
BD1 Order received @ 490 milliseconds Sell 5 at the market
(Opposite-side market order causes an early conclusion to the Auction)
Under this scenario, the CUBE Order would be executed as follows:
5 contracts trade with BD1 @ $1.18 (midpoint of the initiating price
and the lower bound of the range of permissible prices, here the NBB,
rounded up to nearest whole $.01 closer to the initiating price) \49\
---------------------------------------------------------------------------
\49\ In this scenario, the execution between the contra side
market order and the CUBE Order should occur at the midpoint of the
CUBE Order initiating price and the BBO on the same side of the
market as the CUBE Order. In this case, that is the midpoint between
$1.15 and $1.20 or $1.175. In such situations, where the midpoint is
less than a full cent, the execution will round back towards the
CUBE Order initiating price--in this case, $1.18.
---------------------------------------------------------------------------
5 contracts with Contra Order at $1.18 (Auto-match)
40 contracts trade with Contra Order at $1.20 (the initiating price)
(This fills the entire CUBE Order)
Example #13a (No Customer interest on BB and update to BB):
NBBO = $1.15-$1.25 200 x 200
BBO = $1.15-$1.25 100 x 100
CUBE Order to buy 50 contracts with a limit of $1.20
[[Page 13721]]
Contra Order selling 50 contracts with Auto-match
Permissible range of executions $1.15-$1.20
RFR sent identifying the series, side and size, with initiating price
of $1.20
(Auction Starts)
MM1 Quote received @ 200 milliseconds Buy 100 at $1.18
(New BB updates range of executions to $1.18-$1.20)
BD1 Order received @ 490 milliseconds Sell 5 at the market
(Opposite-side market order causes an early conclusion to the Auction)
Under this scenario, the CUBE Order would be executed as follows:
5 contracts trade with BD1 @ $1.19 (midpoint of the initiating price
and the lower bound of the range of permissible prices)
5 contracts with Contra Order at $1.19 (Auto-match)
40 contracts trade with Contra Order at $1.20 (the initiating price)
(This fills the entire CUBE Order)
Proposed paragraph (c)(4)(C)(iii) provides that when auto-match is
selected and other RFR Responses are received before the arrival of the
market order that caused the Auction to conclude early, if the CUBE
Order is to buy (sell) and the market order is to sell (buy), the CUBE
Order would execute against the unrelated market order at the lowest
(highest) RFR Response price within the range of permissible
executions. The Exchange believes this would maximize the opportunities
for price improvement, while maintaining the priority of the
Consolidated Book.
Example of Early Conclusion of Auction--Opposite Side Market Order w/
Auto-Match and Responses before Early Conclusion
Example #14 (No Customer interest on BB):
NBBO = $1.15-$1.25 200 x 200
BBO = $1.15-$1.25 100 x 100
CUBE Order to buy 50 contracts with a limit of $1.20
Contra Order selling 50 contracts with Auto-match
Permissible range of executions $1.15-$1.20
RFR sent identifying the series, side and size, with initiating price
of $1.20
(Auction Starts)
MM4 GTX Order received @ 230 milliseconds Sell 10 at $1.18
MM3 GTX Order received @ 450 milliseconds Sell 40 at $1.20
BD1 Order received @ 490 milliseconds Sell 5 at the market
(Opposite-side market order causes an early conclusion to the Auction)
Under this scenario, the CUBE Order would be executed as follows:
5 contracts trade with BD1 @ $1.18 (market order executes at lowest RFR
Response price within permissible price range, which is the $1.18 offer
from MM4 received at 230 milliseconds)
10 contracts trade with MM4 @ $1.18
15 contracts trade with Contra Order @ $1.18 (Auto-match other RFR
Response prices)
5 contracts trade with the Contra Order @ $1.20 (This satisfies their
40% participation guarantee)
15 contracts trade with MM3 @ $1.20
(This fills the entire CUBE Order)
Pursuant to proposed Rule 971.1NY(c)(4)(C)(iv), and as illustrated
by the examples that follow, if the Initiating Participant has selected
a single stop price or auto-match limit to guarantee the execution of a
CUBE Order to buy (sell), and the order that caused the Auction to
conclude early is a market order to sell (buy), the CUBE Order would
execute against the unrelated market order at the lowest (highest)
price at which an execution could occur within the range of permissible
executions, which may be either an RFR Response price, the single stop
price, or the auto-match limit price.
