Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of Amendment No. 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 2, Adopting Rule 971.1NY for an Electronic Price Improvement Auction for Single-Leg Options Orders, 24779-24789 [2014-09921]

Download as PDF Federal Register / Vol. 79, No. 84 / Thursday, May 1, 2014 / Notices tkelley on DSK3SPTVN1PROD with NOTICES Commission may designate, if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b–4(f)(6)(iii) thereunder.11 A proposed rule change filed under Rule 19b–4(f)(6) 12 normally does not become operative prior to 30 days after the date of the filing. However, pursuant to Rule 19b4(f)(6)(iii),13 the Commission may designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has asked the Commission to waive the 30-day operative delay so that the proposal may become operative immediately upon filing. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest, as it will help eliminate investor confusion and promote competition among the option exchanges.14 Therefore, the Commission designates the proposed rule change to be operative upon filing. The Commission notes that, given the differing requirements as between the originating side and contra-side for QCC Orders, it is essential that the Exchange be able to clearly identify and monitor— throughout the life of a QCC Order, beginning at time of order entry on the Exchange through the post-trade allocation process—each side of the QCC Order and ensure that the requirements of the order type are being satisfied including, importantly, those relating to the originating side. The Commission believes this to be critical so that the Exchange can ensure that market participants are not able to circumvent the requirements of the QCC Order (as amended by this proposed rule change), each of which the Commission continues to believe are critical to ensuring that the QCC Order is narrowly drawn.15 Further, the 11 17 CFR 240.19b–4(f)(6)(iii). As required under Rule 19b–4(f)(6)(iii), the Exchange provided the Commission with written notice of its intent to file the proposed rule change, along with a brief description and the text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. 12 17 CFR 240.19b–4(f)(6). 13 17 CFR 240.19b–4(f)(6)(iii). 14 For purposes only of waiving the 30-day operative delay, the Commission has also considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 15 The Commission expects the Exchange to have the capability to enable it to surveil that such requirements are being met. Though the Exchange has stated its ability to do so, if the Exchange is not able to have such monitoring at any point in time, the Commission would expect the Exchange to take VerDate Mar<15>2010 17:30 Apr 30, 2014 Jkt 232001 Commission notes that the Exchange has made certain representations regarding its enforcement and surveillance of its Members’ use of QCC Orders, including, for example, not only at the time of order entry, but through the post-trade allocation process as well. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is: (i) Necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or 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– Phlx–2014–25 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–Phlx–2014–25. 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 other steps to ensure that the QCC Order cannot be improperly used. For example, if the Exchange were not able to identify and monitor which side of a QCC Order is the originating order, the Commission would expect that it would require that both sides of the QCC Order meet the more stringent requirements of the originating side, i.e., that it be for a single order for at least 1,000 contracts. PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 24779 those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the 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–Phlx– 2014–25, and should be submitted on or before May 22, 2014. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.16 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–09923 Filed 4–30–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–72025; File No. SR– NYSEMKT–2014–17] Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of Amendment No. 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 2, Adopting Rule 971.1NY for an Electronic Price Improvement Auction for Single-Leg Options Orders April 25, 2014. I. Introduction On February 21, 2014, NYSE MKT LLC (‘‘Exchange’’ or ‘‘NYSE MKT’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to adopt new Rule 971.1NY (‘‘Rule 971.1NY’’ or ‘‘Rule’’) to provide for an electronic crossing mechanism with a price improvement auction for options trading on the Exchange, to be referred to as the Customer Best Execution Auction (‘‘CUBE Auction’’ or ‘‘Auction’’). The proposal also would make related changes to certain Exchange rules to accommodate the new 16 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\01MYN1.SGM 01MYN1 24780 Federal Register / Vol. 79, No. 84 / Thursday, May 1, 2014 / Notices CUBE Auction. The proposed rule change was published for comment in the Federal Register on March 11, 2014.3 The Commission received no comments regarding the proposal. On April 21, 2014, the Exchange filed Amendment No. 1 to the proposed rule change. On April 23, 2014, the Exchange withdrew Amendment No. 1 and filed Amendment No. 2 to the proposed rule change.4 This order approves the proposed rule change, as modified by Amendment No. 2, on an accelerated basis. tkelley on DSK3SPTVN1PROD with NOTICES II. Description of the Proposal Proposed Rule 971.1NY would provide for an electronic price improvement auction for single leg options orders. The CUBE Auction would be available to Amex Trading Permit Holders (‘‘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).5 In the Notice, the Exchange stated that the CUBE Auction would operate in a manner consistent with— but not identical to—the operation of electronic price improvement auctions available on other options markets.6 The 3 See Securities Exchange Act Release No. 71655 (March 5, 2014), 79 FR 13711 (‘‘Notice’’). 4 The Exchange withdrew Amendment No. 1 due to a technical error in the amendment. In Amendment No. 2, the Exchange clarified that Exchange-sponsored Floor Broker systems are not enabled to accept orders into the CUBE Auction mechanism from Floor Brokers; (2) revised the rule text to clarify that unrelated quotes and orders will never trade through their limit prices; and (3) revised the rule text to clarify that the Contra Order may not be cancelled or modified. Amendment No. 2 has been placed in the public comment file for SR–NYSEMKT–2014–17 at https://www.sec.gov/ comments/sr-nysemkt-2014-17/ nysemkt201417.shtml (see letter from Janet McGinness, EVP, Legal, NYSE MKT, to Secretary, Commission, dated April 23, 2014) and also is available on the Exchange’s Web site at https://www. nyse.com/nysenotices/nyseamex/rule-filings/pdf. action;jsessionid=0C79EAD580B05432B779CC 2C14D4CDC2?file_no=SR-NYSEMKT-201417&seqnum=3. 5 See Notice, 79 FR at 13711. See also Amendment No. 2, supra note 4. In addition to utilizing the CUBE Auction, floor-based ATP Holders would be permitted to continue to use existing floor-based crossing rules. See Notice, 79 FR at 13711. 6 See Chicago Board Options Exchange, Inc. (‘‘CBOE’’) Rule 6.74A—Automated Improvement Mechanism (‘‘AIM’’); NASDAQ OMX PHLX, INC. (‘‘PHLX’’) Rule 1080(n)—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’’). NYSE MKT noted that the AIM, PIXL, PIP and PIM have features similar to the CUBE Auction including: (a) Providing the opportunity for price improvement; (b) delineating an exposure period for the 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. See Notice, 79 FR at 13711, n.4. VerDate Mar<15>2010 17:30 Apr 30, 2014 Jkt 232001 Exchange stated that 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 and limit orders sent to the Exchange are placed and reside as a file on the NYSE Amex System (‘‘System’’).7 Under proposed Rule 971.1NY(a), an ATP Holder would be able to 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 (‘‘CUBE Order’’) through the CUBE Auction. The ATP Holder that submits the CUBE Order (‘‘Initiating Participant’’) would agree to guarantee the execution of the CUBE Order at a specified price (‘‘single stop price’’) by submitting a contra-side order (‘‘Contra Order’’) representing principal interest or interest that it has solicited to trade with the CUBE Order. In lieu of a specifying a stop price, the Initiating Participant could utilize the auto-match or auto-match limit features of Rule 971.1NY(c)(1) (discussed below). The Initiating Participant’s manner of guaranteeing the CUBE Order and the price(s) 8 at which the CUBE Order is stopped would not be displayed. The Exchange stated that, although the Contra Order would guarantee the CUBE Order an execution, the purpose of the CUBE 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.9 A. Initiating Price As set forth in Rule 971.1NY(a), an Auction begins with an initiating price, which would be announced to all ATP Holders who subscribe to receive the Request for Response (‘‘RFR’’) messages that are sent by the Exchange over ArcaBook 10 upon receipt of a CUBE 7 See Notice, 79 FR at 13711–12. the Initiating Participant utilizes the automatch or auto-match limit features, there would be no single price at which the CUBE Order is stopped. 9 See Notice, 79 FR at 13712. The proposal also would amend Rule 900.2NY(18A) to provide that, for purposes of the CUBE Auction, Professional Customers as defined in that rule would be treated as broker-dealers. The Exchange stated that its proposed treatment of Professional Customers as broker-dealers for purposes of the CUBE Auction is consistent with the rules of the CBOE. See CBOE Rule 1.1(ggg). Further, the proposal would make a technical, non-substantive amendment to Rule 900.2NY(18A) that is unrelated to the CUBE Auction proposal and also would add a new provision to Rule 935.NY to provide an exception from the order exposure requirement if the CUBE Auction is utilized. 10 ArcaBook is a proprietary data feed offered by the Exchange and is available to anyone (including all ATP Holders) by subscription. The Exchange represents that RFRs for CUBE Auctions would be 8 When PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 Order.11 In addition to the initiating price, the RFR would identify the series, side of market, and size of the CUBE Order.12 For a CUBE Order to buy (sell), the initiating price would be the lower (higher) of the CUBE Order’s limit price or the National Best Offer (‘‘NBO’’) (National Best Bid) (‘‘NBB’’),13 except as provided for in proposed paragraph (b)(1)(B) of the Rule (discussed below).14 The initiating price of the CUBE Order, as well as the Contra Order and any responsive GTX Orders (discussed below) could be priced in one cent increments, regardless of the Minimum Price Variation (‘‘MPV’’) applicable to the series.15 B. Permissible Range of Executions At the conclusion of the CUBE Auction, the CUBE Order would be executed at a price or prices within a permissible range of executions, as specified in proposed Rule 971.1NY(b)(1).16 A CUBE Order to buy (sell) generally would have a 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) of the Rule, tighter ranges of executions would apply when there is Customer interest 17 in the BBO for orders of 50 contracts or more or for when there are orders for fewer than 50 contracts,18 as follows: 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 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, would have 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). 11 See proposed Rule 971.1NY(c)(2), discussed further below. 12 See id. 13 See proposed Rule 971.1NY(a). 14 See proposed Rule 971.1NY(b)(1). See also Notice, 79 FR at 13712 for examples illustrating the initiating price. 15 See proposed Rule 971.1NY(b)(7). See also Notice, 79 FR at 13712 for an example illustrating the pricing increments and see infra notes 62–63 and accompanying text regarding unrelated orders arriving on the Exchange on the opposite side of the CUBE Order, which would be permitted to participate in an Auction but only if submitted in the MPV for the series. 16 See infra Section III.0. for a discussion of the application of exceptions to Rule 991.NY (the Exchange’s Trade Through rule) in the context of a CUBE Auction. 17 For purposes of the proposed Rule, the term ‘‘customer’’ (when capitalized) means an individual or organization that is not a broker-dealer, as set forth in Rule 900.2NY(18). 18 See proposed Rule 971.1NY(b)(1)(A). E:\FR\FM\01MYN1.SGM 01MYN1 Federal Register / Vol. 79, No. 84 / Thursday, May 1, 2014 / Notices (upper) bound of executions would be the higher (lower) of the BB plus one cent (BO minus one cent) or the NBB (NBO).19 If the CUBE Order to buy (sell) is for fewer than 50 contracts, the upper bound of executions would 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 would be the higher (lower) of the NBB (NBO) or the BB plus one cent (BO minus one cent).20 An added stipulation regarding the initiation of a CUBE Auction relates to the Exchange’s ‘‘Trade Collar Protection’’ rules, which are utilized to mitigate the risk of advancing too far through the Consolidated Book during periods of increased volatility or reduced liquidity.21 A Marketable Order (as defined in Rule 967NY(a)(1)) held at a Trading Collar (as defined in Rule 967NY(a)(2)) represents interest that is eligible to trade at a specific price, even though that price is not displayed. The Exchange determined that such orders must be taken into consideration in determining the range of permissible executions in a CUBE Auction. Thus, under the proposal, 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 would be narrowed to ensure the priority of the collared order(s). Pursuant to proposed Rule 971.1NY(b)(1)(D), if at the time the CUBE 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.22 A CUBE Order, once accepted, would never execute outside the range of permissible executions and would never trade through its own limit price nor would unrelated quotes and orders that 19 See proposed Rule 971.1NY(b)(1)(B). also Notice, 79 FR at 13713 for examples illustrating the initiating price and the permissible ranges of executions for various potential CUBE Orders. As discussed in further detail below, the provision concerning a CUBE Order for fewer than 50 contracts was proposed by NYSE MKT on a pilot basis. The Exchange stated that this is consistent with how electronic price improvement mechanisms of other markets operate, citing to CBOE Rule 6.74A Interpretation and Policies .03; PHLX Rule 1080(n)(vii); ISE Rule 723 Supplementary Material .03; and BOX IM–7150–1. Id. 21 See Rules 967NY(a)(1) and 967NY(a)(4)(A). 22 See Rule 967NY(a)(2). See also Notice, 79 FR at 13713 for an example illustrating Trade Collar Protection. tkelley on DSK3SPTVN1PROD with NOTICES 20 See VerDate Mar<15>2010 17:30 Apr 30, 2014 Jkt 232001 participate in the CUBE Auction trade through their own limit price.23 C. Time of Execution and Duration of the CUBE Auction Proposed Rule 971.1NY(b) would set forth that the time at which the CUBE Auction is initiated would be considered the time of execution for the CUBE Order.24 Thus, the Exchange stated, even though the execution would print after the CUBE Auction has completed, the CUBE Auction would qualify for the exception to the general prohibition against Trade-Throughs for stopped orders.25 Similarly, according to the Exchange, because the CUBE Auction would have a maximum duration of 750 milliseconds (as discussed below), to the extent that the NBBO may improve during the Auction, the CUBE Auction also would qualify for the exception to Trade-Through liability for transactions within one second prior to execution of the transaction.26 D. Causes for Rejection of a CUBE Order Rule 971.1NY(b) sets forth several instances in which a CUBE Order would be ineligible to commence an Auction and would be rejected along with its accompanying Contra Order. The Auction will reject CUBE Orders that are submitted to buy (sell) with a limit price below (above) the lower (upper) bound of the permissible range of executions; 27 and those that are 23 See Notice, 79 FR at 13714. See also Amendment No. 2, supra note 4. 24 The Exchange stated that, as a result, even though the execution would print after the CUBE Auction has completed, the CUBE Auction would qualify for an exception to the general prohibition against Trade-Throughs of the NBBO, pursuant to 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’’). Similarly, because the CUBE Auction would have a maximum duration of 750 milliseconds (as discussed below), to the extent that the NBBO may improve during the Auction, the Exchange stated that the CUBE Auction also would qualify for an exception to Trade-Through liability, pursuant to 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’’). The Exchange stated that the proposed CUBE Auction is consistent with how the electronic price improvement auctions of other markets operate. See, e.g., CBOE Rule 6.74A; PHLX Rule 1080(n); BOX Rule 7150; ISE Rule 723. 