Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Amendment No. 1 and Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change, as Modified by Amendment No. 1, To Amend NYSE Arca, Inc.'s Rules by Revising the Order of Priority of Bids and Offers When Executing Orders in Open Outcry, 26474-26479 [2014-10535]
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Federal Register / Vol. 79, No. 89 / Thursday, May 8, 2014 / Notices
disapprove, the proposed rule change
(File No. SR–EDGX–2014–05).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–10540 Filed 5–7–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72081; File No. SR–
NYSEArca–2014–04]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of
Amendment No. 1 and Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove a Proposed
Rule Change, as Modified by
Amendment No. 1, To Amend NYSE
Arca, Inc.’s Rules by Revising the
Order of Priority of Bids and Offers
When Executing Orders in Open
Outcry
May 2, 2014.
I. Introduction
On January 15, 2014, NYSE Arca, Inc.
(‘‘Exchange’’ or ‘‘NYSE Arca’’) 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 revise the order of priority of
bids and offers when executing orders
in open outcry. The proposed rule
change was published for comment in
the Federal Register on February 3,
2014.3 On March 18, 2014, the
Commission extended the time period
for Commission action on the proposal
to May 2, 2014.4 The Commission
received ten comment letters from seven
commenters regarding the proposal,5 as
5 15
U.S.C. 78s(b)(2)(A)(ii)(I).
CFR 200.30–3(a)(31).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 71425
(January 28, 2014), 79 FR 6258 (‘‘Notice’’).
4 See Securities Exchange Act Release No. 71733
(March 18, 2014), 79 FR 16072 (March 24, 2014).
5 See Letter from Darren Story, dated January 29,
2014 (‘‘Story Letter I’’); Letter from Abraham Kohen,
AK FE Consultants LLC, dated January 31, 2014
(‘‘Kohen Letter I’’); Letter from David Spack, Chief
Compliance Officer, Casey Securities, LLC, dated
February 3, 2014 (‘‘Casey Letter’’); Letter from
Abraham Kohen, AK FE Consultants LLC, dated
February 4, 2014 (‘‘Kohen Letter II’’); Letter from
Angel Alvira, dated February 12, 2014 (‘‘Alvira
Letter’’); Letter from Donald Hart, dated February
12, 2014 (‘‘Hart Letter I’’); Letter from Doug
Patterson, Chief Compliance Officer, Cutler Group,
LP, dated February 13, 2014 (‘‘Cutler Letter’’); Letter
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well as a response to the comment
letters from NYSE Arca.6 On April 29,
2014, the Exchange filed Amendment
No. 1 to the proposed rule change.7 The
Commission is publishing this notice
and order to solicit comments on the
proposed rule change, as modified by
Amendment No. 1, from interested
persons and to institute proceedings
pursuant to Section 19(b)(2)(B) of the
Act 8 to determine whether to approve
or disapprove the proposed rule change,
as modified by Amendment No. 1.
Institution of proceedings does not
indicate that the Commission has
reached any conclusions with respect to
the proposed rule change, nor does it
mean that the Commission will
ultimately disapprove the proposed rule
change. Rather, as discussed below, the
Commission seeks additional input from
interested parties on the changes to the
proposed rule change, as modified by
Amendment No. 1.
II. Description of the Proposal
NYSE Arca proposes to amend its
rules governing the priority of bids and
offers on its Consolidated Book by
revising the order of priority in open
outcry to afford priority to bids and
offers represented by Market Makers 9
and Floor Brokers 10 (collectively,
‘‘Crowd Participants’’) 11 over certain
equal-priced bids and offers of non–
Customers 12 on the Consolidated
Regulatory Officer, Susquehanna International
Group, LLP (‘‘SIG’’), dated March 14, 2014 (‘‘SIG
Letter’’); and Letter from Darren Story, dated March
21, 2014 (‘‘Story Letter II’’).
6 See Letter from Martha Redding, Chief Counsel,
NYSE Euronext, dated April 4, 2014 (‘‘NYSE Arca
Response’’).
7 In Amendment No. 1, the Exchange revised the
rule text for proposed Rule 6.47: (1) To clarify that
Floor Brokers, when crossing two orders in open
outcry, may not trade through any non-Customer
bids or offers on the Consolidated Book that are
priced better than the proposed execution price;
and (2) to conform the term ‘‘bids and offers’’ to
‘‘bids or offers’’ in paragraphs (a) and (c)
thereunder. Amendment No. 1 has been placed in
the public comment file for SR–NYSEArca–2014–04
at https://www.sec.gov/comments/sr-nysearca-201404/nysearca201404.shtml (see letter from Martha
Redding, Chief Counsel, NYSE Euronext, to Kevin
M. O’Neill, Deputy Secretary, Commission, dated
April 30, 2014) and also is available on the
Exchange’s Web site at https://www.nyse.com/
nysenotices/nysearca/rule-filings/pdf.action;
jsessionid=FACF4F6772B1316D973F5
D4E2D258ACE?file_no=SR-NYSEArca-2014-04&
seqnum=2.