Example of Early Conclusion of Auction--Opposite Side Market Order w/
Stop Price
Example #15 (No Customer interest on BB):
NBBO = $1.15-$1.25 200 x 200
BBO = $1.15-$1.25 100 x 100
CUBE Order to buy 50 contracts with a limit of $1.20
Contra Order selling 50 contracts with single stop price of $1.20
Permissible range of executions $1.15- $1.20
RFR sent identifying the series, side and size, with initiating price
of $1.20
(Auction Starts)
MM4 GTX Order received @ 230 milliseconds Sell 10 at $1.19
MM3 GTX Order received @ 450 milliseconds Sell 40 at $1.20
BD1 Order received @ 490 milliseconds Sell 5 at the market
(Opposite-side market order causes an early conclusion to the Auction)
Under this scenario, the CUBE Order would be executed as follows:
5 contracts trade with BD1 @ $1.19 (lowest-priced Response received
during the Auction)
10 contracts trade with MM4 @ $1.19
20 contracts trade with the Contra Order @ $1.20 (This satisfies their
40% participation guarantee)
15 contracts trade with MM3 @ $1.20
(This fills the entire CUBE Order)
Example of Early Conclusion of Auction--Opposite Side Market Order w/
Auto-Match limit
Example #16 (No Customer interest on BB):
NBBO = $1.20-$1.24 200 x 100
BBO = $1.20-$1.25 100 x 100
CUBE Order to buy 20 contracts with a limit of $1.24
Contra Order selling 20 contracts with an auto-match limit price of
$1.23
Permissible range of executions $1.21-$1.24
RFR sent identifying the series, side and size, with initiating price
of $1.24
(Auction Starts)
MM3 GTX Order received @ 200 milliseconds Sell 20 at $1.23
MM1GTX Order received @ 210 milliseconds Sell 20 at $1.23
MM4 GTX Order received @ 230 milliseconds Sell 20 at $1.23
BD1 Unrelated Order received @ 400 milliseconds Sell 10 at Market
(Opposite-side market order causes early conclusion to the Auction)
Under this scenario, the CUBE Order would be executed as follows:
10 contracts trade with the unrelated order for BD1 @ $1.23 (the lowest
priced Response received during the Auction.)
8 contracts trade with Contra Order @ $1.23 (this satisfies their 40%
participation guarantee)
1 contract trades with MM3 @ $1.23
1 contract trades with MM1 @ $1.23
(This fills the entire CUBE Order)
MM4 does not trade any contracts \50\
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\50\ MM4 receives no allocation pursuant to Rule 964NY(b)(3),
which defaults to time-priority allocation when, as here, the bids
are equal.
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The Auction would also conclude early upon the arrival of an
unrelated, non-marketable quote or limit order, that improves the CUBE
Order's initiating price, pursuant to proposed Rule 971.1NY(c)(4)(D).
Specifically, if, during a CUBE Auction where the CUBE Order is to buy
(sell), the Exchange receives such a non-marketable unrelated order
that is on the same side of the market as the CUBE Order that is priced
higher (lower) than the initiating price, and therefore creates a new
BB (BO) that is higher (lower) than the initiating price, the CUBE
Order would execute pursuant to proposed paragraph (c)(5). Any unfilled
GTX Orders would be eligible to execute against the unrelated order
that caused the CUBE Auction to conclude early and would then cancel.
Any contracts that remain from the unrelated non-marketable order after
that order trades against interest in the Auction would then be
processed in accordance with Rule
[[Page 13722]]
964NY Order Display and Priority. The Exchange believes that early
conclusion in this circumstance would ensure that the Auction interacts
seamlessly with the Consolidated Book so as not to disturb the priority
of orders on the Book, while affording the CUBE Order (and the
unrelated order) opportunities for price improvement.