25 See Rule 991NY(b)(9). 26 See Rule 991NY(b)(5). 27 See proposed Rule 971.1NY(b)(2). See also Notice, 79 FR at 13713 for an example illustrating such a case. The Exchange stated that it is appropriate to reject CUBE Orders to buy (sell) that PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 24781 submitted before the opening of trading; 28 during the final second of the trading session; 29 when the BBO is one cent wide if the CUBE Order is for fewer than 50 contracts; 30 and when the NBBO is crossed.31 E. Price Increments and Minimum Size As noted above, CUBE Orders and Contra Orders would be permitted to be entered in one cent increments regardless of the MPV of the series being traded.32 Contra Orders may be priced in such increments when the Initiating Participant elects to submit a single stop price or the auto-match limit price.33 In addition, the minimum size requirement for a CUBE Order is one contract.34 F. Initiation of the CUBE Auction Process To initiate a CUBE Auction, the Initiating Participant would be permitted to 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.’’ 35 The Initiating Participant may elect to specify a single stop price, at which it would participate in the CUBE Auction at a single price only, regardless of the prices of other responses to the CUBE Auction. For a CUBE Order to buy (sell), an Initiating Participant would be permitted to specify a single stop price that is at or below (above) the initiating price of the CUBE Auction.36 are priced below (above) the lower (upper) bound because they are not the best-priced interest available and should not trade ahead of betterpriced interest on the same side of the market. Id. at 13713–14. 28 See proposed Rule 971.1NY(b)(4). The Exchange stated that it is appropriate to reject such CUBE Orders because a CUBE Order is deemed executed at the time of entry, and any CUBE Orders entered before the opening of trading would not be able to execute. See Notice, 79 FR at 13714. 29 See proposed Rule 971.1NY(b)(5). The Exchange stated that, as the length of the CUBE Auction would be at least 500 milliseconds, it is 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 completed. See Notice, 79 FR at 13714. 30 See proposed Rule 971.1NY(b)(6). The Exchange stated that it is appropriate to reject CUBE Orders in such scenarios because such orders would not be able to meet the permissible range of executions. See Notice, 79 FR at 13714. 31 See proposed Rule 971.1NY(b)(9). The Exchange stated that this is appropriate because the Exchange would not be able to determine a permissible range of executions if the NBBO is crossed. See Notice, 79 FR at 13714. 32 See proposed Rule 971.1NY(b)(7). 33 Id. ‘‘Single stop price’’ and ‘‘auto-match limit’’, as well as a third option, ‘‘auto-match’’, are discussed in Section III.0., infra. 34 See proposed Rule 971.1NY(b)(8). As discussed in Section III.0., infra, CUBE Orders for fewer than 50 contracts would be subject to a pilot program. 35 See proposed Rule 971.1NY(c)(1). 36 See proposed Rule 971.1NY(c)(1)(A). E:\FR\FM\01MYN1.SGM 01MYN1 24782 Federal Register / Vol. 79, No. 84 / Thursday, May 1, 2014 / Notices tkelley on DSK3SPTVN1PROD with NOTICES 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 would be repriced to the lower (upper) bound (i.e., the best-priced interest on the opposite side of the CUBE Order).37 In this instance, the stop price is below the lower bound of permissible execution prices, and thus, the Exchange explains, the execution could be priced back to within the permissible execution range.38 However, a stop price specified for a CUBE Order to buy (sell) that is above (below) the initiating price would not be eligible to initiate a CUBE Auction.39 The Exchange explains that, because in such an instance, the stop price is inferior to the pre-existing trading interest, it would not result in an execution within the permissible range.40 Both the CUBE Order and the Contra Order would be rejected.41 The Initiating Participant may elect the ‘‘auto-match’’ option, which would automatically match both the price and size of all RFR Responses.42 Accordingly, the Initiating Participant could 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.43 The Initiating Participant may elect the ‘‘auto-match limit’’ option, which for a CUBE Order to buy (sell) would automatically match the price and size of all RFR Responses at each price level that is lower (higher) than the initiating price down (up) to a specified limit price, referred to as the ‘‘auto-match limit price.’’ 44 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 37 See id. See also infra note 55 for the Exchange’s explanation of this provision. 38 See Notice, 79 FR at 13714. 39 See proposed Rule 971.1NY(c)(1)(A). 40 See Notice, 79 FR at 13714–15. 41 See Notice, 79 FR at 13715 for an example illustrating the impact of various single stop prices on a CUBE Order. 42 See proposed Rule 971.1NY(c)(1)(B). See Section III.0., infra, for a discussion of RFR Responses. 43 See id. See also Notice, 79 FR at 13715 for an example illustrating the impact of auto-match on a CUBE Order. 44 See proposed Rule 971.1NY(c)(1)(C). VerDate Mar<15>2010 17:30 Apr 30, 2014 Jkt 232001 price down (up) to the auto-match limit price.45 Only one Auction would be permitted to be conducted at one time.46 In addition, once an Auction has commenced, the Initiating Participant would not be permitted to cancel or modify either the CUBE Order or the Contra Order.47 would encourage competition among participants, thereby enhancing the potential for price improvement for the CUBE Order.52 The Exchange stated that any ATP Holder would be able to respond to the RFR, either as principal or as agent on behalf of customers, provided that the RFR Response was properly marked specifying price, size, and side of the G. Request for Responses, Response market.53 Proposed Rule 971.1NY Time Interval, Responses, and would introduce a new order type, the Unrelated Orders and Quotes That Are ‘‘GTX Order,’’ to serve as one way to Posted to the Consolidated Book respond to a CUBE Auction, designed Upon receipt of a valid CUBE Order solely for that purpose.54 A ‘‘GTX (i.e., the CUBE Order is not rejected), the Order’’ would be defined as a nonExchange would announce the CUBE routable order with a time-in-force Auction by disseminating an RFR to all contingency for the Response Time participants who subscribe to receive Interval and would be required to RFR messages, which, the Exchange specify price, size, and side of the stated, would be included in the data market.55 GTX Orders would not be feed from ArcaBook for options.48 As displayed to the Consolidated Book nor noted above, the RFR would identify the disseminated to any participants 56 following characteristics of a CUBE because, as explained by the Exchange, Order: The series, the side of the market, these orders would interact only with the size, and the initiating price. liquidity available during the Auction.57 Once the RFR is disseminated, ATP The minimum price increment for a Holders would be able to enter GTX Order would be one cent, responses to the Auction for the regardless of the MPV for the series duration of the CUBE Auction subject to the Auction.58 ATP Holders (‘‘Response Time Interval’’), which that submitted GTX Orders would be would last for a random period of time permitted to cancel them.59 between 500 and 750 milliseconds.49 The Exchange stated that the length of 52 The Exchange stated that in December 2013, to determine whether the CUBE Auction timer would the Response Time Interval would be provide sufficient time to respond to an RFR, the determined by the CUBE Auction Exchange asked ATP Holders that both subscribe to mechanism following the receipt of a ArcaBook and act as Market Makers on the valid CUBE Order and Exchange (‘‘Relevant ATP Holders’’) whether their firms ‘‘could respond to an Auction with a random contemporaneously with the duration of 500–750 milliseconds.’’ The Exchange dissemination of the RFR.50 of The Exchange stated that the use of an reported that, thethe 21 Relevant ATP Holders that responded to question, 100% (n=21) indicated undisclosed random Response Time that their firms could respond in this time frame. Thus, the Exchange stated that the CUBE Auction Interval of between 500 and 750 duration of at least 500 milliseconds, which the milliseconds would provide the CUBE Exchange noted is the mid-range of auction Auction with a functional difference to mechanisms at other market centers, would provide distinguish it from similar price a meaningful opportunity for participants on NYSE Amex to respond to an Auction while at the same improvement mechanisms offered by time facilitating the prompt execution of orders. See other exchanges.51 The Exchange Notice, 79 FR at 13715, n.29. remarked that the length of time allotted 53 See proposed Rule 971.1NY(c)(2)(C). on the CUBE Auction timer would 54 See proposed Rule 971.1NY(c)(2)(C)(i). 55 See proposed Rule 971.1NY(c)(2)(C)(i). For a provide ATP Holders with sufficient CUBE Order to buy (sell), a GTX Order priced time to submit RFR Responses and 45 See id. See also Notice, 79 FR at 13715 for an example illustrating the impact of auto-match limit on a CUBE Order. 46 See proposed Rule 971.1NY(c). 47 See id. The Exchange stated that this requirement reduces the potential for misuse of the CUBE Auction by ATP Holders that are not legitimately interested in making a bona fide trade in the CUBE Auction. See Notice, 79 FR at 13715. See also Amendment No. 2, supra note 4, which would revise the rule text to clarify that the Contra Order may not be cancelled or modified. 48 See supra note 10 for a description of ArcaBook. 49 See proposed Rule 971.1NY(c)(2). 50 See Notice, 79 FR at 13715. 51 See id. See also, ≤e.g., CBOE Rule 6.74A(b)(2)(A); PHLX Rule 1080(n)(ii)(B)(1); ISE Rule 723(c)(5)(I). PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 below (above) the lower (upper) bound of executions would be repriced to the lower (upper) bound of executions as specified in proposed Rule 971.1NY(b)(1). See proposed Rule 971.1NY(c)(2)(C)(i)(f). According to the Exchange, such repricing would ensure that GTX Orders eligible to participate in the Auction would not be excluded if they are priced more aggressively than the lower (upper) bound of execution. See Notice, 79 FR at 13716 for an example illustrating the repricing of a GTX Order. 56 See proposed Rule 971.1NY(c)(2)(C)(i)(a). 57 Any portion of a GTX Order that is not executed in the CUBE Auction would be cancelled at the conclusion of the Auction. See id. However, see infra notes 75–76 and accompanying text for a case in which a GTX Order would interact with an unrelated order that arrived on the Exchange on the CUBE Order’s side of the market. 58 See proposed Rule 971.1NY(c)(2)(C)(ii)(a). 59 See proposed Rule 971.1NY(c)(2)(C)(i)(d). E:\FR\FM\01MYN1.SGM 01MYN1 Federal Register / Vol. 79, No. 84 / Thursday, May 1, 2014 / Notices In addition, any unrelated orders and quotes received on the opposite side of the CUBE Order during the Response Time Interval and in the same series at the CUBE Order would be considered as RFR Responses that are eligible to participate in the Auction, provided that such unrelated orders and quotes are priced within the permissible range of executions, are not marked as GTX Orders, and are not marketable against the NBBO. The Exchange stated that considering these unrelated orders and quotes as RFR Responses—even if submitted coincidentally, as opposed to purposefully in response to an RFR— 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.60 Such opposite-side, unrelated orders and quotes would be posted to the Consolidated Book 61 and, if they are at the best RFR Response price at the conclusion of the Auction, they would participate in the execution of the CUBE Order.62 Unrelated orders and quotes would be able to participate in an Auction, however, only if priced in the MPV for the series in the CUBE Auction.63 Only CUBE Orders, GTX Orders and Contra Orders—which are specifically slated for the CUBE Auction—would be permitted to be priced in one cent increments, regardless of the MPV for that option.64 Thus, an order or quote 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. Unrelated orders and quotes arriving on the Exchange during the Response Time Interval on the same side of the market as the CUBE Order likewise would be posted on the Consolidated Book, provided that those orders and quotes do not cross the initiating price.65 If such an order or quote does cross the initiating price—i.e., if an order to buy (sell) is priced higher 60 See Notice, 79 FR at 13716. generally Rule 964NY(a) (‘‘The System shall display to Users all non-marketable limit orders in the Display Order Process, unless indicated otherwise’’). 62 Any portion of these unrelated orders or quotes remaining after the CUBE Order is executed would remain on the Consolidated Book and processed in accordance with Rule 964NY, the Exchange’s options priority and order allocation rules. See proposed Rule 971.1NY(c)(5)(C). 63 See proposed Rule 971.1NY(c)(2)(C)(ii)(c). 64 See id. 65 See generally Rule 964NY(a) (‘‘The System shall display to Users all non-marketable limit orders in the Display Order Process, unless indicated otherwise’’). tkelley on DSK3SPTVN1PROD with NOTICES 61 See VerDate Mar<15>2010 17:30 Apr 30, 2014 Jkt 232001 (lower) than the initiating price—it would cause the CUBE Auction to conclude early and the unrelated order would be then posted to the Consolidated Book.66 H. Conclusion of the CUBE Auction and Order Allocation Unless there is an early conclusion to the Auction, as described more fully below, the CUBE Auction would conclude at the end of the Response Time Interval 67 and the CUBE Order would be allocated among the participants in the Auction at the best prices as set forth in proposed Rule 971.1NY(c)(5), as follows: The Auction mechanism would determine whether the 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, thereby granting the CUBE Order the maximum amount of price improvement possible. When there are multiple RFR Responses at a given price, at each price level, any Customer orders resting on the Consolidated Book at the start of the CUBE Auction would have first priority, followed by Customer orders that arrived during the CUBE Auction as RFR Responses. The remaining contracts would be allocated among the RFR Responses at that price level on a pro rata basis in accordance with the size pro rata algorithm set forth in Rule 961.1NY(b)(3),68 subject, however, to the following: If sufficient interest in the CUBE Order remains after executing against Customer interest or better priced interest, the Contra Order then would 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 CUBE Auction) or (b) 50% of the size of the initial CUBE Order (if there is only one RFR Response to the CUBE Auction). The 66 See id. See also infra note 86 and accompanying text for a more detailed discussion of this provision. 67 See proposed Rule 971.1NY(c)(3). 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. 68 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. See Proposed Rule 971.1NY(c)(5). The Exchange stated that this encourages participation in the CUBE Auction (by not rejecting these RFR Responses) and assists in avoiding the opportunity for an ATP Holder to subvert the size pro rata allocation method by submitting outsized trading interest. See Notice, 79 FR at 13717. PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 24783 remaining contracts would then be allocated among the RFR Responses pursuant to the pro rata trading algorithm.69 If all RFR Responses were filled, any remaining CUBE Order contracts would be allocated to the Contra Order. As discussed above, an Initiating Participant can opt to guarantee the execution of a CUBE Order by specifying a single stop price, automatch or an auto-match limit price.70 Proposed Rule 971.1NY(c)(5)(B)(i)–(iii) sets forth the details of how an order is allocated in the case of each of these elections.71 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 met its allocation guarantee at a price below (above) the clean-up price, it would 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 were other RFR Responses at the clean-up price, the remaining CUBE Order contracts would 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 were no RFR Responses to the Auction and an auto-match feature is selected, the CUBE Order would execute against the Contra Order at the initiating price. I. Early Conclusion of a CUBE Auction Proposed Rule 971.1NY describes certain events that would cause a CUBE 69 The Exchange stated that the participation guarantee is a fair inducement in exchange for guaranteeing that the entire size the CUBE Order, for which the Initiating Participant is an agent, and is consistent with the rules of NYSE MKT and other option exchanges. See Notice, 79 FR at 13717. 