8 15 U.S.C. 78s(b)(2)(B).
9 See Rule 6.32 (Market Maker Defined).
10 See Rule 6.43 (Options Floor Broker Defined).
11 The term ‘‘Crowd Participants’’ means the
Market Makers appointed to an option issue under
Rule 6.35, and any Floor Brokers actively
representing orders at the best bid or offer on the
Exchange for a particular option series. See Rule
6.1(b)(38).
12 A non-Customer is a market participant who
does not meet the definition of Customer as defined
in paragraph (c)(6) of Rule 15c3–1 under the
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Book 13 during the execution of an order
in open outcry on the Floor 14 of the
Exchange.15
Current Rule 6.75(a) provides that any
bids displayed on the Consolidated
Book have priority over same-priced
bids represented in open outcry. Such
priority also is described in current Rule
6.47, which governs crossing orders in
open outcry. Floor Broker crossing
transactions, as described in Rule
6.47(a)(3), may not trade ahead of bids
or offers on the Consolidated Book that
are priced equal to or better than the
proposed crossing price. The Exchange
stated that, because of this priority
afforded to the Consolidated Book,
Crowd Participants who have negotiated
a large transaction ultimately might not
be able to participate in its execution.16
The Exchange proposed to restructure
its priority rules so that bids and offers
of Crowd Participants would have
priority over equal-priced bids and
offers of non-Customers on the
Consolidated Book that are ranked in
time priority behind any equal-priced
Customer bids and offers on the
Consolidated Book. Equal-priced
Customer 17 interest would continue to
be afforded priority over Crowd
Participants in the execution of an open
outcry transaction. In addition,
consistent with the existing price/time
priority presently applicable to bids and
offers on the Consolidated Book, equalpriced non-Customer bids and offers
ranked in time priority ahead of
Customer interest also would be
afforded priority over Crowd
Participants in the execution of an open
outcry transaction. In the Exchange’s
view, the proposed rule change strikes
the appropriate balance between
encouraging larger negotiated
transactions in open outcry, while at the
Securities Exchange Act of 1934, 17 CFR 240.15c3–
1. See Rule 6.1(b)(29).
13 The Exchange also proposed to make nonsubstantive changes to existing rule text contained
in Rules 6.47 and 6.75. See Notice, 79 FR at 6260
for a description of these non-substantive changes.
14 See Rule 1.1(i).
15 The term ‘‘Consolidated Book’’ means the
Exchange’s electronic book of limit orders for the
accounts of Public Customers and broker-dealers,
and Quotes with Size. See Rule 6.1(b)(37).
16 See Notice, 79 FR at 6258. The Exchange stated
that Crowd Participants could negotiate a
transaction with an understanding of the make-up
of bids and offers on the Consolidated Book at the
beginning of open outcry. However, as the trade is
executed, the Consolidated Book could update with
newly-arriving electronically-entered bids and
offers that have priority under current Rule 6.75(a).
The Exchange noted that, given the speed at which
quotes can flicker in the Consolidated Book, Crowd
Participants who have agreed to a transaction in
open outcry do not know if they will actually
participate on the trade until after execution. Id. at
6258–59.
17 See supra note 12.
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same time protecting Customer interest
on the Consolidated Book, and any
interest that has time priority over such
protected Customer interest.18
To effect this change to its floor
priority rules, the proposal would
amend the Exchange’s rules as follows.
As noted above, Rule 6.75(a) presently
states that the highest bid shall have
priority but where two or more bids for
the same option contract represent the
highest price and one such bid is
displayed on the Consolidated Book,
such bid shall have priority over any bid
at the post (i.e., the Trading Crowd.) 19
The Exchange proposed to amend Rule
6.75(a) 20 by limiting the priority of bids
in the Consolidated Book over bids in
the Trading Crowd solely to those bids
for Customers along with nonCustomers that are ranked in time
priority ahead of such Customers.21
Rule 6.76 presently governs order
ranking, display and allocation of orders
on the NYSE Arca Options platform
(‘‘OX system’’). The Exchange proposed
new paragraph (d) to Rule 6.76 that
would set forth the priority of bids and
offers on the Consolidated Book against
orders executed through open outcry in
the Trading Crowd. The proposed text
provides a step-by step-description of
the order of priority to be afforded bids
and offers of both Customers and nonCustomers on the Consolidated Book.