Example of Early Conclusion of Auction--Same Side New BBO Improves
Initiating Price
Example #17 (No Customer interest on BB):
NBBO = $1.20-$1.24 200 x 200
BBO = $1.20-$1.24 100 x 100
CUBE Order to buy 20 contracts with a limit price of $1.22
Contra Order selling 20 contracts at $1.22
Permissible range of executions $1.21-$1.22
RFR sent identifying the series, side and size, with an initiating
price of $1.22
(Auction Starts)
MM3 GTX Order received @ 300 milliseconds Sell 20 at $1.22
MM1 GTX Order received @ 310 milliseconds Sell 20 at $1.22
MM4 GTX Order received @ 430 milliseconds Sell 20 at $1.22
C1 Unrelated Order received @ 550 milliseconds Buy 100 at $1.23
(Same side limit order to buy that improves (i.e., is priced higher
than) the CUBE Order's initiating price causes the Auction to conclude
early)
Under this scenario, the CUBE Order would be executed as follows:
8 contracts trade with the Contra Order @ $1.22 (This satisfies their
40% participation guarantee)
4 contract trades with MM3 @ $1.22
4 contract trades with MM1 @ $1.22
4 contracts trade with MM4 @ $1.22
(This fills the entire CUBE Order)
C1 unrelated order then executes as follows:
16 contracts trade with MM3 @ $1.22
16 contracts trade with MM1 @ $1.22
16 contracts trade with MM4 @ $1.22
Remaining contracts post to the Consolidated Book as new BB paying
$1.23 for 52 contracts
The final scenario that would result in the early conclusion of an
Auction, pursuant to proposed Rule 971.1NY(c)(4)(E), would occur if,
during the Auction, the Exchange received interest sufficient to fill a
resting AON order. After the early conclusion of the Auction, the CUBE
Order would execute pursuant to paragraph (c)(5) and the Exchange would
then determine whether the AON could be executed against interest in
the Auction. The Exchange believes that early conclusion in this
circumstance would ensure that the Auction interacts seamlessly with
the Consolidated Book so as not to disturb the priority of orders on
the Book, while affording the CUBE Auction opportunities for price
improvement.
Example of Early Conclusion of Auction--Sufficient Interest To Fill AON
Order Received During Response Time Interval
Example #18 (No Customer interest on BB):
NBBO = $1.20-$1.24 200 x 200
BBO = $1.20-$1.24 100 x 100
CUBE Order to buy with a limit price of $1.22 for 20 contracts
Contra Order selling 20 contracts with a single stop price of $1.22
Permissible range of executions $1.21-$1.22
RFR sent identifying the series, side and size, with initiating price
of $1.22
Resting AON Order to buy 20 contracts at $1.21
(Auction Starts)
MM3 GTX Order received @ 200 milliseconds Sell 20 at $1.21
(Arriving interest sufficient to fill resting AON order to buy causes
the Auction to conclude early)
Under this scenario, the CUBE Order would be executed as follows:
20 contracts trade with MM3 @ $1.21
(This fills the entire CUBE Order)
Contra Order does not trade
System reevaluates whether AON can be executed and concludes cannot,
because interest executed with CUBE Order.
Conduct Inconsistent With Just and Equitable Principles of Trade
The Exchange is proposing Commentary to the Rule to set forth that
certain activity in connection with the CUBE Auction would be
considered conduct inconsistent with just and equitable principles of
trade to discourage ATP Holders from attempting to misuse or manipulate
the Auction process. This practice is consistent with the rules of
other options exchanges that offer electronic price improvement auction
mechanisms.\51\ Specifically, pursuant to proposed Commentary .02 (a)-
(d) to Rule 971.1NY, the Exchange proposes that the following conduct
would be considered conduct inconsistent with just and equitable
principles of trade:
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\51\ See, e.g., PHLX Rule 1080(n)(iii)-(v); ISE Rule 723
Supplementary Material .01; BOX IM-7150-2(a) and (b).
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(a) An ATP Holder entering RFR Responses to a CUBE Auction for
which the ATP Holder is the Initiating Participant. The Exchange
believes this would prevent Initiating Participants from submitting an
inaccurate or misleading stop price or trying to improve their
allocation entitlement by participating with multiple expressions of
interest.
(b) Engaging in a pattern and practice of entering unrelated orders
and quotes for the purpose of causing a CUBE Auction to conclude early,
i.e., before the end of the Response Time Interval. The Exchange
believes this would prevent an ATP Holder from shortening the duration
of the Auction thus possibly reducing the number of Responses to an
Auction in order to gain a higher contract allocation than the
percentage the ATP Holder may have otherwise received had the Auction
not concluded early.