70 See supra notes 35–45 and accompanying text. 71 See Notice, 79 FR at 13717–18 for examples illustrating trade allocations for guarantees with a single stop price, with auto-match and with automatch limit. E:\FR\FM\01MYN1.SGM 01MYN1 24784 Federal Register / Vol. 79, No. 84 / Thursday, May 1, 2014 / Notices Auction to conclude early (i.e., before the end of the Response Time Interval) and sets forth how the CUBE Order is to be allocated in each case. Pursuant to proposed Rule 971.1NY(c)(3), a trading halt in the affected series would result in the early conclusion of an Auction.72 In such case, the CUBE Order would execute according to the procedures set forth in proposed Rule 971.1NY(c)(5). Proposed Rule 971.1NY(c)(4) describes additional events where a CUBE Auction would conclude early. First, 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 according to the procedures set forth in proposed Rule 971.1NY(c)(5).73 The new CUBE Auction would proceed as described in proposed Rule 971.1NY(c). Second, if, during a CUBE Auction, the Exchange receives an unrelated order or quote on the 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 74) at the time of arrival, the CUBE Auction would conclude early and the CUBE Order would be executed according to the procedures for a full term auction set forth in proposed Rule 971.1NY(c)(5).75 In this circumstance, however, any GTX Orders that do not execute in the CUBE Auction would execute against the unrelated order or quote that caused the CUBE Auction to conclude early to the extent possible and would then cancel.76 Any contracts remaining from the unrelated order or quote would then be posted to the Consolidated Book and processed in accordance with the Rule 964NY.77 Third, a CUBE Auction would conclude early if, during the Auction, 72 See proposed Rule 971.1NY(c)(3). proposed Rule 971.1NY(c)(4)(A). 74 The Exchange’s rules provide that an order that has been designated as an order type that is not eligible to be routed away would either be placed on the Consolidated Book or cancelled if such order would lock or cross the NBBO. See Rule 964NY(c)(2)(E). The Exchange noted that, if an incoming non-routable order is marketable against the NBBO, but not the BBO, and by its terms, such order, e.g., an IOC Order, would cancel, 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 CUBE Auction. See Notice, 79 FR at 13719, n.40. 75 See proposed Rule 971.1NY(c)(4)(B). See also Notice, 79 FR at 13719 for an example illustrating the early conclusion of the Auction due to a same side order marketable against the NBBO at the time of arrival. The Exchange stated 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. 76 See proposed Rule 971.1NY(c)(4)(B). 77 See id. tkelley on DSK3SPTVN1PROD with NOTICES 73 See VerDate Mar<15>2010 17:30 Apr 30, 2014 Jkt 232001 the Exchange receives any RFR Response (that is, on the opposite side of the CUBE Order) that is marketable against the NBBO (or BBO, if a nonroutable order) at the time of arrival.78 The Auction would conclude early whether the RFR Response was a GTX Order or an unrelated order or quote that is a marketable limit order or a market order.79 However, the allocation would differ, as follows: • If the CUBE Auction concluded early because the Exchange received 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 in accordance with the procedures set forth in proposed Rule 971.1NY(c)(5). Contracts remaining, if any, from unrelated orders or quotes at the time the CUBE Auction concludes would be processed in accordance with Rule 964NY. Any unfilled GTX Orders would cancel.80 • If the opposite-side order that caused the CUBE Auction to conclude early was a market order, the allocation of the CUBE Order would vary, depending on how the Initiating Participant guaranteed the execution of the CUBE Order and what, if any, RFR Responses were received before the CUBE Auction concluded. D If the Initiating Participant selected auto-match and no RFR Responses had been received before the market order arrived that caused the CUBE Auction to conclude early, if the CUBE Order is to buy (sell), the CUBE Order would execute against the market order at the midpoint of the initiating price and the lower (upper) bound of the range of 78 See proposed Rule 971.1NY(c)(4)(C). The Exchange stated that early conclusion in such circumstances 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 Rule 971.1NY(c)(5), and thus would participate in the CUBE Auction consistent with its limit price and order instructions. See Notice, 79 FR at 13719. 79 The Exchange noted that, while the incoming order that is on the opposite side of the CUBE Order may be marketable against an NBBO that updated during the Response Time Interval, the fact that the NBBO updated during the Response Time Interval in of itself does not cause an early conclusion to the CUBE Auction. Id. See also id. at 13720 for an example illustrating the early conclusion of an Auction as a result of the arrival of an opposite-side limit order that was marketable against an updated NBBO. 80 See proposed Rule 971.1NY (c)(4)(C)(i). Regarding the cancellation of unfilled GTX Orders, see also supra note 57 and accompanying text. See also Notice, 79 FR at 13719–20 for examples illustrating the early conclusion of an Auction as a result of the arrival of an opposite-side marketable limit order. PO 00000 Frm 00118 Fmt 4703 Sfmt 4703 permissible executions.81 If no midpoint is possible, the execution would be rounded up (down) to the nearest whole penny toward the initiating price. Any unfilled size of the CUBE Order will then execute according to the procedures set forth in proposed Rule 971.1NY(c)(5).82 D If the Initiating Participant selected auto-match and other RFR Responses are received before the arrival of the market order that caused the CUBE 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. Any unfilled size of the CUBE Order would then execute according to the procedures set forth in proposed Rule 971.1NY(c)(5).83 D If the Initiating Participant selected a single stop price or auto-match limit to guarantee the execution of a CUBE Order to buy (sell) and a market order to sell (buy) caused the CUBE Auction to conclude early, 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. Any unfilled size of the CUBE Order would then execute according to the procedures set forth in proposed Rule 971.1NY(c)(5).84 81 See proposed Rule 971.1NY(c)(4)(C)(ii). See also Notice, 79 FR at 13720 for an example illustrating the early conclusion of an Auction due to the arrival of an opposite-side market order in a case where auto-match was selected and no RFR Responses had been received. The Exchange stated that rounding in the manner described 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. Id. 82 As discussed above, the Exchange stated that the CUBE Auction would be permitted to execute orders in the CUBE Auction as exceptions to TradeThrough Liability pursuant to Rule 991NY(b)(5). Accordingly, an opposite-side market order that arrives during the CUBE 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. See Notice, 79 FR at 13720, n.49. 83 See proposed Rule 971.1NY(c)(4)(C)(iii). See also Notice, 79 FR at 13721 for an example illustrating the early conclusion of an Auction as a result of the arrival of an opposite-side market order in a case where auto-match was selected and other RFR Responses were received. 84 See proposed Rule 971.1NY(c)(4)(C)(iv). See also Notice, 79 FR at 13721 for examples illustrating the early conclusion of an Auction as a result of the arrival of an opposite-side market order where the Initiating Participant had selected a single stop price or the auto-match limit option. E:\FR\FM\01MYN1.SGM 01MYN1 Federal Register / Vol. 79, No. 84 / Thursday, May 1, 2014 / Notices tkelley on DSK3SPTVN1PROD with NOTICES Fourth, the CUBE Auction also would conclude early upon the arrival of an unrelated, non-marketable quote or limit order on the same side as the CUBE Order that improves the CUBE Order’s initiating price.85 Specifically, if, during a CUBE Auction where the CUBE Order is to buy (sell), the Exchange receives such an 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 first execute against the RFR Response according to the procedures set forth in proposed Rule 971.1NY(c)(5).86 Any unfilled GTX Orders would be eligible to execute against the unrelated order or quote 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 traded against interest in the CUBE Auction would then be processed in accordance with Rule 964NY.87 Fifth, a CUBE Auction would conclude early when an All-or-None (‘‘AON’’) order is present on the same side as the CUBE Order. An AON order, whether it was resting on the book prior to an Auction or it arrived during Auction, would be permitted to trade only if sufficient size remained to fill the entire AON order after the CUBE Order was fully executed. If sufficient interest to fill an entire AON order was received during the Response Time Interval, the Auction would conclude early and the CUBE Order would be executed according to procedures set forth in proposed Rule 971.1NY(c)(5). After the Auction concluded, the Exchange would evaluate whether the AON could be executed.88 85 See proposed Rule 971.1NY(c)(4)(D). See also supra note 66 and accompanying text. 86 See proposed Rule 971.1NY(c)(5) regarding the allocation procedures of a full-term Auction, discussed above. The Exchange stated 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 CUBE 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. See Notice, 79 FR at 13716. 87 See Notice, 79 FR at 13722 for an example illustrating the early conclusion of an Auction due to a same-side order that creates a new BBO that improves the initiating price. The Exchange stated that early conclusion in this circumstance would ensure that the CUBE 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. Id. 88 See Notice, 79 FR at 13722 for an example illustrating the early conclusion of an Auction due to sufficient interest to fill a resting AON order. The Exchange stated that early conclusion in this VerDate Mar<15>2010 17:30 Apr 30, 2014 Jkt 232001 J. Conduct Inconsistent With Just and Equitable Principles of Trade The Exchange is proposing Commentary .02 to the proposed Rule to state 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 CUBE Auction process. The following would be considered inconsistent with just and equitable principles of trade: (1) An ATP Holder entering RFR Responses to a CUBE Auction for which the ATP Holder is the Initiating Participant; (2) an ATP Holder engaging in a pattern and practice of trading or quoting activity for the purpose of causing a CUBE Auction to conclude early; (3) the Initiating Participant breaking up an agency order into separate CUBE Orders for the purpose of gaining a higher allocation percentage; and (4) an ATP Holder engaging in a pattern or practice of sending multiple RFR Responses at the same time that exceed the size of the CUBE Order.89 K. Order Exposure Rule 935NY prohibits ATP Holders from executing as principal any orders they represent as agent unless (i) agency orders are first exposed on the Exchange for at least one second or (ii) the ATP Holder has been bidding or offering on the Exchange for at least one second prior to receiving an agency order that is executable against such bid or offer. According to the Exchange, Rule 935NY helps to ensure that orders are properly exposed to market participants, affording them reasonable time in which to participate in the execution of agency orders.90 The Exchange stated that the Response Time Interval, with a random length of between 500 and 750 milliseconds, would be of sufficient length 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.91 Accordingly, the Exchange’s proposal would amend Rule 935NY to state that a CUBE Order would not be subject to the one-second order exposure requirement of Rule 935NY. The Exchange stated that, circumstance would ensure that the CUBE 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. Id. 89 See also infra note 92 discussing Rule 935NY, Commentary .01. 90 See Notice, 79 FR at 13722. 91 See supra note 52. PO 00000 Frm 00119 Fmt 4703 Sfmt 4703 24785 consistent with Rule 935NY, Commentary .01, ATP Holders would be permitted to utilize the CUBE Auction only where there is a genuine intention to execute a bona fide transaction.92 L. Proposed Pilot Period for Auctions of Fewer Than 50 Contracts Under the proposal, proposed Rules 971.1NY(b)(1)(B), which relates to CUBE Auctions for fewer than 50 contracts, and 971.1NY(b)(8), which states that the minimum size for a CUBE Auction would be one contract, would be adopted for a pilot period effective for one year beginning on the approval date of the proposed rule change (‘‘Pilot Period’’).93 The Exchange stated that, during the Pilot Period, it would 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.94 92 See Notice, 79 FR at 13237. Rule 935NY, Commentary .01, states: ‘‘Rule 935NY prevents a[n ATP Holder] 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 [ATP Holder] was already bidding or offering on the book.’’ 93 See proposed Rule 971.1NY, Commentary .01. 94 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.; and (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- E:\FR\FM\01MYN1.SGM Continued 01MYN1 24786 Federal Register / Vol. 79, No. 84 / Thursday, May 1, 2014 / Notices tkelley on DSK3SPTVN1PROD with NOTICES The Exchange further states that any data that is submitted to the Commission will be provided on a confidential basis.95 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. See, e.g., Securities Exchange Act Release Nos. 53222 (February 3, 2006); 71 FR 7089 (February 10, 2006) (File No. SR–CBOE–2005–60); 63027 (October 1, 2010); 75 FR 62160 (October 7, 2010) (File No. SR–Phlx–2010–108); and 66871 (April 27, 2012) 77 FR 26323 (May 3, 2012) (File No. 10–206). 95 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 automatch 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 nonroutable 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. VerDate Mar<15>2010 17:30 Apr 30, 2014 Jkt 232001 M. Implementation The Exchange stated that it would 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 would be no later than 60 days following publication of the Trader Update announcing Commission approval. The Exchange stated that this implementation schedule would provide ATP Holders with adequate notice of the CUBE Auction and would allow ample time for ATP Holders to prepare their systems for participation in the CUBE Auction process, if such participation is desired. III. Discussion and Commission Findings After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange and, in particular, with Section 6(b) of the Act.96 In particular, the Commission finds that the proposed rule change is consistent with Sections 6(b)(5) of the Act,97 which Also, (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. 96 15 U.S.C. 78f(b). In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 97 15 U.S.C. 78f(b)(5). PO 00000 Frm 00120 Fmt 4703 Sfmt 4703 requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; and not be designed to permit unfair discrimination between customers, issuers, brokers or dealers. The Commission believes that approving the Exchange’s proposal to establish the CUBE Auction mechanism may increase competition among those options exchanges that offer similar mechanisms. The Commission further believes that allowing ATP Holders to enter orders into the CUBE Auction mechanism may provide additional opportunities for such orders to receive price improvement over the NBBO. The Exchange’s CUBE Auction mechanism is similar to electronic price improvement auction mechanisms available at other options exchanges.98 The features of the CUBE Auction are similar in many aspects to the features found in the price improvement mechanisms of other exchanges, including: The characteristics of the CUBE Order that are identified in the RFR; 99 the auto-match and auto-match limit options; 100 the participation guarantee allocated to the Initiating Participant; 101 early conclusions of the auction in specific circumstances, including trading halts 102 and sameside unrelated orders that create a BBO that crosses the initiating price; 103 and provisions regarding just and equitable principles of trade.104 The Commission notes that the initiating price would be equal to or better than the NBBO at the time of commencement of the CUBE Auction and that an ATP Holder that enters a 98 See supra note 6 and accompanying text. supra note 48 and accompanying text, and see, e.g., ISE Rule 723(c). 100 See supra notes 42–45 and accompanying text, and see, e.g., Phlx Rule 1080(n)(ii)(A)(1). 101 See supra notes 68–69 and accompanying text. Participation guarantees are a basic feature of electronic improvement mechanisms of all options exchanges that have them. 102 See supra note 72 and accompanying text, and see, e.g., CBOE Rule 6.74A(b)(2)(F) and Phlx Rule 1080(n)(ii)(B)(4). 103 See supra notes 85–87 and accompanying text, and see, e.g., Phlx Rule 1080(n)(ii)(B)(2), which sets forth a very similar provision. 104 See supra note 89 and accompanying text. All the exchanges with electronic price improvement mechanisms have similar rules. 