The Exchange noted that the priority
scheme described in proposed Rule
6.76(d) is consistent with the proposed
changes to Rule 6.75.22
The Exchange also proposed to
include language in Rule 6.76(d)(4) that
sets forth certain OTP Holder 23
obligations under Section 11(a) of the
18 See
Notice, 79 FR at 6259.
term ‘‘Trading Crowd’’ means all Market
Makers who hold an appointment in the option
classes at the trading post where such trading
crowd is located and all Market Makers who
regularly effect transactions in person for their
Market Maker accounts at that trading post, but
generally will consist of the individuals present at
the trading post. See Rule 6.1(b)(30).
20 The Exchange noted that the changes made to
Rule 6.75(a) dealing with the priority of ‘‘bids’’ also
would effect a corresponding change to the meaning
of Rule 6.75(b) dealing with ‘‘offers,’’ although there
would be no change to the rule text in Rule 6.75(b).
See Notice, 79 FR at 6259.
21 See Notice, 79 FR at 6259–60 for examples
illustrating how the Exchange’s priority and
allocation rules would be applied under the
proposed rule change.
22 See Notice, 79 FR at 6259. According to the
Exchange, the inclusion of a description of open
outcry priority procedures in Rule 6.76 would serve
as a useful cross reference to Rule 6.75. The
Exchange stated that including such a cross
reference is consistent with similar rule structures
by the Chicago Board Options Exchange, Inc.
(‘‘CBOE’’) and NYSE MKT LLC (‘‘NYSE MKT’’). See
id. (citing CBOE Rule 6.45A(b) and NYSE MKT Rule
964NY(e)).
23 See Rule 1.1(q).
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19 The
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Act.24 The proposed rule text states that,
notwithstanding the priority scheme set
forth in proposed Rule 6.76(d)(2), an
OTP Holder effecting a transaction on
the Floor for its own account, the
account of an associated person, or an
account with respect to which it or an
associated person has investment
discretion pursuant to the ‘‘G Rule’’
must still yield priority to any equalpriced non-OTP Holder bids or offers on
the Consolidated Book.25
Rule 6.47 outlines the procedures
used when a Floor Broker attempts to
cross two orders in open outcry.
Currently, Floor Brokers must trade
against all equal-priced Customer and
non-Customer bids and offers in the
Consolidated Book before effecting a
cross transaction in the Trading Crowd.
The Exchange proposed to revise Rule
6.47 to conform the priority rules
applicable to open outcry cross
transactions to the proposed changes
described above. Accordingly, the
Exchange proposed to amend the
procedures for the crossing scenarios
described in Rule 6.47 26 by stating that
Floor Brokers, when crossing two orders
in open outcry, must yield priority to:
(1) Any Customer bids or offers on the
Consolidated Book that are priced equal
to or better than the proposed execution
price and to any non-Customer bids or
offers on the Consolidated Book that are
ranked ahead of such equal or betterpriced Customer bids or offers; and (2)
24 Specifically, pursuant to Section 11(a)(1)(G) of
the Exchange Act and Rule 11a1–1(T) thereunder
(the ‘‘G Rule’’), an OTP Holder may effect
transactions on the Floor for its own account, the
account of an associated person, or an account with
respect to which it or an associated person has
investment discretion, provided that such
transaction yields priority in execution to orders for
the account of persons who are not OTP Holders
or associated with OTP Holders. See 15 U.S.C.
78k(a)(1)(G) and 17 CFR 11a1–1(T). The Exchange
stated that the proposed rule text is based on the
rules of the Chicago CBOE and NYSE MKT on
behalf of NYSE Amex Options. See Notice, 79 FR
at 6259 (citing CBOE Rule 6.45A(b)(i)(D) and NYSE
MKT Rule 910NY).
25 According to the Exchange, at this time, no
OTP Holder that currently operates on the
Exchange’s Floor as a Floor Broker enters orders for
its own account, the account of an associated
person, or an account with respect to which it or
an associated person has investment discretion. The
Exchange stated, however, that the Financial
Industry Regulatory Authority, Inc. on behalf of
NYSE Regulation, Inc., monitors whether Floor
Brokers comply with Section 11(a) of the Act. See
id.
26 The crossing scenarios described in Rule 6.47
are: (a) Non-Facilitation (Regular Way) Crosses; (b)
Facilitation Procedures; (c) Crossing Solicited
Orders; (d) Mid-Point Cross; and (e) Customer-toCustomer Cross. The Exchange did not propose any
change to Rule 6.47(d) relating to Mid-Point Cross,
and thus Mid-Point Cross transactions would not be
affected by the proposed rule change. Telephone
conversation between Glenn Gsell, Managing
Director, NYSE Arca and Commission staff, dated
April 23, 2014.