(c) An Initiating Participant that breaks up an agency order into
separate CUBE Orders for the purpose of gaining a higher allocation
percentage than the Initiating Participant would have otherwise
received in accordance with the allocation procedures contained in
proposed paragraph (c)(5) to proposed Rule 971.1NY. The Exchange
believes this would prevent Initiating Participants from manipulating
the CUBE Orders size and number to gain a higher guaranteed execution
than the Initiating Participant would have otherwise received.
(d) Engaging in a pattern and practice of sending multiple RFR
Responses at the same price that in the aggregate exceed the size of
the CUBE Order. The Exchange believes this will prevent ATP Holders
from attempting to misuse or manipulate the allocation process.
Order Exposure and Prohibited Conduct
Current Rule 935NY prohibits Users \52\ from executing as principal
any orders they represent as agent unless (i) agency orders are first
exposed on the Exchange for at least one (1) second or (ii) the User
has been bidding or offering on the Exchange for at least one (1)
second prior to receiving an agency order that is executable against
such bid or offer. This rule helps to ensure that orders are properly
exposed to market participants, affording them a reasonable amount of
time in which to participate in the execution of the agency order.
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\52\ Rule 900.2NY(87) defines User as any ATP Holder that is
authorized to obtain access to the System.
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As previously stated in this filing, the Exchange believes that the
proposed Response Time Interval, with a random length of between 500
and 750 milliseconds, is of sufficient length so as
[[Page 13723]]
to permit ATP Holders time to respond to a CUBE Auction thereby
enhancing opportunities for competition among participants and
increasing the likelihood of price improvement for the CUBE Order.
Accordingly, the Exchange proposes to amend Rule 935NY to stipulate
that a User may execute as principal an order that the User represents
as agent, provided that the User avails him or herself of the CUBE
Auction process, pursuant to Rule 971.1NY. Such CUBE Order would not be
subject to the one-second order exposure requirement of Rule 935NY,
which exclusion from the one-second order exposure requirement is
consistent with the treatment of similar orders at BOX Options.\53\
Consistent with Rule 935NY Commentary .01, ATP Holders shall only
utilize the Auction where there is a genuine intention to execute a
bona fide transaction.\54\
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\53\ See BOX IM-7140-2.
\54\ See Rule 935NY Commentary .01 (``Rule 935NY prevents a User
from executing agency orders to increase its economic gain from
trading against the order without first giving other trading
interest on the Exchange an opportunity to either trade with the
agency order or to trade at the execution price when the User was
already bidding or offering on the book.'')
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Proposed Pilot Period for Auctions of Fewer Than 50 Contracts
The Exchange is proposing that proposed Rules 971.1NY(b)(1)(B)
(regarding CUBE Auctions for fewer than 50 contracts) and 971.1NY(b)(8)
(that the minimum size for an Auction shall be one contract) be adopted
for a pilot period effective for one year beginning on the approval
date for this rule proposal. During this Pilot Period, the Exchange
will submit certain data, periodically as required by the Commission,
to provide supporting evidence that, among other things, there is
meaningful competition for all size orders and that there is an active
and liquid market functioning on the Exchange outside of the CUBE
Auction. Any data that is submitted to the Commission will be provided
on a confidential basis.
To aid the Commission in its evaluation of the Pilot Program, the
Exchange will provide the following additional information each month:
(1) The number of orders of 50 contracts or greater entered into
the CUBE Auction;
(2) The number of orders of fewer than 50 contracts entered into
the CUBE Auction;
(3) The percentage of all orders of 50 contracts or greater sent to
the Exchange that are entered into the CUBE;
(4) The percentage of all orders of fewer than 50 contracts sent to
the Exchange that are entered into the CUBE Auction;
(5) The percentage of all Exchange trades represented by orders of
fewer than 50 contracts;
(6) The percentage of all Exchange trades effected through the CUBE
Auction represented by orders of fewer than 50 contracts;
(7) The percentage of all contracts traded on the Exchange
represented by orders of fewer than 50 contracts;
(8) The percentage of all contracts effected through the CUBE
Auction represented by orders of fewer than 50 contracts;
(9) The spread in the option, at the time an order of 50 contracts
or greater is submitted into the CUBE Auction;
(10) The spread in the option, at the time an order of fewer than
50 contracts is submitted into the CUBE Auction;
(11) Of CUBE Auction trades for orders of fewer than 50 contracts,
the percentage of CUBE Auction trades executed at the NBBO, NBBO plus
$.01, NBBO plus $.02, NBBO plus $.03, etc.;
(12) Of CUBE Auction trades for orders of 50 contracts or greater,
the percentage of CUBE Auction trades executed at the NBBO, NBBO plus
$.01, NBBO plus $.02, NBBO plus $.03, etc.;
(13) The number of orders submitted by an ATP Holder when the bid-
ask spread was at a particular increment (e.g., $.01, $.02, $.03,
etc.).