99 See E:\FR\FM\01MYN1.SGM 01MYN1 tkelley on DSK3SPTVN1PROD with NOTICES Federal Register / Vol. 79, No. 84 / Thursday, May 1, 2014 / Notices CUBE Order in the CUBE Auction must submit a Contra Order for the full size of that CUBE Order.105 Once the CUBE Order and the Contra Order are submitted to the Auction, they may not be cancelled or modified.106 Therefore, a CUBE Order submitted to the CUBE Auction, regardless of its size, would be guaranteed an execution price of at least NBBO at the time the CUBE Auction commences and, moreover, would be given an opportunity for price improvement beyond the NBBO by being exposed to ATP Holders during the CUBE Auction. The CUBE Auction mechanism also provides for responses to the RFR on behalf of all types of interest, including unrelated quotes and orders as well as GTX Orders that are specifically designated as responses. The Commission believes that this feature provides the potential for a CUBE Order to be exposed to a competitive auction. Further, when the Exchange receives a properly designated CUBE Order for CUBE Auction processing, it will send to all subscribers of its ArcaBook data feed, an RFR detailing the series, side and size of the CUBE Order and the initiating price. This RFR message, available to any ArcaBook subscriber, is designed to help attract responses to a CUBE Auction, which may result in a competitive CUBE Auction and ultimately better prices for the CUBE Order to the extent that the RFR message is successful in attracting competitive responses. The RFR will be subject to a Response Time Interval for a random period of time between 500 and 750 milliseconds. In December 2013, to determine whether the CUBE Auction timer would provide sufficient time to respond to an RFR, the Exchange asked Relevant ATP Holders whether their firms ‘‘could respond to an Auction with a random duration of 500–750 milliseconds.’’ 107 Of the 21 Relevant ATP Holders that responded to the question, all indicated that their firms could respond in this time frame. Based on NYSE MKT’s statements, the Commission believes that the random Response Time Interval could facilitate the prompt execution of CUBE Orders in the CUBE Auction, while providing market participants with an opportunity to compete for exposed bids and offers. The Commission notes that it has previously approved auction mechanisms with a 105 Rule 971.1NY(a). 971.1NY(c). See also Amendment No. 2. 107 See supra note 52. See also Notice, 79 FR at 13715, n.29. 106 Rule VerDate Mar<15>2010 17:30 Apr 30, 2014 Jkt 232001 random time feature 108 and with a 500 millisecond auction response period.109 At the conclusion of a CUBE Auction, Customer orders resting on the Consolidated Book have first priority to trade against the CUBE Order, followed by Customer orders that arrived during the CUBE Auction as RFR Responses. After execution of Customer responses and orders, the Initiating Participant may be allocated a limited percentage of the CUBE Order, not to exceed 40% of the contracts at the applicable price point (except that, if only one response matches the Initiating Participant’s single price submission at the best price, then the Initiating Participant may be allocated up to 50% of the order). The Commission notes that the established principles of priority of interest contained in Rule 964NY would apply to the CUBE Auction. The Commission believes that the proposed matching algorithm set forth in proposed Rule 971.1NY is sufficiently clear regarding how orders are to be allocated in the CUBE Auction and does not raise any novel issues. Under the Exchange’s proposal, there would be no minimum size requirement for orders entered into the CUBE for a pilot period expiring on April 25, 2015.110 The Commission believes that approval of these provisions on a pilot basis is appropriate and that the Exchange’s proposal should provide small customer orders with the opportunity for price improvement in a manner that is consistent with the Act. The Commission expects that the data submitted to the Commission by the Exchange will be used by both the Exchange and the Commission staff to analyze whether there is meaningful competition for all size orders and that there is an active and liquid market functioning on the Exchange outside of 108 See Securities Exchange Act Release No. 53222 (February 3, 2006), 71 FR 7089 (February 10, 2006) (approval of File No. SR–CBOE–2005–60, CBOE’s proposal to adopt AIM, which included a random time period of three to five seconds for exposure of orders entered into that mechanism). See also Securities Exchange Act Release No. 58088 (July 2, 2008), 73 FR 39747 (July 10, 2008) (approval of File No. SR–CBOE–2008–16, which eliminated the random time period and established an exposure period of one second). 109 See ISE Rule 723(c)(5)(i). See also Securities Exchange Act Release No. 68849 (February 6, 2013), 78 FR 9973 (February 12, 2013) (approval of File No. SR–ISE–2012–100, ISE’s proposal to adopt a 500 millisecond response period). 110 Rule 971.1NY(b)(1)(B), which relates to CUBE Auctions for fewer than 50 contracts, and Rule 971.1NY(b)(8), which states that the minimum size for a CUBE Auction would be one contract. See also BOX Rule 7150, IM–7150–1, CBOE Rule 6.74A, Interpretations and Policies .03, ISE Rule 723, Supplementary Material .03, and Phlx Rule 1080(n)(i)(C) (establishing pilot programs regarding the no minimum size requirement for orders entered into price improvement auctions). PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 24787 the CUBE Auction. In addition, data submitted by the Exchange with respect to situations in which the CUBE Auction is terminated prematurely will afford both the Commission and the Exchange an opportunity to analyze the impact of early terminations and unrelated orders on the CUBE Auction.111 The Commission will evaluate the CUBE Auction during the Pilot Period to determine whether it would be beneficial to customers and to the options market as a whole to approve any proposal requesting permanent approval to permit orders of fewer than 50 contracts to be submitted to the CUBE Auction . IV. Section 11(a) of the Act Section 11(a)(1) of the Act 112 prohibits a 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 person exercises discretion (collectively, ‘‘covered accounts’’), unless an exception applies. Section 11(a)(1) and the rules thereunder contain a number of exceptions for principal transactions by members and their associated persons, including the exceptions set forth in Rule 11a2–2(T) under the Act.113 The Exchange has represented that it has analyzed its rule proposed hereunder, and has determined that they are consistent with Section 11(a) of the Act and rules thereunder. For the reason set forth below, the Commission believes that the proposed CUBE Auction rules are consistent with the requirements of Section 11(a) of the Act and the rules thereunder. A. Rule 11a2–2(T) Under the Act (‘‘Effect Versus Execute’’ Rule) Rule 11a2–2(T) under the Act,114 known as the ‘‘effect versus execute’’ rule, provides exchange members with an exception from the Section 11(a)(1) prohibition. Rule 11a2–2(T) permits an exchange member, subject to certain conditions, to effect transactions for covered accounts by arranging for an unaffiliated member to execute the transactions on the exchange. To comply with the conditions of Rule 11a2–2(T), a member: (1) May not be affiliated with the executing member; (2) must transmit the order from off the exchange floor; (3) may not participate in the execution of the transaction once it has been transmitted to the member 111 See supra notes 94–95 and accompanying text. U.S.C. 78k(a)(1). 113 17 CFR 240.11a2–2(T). 114 Id. 112 15 E:\FR\FM\01MYN1.SGM 01MYN1 24788 Federal Register / Vol. 79, No. 84 / Thursday, May 1, 2014 / Notices tkelley on DSK3SPTVN1PROD with NOTICES performing the execution; 115 and (4) 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. 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. 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 the requirement is satisfied when automated exchange facilities, such as MKT’s 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 their orders after transmitting them to the Exchange.116 The Exchange represents that the design of the CUBE Auction ensures that ATP Holders do not have any special or unique trading advantages in the handling of their orders after transmission. Based on the Exchange’s representations, the Commission believes that the CUBE Auction’s rules satisfy this requirement. Second, Rule 11a2–2(T) requires orders for covered accounts be transmitted from off the exchange floor. The Exchange represents that orders for covered accounts sent to the CUBE Auction from off-floor ATP Holders will be transmitted from remote terminals directly to the CUBE Auction by electronic means. In the context of other automated trading systems, the Commission has found that the off-floor transmission requirement is met if a 115 The member may, however, participate in clearing and settling the transaction. See Securities Exchange Act Release No. 14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) (regarding the Designated Order Turnaround System of the New York Stock Exchange (‘‘1978 Release’’)). 116 In considering the operation of automated execution systems operated by an exchange, the Commission has noted that, while there is no independent executing exchange member, the execution of an order is automatic once it has been transmitted into each 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 Securities Exchange Act Release No. 15533 (January 29, 1979), 44 FR 6084 (January 31, 1979) (regarding the American Stock Exchange’s Post Execution Reporting System and 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’’)). VerDate Mar<15>2010 17:30 Apr 30, 2014 Jkt 232001 covered account order is transmitted from a remote location directly to an exchange’s floor by electronic means.117 With respect to such orders transmitted electronically from remote terminals directly to the CUBE Auction, the Commission believes that the CUBE Auction’s rules satisfy the off-floor transmission requirement.118 The Commission believes that, based on the foregoing, the proposal satisfies the offfloor transmission requirement for the purposes of ‘‘effect versus execute’’ rule. Third, Rule 11a2–2(T) requires that the member not participate in the execution of its order once it has been transmitted to the member performing the execution. 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. The Exchange states that, 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.119 Accordingly, the Commission believes that an ATP Holder does not participate in the execution of an order submitted into the CUBE Auction. Based on the Exchange’s representations, the Commission believes that the proposal satisfies the 117 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); the 1979 Release; and the 1978 Release. 118 The Exchange further represents that there may be instances of orders for a covered account that may be sent by an off-floor ATP Holder to an unaffiliated Floor Broker for entry into the CUBE Auction mechanism. The Exchange represents that at the current time, Exchange-sponsored Floor Broker systems are not enabled to accept orders into the CUBE Auction mechanism from Floor Brokers. The Exchange further represents that, if a Floor Broker were to gain access to the CUBE Auction mechanism via a third-party system, that Floor Broker may not rely on any exceptions found in Section 11(a) of the Act or rules thereunder to 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. See Amendment No. 2, supra note 4. 119 The Exchange represents that the Initiating Participant may not cancel or modify a CUBE Order once a CUBE Auction has started. See proposed Rule 971.1NY(c). PO 00000 Frm 00122 Fmt 4703 Sfmt 4703 non-participation requirement of Rule 11a2–2(T). Fourth, 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).120 The Exchange recognizes that ATP Holders trading for covered accounts over which they exercise investment discretion must comply with this condition to rely on the Rule’s exception. The Exchange represents that it will enforce this requirement pursuant to its obligation under Section 6(b)(1) of the Act to enforce compliance with the federal securities laws. V. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No. 2 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 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 120 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 person 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. See 17 CFR 240.11a2–2(T)(d). 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’’). E:\FR\FM\01MYN1.SGM 01MYN1 Federal Register / Vol. 79, No. 84 / Thursday, May 1, 2014 / Notices tkelley on DSK3SPTVN1PROD with NOTICES comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/rules/ sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make publicly available. All submissions should refer to File Number SR– NYSEMKT–2014–17 and should be submitted on or before May 22, 2014. VI. Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 2 The Commission finds good cause for approving the proposed rule change, as amended by Amendment No. 2, prior to the 30th day after the date of publication of notice in the Federal Register. Amendment No. 2: (1) Clarified that Exchange-sponsored Floor Broker systems are not enabled to accept orders into the CUBE Auction mechanism from Floor Brokers; (2) revised the rule text to clarify that unrelated quotes and orders will never trade through their limit prices; and (3) revised the rule text to clarify that the Contra Order may not be cancelled or modified. As to the first item, Amendment No. 2 provides additional clarity in the discussion concerning the analysis of the original proposal’s compliance with the requirements of Section 11(a) of the Act. As to the second item, Amendment No. 2 merely clarifies the rule text. As to the third item, Amendment No. 2 merely conforms the rule text to the description of the limitation in the Notice. The CUBE Auction will function in a manner substantially similar to that described in the Notice and Amendment No. 2 simply provides additional clarity regarding a few features of the proposal. VerDate Mar<15>2010 17:30 Apr 30, 2014 Jkt 232001 VII. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,121 that the proposed rule change, as modified by Amendment No. 2 (SR–NYSEMKT– 2014–17) is approved on an accelerated basis, except that (1) paragraphs (b)(1)(B) and (b)(8) of Rule 971.1NY are approved on a pilot basis until April 25, 2015; and (2) there shall be no minimum size requirements for orders entered into the CUBE Auction for a pilot period expiring on April 25, 2015. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.122 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–09921 Filed 4–30–14; 8:45 am] BILLING CODE P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–72028; File No. SR– NYSEArca–2014–42] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of Shares of Schwab Active Short Duration Income ETF; Schwab TargetDuration 2-Month ETF; Schwab TargetDuration 9-Month ETF; and Schwab TargetDuration 12-Month ETF Under NYSEArca Equities Rule 8.600 April 25, 2014. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that on April 14, 2014, NYSE Arca, Inc. (‘‘Exchange’’ or ‘‘NYSE Arca’’) 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 Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to list and trade shares (‘‘Shares’’) of the following under NYSE Arca Equities Rule 8.600, which governs the listing and trading of 121 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 15 U.S.C. 78a. 3 17 CFR 240.19b–4. 122 17 PO 00000 Frm 00123 Fmt 4703 Sfmt 4703 24789 Managed Fund Shares 4 on the Exchange: Schwab Active Short Duration Income ETF; Schwab TargetDuration 2-Month ETF; Schwab TargetDuration 9-Month ETF; and Schwab TargetDuration 12-Month ETF (each a ‘‘Fund’’ and collectively, the ‘‘Funds’’). 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 the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to list and trade shares (‘‘Shares’’) of the following under NYSE Arca Equities Rule 8.600, which governs the listing and trading of Managed Fund Shares 5 on the 4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a–1) (‘‘1940 Act’’) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies. In contrast, an open-end investment company that issues Investment Company Units, listed and traded on the Exchange under NYSE Arca Equities Rule 5.2(j)(3), seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index, fixed income securities index or combination thereof. 5 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a–1) (‘‘1940 Act’’) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies. In contrast, an open-end investment company that issues Investment Company Units, listed and traded on the Exchange under NYSE Arca Equities Rule 5.2(j)(3), seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index, fixed income securities index or combination thereof. E:\FR\FM\01MYN1.SGM 01MYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 79, Number 84 (Thursday, May 1, 2014)]
[Notices]
[Pages 24779-24789]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-09921]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72025; File No. SR-NYSEMKT-2014-17]


Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of 
Amendment No. 2 and Order Granting Accelerated Approval of a Proposed 
Rule Change, as Modified by Amendment No. 2, Adopting Rule 971.1NY for 
an Electronic Price Improvement Auction for Single-Leg Options Orders

April 25, 2014.

I. Introduction

    On February 21, 2014, NYSE MKT LLC (``Exchange'' or ``NYSE MKT'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
adopt new Rule 971.1NY (``Rule 971.1NY'' or ``Rule'') to provide for an 
electronic crossing mechanism with a price improvement auction for 
options trading on the Exchange, to be referred to as the Customer Best 
Execution Auction (``CUBE Auction'' or ``Auction''). The proposal also 
would make related changes to certain Exchange rules to accommodate the 
new

[[Page 24780]]

CUBE Auction. The proposed rule change was published for comment in the 
Federal Register on March 11, 2014.\3\ The Commission received no 
comments regarding the proposal. On April 21, 2014, the Exchange filed 
Amendment No. 1 to the proposed rule change. On April 23, 2014, the 
Exchange withdrew Amendment No. 1 and filed Amendment No. 2 to the 
proposed rule change.\4\ This order approves the proposed rule change, 
as modified by Amendment No. 2, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 71655 (March 5, 
2014), 79 FR 13711 (``Notice'').
    \4\ The Exchange withdrew Amendment No. 1 due to a technical 
error in the amendment. In Amendment No. 2, the Exchange clarified 
that Exchange-sponsored Floor Broker systems are not enabled to 
accept orders into the CUBE Auction mechanism from Floor Brokers; 
(2) revised the rule text to clarify that unrelated quotes and 
orders will never trade through their limit prices; and (3) revised 
the rule text to clarify that the Contra Order may not be cancelled 
or modified. Amendment No. 2 has been placed in the public comment 
file for SR-NYSEMKT-2014-17 at https://www.sec.gov/comments/sr-nysemkt-2014-17/nysemkt201417.shtml (see letter from Janet 
McGinness, EVP, Legal, NYSE MKT, to Secretary, Commission, dated 
April 23, 2014) and also is available on the Exchange's Web site at 
https://www.nyse.com/nysenotices/nyseamex/rule-filings/pdf.action;jsessionid=0C79EAD580B05432B779CC2C14D4CDC2?file--no=SR-
NYSEMKT-2014-17&seqnum=3.
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II. Description of the Proposal

    Proposed Rule 971.1NY would provide for an electronic price 
improvement auction for single leg options orders. The CUBE Auction 
would be available to Amex Trading Permit Holders (``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).\5\ In the 
Notice, the Exchange stated that the CUBE Auction would operate in a 
manner consistent with--but not identical to--the operation of 
electronic price improvement auctions available on other options 
markets.\6\ The Exchange stated that 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 and limit 
orders sent to the Exchange are placed and reside as a file on the NYSE 
Amex System (``System'').\7\
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    \5\ See Notice, 79 FR at 13711. See also Amendment No. 2, supra 
note 4. In addition to utilizing the CUBE Auction, floor-based ATP 
Holders would be permitted to continue to use existing floor-based 
crossing rules. See Notice, 79 FR at 13711.
    \6\ See Chicago Board Options Exchange, Inc. (``CBOE'') Rule 
6.74A--Automated Improvement Mechanism (``AIM''); NASDAQ OMX PHLX, 
INC. (``PHLX'') Rule 1080(n)--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''). NYSE MKT noted that the AIM, 
PIXL, PIP and PIM have features similar to the CUBE Auction 
including: (a) Providing the opportunity for price improvement; (b) 
delineating an exposure period for the 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. See Notice, 79 FR at 13711, n.4.
    \7\ See Notice, 79 FR at 13711-12.
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    Under proposed Rule 971.1NY(a), an ATP Holder would be able to 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 (``CUBE 
Order'') through the CUBE Auction. The ATP Holder that submits the CUBE 
Order (``Initiating Participant'') would agree to guarantee the 
execution of the CUBE Order at a specified price (``single stop 
price'') by submitting a contra-side order (``Contra Order'') 
representing principal interest or interest that it has solicited to 
trade with the CUBE Order. In lieu of a specifying a stop price, the 
Initiating Participant could utilize the auto-match or auto-match limit 
features of Rule 971.1NY(c)(1) (discussed below). The Initiating 
Participant's manner of guaranteeing the CUBE Order and the price(s) 
\8\ at which the CUBE Order is stopped would not be displayed. The 
Exchange stated that, although the Contra Order would guarantee the 
CUBE Order an execution, the purpose of the CUBE 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.\9\
---------------------------------------------------------------------------

    \8\ When the Initiating Participant utilizes the auto-match or 
auto-match limit features, there would be no single price at which 
the CUBE Order is stopped.
    \9\ See Notice, 79 FR at 13712. The proposal also would amend 
Rule 900.2NY(18A) to provide that, for purposes of the CUBE Auction, 
Professional Customers as defined in that rule would be treated as 
broker-dealers. The Exchange stated that its proposed treatment of 
Professional Customers as broker-dealers for purposes of the CUBE 
Auction is consistent with the rules of the CBOE. See CBOE Rule 
1.1(ggg). Further, the proposal would make a technical, non-
substantive amendment to Rule 900.2NY(18A) that is unrelated to the 
CUBE Auction proposal and also would add a new provision to Rule 
935.NY to provide an exception from the order exposure requirement 
if the CUBE Auction is utilized.
---------------------------------------------------------------------------

A. Initiating Price

    As set forth in Rule 971.1NY(a), an Auction begins with an 
initiating price, which would be announced to all ATP Holders who 
subscribe to receive the Request for Response (``RFR'') messages that 
are sent by the Exchange over ArcaBook \10\ upon receipt of a CUBE 
Order.\11\ In addition to the initiating price, the RFR would identify 
the series, side of market, and size of the CUBE Order.\12\ For a CUBE 
Order to buy (sell), the initiating price would be the lower (higher) 
of the CUBE Order's limit price or the National Best Offer (``NBO'') 
(National Best Bid) (``NBB''),\13\ except as provided for in proposed 
paragraph (b)(1)(B) of the Rule (discussed below).\14\ The initiating 
price of the CUBE Order, as well as the Contra Order and any responsive 
GTX Orders (discussed below) could be priced in one cent increments, 
regardless of the Minimum Price Variation (``MPV'') applicable to the 
series.\15\
---------------------------------------------------------------------------

    \10\ ArcaBook is a proprietary data feed offered by the Exchange 
and is available to anyone (including all ATP Holders) by 
subscription. The Exchange represents that 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, would have 
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).
    \11\ See proposed Rule 971.1NY(c)(2), discussed further below.
    \12\ See id.
    \13\ See proposed Rule 971.1NY(a).
    \14\ See proposed Rule 971.1NY(b)(1). See also Notice, 79 FR at 
13712 for examples illustrating the initiating price.
    \15\ See proposed Rule 971.1NY(b)(7). See also Notice, 79 FR at 
13712 for an example illustrating the pricing increments and see 
infra notes 62-63 and accompanying text regarding unrelated orders 
arriving on the Exchange on the opposite side of the CUBE Order, 
which would be permitted to participate in an Auction but only if 
submitted in the MPV for the series.
---------------------------------------------------------------------------

B. Permissible Range of Executions

    At the conclusion of the CUBE Auction, the CUBE Order would be 
executed at a price or prices within a permissible range of executions, 
as specified in proposed Rule 971.1NY(b)(1).\16\ A CUBE Order to buy 
(sell) generally would have a 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) of the Rule, tighter ranges of executions would 
apply when there is Customer interest \17\ in the BBO for orders of 50 
contracts or more or for when there are orders for fewer than 50 
contracts,\18\ as follows:
---------------------------------------------------------------------------

    \16\ See infra Section III.0. for a discussion of the 
application of exceptions to Rule 991.NY (the Exchange's Trade 
Through rule) in the context of a CUBE Auction.
    \17\ For purposes of the proposed Rule, the term ``customer'' 
(when capitalized) means an individual or organization that is not a 
broker-dealer, as set forth in Rule 900.2NY(18).
    \18\ See 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

[[Page 24781]]

(upper) bound of executions would be the higher (lower) of the BB plus 
one cent (BO minus one cent) or the NBB (NBO).\19\ If the CUBE Order to 
buy (sell) is for fewer than 50 contracts, the upper bound of 
executions would 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 would be the higher (lower) of the 
NBB (NBO) or the BB plus one cent (BO minus one cent).\20\
---------------------------------------------------------------------------

    \19\ See proposed Rule 971.1NY(b)(1)(B).
    \20\ See also Notice, 79 FR at 13713 for examples illustrating 
the initiating price and the permissible ranges of executions for 
various potential CUBE Orders. As discussed in further detail below, 
the provision concerning a CUBE Order for fewer than 50 contracts 
was proposed by NYSE MKT on a pilot basis. The Exchange stated that 
this is consistent with how electronic price improvement mechanisms 
of other markets operate, citing to CBOE Rule 6.74A Interpretation 
and Policies .03; PHLX Rule 1080(n)(vii); ISE Rule 723 Supplementary 
Material .03; and BOX IM-7150-1. Id.
---------------------------------------------------------------------------

    An added stipulation regarding the initiation of a CUBE Auction 
relates to the Exchange's ``Trade Collar Protection'' rules, which are 
utilized to mitigate the risk of advancing too far through the 
Consolidated Book during periods of increased volatility or reduced 
liquidity.\21\ A Marketable Order (as defined in Rule 967NY(a)(1)) held 
at a Trading Collar (as defined in Rule 967NY(a)(2)) represents 
interest that is eligible to trade at a specific price, even though 
that price is not displayed. The Exchange determined that such orders 
must be taken into consideration in determining the range of 
permissible executions in a CUBE Auction.
---------------------------------------------------------------------------

    \21\ See Rules 967NY(a)(1) and 967NY(a)(4)(A).
---------------------------------------------------------------------------

    Thus, under the proposal, 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 
would be narrowed to ensure the priority of the collared order(s). 
Pursuant to proposed Rule 971.1NY(b)(1)(D), if at the time the CUBE 
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.\22\
---------------------------------------------------------------------------

    \22\ See Rule 967NY(a)(2).
    See also Notice, 79 FR at 13713 for an example illustrating 
Trade Collar Protection.
---------------------------------------------------------------------------

    A CUBE Order, once accepted, would never execute outside the range 
of permissible executions and would never trade through its own limit 
price nor would unrelated quotes and orders that participate in the 
CUBE Auction trade through their own limit price.\23\
---------------------------------------------------------------------------

    \23\ See Notice, 79 FR at 13714. See also Amendment No. 2, supra 
note 4.
---------------------------------------------------------------------------

C. Time of Execution and Duration of the CUBE Auction

    Proposed Rule 971.1NY(b) would set forth that the time at which the 
CUBE Auction is initiated would be considered the time of execution for 
the CUBE Order.\24\ Thus, the Exchange stated, even though the 
execution would print after the CUBE Auction has completed, the CUBE 
Auction would qualify for the exception to the general prohibition 
against Trade-Throughs for stopped orders.\25\ Similarly, according to 
the Exchange, because the CUBE Auction would have a maximum duration of 
750 milliseconds (as discussed below), to the extent that the NBBO may 
improve during the Auction, the CUBE Auction also would qualify for the 
exception to Trade-Through liability for transactions within one second 
prior to execution of the transaction.\26\
---------------------------------------------------------------------------

    \24\ The Exchange stated that, as a result, even though the 
execution would print after the CUBE Auction has completed, the CUBE 
Auction would qualify for an exception to the general prohibition 
against Trade-Throughs of the NBBO, pursuant to 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''). Similarly, because the 
CUBE Auction would have a maximum duration of 750 milliseconds (as 
discussed below), to the extent that the NBBO may improve during the 
Auction, the Exchange stated that the CUBE Auction also would 
qualify for an exception to Trade-Through liability, pursuant to 
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''). The 
Exchange stated that the proposed CUBE Auction is consistent with 
how the electronic price improvement auctions of other markets 
operate. See, e.g., CBOE Rule 6.74A; PHLX Rule 1080(n); BOX Rule 
7150; ISE Rule 723.
    \25\ See Rule 991NY(b)(9).
    \26\ See Rule 991NY(b)(5).
---------------------------------------------------------------------------

D. Causes for Rejection of a CUBE Order

    Rule 971.1NY(b) sets forth several instances in which a CUBE Order 
would be ineligible to commence an Auction and would be rejected along 
with its accompanying Contra Order. The Auction will reject CUBE Orders 
that are submitted to buy (sell) with a limit price below (above) the 
lower (upper) bound of the permissible range of executions; \27\ and 
those that are submitted before the opening of trading; \28\ during the 
final second of the trading session; \29\ when the BBO is one cent wide 
if the CUBE Order is for fewer than 50 contracts; \30\ and when the 
NBBO is crossed.\31\
---------------------------------------------------------------------------

    \27\ See proposed Rule 971.1NY(b)(2). See also Notice, 79 FR at 
13713 for an example illustrating such a case. The Exchange stated 
that 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. Id. at 13713-
14.
    \28\ See proposed Rule 971.1NY(b)(4). The Exchange stated that 
it is appropriate to reject such CUBE Orders because a CUBE Order is 
deemed executed at the time of entry, and any CUBE Orders entered 
before the opening of trading would not be able to execute. See 
Notice, 79 FR at 13714.
    \29\ See proposed Rule 971.1NY(b)(5). The Exchange stated that, 
as the length of the CUBE Auction would be at least 500 
milliseconds, it is 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 completed. See Notice, 79 FR at 
13714.
    \30\ See proposed Rule 971.1NY(b)(6). The Exchange stated that 
it is appropriate to reject CUBE Orders in such scenarios because 
such orders would not be able to meet the permissible range of 
executions. See Notice, 79 FR at 13714.
    \31\ See proposed Rule 971.1NY(b)(9). The Exchange stated that 
this is appropriate because the Exchange would not be able to 
determine a permissible range of executions if the NBBO is crossed. 
See Notice, 79 FR at 13714.
---------------------------------------------------------------------------

E. Price Increments and Minimum Size

    As noted above, CUBE Orders and Contra Orders would be permitted to 
be entered in one cent increments regardless of the MPV of the series 
being traded.\32\ Contra Orders may be priced in such increments when 
the Initiating Participant elects to submit a single stop price or the 
auto-match limit price.\33\ In addition, the minimum size requirement 
for a CUBE Order is one contract.\34\
---------------------------------------------------------------------------

    \32\ See proposed Rule 971.1NY(b)(7).
    \33\ Id. ``Single stop price'' and ``auto-match limit'', as well 
as a third option, ``auto-match'', are discussed in Section III.0., 
infra.
    \34\ See proposed Rule 971.1NY(b)(8). As discussed in Section 
III.0., infra, CUBE Orders for fewer than 50 contracts would be 
subject to a pilot program.
---------------------------------------------------------------------------

F. Initiation of the CUBE Auction Process

    To initiate a CUBE Auction, the Initiating Participant would be 
permitted to 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.'' \35\
---------------------------------------------------------------------------

    \35\ See proposed Rule 971.1NY(c)(1).
---------------------------------------------------------------------------

    The Initiating Participant may elect to specify a single stop 
price, at which it would participate in the CUBE Auction at a single 
price only, regardless of the prices of other responses to the CUBE 
Auction. For a CUBE Order to buy (sell), an Initiating Participant 
would be permitted to specify a single stop price that is at or below 
(above) the initiating price of the CUBE Auction.\36\
---------------------------------------------------------------------------

    \36\ See proposed Rule 971.1NY(c)(1)(A).