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26475
to any non-Customer bids or offers on
the Consolidated Book that are priced
better than the proposed execution
price.27 The Exchange noted that Floor
Brokers would be required to trade
against equal and better-priced
Customer bids or offers on the
Consolidated Book, any better-priced
bids or offers of non-Customers on the
Consolidated Book and any nonCustomer bids or offers that are ranked
ahead of equal-priced Customer bids or
offers, before attempting a cross
transaction.28 Consistent with proposed
Rule 6.75(a), Floor Brokers would not be
required to trade against equal-priced
non-Customer bids and offers that are
ranked behind such Customer and nonCustomer bids and offers.29
The Exchange stated that it would
announce the implementation date of
the proposed rule change by Trader
Update to be published no later than 90
days following approval 30 and the
implementation date would be no later
than 90 days following the issuance of
the Trader Update.
III. Comment Letters and NYSE Arca’s
Response
The Commission received ten
comment letters from seven
commenters.31 NYSE Arca submitted a
response to the comment letters.32
Five of the commenters, four of whom
identified themselves as Crowd
Participants on NYSE Arca,33 generally
were supportive of the proposal to
revise the order of priority of bids and
offers when executing orders in open
outcry.34 Four of these commenters
stated a view that the proposal would
allow NYSE Arca to compete with other
exchanges that currently have similar
priority rules.35 Three of these
27 See Notice, 79 FR at 6259–60 for examples
illustrating the proposed priority changes as
applicable for Non-Facilitation and Facilitation
Crosses. See also Amendment No. 1, supra note 7.
28 See Notice, 79 FR at 6259.
29 The Exchange stated its belief that affording
priority to Crowd Participants ahead of such nonCustomer interest on the Consolidated Book would
create an increased incentive for block-sized
transactions on the Floor. See Notice, 79 FR at 6259.
30 See Notice, 79 FR at 6260.
31 See supra note 5.
32 See supra note 6.
33 See Casey Letter (Floor Broker); Alvira Letter
(Market Maker); Hart Letters I and II (Market
Maker); Cutler Letter (Crowd Participant), supra
note 5.
34 See Story Letter I; Casey Letter; Alvira Letter;
Hart Letter I; Cutler Letter; Hart Letter II; and Story
Letter II.
35 See Casey Letter (‘‘The Proposal would still
leave Arca Crowd Participants at a slight
disadvantage to crowd participants on CBOE and
Amex, but would go a long way towards leveling
the playing field’’); Alvira Letter (‘‘I would like to
see us in a competitive balance with the AMEX who
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commenters stated that the proposal
would allow Crowd Participants to
compete with bids and offers of nonCustomers on the Consolidated Book,36
and two of them stated that Crowd
Participants were the market
participants most likely to provide
services during times of market
duress.37 Two commenters also noted
that the rule change would maintain
priority for Customer orders resting on
the Consolidated Book.38
Two commenters stated their belief
that the proposal would increase
competition on the floor for orders,39
and one of these commenters noted that
this competition would benefit the
investing public.40 Similarly, two
commenters stated their view that the
proposal would improve investor
executions on the floor.41 One
commenter noted that the proposal
have already implemented the change’’); Cutler
Letter (‘‘AMEX and CBOE currently have similar
rules in place’’); and Hart Letter II (‘‘This would
enable the PCX to level the rules with other
exchanges’’). See also SIG Letter (‘‘the proposal at
least relates in part to a legitimate competitive
concern’’).
36 See Casey Letter (‘‘The current market structure
leaves NYSE Arca Crowd Participants and their
customers at a distinct disadvantage . . . to noncustomer professional traders, including High
Frequency Traders’’); Hart Letter I (‘‘This rule
disadvantages floor based market makers, which are
the only ones providing liquidity when the markets
are under duress’’); and Cutler Letter (‘‘This
Proposed Rule change will level the competitive
balance between floor market makers and electronic
non-customer professional traders’’).
37 See Hart Letter I (‘‘market makers . . . are the
only ones providing liquidity when the markets are
under duress’’) and Story Letter II (‘‘Perhaps one of
the most compelling arguments for floor based
market-makers is that they are required to stand in
and make two-sided markets in volatile
environments. They cannot just turn off the
machines and walk away’’).
38 See Story Letter I (‘‘It will allow for price
discovery and improvement, but at the same time
maintaining protection for customer orders resting
on the order book’’) and Casey Letter (‘‘As Crowd
Participants will still be required to interact with
any Customer orders in the Consolidated Book,
public Customers will not be adversely affected’’).
39 See Casey Letter (‘‘The Proposal, by creating
more uniform open outcry priority rules across
floors, will increase competition for execution of
these negotiated transactions’’) and Story Letter II
(‘‘This filing will create an advantage for price
improving CUSTOMER orders’’) (emphasis in
original).
40 See Casey Letter (‘‘Increasing competition in
financial markets is nearly always beneficial for
investors; the Proposal would increase competition
among options floor brokers, and would ultimately
benefit the investing public’’).