Also, relative to Item 13, for each spread, the Exchange will
provide the percentage of contracts in orders of fewer than 50
contracts submitted to the CUBE Auction where the contra-side was: (a)
The ATP Holder that submitted the order to the CUBE Auction; (b) market
makers assigned to the class; (c) other Exchange Participants; (d)
Customers; (e) Professional Customers and (f) unrelated orders. For
each spread, also specify the percentage of contracts in orders of 50
contracts or greater submitted to the CUBE Auction where the contra-
side was: (a) The ATP Holder that submitted the order to the CUBE
Auction; (b) market makers assigned to the class; (c) other Exchange
Participants; (d) Customers; (e) Professional Customers and (f)
unrelated orders.
Further, the Exchange will provide, for the first and third
Wednesday of each month, the: (a) Total number of CUBE Auctions on that
date; (b) number of CUBE Auctions where the order submitted to the CUBE
Auction was fewer than 50 contracts; (c) number of CUBE Auctions where
the order submitted to the CUBE Auction was 50 contracts or greater;
(d) number of CUBE Auctions (where the order submitted to the CUBE
Auction was fewer than 50 contracts and where the order submitted was
50 contracts or greater) where the number of Participants (excluding
the Contra Order) was zero, one, two, three, four, etc.
The Exchange will also provide: The percentage of all Exchange
trades effected through the CUBE Auction in which the Initiating
Participant has elected to auto-match with a limit price and the
percentage of such trades in which the Initiating Participant has
elected to auto-match without a limit price, and the average amount of
price improvement provided to the CUBE Order when the Initiating
Participant has elected to auto-match with a limit price and the
average without a limit price, versus the average amount of price
improvement provided to the CUBE Order when the Initiating Participant
has chosen a single stop price.
Finally, during the Pilot Program, the Exchange will provide
information each month with respect to situations in which the CUBE
Auction is terminated prematurely or a market or marketable limit order
immediately executes with an initiating order before the CUBE Auction's
conclusion. The following information will be provided:
(a) The number of times that the Auction concluded early upon the
arrival of an unrelated quote or order that is on the same side of the
market as the CUBE Order, that is marketable against any RFR Responses
or the NBBO (or the BBO, for a non-routable order) at the time of
arrival, and at what time such unrelated order/quote ended the Auction.
Also, (i) the number of times such orders were entered by the same (or
affiliated) firm that initiated the CUBE Auction that was concluded
early, and (ii) the number of times such orders were entered by a firm
(or an affiliate of such firm) that participated in the execution of
the CUBE Order;
(b) For the orders addressed in each of (a)(i) and (a)(ii) above,
the percentage of CUBE Auctions that concluded early due to the
receipt, during the CUBE Auction, of an unrelated quote or order on the
same side of the market as the CUBE Order, that is marketable against
any RFR Responses or the NBBO (or the BBO, for a non-routable order) at
the time of arrival; and the average amount of price improvement
provided to the CUBE Order where the CUBE Auction is concluded early;
(c) The number of times that the Auction concluded early upon the
arrival of any RFR Response that is marketable against the NBBO (or the
BBO, for a non-routable order) at the time of arrival, and at what time
such RFR Response ended the Auction. Also,
[[Page 13724]]
(i) the number of times such RFR Responses were entered by the same (or
affiliated) firm that initiated the CUBE Auction, and (ii) the number
of times such RFR Responses were entered by a firm (or an affiliate of
such firm) that participated in the execution of the CUBE Order;
(d) For the orders addressed in each of (c)(i) and (c)(ii) above,
the percentage of CUBE Auctions that concluded early due to the
receipt, during the CUBE Auction, of any RFR Response that is
marketable against the NBBO (or the BBO, for a non-routable order) at
the time of arrival; and the average amount of price improvement
provided to the CUBE Order where the CUBE Order is immediately
executed;
(e) The number of times that the Auction concluded early due to a
trading halt and at what time the trading halt ended the CUBE Auction.