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

[[Page 24782]]

    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 
would be repriced to the lower (upper) bound (i.e., the best-priced 
interest on the opposite side of the CUBE Order).\37\ In this instance, 
the stop price is below the lower bound of permissible execution 
prices, and thus, the Exchange explains, the execution could be priced 
back to within the permissible execution range.\38\ However, a stop 
price specified for a CUBE Order to buy (sell) that is above (below) 
the initiating price would not be eligible to initiate a CUBE 
Auction.\39\ The Exchange explains that, because in such an instance, 
the stop price is inferior to the pre-existing trading interest, it 
would not result in an execution within the permissible range.\40\ Both 
the CUBE Order and the Contra Order would be rejected.\41\
---------------------------------------------------------------------------

    \37\ See id. See also infra note 55 for the Exchange's 
explanation of this provision.
    \38\ See Notice, 79 FR at 13714.
    \39\ See proposed Rule 971.1NY(c)(1)(A).
    \40\ See Notice, 79 FR at 13714-15.
    \41\ See Notice, 79 FR at 13715 for an example illustrating the 
impact of various single stop prices on a CUBE Order.
---------------------------------------------------------------------------

    The Initiating Participant may elect the ``auto-match'' option, 
which would automatically match both the price and size of all RFR 
Responses.\42\ Accordingly, the Initiating Participant could 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.\43\
---------------------------------------------------------------------------

    \42\ See proposed Rule 971.1NY(c)(1)(B). See Section III.0., 
infra, for a discussion of RFR Responses.
    \43\ See id. See also Notice, 79 FR at 13715 for an example 
illustrating the impact of auto-match on a CUBE Order.
---------------------------------------------------------------------------

    The Initiating Participant may elect the ``auto-match limit'' 
option, which for a CUBE Order to buy (sell) would automatically match 
the price and size of all RFR Responses at each price level that is 
lower (higher) than the initiating price down (up) to a specified limit 
price, referred to as the ``auto-match limit price.'' \44\ 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.\45\
---------------------------------------------------------------------------

    \44\ See proposed Rule 971.1NY(c)(1)(C).
    \45\ See id. See also Notice, 79 FR at 13715 for an example 
illustrating the impact of auto-match limit on a CUBE Order.
---------------------------------------------------------------------------

    Only one Auction would be permitted to be conducted at one 
time.\46\ In addition, once an Auction has commenced, the Initiating 
Participant would not be permitted to cancel or modify either the CUBE 
Order or the Contra Order.\47\
---------------------------------------------------------------------------

    \46\ See proposed Rule 971.1NY(c).
    \47\ See id. The Exchange stated that this requirement reduces 
the potential for misuse of the CUBE Auction by ATP Holders that are 
not legitimately interested in making a bona fide trade in the CUBE 
Auction. See Notice, 79 FR at 13715. See also Amendment No. 2, supra 
note 4, which would revise the rule text to clarify that the Contra 
Order may not be cancelled or modified.
---------------------------------------------------------------------------

G. Request for Responses, Response Time Interval, Responses, and 
Unrelated Orders and Quotes That Are Posted to the Consolidated Book

    Upon receipt of a valid CUBE Order (i.e., the CUBE Order is not 
rejected), the Exchange would announce the CUBE Auction by 
disseminating an RFR to all participants who subscribe to receive RFR 
messages, which, the Exchange stated, would be included in the data 
feed from ArcaBook for options.\48\ As noted above, the RFR would 
identify the following characteristics of a CUBE Order: The series, the 
side of the market, the size, and the initiating price.
---------------------------------------------------------------------------

    \48\ See supra note 10 for a description of ArcaBook.
---------------------------------------------------------------------------

    Once the RFR is disseminated, ATP Holders would be able to enter 
responses to the Auction for the duration of the CUBE Auction 
(``Response Time Interval''), which would last for a random period of 
time between 500 and 750 milliseconds.\49\ The Exchange stated that 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.\50\
---------------------------------------------------------------------------

    \49\ See proposed Rule 971.1NY(c)(2).
    \50\ See Notice, 79 FR at 13715.
---------------------------------------------------------------------------

    The Exchange stated 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.\51\ 
The Exchange remarked that the length of time allotted on the CUBE 
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.\52\
---------------------------------------------------------------------------

    \51\ See id. See also, e.g., CBOE Rule 
6.74A(b)(2)(A); PHLX Rule 1080(n)(ii)(B)(1); ISE Rule 723(c)(5)(I).
    \52\ The Exchange stated that in December 2013, to determine 
whether the CUBE 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 
(``Relevant ATP Holders'') whether their firms ``could respond to an 
Auction with a random duration of 500-750 milliseconds.'' The 
Exchange reported that, of the 21 Relevant ATP Holders that 
responded to the question, 100% (n=21) indicated that their firms 
could respond in this time frame. Thus, the Exchange stated that the 
CUBE Auction duration of at least 500 milliseconds, which the 
Exchange noted is the mid-range of auction 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. See Notice, 79 FR 
at 13715, n.29.
---------------------------------------------------------------------------

    The Exchange stated that any ATP Holder would be able to respond to 
the RFR, either as principal or as agent on behalf of customers, 
provided that the RFR Response was properly marked specifying price, 
size, and side of the market.\53\ Proposed Rule 971.1NY would introduce 
a new order type, the ``GTX Order,'' to serve as one way to respond to 
a CUBE Auction, designed solely for that purpose.\54\ A ``GTX Order'' 
would be defined as a non-routable order with a time-in-force 
contingency for the Response Time Interval and would be required to 
specify price, size, and side of the market.\55\ GTX Orders would not 
be displayed to the Consolidated Book nor disseminated to any 
participants \56\ because, as explained by the Exchange, these orders 
would interact only with liquidity available during the Auction.\57\ 
The minimum price increment for a GTX Order would be one cent, 
regardless of the MPV for the series subject to the Auction.\58\ ATP 
Holders that submitted GTX Orders would be permitted to cancel 
them.\59\
---------------------------------------------------------------------------

    \53\ See proposed Rule 971.1NY(c)(2)(C).
    \54\ See proposed Rule 971.1NY(c)(2)(C)(i).
    \55\ See proposed Rule 971.1NY(c)(2)(C)(i). For a CUBE Order to 
buy (sell), a GTX Order priced below (above) the lower (upper) bound 
of executions would be repriced to the lower (upper) bound of 
executions as specified in proposed Rule 971.1NY(b)(1). See proposed 
Rule 971.1NY(c)(2)(C)(i)(f). According to the Exchange, such 
repricing would ensure that GTX Orders eligible to participate in 
the Auction would not be excluded if they are priced more 
aggressively than the lower (upper) bound of execution. See Notice, 
79 FR at 13716 for an example illustrating the repricing of a GTX 
Order.
    \56\ See proposed Rule 971.1NY(c)(2)(C)(i)(a).
    \57\ Any portion of a GTX Order that is not executed in the CUBE 
Auction would be cancelled at the conclusion of the Auction. See id. 
However, see infra notes 75-76 and accompanying text for a case in 
which a GTX Order would interact with an unrelated order that 
arrived on the Exchange on the CUBE Order's side of the market.
    \58\ See proposed Rule 971.1NY(c)(2)(C)(ii)(a).
    \59\ See proposed Rule 971.1NY(c)(2)(C)(i)(d).

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

[[Page 24783]]

    In addition, any unrelated orders and quotes received on the 
opposite side of the CUBE Order during the Response Time Interval and 
in the same series at the CUBE Order would be considered as RFR 
Responses that are eligible to participate in the Auction, provided 
that such unrelated orders and quotes are priced within the permissible 
range of executions, are not marked as GTX Orders, and are not 
marketable against the NBBO. The Exchange stated that considering these 
unrelated orders and quotes as RFR Responses--even if submitted 
coincidentally, as opposed to purposefully in response to an RFR--
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.\60\ Such opposite-side, unrelated orders 
and quotes would be posted to the Consolidated Book \61\ and, if they 
are at the best RFR Response price at the conclusion of the Auction, 
they would participate in the execution of the CUBE Order.\62\
---------------------------------------------------------------------------

    \60\ See Notice, 79 FR at 13716.
    \61\ See generally Rule 964NY(a) (``The System shall display to 
Users all non-marketable limit orders in the Display Order Process, 
unless indicated otherwise'').
    \62\ Any portion of these unrelated orders or quotes remaining 
after the CUBE Order is executed would remain on the Consolidated 
Book and processed in accordance with Rule 964NY, the Exchange's 
options priority and order allocation rules. See proposed Rule 
971.1NY(c)(5)(C).
---------------------------------------------------------------------------

    Unrelated orders and quotes would be able to participate in an 
Auction, however, only if priced in the MPV for the series in the CUBE 
Auction.\63\ Only CUBE Orders, GTX Orders and Contra Orders--which are 
specifically slated for the CUBE Auction--would be permitted to be 
priced in one cent increments, regardless of the MPV for that 
option.\64\ Thus, an order or quote 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.
---------------------------------------------------------------------------

    \63\ See proposed Rule 971.1NY(c)(2)(C)(ii)(c).
    \64\ See id.
---------------------------------------------------------------------------

    Unrelated orders and quotes arriving on the Exchange during the 
Response Time Interval on the same side of the market as the CUBE Order 
likewise would be posted on the Consolidated Book, provided that those 
orders and quotes do not cross the initiating price.\65\ If such an 
order or quote does cross the initiating price--i.e., if an order to 
buy (sell) is priced higher (lower) than the initiating price--it would 
cause the CUBE Auction to conclude early and the unrelated order would 
be then posted to the Consolidated Book.\66\
---------------------------------------------------------------------------

    \65\ See generally Rule 964NY(a) (``The System shall display to 
Users all non-marketable limit orders in the Display Order Process, 
unless indicated otherwise'').
    \66\ See id. See also infra note 86 and accompanying text for a 
more detailed discussion of this provision.
---------------------------------------------------------------------------

H. Conclusion of the CUBE Auction and Order Allocation

    Unless there is an early conclusion to the Auction, as described 
more fully below, the CUBE Auction would conclude at the end of the 
Response Time Interval \67\ and the CUBE Order would be allocated among 
the participants in the Auction at the best prices as set forth in 
proposed Rule 971.1NY(c)(5), as follows:
---------------------------------------------------------------------------

    \67\ See proposed Rule 971.1NY(c)(3). 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.
---------------------------------------------------------------------------

    The Auction mechanism would determine whether the 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, thereby granting the CUBE Order the maximum amount of price 
improvement possible.
    When there are multiple RFR Responses at a given price, at each 
price level, any Customer orders resting on the Consolidated Book at 
the start of the CUBE Auction would have first priority, followed by 
Customer orders that arrived during the CUBE Auction as RFR Responses. 
The remaining contracts would be allocated among the RFR Responses at 
that price level on a pro rata basis in accordance with the size pro 
rata algorithm set forth in Rule 961.1NY(b)(3),\68\ subject, however, 
to the following:
---------------------------------------------------------------------------

    \68\ 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. See Proposed Rule 971.1NY(c)(5). The 
Exchange stated that this encourages participation in the CUBE 
Auction (by not rejecting these RFR Responses) and assists in 
avoiding the opportunity for an ATP Holder to subvert the size pro 
rata allocation method by submitting outsized trading interest. See 
Notice, 79 FR at 13717.
---------------------------------------------------------------------------

    If sufficient interest in the CUBE Order remains after executing 
against Customer interest or better priced interest, the Contra Order 
then would 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 CUBE Auction) or 
(b) 50% of the size of the initial CUBE Order (if there is only one RFR 
Response to the CUBE Auction). The remaining contracts would then be 
allocated among the RFR Responses pursuant to the pro rata trading 
algorithm.\69\ If all RFR Responses were filled, any remaining CUBE 
Order contracts would be allocated to the Contra Order.
---------------------------------------------------------------------------

    \69\ The Exchange stated that the participation guarantee is a 
fair inducement in exchange for guaranteeing that the entire size 
the CUBE Order, for which the Initiating Participant is an agent, 
and is consistent with the rules of NYSE MKT and other option 
exchanges. See Notice, 79 FR at 13717.
---------------------------------------------------------------------------

    As discussed above, an Initiating Participant can opt to guarantee 
the execution of a CUBE Order by specifying a single stop price, auto-
match or an auto-match limit price.\70\ Proposed Rule 
971.1NY(c)(5)(B)(i)-(iii) sets forth the details of how an order is 
allocated in the case of each of these elections.\71\
---------------------------------------------------------------------------

    \70\ See supra notes 35-45 and accompanying text.
    \71\ See Notice, 79 FR at 13717-18 for examples illustrating 
trade allocations for guarantees with a single stop price, with 
auto-match and with auto-match limit.
---------------------------------------------------------------------------

    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 met its allocation guarantee at a price 
below (above) the clean-up price, it would 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 were other RFR 
Responses at the clean-up price, the remaining CUBE Order contracts 
would 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 were no RFR Responses to the Auction and an auto-match 
feature is selected, the CUBE Order would execute against the Contra 
Order at the initiating price.