41 See Story Letter I (‘‘This rule change will allow
market participants to IMPROVE fills for customers
without creating any disadvantage for other market
participants’’) and Casey Letter (‘‘The execution of
sizeable negotiated transactions in listed options is
an important service provided to investors almost
exclusively by the few remaining options Floor
Brokers. The Proposal . . . will provide investors
with greater flexibility, greater access to liquidity,
and lower execution costs’’) (emphasis in original).
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would create an advantage for price
improving customers.42
Two commenters expressed concerns
about the proposal.43 One commenter
stated its view that the proposal would
disenfranchise and disadvantage certain
market participants, and suggested
instead that the Exchange give size
preference for equal bid prices.44 The
commenter believed that such
preference would be a more fair way of
revising the priority of bids and offers.45
This commenter further noted that,
under the Exchange’s proposal, even
small bids from Crowd Participants
would take priority over electronic nonCustomer bids.46 The same commenter
also noted its belief that best execution
is not enhanced by allowing more
exchanges to disadvantage other
traders.47 The commenter suggested
that, regardless of the merits of high
frequency trading, there was no reason
to disadvantage all non-Customers by
giving priority to one class of traders
that would allow them to jump ahead of
the queue.48 One commenter who
supported the proposal took issue with
views expressed by this commenter and
noted that current NYSE Arca rules are
structured so as to disadvantage on-floor
market makers.49
Another commenter also raised
concerns with the proposal.50 The
commenter acknowledged that the
proposal would reduce the number of
instances where high-frequency, nonCustomer orders arriving on to the book
could cause Crowd Participants to be
‘‘scaled-back’’ from agreed upon
negotiated amounts. The commenter
acknowledged that this ‘‘scaling back’’
currently presented certain operational
and hedging challenges to Crowd
Participants.51 The commenter
remarked, however, that the proposal
apparently was focused on attracting
block cross volume to the Exchange.52
The commenter noted that when
NYSE Arca uses the term ‘‘Crowd
Participants,’’ it appears to refer to offfloor trading houses that attempt to
42 See
Story Letter II.
Kohen Letter I; Kohen II; and SIG Letter.
44 See Kohen Letter I.
45 See Kohen Letter I.
46 See Kohen Letter I (‘‘otherwise Crowd
Participants’ 1 contract or 100 share bid will always
take priority’’).
47 See Kohen Letter II.
48 See Kohen Letter II.
49 See Story Letter II.
50 See SIG Letter.
51 See SIG Letter at 1.
52 See SIG Letter at 1 (‘‘This focus is made
apparent by Arca when it asserts that the new rule
. . . will provide greater opportunity for bids and
offers of crowd participants to participate in open
outcry transaction [sic] and therefore promote
larger-sized negotiated transactions’’).
43 See
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Sfmt 4703
internalize, in large part, block orders
from institutional customers (i.e., clean
cross orders). The commenter
acknowledged that this term also
includes option market makers on the
NYSE Arca Floor, but stated its view
that the market maker participation in
such orders is often minimal as a
percentage of the total order size.53 The
commenter stated that the majority of
available market maker liquidity at the
Exchange is represented by a group of
off-floor market maker firms that are
collectively responsible for over 90% of
displayed liquidity in multiply traded
options, rather than on-floor market
makers.54
The commenter further stated its view
that the proposal would attract more
clean-cross type orders that it believes
would further insulate customer interest
from competition by parties other than
crowd participants.55 In its view,
because such negotiations usually occur
outside the view of off-floor market
makers, the crosses often occur at prices
that have not been sufficiently vetted by
those most likely to offer price
improvement.56 Given its concerns, the
commenter believed that the proposal
would be detrimental to investors, as
the opportunity for price improvement
would be significantly diminished.57
The commenter stated that the
proposal did not provide an explanation
regarding how more crowd participation
in larger-sized block floor crosses would
benefit customers or the market in
general.58 The commenter
acknowledged that, as other floor
exchanges have rules that place booked
parity interest behind crowd
participants, NYSE Arca’s proposal at
least relates in part to a legitimate
competitive concern for the Exchange.59
53 See
SIG Letter at 2.
SIG Letter at 2. The commenter remarked
that, due to the off-floor market makers, electronic
crossing systems for block sized orders generally
have shown to be a better alternative to floor
crosses, at least on a transparency and price
competition basis. Id.
55 See SIG Letter at 2.
56 See SIG Letter at 2. The commenter also noted
that it had submitted a Petition for Rulemaking filed
with the Commission in April 2013. The
commenter represented that, in that petition,
several market making firms (including the
commenter) asserted their belief that exchanges
with trading floors would generate better priced
executions for customers if they required crosses to
be auctioned through electronic systems that
included off-floor registered market makers in the
respective option classes. See Petition for
Rulemaking Regarding Option Floor Crosses, File
No. 4–662 (April 22, 2013), available at https://
www.sec.gov/rules/petitions/2013/petn4–662.pdf.