Of the CUBE Auctions that concluded early due to a trading halt, the
number that resulted in price improvement over the CUBE Order stop
price, and the average amount of price improvement provided to the CUBE
Order. Further, in the Auctions that concluded early due to a trading
halt, the percentage of contracts that received price improvement over
the CUBE Order stop price;
(f) The number of times that the Auction concluded early upon the
initiation of a new CUBE Auction in the same series and at what time
the initiation of a new CUBE Auction ended the ongoing CUBE Auction.
(g) The number of times that the Auction concluded early upon the
receipt of an order with either an IOC, FOK or NOW contingency and at
what time the receipt of such order ended the ongoing CUBE Auction
(h) The number of times that the Auction concluded early because
sufficient interest to fill an entire AON order is received during the
Response Time Interval and at what time the ongoing CUBE Auction was
completed; and
(i) The average amount of price improvement provided to the
initiating order when the CUBE Auction is not concluded early.
Section 11(a) of the Exchange Act
Section 11(a) of the Exchange Act prohibits any member of a
national securities exchange from effecting transactions on that
exchange for its own account, the account of an associated person, or
an account over which it or its associated persons exercises discretion
(``covered accounts''), unless an exception applies.\55\ Section
11(a)(1) contains a number of exceptions for principal transactions by
members and their associated persons. As set forth below, the Exchange
believes that the proposed rules for the CUBE Auction are consistent
with the requirements of Section 11(a) and the rules thereunder.
---------------------------------------------------------------------------
\55\ 15 U.S.C. 78k(a)(1).
---------------------------------------------------------------------------
In this regard, Section 11(a)(1)(A) provides an exception from the
prohibitions in Section 11(a) for dealers acting in the capacity of
market makers. The Exchange believes that orders sent by on- and off-
floor market makers, for covered accounts, to the proposed CUBE Auction
would qualify for this exception from Section 11(a).
In addition to this market maker exception, Rule 11a2-2(T) under
the Exchange Act, known as the ``effect versus execute'' rule, provides
exchange members with an exception from Section 11(a) by permitting
them, subject to certain conditions, to effect transactions for covered
accounts by arranging for an unaffiliated member to execute the
transactions on the exchange.\56\ To comply with the ``effect versus
execute'' rule's conditions, a member: (i) Must transmit the order from
off the exchange floor; (ii) may not participate in the execution of
the transaction once it has been transmitted to the member performing
the execution; \57\ (iii) may not be affiliated with the member
executing the transaction on the floor, or through the facilities, of
the Exchange; and (iv) with respect to an account over which the member
has investment discretion, neither the member nor its associated person
may retain any compensation in connection with effecting the
transaction except as provided in the rule.\58\
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\56\ 17 CFR 240.11a2-2(T).
\57\ The member, however, may participate in clearing and
settling the transaction. See Securities Exchange Act Release No.
14563 (March 14, 1978), 43 FR 11542 (March 17, 1978).
\58\ 17 CFR 240.11a2-2(T).
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The Exchange believes that orders sent by off-floor ATP Holders,
for covered accounts, to the proposed CUBE Auction would qualify for
this ``effect versus execute'' exception from Section 11(a), as
described below. In this regard, the first condition of Rule 11a2-2(T)
is that orders for covered accounts be transmitted from off the
exchange floor. The Exchange represents that orders for covered
accounts from off-floor ATP Holders sent to the CUBE Auction would be
transmitted from remote terminals that are off the Exchange floor
directly to the mechanisms by electronic means.\59\ In the context of
other automated trading systems, the Commission has found that the off-
floor transmission requirement is met if a covered account order is
transmitted from a remote location directly to an exchange's floor by
electronic means.\60\
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\59\ In the alternative, orders for a covered account may be
sent by an off-floor ATP Holder to an unaffiliated Floor Broker for
entry into the CUBE Auction mechanism. Floor Brokers, however, may
not enter orders for their own covered accounts into the Auction
mechanism from on the floor, or transmit such orders from on the
floor to off of the floor for entry into the CUBE Auction mechanism.