I. Early Conclusion of a CUBE Auction

    Proposed Rule 971.1NY describes certain events that would cause a 
CUBE

[[Page 24784]]

Auction to conclude early (i.e., before the end of the Response Time 
Interval) and sets forth how the CUBE Order is to be allocated in each 
case.
    Pursuant to proposed Rule 971.1NY(c)(3), a trading halt in the 
affected series would result in the early conclusion of an Auction.\72\ 
In such case, the CUBE Order would execute according to the procedures 
set forth in proposed Rule 971.1NY(c)(5).
---------------------------------------------------------------------------

    \72\ See proposed Rule 971.1NY(c)(3).
---------------------------------------------------------------------------

    Proposed Rule 971.1NY(c)(4) describes additional events where a 
CUBE Auction would conclude early. First, 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 according to the 
procedures set forth in proposed Rule 971.1NY(c)(5).\73\ The new CUBE 
Auction would proceed as described in proposed Rule 971.1NY(c).
---------------------------------------------------------------------------

    \73\ See proposed Rule 971.1NY(c)(4)(A).
---------------------------------------------------------------------------

    Second, if, during a CUBE Auction, the Exchange receives an 
unrelated order or quote on the 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 \74\) at the time of arrival, the CUBE Auction 
would conclude early and the CUBE Order would be executed according to 
the procedures for a full term auction set forth in proposed Rule 
971.1NY(c)(5).\75\ In this circumstance, however, any GTX Orders that 
do not execute in the CUBE Auction would execute against the unrelated 
order or quote that caused the CUBE Auction to conclude early to the 
extent possible and would then cancel.\76\ Any contracts remaining from 
the unrelated order or quote would then be posted to the Consolidated 
Book and processed in accordance with the Rule 964NY.\77\
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    \74\ The Exchange's rules provide that an order that has been 
designated as an order type that is not eligible to be routed away 
would either be placed on the Consolidated Book or cancelled if such 
order would lock or cross the NBBO. See Rule 964NY(c)(2)(E). The 
Exchange noted that, if an incoming non-routable order is marketable 
against the NBBO, but not the BBO, and by its terms, such order, 
e.g., an IOC Order, would cancel, 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 CUBE Auction. See Notice, 79 FR at 13719, 
n.40.
    \75\ See proposed Rule 971.1NY(c)(4)(B). See also Notice, 79 FR 
at 13719 for an example illustrating the early conclusion of the 
Auction due to a same side order marketable against the NBBO at the 
time of arrival. The Exchange stated 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.
    \76\ See proposed Rule 971.1NY(c)(4)(B).
    \77\ See id.
---------------------------------------------------------------------------

    Third, a CUBE Auction would conclude early if, during the Auction, 
the Exchange receives any RFR Response (that is, on the opposite side 
of the CUBE Order) that is marketable against the NBBO (or BBO, if a 
non-routable order) at the time of arrival.\78\ The Auction would 
conclude early whether the RFR Response was a GTX Order or an unrelated 
order or quote that is a marketable limit order or a market order.\79\ 
However, the allocation would differ, as follows:
---------------------------------------------------------------------------

    \78\ See proposed Rule 971.1NY(c)(4)(C). The Exchange stated 
that early conclusion in such circumstances 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 Rule 
971.1NY(c)(5), and thus would participate in the CUBE Auction 
consistent with its limit price and order instructions. See Notice, 
79 FR at 13719.
    \79\ The Exchange noted that, while the incoming order that is 
on the opposite side of the CUBE Order may be marketable against an 
NBBO that updated during the Response Time Interval, the fact that 
the NBBO updated during the Response Time Interval in of itself does 
not cause an early conclusion to the CUBE Auction. Id. See also id. 
at 13720 for an example illustrating the early conclusion of an 
Auction as a result of the arrival of an opposite-side limit order 
that was marketable against an updated NBBO.
---------------------------------------------------------------------------

     If the CUBE Auction concluded early because the Exchange 
received 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 in accordance with the procedures set forth in 
proposed Rule 971.1NY(c)(5). Contracts remaining, if any, from 
unrelated orders or quotes at the time the CUBE Auction concludes would 
be processed in accordance with Rule 964NY. Any unfilled GTX Orders 
would cancel.\80\
---------------------------------------------------------------------------

    \80\ See proposed Rule 971.1NY (c)(4)(C)(i). Regarding the 
cancellation of unfilled GTX Orders, see also supra note 57 and 
accompanying text. See also Notice, 79 FR at 13719-20 for examples 
illustrating the early conclusion of an Auction as a result of the 
arrival of an opposite-side marketable limit order.
---------------------------------------------------------------------------

     If the opposite-side order that caused the CUBE Auction to 
conclude early was a market order, the allocation of the CUBE Order 
would vary, depending on how the Initiating Participant guaranteed the 
execution of the CUBE Order and what, if any, RFR Responses were 
received before the CUBE Auction concluded.
    [ssquf] If the Initiating Participant selected auto-match and no 
RFR Responses had been received before the market order arrived that 
caused the CUBE Auction to conclude early, if the CUBE Order is to buy 
(sell), the CUBE Order would execute against the market order at the 
midpoint of the initiating price and the lower (upper) bound of the 
range of permissible executions.\81\ If no midpoint is possible, the 
execution would be rounded up (down) to the nearest whole penny toward 
the initiating price. Any unfilled size of the CUBE Order will then 
execute according to the procedures set forth in proposed Rule 
971.1NY(c)(5).\82\
---------------------------------------------------------------------------

    \81\ See proposed Rule 971.1NY(c)(4)(C)(ii). See also Notice, 79 
FR at 13720 for an example illustrating the early conclusion of an 
Auction due to the arrival of an opposite-side market order in a 
case where auto-match was selected and no RFR Responses had been 
received. The Exchange stated that rounding in the manner described 
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. Id.
    \82\ As discussed above, the Exchange stated that the CUBE 
Auction would be permitted to execute orders in the CUBE Auction as 
exceptions to Trade-Through Liability pursuant to Rule 991NY(b)(5). 
Accordingly, an opposite-side market order that arrives during the 
CUBE 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. See Notice, 79 FR 
at 13720, n.49.
---------------------------------------------------------------------------

    [ssquf] If the Initiating Participant selected auto-match and other 
RFR Responses are received before the arrival of the market order that 
caused the CUBE 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. Any unfilled 
size of the CUBE Order would then execute according to the procedures 
set forth in proposed Rule 971.1NY(c)(5).\83\
---------------------------------------------------------------------------

    \83\ See proposed Rule 971.1NY(c)(4)(C)(iii). See also Notice, 
79 FR at 13721 for an example illustrating the early conclusion of 
an Auction as a result of the arrival of an opposite-side market 
order in a case where auto-match was selected and other RFR 
Responses were received.
---------------------------------------------------------------------------

    [ssquf] If the Initiating Participant selected a single stop price 
or auto-match limit to guarantee the execution of a CUBE Order to buy 
(sell) and a market order to sell (buy) caused the CUBE Auction to 
conclude early, 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. Any unfilled size of the CUBE Order would then execute according 
to the procedures set forth in proposed Rule 971.1NY(c)(5).\84\
---------------------------------------------------------------------------

    \84\ See proposed Rule 971.1NY(c)(4)(C)(iv). See also Notice, 79 
FR at 13721 for examples illustrating the early conclusion of an 
Auction as a result of the arrival of an opposite-side market order 
where the Initiating Participant had selected a single stop price or 
the auto-match limit option.

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

[[Page 24785]]

    Fourth, the CUBE Auction also would conclude early upon the arrival 
of an unrelated, non-marketable quote or limit order on the same side 
as the CUBE Order that improves the CUBE Order's initiating price.\85\ 
Specifically, if, during a CUBE Auction where the CUBE Order is to buy 
(sell), the Exchange receives such an 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 
first execute against the RFR Response according to the procedures set 
forth in proposed Rule 971.1NY(c)(5).\86\ Any unfilled GTX Orders would 
be eligible to execute against the unrelated order or quote 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 
traded against interest in the CUBE Auction would then be processed in 
accordance with Rule 964NY.\87\
---------------------------------------------------------------------------

    \85\ See proposed Rule 971.1NY(c)(4)(D). See also supra note 66 
and accompanying text.
    \86\ See proposed Rule 971.1NY(c)(5) regarding the allocation 
procedures of a full-term Auction, discussed above. The Exchange 
stated 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 CUBE 
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. See Notice, 79 FR at 
13716.
    \87\ See Notice, 79 FR at 13722 for an example illustrating the 
early conclusion of an Auction due to a same-side order that creates 
a new BBO that improves the initiating price. The Exchange stated 
that early conclusion in this circumstance would ensure that the 
CUBE 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. Id.
---------------------------------------------------------------------------

    Fifth, a CUBE Auction would conclude early when an All-or-None 
(``AON'') order is present on the same side as the CUBE Order. An AON 
order, whether it was resting on the book prior to an Auction or it 
arrived during Auction, would be permitted to trade only if sufficient 
size remained to fill the entire AON order after the CUBE Order was 
fully executed. If sufficient interest to fill an entire AON order was 
received during the Response Time Interval, the Auction would conclude 
early and the CUBE Order would be executed according to procedures set 
forth in proposed Rule 971.1NY(c)(5). After the Auction concluded, the 
Exchange would evaluate whether the AON could be executed.\88\
---------------------------------------------------------------------------

    \88\ See Notice, 79 FR at 13722 for an example illustrating the 
early conclusion of an Auction due to sufficient interest to fill a 
resting AON order. The Exchange stated that early conclusion in this 
circumstance would ensure that the CUBE 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. Id.
---------------------------------------------------------------------------

J. Conduct Inconsistent With Just and Equitable Principles of Trade

    The Exchange is proposing Commentary .02 to the proposed Rule to 
state 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 CUBE Auction process. The following would be considered 
inconsistent with just and equitable principles of trade: (1) An ATP 
Holder entering RFR Responses to a CUBE Auction for which the ATP 
Holder is the Initiating Participant; (2) an ATP Holder engaging in a 
pattern and practice of trading or quoting activity for the purpose of 
causing a CUBE Auction to conclude early; (3) the Initiating 
Participant breaking up an agency order into separate CUBE Orders for 
the purpose of gaining a higher allocation percentage; and (4) an ATP 
Holder engaging in a pattern or practice of sending multiple RFR 
Responses at the same time that exceed the size of the CUBE Order.\89\
---------------------------------------------------------------------------

    \89\ See also infra note 92 discussing Rule 935NY, Commentary 
.01.
---------------------------------------------------------------------------

K. Order Exposure

    Rule 935NY prohibits ATP Holders from executing as principal any 
orders they represent as agent unless (i) agency orders are first 
exposed on the Exchange for at least one second or (ii) the ATP Holder 
has been bidding or offering on the Exchange for at least one second 
prior to receiving an agency order that is executable against such bid 
or offer. According to the Exchange, Rule 935NY helps to ensure that 
orders are properly exposed to market participants, affording them 
reasonable time in which to participate in the execution of agency 
orders.\90\
---------------------------------------------------------------------------

    \90\ See Notice, 79 FR at 13722.
---------------------------------------------------------------------------

    The Exchange stated that the Response Time Interval, with a random 
length of between 500 and 750 milliseconds, would be of sufficient 
length 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.\91\ 
Accordingly, the Exchange's proposal would amend Rule 935NY to state 
that a CUBE Order would not be subject to the one-second order exposure 
requirement of Rule 935NY. The Exchange stated that, consistent with 
Rule 935NY, Commentary .01, ATP Holders would be permitted to utilize 
the CUBE Auction only where there is a genuine intention to execute a 
bona fide transaction.\92\
---------------------------------------------------------------------------

    \91\ See supra note 52.
    \92\ See Notice, 79 FR at 13237. Rule 935NY, Commentary .01, 
states: ``Rule 935NY prevents a[n ATP Holder] 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 [ATP Holder] was already bidding or 
offering on the book.''
---------------------------------------------------------------------------

L. Proposed Pilot Period for Auctions of Fewer Than 50 Contracts

    Under the proposal, proposed Rules 971.1NY(b)(1)(B), which relates 
to CUBE Auctions for fewer than 50 contracts, and 971.1NY(b)(8), which 
states that the minimum size for a CUBE Auction would be one contract, 
would be adopted for a pilot period effective for one year beginning on 
the approval date of the proposed rule change (``Pilot Period'').\93\ 
The Exchange stated that, during the Pilot Period, it would 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.\94\
---------------------------------------------------------------------------

    \93\ See proposed Rule 971.1NY, Commentary .01.
    \94\ 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.; 
and (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. See, e.g., 
Securities Exchange Act Release Nos. 53222 (February 3, 2006); 71 FR 
7089 (February 10, 2006) (File No. SR-CBOE-2005-60); 63027 (October 
1, 2010); 75 FR 62160 (October 7, 2010) (File No. SR-Phlx-2010-108); 
and 66871 (April 27, 2012) 77 FR 26323 (May 3, 2012) (File No. 10-
206).