57 See SIG Letter at 2–3.
58 See SIG Letter at 3.
59 See SIG Letter at 3 (‘‘No doubt, Arca relies
heavily on open outcry crosses for transaction
volume. And, no doubt, the more often that high54 See
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However, the commenter stated that it
was important that exchanges give
sufficient reason why a proposed rule is
not injurious to customers or the market
in general, and that the Exchange’s
proposal fails to give such reasons,
perhaps, as the commenter opined,
because there were none to give.60 The
commenter requested that the
Commission establish the reasoning
behind the Exchange’s desire to increase
block-cross volume and the reasons, if
any, for NYSE Arca’s belief that more
(and cleaner) block floor crosses were
good for investors.61
One commenter who supported the
proposal raised issues with the
arguments made by the commenter who
expressed several concerns regarding
the proposal.62 The commenter who
supported the proposal stated that the
other commenter’s concerns were
misguided and unfounded because the
proposal would allow for price
improvement on any size order, whether
large or not. The commenter who
supported the proposal also noted the
proposal would allow large marketmaking groups like that commenter to
continue to provide inside markets and
actually trade at those prices on NYSE
Arca.63 The commenter who supported
the proposal disagreed with the
suggestion that the proposal was
necessarily about attracting cleancrosses outside the view of off-floor
market makers, and stated its belief that
the rule was designed to provide
opportunity to improve markets.64
NYSE Arca provided a response letter
addressing issues raised by the
commenters.65 NYSE Arca emphasized
that the proposal would align the rules
of the Exchange with other U.S. options
exchange trading floors, but with a
unique caveat that any non-Customer
electronic interest with time priority
over a Customer order in the Book also
would maintain priority over floor
participants.66
In response to one commenter’s
suggestion that the Exchange adopt a
pure size priority model,67 NYSE Arca
stated that a wholesale restructuring of
its priority model was beyond the scope
of the current proposal.68 NYSE Arca
frequency professional booked orders break-up
‘‘matched’’ floor crosses, the more likely it becomes
that off-floor facilitating firms will send their orders
to other exchanges to be crossed’’).
60 See SIG Letter at 3.
61 See SIG Letter at 3.
62 See Story Letter II.
63 See Story Letter II.
64 See Story Letter II.
65 See NYSE Arca Response Letter.
66 See NYSE Arca Response Letter at 1–4.
67 See Kohen Letters I and II.
68 See NYSE Arca Response Letter at 2.
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further noted its view that such a model
would unduly disadvantage small size
retail customer orders by allowing laterarriving professional participants
willing to trade a larger quantity to be
accorded priority.69
In response to one commenter who
expressed several concerns regarding
the proposal, NYSE Arca stated that the
concerns about the practice of crossing
institutional orders without electronic
participants providing price
improvement was unrelated to the
proposal to allocate priority among
participants at the same price.70 NYSE
Arca noted that its rules would continue
to give priority to participants who
display an improved price.71
NYSE Arca disagreed with that
commenter’s suggestion that the
proposal would attract more clean-cross
type orders, noting that the proposal
was intended to promote liquidity and
price discovery, and stated that nothing
would ‘‘insulate customer interest from
competition by parties other than crowd
participants.’’ 72 NYSE Arca stated that
the proposal is intended to promote
liquidity and price discovery on the
Exchange by adopting a priority
structure that would be similar to, but
more favorable for electronic nonCustomer participants than, the priority
structure that exists on other U.S.
options trading floors.73 The Exchange
pointed out that the execution price
would have to be equal to or better than
the NBBO and that Crowd Participants
would have to yield to superior
electronic bids or offers.74 NYSE Arca
stated further that the proposal would
not reduce the ability or incentive for
any participant to improve its displayed
quote electronically, as the proposal
only would impact the allocation of
orders among multiple participants at
the same price.75
In response to the commenter’s
request that the Exchange explain why
more (and cleaner) block floor crosses
are good for investors, the Exchange
noted its view that institutional trading
desks provide a valuable service by
providing liquidity to their customers
for block-size orders.76 The Exchange
stated, however, that it did not believe
that the total level of larger-size block
floor crosses in the industry would
increase as a result of its proposal.77 The
Exchange noted that other trading floors
69 See
NYSE Arca Response Letter at 2.
NYSE Arca Response Letter at 2.
71 See NYSE Arca Response Letter at 2.
72 See NYSE Arca Response Letter at 2–3.
73 See NYSE Arca Response Letter at 3.
74 See NYSE Arca Response Letter at 3.
75 See NYSE Arca Response Letter at 3.
76 See NYSE Arca Response Letter at 3.
77 See NYSE Arca Response Letter at 3.
70 See
PO 00000
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Fmt 4703
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26477
currently execute existing institutional
block cross volume, and the Exchange’s
goal was to offer an alternative venue for
such executions.78
IV. Proceedings To Determine Whether
To Disapprove SR–NYSEArca–2014–04
and Grounds for Disapproval Under
Consideration
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) of the Act 79 to determine
whether the proposed rule change
should be approved or disapproved.80
Institution of such proceedings is
appropriate at this time in view of the
legal and policy issues that are raised by
the proposal and are discussed below.