\60\ See, e.g., Securities Exchange Act Release Nos. 59154
(December 23, 2008), 73 FR 80468 (December 31, 2008) (SR-BSE-2008-
48) (approving, among other things, the equity rules of the Boston
Stock Exchange (``BSE'')); 57478 (March 12, 2008), 73 FR 14521
(March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-080)
(approving rules governing the trading of options on The NASDAQ
Options Market); 49068 (January 13, 2004), 69 FR 2775 (January 20,
2004) (SR-BSE-2002-15) (approving the Boston Options Exchange as an
options trading facility of BSE); 15533 (January 29, 1979), 44 FR
6084 (January 31, 1979) (approving the Amex Post Execution Reporting
System, the Amex Switching System, the Intermarket Trading System,
the Multiple Dealer Trading Facility of the Cincinnati Stock
Exchange, the PCX Communications and Execution System, and the
Philadelphia Stock Exchange Automated Communications and Execution
System) (``1979 Release''); and 14563 (March 14, 1978), 43 FR 11542
(March 17, 1978) (approving NYSE's Designated Order Turnaround
System) (``1978 Release'').
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The second condition of Rule 11a2-2(T) requires that the member not
participate in the execution of its order once the order is transmitted
to the floor for execution.\61\ The Exchange represents that, upon
submission to the CUBE Auction, an order will be executed automatically
pursuant to the proposed rules set forth for the Auction. In
particular, execution of an order sent to the Auction depends not on
the ATP Holder entering the order, but rather on what other orders are
present and the priority of those orders. Thus, at no time following
the submission of an order is an ATP Holder able to acquire control or
influence over the result or timing of order execution.\62\
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\61\ The description above covers the universe of the types of
ATP Holders (i.e., on- and off-floor market makers, off-floor firms
that are not market makers, and Floor Brokers).
\62\ The Exchange notes that the Initiating Participant may not
cancel or modify a CUBE Order once a CUBE Auction has started. See
proposed Rule 971.1NY(c).
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The third condition of Rule 11a2-2(T) requires that the order be
executed by an exchange member who is unaffiliated with the member
initiating the order. The Commission has stated that this requirement
is satisfied when automated exchange facilities, such as the CUBE
Auction, are used, as long as the design of these systems ensures that
members do not possess any special or unique trading advantages in
handling
[[Page 13725]]
their orders after transmitting them to the exchange.\63\ The Exchange
represents that the CUBE Auction is designed so that no ATP Holder has
any special or unique trading advantage in the handling of its orders
after transmitting its orders to the mechanism.
---------------------------------------------------------------------------
\63\ In considering the operation of automated execution systems
operated by an exchange, the Commission noted that, while there is
not an independent executing exchange member, the execution of an
order is automatic once it has been transmitted into the system.
Because the design of these systems ensures that members do not
possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange, the Commission has
stated that executions obtained through these systems satisfy the
independent execution requirement of Rule 11a2-2(T). See 1979
Release.
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The fourth condition of Rule 11a2-2(T) requires that, in the case
of a transaction effected for an account with respect to which the
initiating member or an associated person thereof exercises investment
discretion, neither the initiating member, nor any associated person
thereof, may retain any compensation in connection with effecting the
transaction, unless the person authorized to transact business for the
account has expressly provided otherwise by written contract, referring
to Section 11(a) of the Act and Rule 11a2-2(T) thereunder.\64\ The
Exchange recognizes that ATP Holders relying on Rule 11a2-2(T) for
transactions effected through the CUBE Auction must comply with this
condition of the Rule.
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\64\ See 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written
contract to retain compensation, in connection with effecting
transactions for covered accounts over which such member or
associated persons thereof exercises investment discretion, to
furnish, at least annually to the person authorized to transact
business for the account, a statement setting forth the total amount
of compensation retained by the member in connection with effecting
transactions for the account during the period covered by the
statement, which amount must be exclusive of all amounts paid to
others during that period for services rendered to effect such
transactions. See also 1978 Release (stating ``[t]he contractual and
disclosure requirements are designed to assure that accounts
electing to permit transaction-related compensation do so only after
deciding that such arrangements are suitable to their interests'').