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

[[Page 24786]]

    The Exchange further states that any data that is submitted to the 
Commission will be provided on a confidential basis.\95\
---------------------------------------------------------------------------

    \95\ 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, (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.
---------------------------------------------------------------------------

M. Implementation

    The Exchange stated that it would 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 
would be no later than 60 days following publication of the Trader 
Update announcing Commission approval. The Exchange stated that this 
implementation schedule would provide ATP Holders with adequate notice 
of the CUBE Auction and would allow ample time for ATP Holders to 
prepare their systems for participation in the CUBE Auction process, if 
such participation is desired.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with Section 6(b) of the Act.\96\ In particular, 
the Commission finds that the proposed rule change is consistent with 
Sections 6(b)(5) of the Act,\97\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest; and not be designed to 
permit unfair discrimination between customers, issuers, brokers or 
dealers.
---------------------------------------------------------------------------

    \96\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \97\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission believes that approving the Exchange's proposal to 
establish the CUBE Auction mechanism may increase competition among 
those options exchanges that offer similar mechanisms. The Commission 
further believes that allowing ATP Holders to enter orders into the 
CUBE Auction mechanism may provide additional opportunities for such 
orders to receive price improvement over the NBBO.
    The Exchange's CUBE Auction mechanism is similar to electronic 
price improvement auction mechanisms available at other options 
exchanges.\98\ The features of the CUBE Auction are similar in many 
aspects to the features found in the price improvement mechanisms of 
other exchanges, including: The characteristics of the CUBE Order that 
are identified in the RFR; \99\ the auto-match and auto-match limit 
options; \100\ the participation guarantee allocated to the Initiating 
Participant; \101\ early conclusions of the auction in specific 
circumstances, including trading halts \102\ and same-side unrelated 
orders that create a BBO that crosses the initiating price; \103\ and 
provisions regarding just and equitable principles of trade.\104\
---------------------------------------------------------------------------

    \98\ See supra note 6 and accompanying text.
    \99\ See supra note 48 and accompanying text, and see, e.g., ISE 
Rule 723(c).
    \100\ See supra notes 42-45 and accompanying text, and see, 
e.g., Phlx Rule 1080(n)(ii)(A)(1).
    \101\ See supra notes 68-69 and accompanying text. Participation 
guarantees are a basic feature of electronic improvement mechanisms 
of all options exchanges that have them.
    \102\ See supra note 72 and accompanying text, and see, e.g., 
CBOE Rule 6.74A(b)(2)(F) and Phlx Rule 1080(n)(ii)(B)(4).
    \103\ See supra notes 85-87 and accompanying text, and see, 
e.g., Phlx Rule 1080(n)(ii)(B)(2), which sets forth a very similar 
provision.
    \104\ See supra note 89 and accompanying text. All the exchanges 
with electronic price improvement mechanisms have similar rules.
---------------------------------------------------------------------------

    The Commission notes that the initiating price would be equal to or 
better than the NBBO at the time of commencement of the CUBE Auction 
and that an ATP Holder that enters a

[[Page 24787]]

CUBE Order in the CUBE Auction must submit a Contra Order for the full 
size of that CUBE Order.\105\ Once the CUBE Order and the Contra Order 
are submitted to the Auction, they may not be cancelled or 
modified.\106\ Therefore, a CUBE Order submitted to the CUBE Auction, 
regardless of its size, would be guaranteed an execution price of at 
least NBBO at the time the CUBE Auction commences and, moreover, would 
be given an opportunity for price improvement beyond the NBBO by being 
exposed to ATP Holders during the CUBE Auction.
---------------------------------------------------------------------------

    \105\ Rule 971.1NY(a).
    \106\ Rule 971.1NY(c). See also Amendment No. 2.
---------------------------------------------------------------------------

    The CUBE Auction mechanism also provides for responses to the RFR 
on behalf of all types of interest, including unrelated quotes and 
orders as well as GTX Orders that are specifically designated as 
responses. The Commission believes that this feature provides the 
potential for a CUBE Order to be exposed to a competitive auction. 
Further, when the Exchange receives a properly designated CUBE Order 
for CUBE Auction processing, it will send to all subscribers of its 
ArcaBook data feed, an RFR detailing the series, side and size of the 
CUBE Order and the initiating price. This RFR message, available to any 
ArcaBook subscriber, is designed to help attract responses to a CUBE 
Auction, which may result in a competitive CUBE Auction and ultimately 
better prices for the CUBE Order to the extent that the RFR message is 
successful in attracting competitive responses.
    The RFR will be subject to a Response Time Interval for a random 
period of time between 500 and 750 milliseconds. In December 2013, to 
determine whether the CUBE Auction timer would provide sufficient time 
to respond to an RFR, the Exchange asked Relevant ATP Holders whether 
their firms ``could respond to an Auction with a random duration of 
500-750 milliseconds.'' \107\ Of the 21 Relevant ATP Holders that 
responded to the question, all indicated that their firms could respond 
in this time frame. Based on NYSE MKT's statements, the Commission 
believes that the random Response Time Interval could facilitate the 
prompt execution of CUBE Orders in the CUBE Auction, while providing 
market participants with an opportunity to compete for exposed bids and 
offers. The Commission notes that it has previously approved auction 
mechanisms with a random time feature \108\ and with a 500 millisecond 
auction response period.\109\
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    \107\ See supra note 52. See also Notice, 79 FR at 13715, n.29.
    \108\ See Securities Exchange Act Release No. 53222 (February 3, 
2006), 71 FR 7089 (February 10, 2006) (approval of File No. SR-CBOE-
2005-60, CBOE's proposal to adopt AIM, which included a random time 
period of three to five seconds for exposure of orders entered into 
that mechanism). See also Securities Exchange Act Release No. 58088 
(July 2, 2008), 73 FR 39747 (July 10, 2008) (approval of File No. 
SR-CBOE-2008-16, which eliminated the random time period and 
established an exposure period of one second).
    \109\ See ISE Rule 723(c)(5)(i). See also Securities Exchange 
Act Release No. 68849 (February 6, 2013), 78 FR 9973 (February 12, 
2013) (approval of File No. SR-ISE-2012-100, ISE's proposal to adopt 
a 500 millisecond response period).
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    At the conclusion of a CUBE Auction, Customer orders resting on the 
Consolidated Book have first priority to trade against the CUBE Order, 
followed by Customer orders that arrived during the CUBE Auction as RFR 
Responses. After execution of Customer responses and orders, the 
Initiating Participant may be allocated a limited percentage of the 
CUBE Order, not to exceed 40% of the contracts at the applicable price 
point (except that, if only one response matches the Initiating 
Participant's single price submission at the best price, then the 
Initiating Participant may be allocated up to 50% of the order). The 
Commission notes that the established principles of priority of 
interest contained in Rule 964NY would apply to the CUBE Auction. The 
Commission believes that the proposed matching algorithm set forth in 
proposed Rule 971.1NY is sufficiently clear regarding how orders are to 
be allocated in the CUBE Auction and does not raise any novel issues.
    Under the Exchange's proposal, there would be no minimum size 
requirement for orders entered into the CUBE for a pilot period 
expiring on April 25, 2015.\110\ The Commission believes that approval 
of these provisions on a pilot basis is appropriate and that the 
Exchange's proposal should provide small customer orders with the 
opportunity for price improvement in a manner that is consistent with 
the Act. The Commission expects that the data submitted to the 
Commission by the Exchange will be used by both the Exchange and the 
Commission staff to analyze whether 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. In addition, 
data submitted by the Exchange with respect to situations in which the 
CUBE Auction is terminated prematurely will afford both the Commission 
and the Exchange an opportunity to analyze the impact of early 
terminations and unrelated orders on the CUBE Auction.\111\ The 
Commission will evaluate the CUBE Auction during the Pilot Period to 
determine whether it would be beneficial to customers and to the 
options market as a whole to approve any proposal requesting permanent 
approval to permit orders of fewer than 50 contracts to be submitted to 
the CUBE Auction .
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    \110\ Rule 971.1NY(b)(1)(B), which relates to CUBE Auctions for 
fewer than 50 contracts, and Rule 971.1NY(b)(8), which states that 
the minimum size for a CUBE Auction would be one contract. See also 
BOX Rule 7150, IM-7150-1, CBOE Rule 6.74A, Interpretations and 
Policies .03, ISE Rule 723, Supplementary Material .03, and Phlx 
Rule 1080(n)(i)(C) (establishing pilot programs regarding the no 
minimum size requirement for orders entered into price improvement 
auctions).
    \111\ See supra notes 94-95 and accompanying text.
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IV. Section 11(a) of the Act

    Section 11(a)(1) of the Act \112\ prohibits a 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 person exercises discretion 
(collectively, ``covered accounts''), unless an exception applies. 
Section 11(a)(1) and the rules thereunder contain a number of 
exceptions for principal transactions by members and their associated 
persons, including the exceptions set forth in Rule 11a2-2(T) under the 
Act.\113\ The Exchange has represented that it has analyzed its rule 
proposed hereunder, and has determined that they are consistent with 
Section 11(a) of the Act and rules thereunder. For the reason set forth 
below, the Commission believes that the proposed CUBE Auction rules are 
consistent with the requirements of Section 11(a) of the Act and the 
rules thereunder.
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    \112\ 15 U.S.C. 78k(a)(1).
    \113\ 17 CFR 240.11a2-2(T).
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A. Rule 11a2-2(T) Under the Act (``Effect Versus Execute'' Rule)

    Rule 11a2-2(T) under the Act,\114\ known as the ``effect versus 
execute'' rule, provides exchange members with an exception from the 
Section 11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange 
member, subject to certain conditions, to effect transactions for 
covered accounts by arranging for an unaffiliated member to execute the 
transactions on the exchange. To comply with the conditions of Rule 
11a2-2(T), a member: (1) May not be affiliated with the executing 
member; (2) must transmit the order from off the exchange floor; (3) 
may not participate in the execution of the transaction once it has 
been transmitted to the member

[[Page 24788]]

performing the execution; \115\ and (4) 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. 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.
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    \114\ Id.
    \115\ The member may, however, participate in clearing and 
settling the transaction. See Securities Exchange Act Release No. 
14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) (regarding the 
Designated Order Turnaround System of the New York Stock Exchange 
(``1978 Release'')).
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    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 the requirement is satisfied when automated 
exchange facilities, such as MKT's 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 their orders after 
transmitting them to the Exchange.\116\ The Exchange represents that 
the design of the CUBE Auction ensures that ATP Holders do not have any 
special or unique trading advantages in the handling of their orders 
after transmission. Based on the Exchange's representations, the 
Commission believes that the CUBE Auction's rules satisfy this 
requirement.
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    \116\ In considering the operation of automated execution 
systems operated by an exchange, the Commission has noted that, 
while there is no independent executing exchange member, the 
execution of an order is automatic once it has been transmitted into 
each 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 
Securities Exchange Act Release No. 15533 (January 29, 1979), 44 FR 
6084 (January 31, 1979) (regarding the American Stock Exchange's 
Post Execution Reporting System and 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'')).
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    Second, Rule 11a2-2(T) requires orders for covered accounts be 
transmitted from off the exchange floor. The Exchange represents that 
orders for covered accounts sent to the CUBE Auction from off-floor ATP 
Holders will be transmitted from remote terminals directly to the CUBE 
Auction by electronic means. 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.\117\ With respect to such orders transmitted electronically from 
remote terminals directly to the CUBE Auction, the Commission believes 
that the CUBE Auction's rules satisfy the off-floor transmission 
requirement.\118\ The Commission believes that, based on the foregoing, 
the proposal satisfies the off-floor transmission requirement for the 
purposes of ``effect versus execute'' rule.
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    \117\ 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); the 1979 Release; and the 1978 
Release.
    \118\ The Exchange further represents that there may be 
instances of orders for a covered account that may be sent by an 
off-floor ATP Holder to an unaffiliated Floor Broker for entry into 
the CUBE Auction mechanism. The Exchange represents that at the 
current time, Exchange-sponsored Floor Broker systems are not 
enabled to accept orders into the CUBE Auction mechanism from Floor 
Brokers. The Exchange further represents that, if a Floor Broker 
were to gain access to the CUBE Auction mechanism via a third-party 
system, that Floor Broker may not rely on any exceptions found in 
Section 11(a) of the Act or rules thereunder to 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. See Amendment No. 2, 
supra note 4.
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    Third, Rule 11a2-2(T) requires that the member not participate in 
the execution of its order once it has been transmitted to the member 
performing the execution. 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. The Exchange states 
that, 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.\119\ 
Accordingly, the Commission believes that an ATP Holder does not 
participate in the execution of an order submitted into the CUBE 
Auction. Based on the Exchange's representations, the Commission 
believes that the proposal satisfies the non-participation requirement 
of Rule 11a2-2(T).
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    \119\ The Exchange represents that the Initiating Participant 
may not cancel or modify a CUBE Order once a CUBE Auction has 
started. See proposed Rule 971.1NY(c).
---------------------------------------------------------------------------

    Fourth, 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).\120\ The Exchange recognizes that ATP Holders trading for covered 
accounts over which they exercise investment discretion must comply 
with this condition to rely on the Rule's exception. The Exchange 
represents that it will enforce this requirement pursuant to its 
obligation under Section 6(b)(1) of the Act to enforce compliance with 
the federal securities laws.
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    \120\ 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 person 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. See 17 CFR 240.11a2-2(T)(d). 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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V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 2 
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 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

[[Page 24789]]

comments more efficiently, please use only one method.
    The Commission will post all comments on the Commission's Internet 
Web site (https://www.sec.gov/rules/sro.shtml). Copies of the 
submission, all subsequent amendments, all written statements with 
respect to the proposed rule change that are filed with the Commission, 
and all written communications relating to the proposed rule change 
between the Commission and any person, other than those that may be 
withheld from the public in accordance with the provisions of 5 U.S.C. 
552, will be available for Web site viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE., Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make publicly available. All 
submissions should refer to File Number SR-NYSEMKT-2014-17 and should 
be submitted on or before May 22, 2014.

VI. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 2

    The Commission finds good cause for approving the proposed rule 
change, as amended by Amendment No. 2, prior to the 30th day after the 
date of publication of notice in the Federal Register. Amendment No. 2: 
(1) Clarified that Exchange-sponsored Floor Broker systems are not 
enabled to accept orders into the CUBE Auction mechanism from Floor 
Brokers; (2) revised the rule text to clarify that unrelated quotes and 
orders will never trade through their limit prices; and (3) revised the 
rule text to clarify that the Contra Order may not be cancelled or 
modified. As to the first item, Amendment No. 2 provides additional 
clarity in the discussion concerning the analysis of the original 
proposal's compliance with the requirements of Section 11(a) of the 
Act. As to the second item, Amendment No. 2 merely clarifies the rule 
text. As to the third item, Amendment No. 2 merely conforms the rule 
text to the description of the limitation in the Notice. The CUBE 
Auction will function in a manner substantially similar to that 
described in the Notice and Amendment No. 2 simply provides additional 
clarity regarding a few features of the proposal.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\121\ that the proposed rule change, as modified by Amendment No. 2 
(SR-NYSEMKT-2014-17) is approved on an accelerated basis, except that 
(1) paragraphs (b)(1)(B) and (b)(8) of Rule 971.1NY are approved on a 
pilot basis until April 25, 2015; and (2) there shall be no minimum 
size requirements for orders entered into the CUBE Auction for a pilot 
period expiring on April 25, 2015.
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    \121\ 15 U.S.C. 78s(b)(2).
    \122\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\122\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-09921 Filed 4-30-14; 8:45 am]
BILLING CODE P

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