As noted above, institution of
proceedings does not indicate that the
Commission has reached any
conclusions with respect to any of the
issues involved. Rather, as described in
greater detail below, the Commission
seeks and encourages interested persons
to comment on the proposal, as
modified by Amendment No. 1, and
provide the Commission with additional
comment to inform the Commission’s
analysis whether to approve or
disapprove the proposed rule change, as
modified by Amendment No. 1.
Pursuant to Section 19(b)(2)(B) of the
Act, the Commission is providing notice
of the grounds for disapproval under
consideration. In particular, Section
6(b)(5) of the Act 81 requires that the
rules of an exchange be designed,
among other things, to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest; and are not designed to
permit unfair discrimination between
customers, issuers, brokers, or dealers.
In addition, Section 6(b)(8) of the Act 82
requires that rules of an exchange do not
impose any burden on competition not
78 See NYSE Arca Response Letter at 3. The
Exchange also provided examples where a firm
looking to facilitate its customer order might choose
to send the order to an exchange other than NYSE
Arca under the Exchange’s current priority rules.
79 15 U.S.C. 78s(b)(2)(B).
80 Section 19(b)(2)(B) of the Act provides that
proceedings to determine whether to disapprove a
proposed rule change must be concluded within
180 days of the date of publication of notice of the
filing of the proposed rule change. The time for
conclusion of the proceedings may be extended for
up to an additional 60 days if the Commission finds
good cause for such extension and publishes its
reasons for so finding or if the self-regulatory
organization consents to the extension.
81 15 U.S.C. 78f(b)(5).
82 15 U.S.C. 78f(b)(8).
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26478
Federal Register / Vol. 79, No. 89 / Thursday, May 8, 2014 / Notices
necessary or appropriate in furtherance
of the Act.
NYSE Arca’s proposal would revise
the order of priority of bids and offers
during the execution of orders in open
outcry on NYSE Arca’s Floor. The
Exchange proposed to restructure its
priority rules so that bids and offers of
Crowd Participants would have priority
over equal-priced bids and offers of
Customer bids and offers on the
Consolidated Book and bids and offers
of non-Customers on the Consolidated
Book that are ranked in time priority
behind any equal-priced Customer bids
and offers on the Consolidated Book.
Thus, equal-priced Customer interest
would continue to be afforded priority
over Crowd Participants in the
execution of an open outcry transaction.
In addition, consistent with the existing
price/time priority presently applicable
to bids and offers on the Consolidated
Book, equal-priced non-Customer bids
and offers ranked in time priority ahead
of Customer interest also would be
afforded priority over Crowd
Participants in the execution of an open
outcry transaction.
The Exchange believes that its
proposal strikes the appropriate balance
between encouraging larger negotiated
transactions in open outcry, while at the
same time protecting Customer interest
on the Consolidated Book, and any
interest that has time priority over such
protected Customer interest. The
Exchange believes that larger-sized
negotiated transactions will in turn lead
to greater competition for orders,
creating a more robust open outcry
market and benefiting investors who
choose to send orders to the Exchange.
In the Exchange’s view, the proposal
would align its rules governing priority
during open outcry transactions with
the floor priority rules of other U.S.
options exchanges, except that any nonCustomer interest in the Consolidated
Book with time priority over a booked
Customer order would maintain priority
over the trading crowd.
As detailed above, five commenters
favored the proposal,83 and two
commenters expressed concerns about
the proposal.84 One of these
commenters stated its view that the
Exchange had not provided an
explanation regarding how more crowd
participation in larger-sized block floor
crosses would benefit customers or the
market in general.85 This commenter
stated its belief that the proposal would
further insulate customer interest from
competition by off-floor market makers
83 See
supra note 33.
supra note 43.
85 See SIG Letter.
84 See
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that primarily display their liquidity
electronically, who the commenter
believes would be most likely to offer
price improvement. The other
commenter who questioned the
proposal believed that the proposal
could disenfranchise and disadvantage
certain market participants and suggest
that size preference be given for equal
bid prices. The Exchange in response
stated that the first commenter’s
concerns were entirely unrelated to the
proposal and that the proposal was
instead intended to promote liquidity
and price discovery, and that the second
commenter’s suggestion on size priority
was beyond the scope of the proposal.