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Implementation
The Exchange will announce the implementation date of the proposed
rule change in a Trader Update to be published no later than 60 days
following Commission approval. The implementation date will be no later
than 60 days following publication of the Trader Update announcing
Commission approval. The Exchange believes that this implementation
schedule would provide ATP Holders with adequate notice of the Auction
and would allow ample time for ATP Holders to prepare their systems for
participation in the Auction process, if such participation is desired.
2. Statutory Basis
For the reasons set forth above, the Exchange believes the proposed
rule change is consistent with Section 6(b) of the Act in general, and
furthers the objectives of Section 6(b)(5) of the Act, in that it is
designed to promote just and equitable principles of trade, remove
impediments to and perfect the mechanisms of a free and open market and
a national market system and, in general, to protect investors and the
public interest. In particular, the proposal would provide ATP Holders
and Customers with an electronic Auction mechanism equipped to
electronically execute proposed crossing transactions while affording
opportunities for price improvement and helping to ensure equal access
to exposed orders. The Exchange believes that the Auction would promote
and foster competition as it would provide more options contracts with
the opportunity for price improvement. In this regard, the CUBE Auction
is intended to be beneficial to investors because the Auction may
result in increased liquidity available at improved prices, with
competitive final pricing out of the Initiating Participant's complete
control.
Moreover, the Exchange notes that because the CUBE Auction is
intended to operate seamlessly with the Consolidated Book, the proposed
Auction would promote just and equitable principles of trade by
providing price improvement opportunities for agency orders while at
the same time providing an opportunity for such agency orders to
interact with orders or quotes received during the Response Time
Interval, including unrelated orders. Specifically, the Exchange notes
that any ATP Holder that elects to subscribe to ArcaBook, including a
broker dealer, is eligible to respond to an RFR and may therefore
potentially participate in the Auction. As a result, the Exchange
believes that the Auction will increase the number of options orders
that are provided with the opportunity to receive price improvement.
The Exchange believes that the proposed guaranteed allocation of
contracts to the Contra Order removes impediments to and perfects the
mechanism of a free and open market because it should encourage ATP
Holders to guarantee the execution of orders they may represent on an
agency basis by entering agency orders into the CUBE Auction. The
Exchange notes that the proposed guarantee would also protect investors
because the guaranteed allocation is subject to there being sufficient
size remaining of the CUBE Order after executing against better-priced
interest (thereby providing price improvement to the CUBE Order) and
Customers (thereby protecting Customer interest). In addition, the CUBE
Auction promotes equal access by providing any ATP Holder that elects
to subscribe to ArcaBook with the opportunity to interact with orders
in the CUBE Auction. In this regard, any ATP Holder can subscribe to
receive the options data provided through ArcaBook. The CUBE Auction is
also non-discriminatory by using a random timer for the exposure
period, which period is not disclosed to any participants or Exchange
staff, and is not even determined until the RFR is sent. The Exchange
also believes that the proposed amendment to Rule 900.2NY to exclude
Professional Customers from the definition of ``Customer'' for purposes
of this rule is consistent with just and equitable principles of trade
because it is intended to protect investors that are not broker dealers
and ensure that their orders are protected regardless of whether there
is an Auction.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange is proposing
the Auction as a market enhancement that should increase competition
for order flow on the Exchange in a manner that would be beneficial to
investors. Specifically, the Exchange believes that the CUBE Auction
would provide investors seeking to effect options orders with an
opportunity for increased liquidity available at improved prices, with
competitive final pricing out of the Initiating Participant's complete
control. The proposal is structured to offer the same enhancement to
all market participants and would not impose a competitive burden on
any participant. The Exchange notes that it operates in a highly
competitive market in which market participants can readily direct
order flow to competing venues who offer similar functionality. The
Exchange believes the proposed rule change is pro-competitive because
it would enable the Exchange to provide market participants with
functionality that is similar to that of other options exchanges. The
Exchange notes that not having the CUBE Auction at the
[[Page 13726]]
Exchange places the Exchange at a competitive disadvantage vis-
[agrave]-vis other exchanges that offer similar price improvement
mechanisms.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NYSEMKT-2014-17 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEMKT-2014-17. 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 20549-1090, 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-2014-17, and should be submitted on or before April 1, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\65\
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\65\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-05179 Filed 3-10-14; 8:45 am]
BILLING CODE 8011-01-P