The Commission believes that
questions are raised as to whether NYSE
Arca’s proposal is consistent with: (1)
The requirements of Section 6(b)(5) of
the Act, including whether the
Exchange’s proposed revisions to its
rules regarding the order of priority in
open outcry are designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest; and are not designed to
permit unfair discrimination between
customers, issuers, brokers, or dealers;
and (2) the requirements of Section
6(b)(8) of the Act, including whether the
Exchange’s proposed revisions to its
rules regarding the order or priority in
open outcry impose any unnecessary or
inappropriate burden on competition.
The Commission believes that the issues
raised by the proposed rule change can
benefit from additional consideration
and evaluation.
V. Request for Written Comments
The Commission requests that
interested persons provide written
submissions of their views, data and
arguments with respect to the concerns
identified above, as well as any others
they may have with the proposal, as
modified by Amendment No. 1. In
particular, the Commission invites the
written views of interested persons
concerning whether the proposed rule
change, as modified by Amendment No.
1, is inconsistent with Sections 6(b)(5)
and 6(b)(8) or any other provision of the
Act, or the rules and regulations
thereunder. Although there do not
appear to be any issues relevant to
approval or disapproval that would be
facilitated by an oral presentation of
views, data, and arguments, the
Commission will consider, pursuant to
Rule 19b–4, any request for an
PO 00000
Frm 00077
Fmt 4703
Sfmt 4703
opportunity to make an oral
presentation.86
Interested persons are invited to
submit written data, views and
arguments concerning Amendment No.
1 and regarding whether the proposed
rule change, as modified by Amendment
No. 1, should be approved or
disapproved by May 29, 2014. Any
person who wishes to file a rebuttal to
any other person’s submission must file
that rebuttal by June 12, 2014.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSEArca–2014–04 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–NYSEArca–2014–04. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method.
The Commission will post all
comments on the Commission’s Internet
Web site (https://www.sec.gov/rules/
sro.shtml). Copies of the submission, all
subsequent amendments, all written
statements with respect to the proposed
rule change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
86 Section 19(b) (2) of the Act, as amended by the
Securities Act Amendments of 1975, Public Law
94–29 (June 4, 1975), grants the Commission
flexibility to determine what type of proceeding—
either oral or notice and opportunity for written
comments—is appropriate for consideration of a
particular proposal by a self-regulatory
organization. See Securities Act Amendments of
1975, Senate Comm. on Banking, Housing & Urban
Affairs, S. Rep. No. 75, 94th Cong., 1st Sess. 30
(1975).
E:\FR\FM\08MYN1.SGM
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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–NYSEArca–2014–04 and
should be submitted on or before May
29, 2014. If comments are received, any
rebuttal comments should be submitted
by June 12, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.87
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–10535 Filed 5–7–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72088; File No. SR–EDGX–
2014–14]
Self-Regulatory Organizations; EDGX
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend EDGX Rule
11.5 Regarding the Route Peg Order
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of these statements may be examined at
the places specified in Item IV below.
The self-regulatory organization has
prepared summaries, set forth in
sections A, B and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
The Exchange proposes to amend the
Route Peg Order under Rule 11.5(c)(17)
to permit: (i) Executions against routable
orders that are equal to or less than the
aggregate size of the Route Peg Order
interest available at that price; and (ii)
Users 3 to add a minimum execution
quantity instruction. All of the changes
described herein are applicable to EDGX
Members.
1. Purpose
The Exchange proposes to amend the
Route Peg Order under Rule 11.5(c)(17)
to permit: (i) Executions against routable
orders that are equal to or less than the
aggregate size of the Route Peg Order
interest available at that price, which
would replace the current requirement
that routable orders be equal to or less
than the size of an individual Route Peg
Order; and (ii) Users to add a minimum
execution quantity instruction.
A Route Peg Order is a non-displayed
limit order that posts to the EDGX Book,
and thereafter is eligible for execution at
the national best bid (‘‘NBB’’) for buy
orders and national best offer (‘‘NBO’’)
for sell orders against routable orders
that are equal to or less than the size of
the Route Peg Order.4 Route Peg Orders
are passive, resting orders on the EDGX
Book 5 and do not take liquidity. Route
Peg Orders may be entered, cancelled,
and cancelled/replaced prior to and
during Regular Trading Hours.6 Route
Peg Orders are eligible for execution in
a given security during Regular Trading
Hours, except that, even after the
commencement of Regular Trading
Hours, Route Peg Orders are not eligible
for execution (1) in the opening cross,
and (2) until such time that regular
session orders in that security can be
87 17 CFR 200.30–3(a)(12); 17 CFR 200.30–
3(a)(57).
1 15 U.S.C.78s(b)(1).
2 17 CFR 240.19B–4.
3 The term ‘‘User’’ is defined as ‘‘any Member or
Sponsored Participant who is authorized to obtain
access to the System pursuant to Rule 11.3.’’ See
Exchange Rule 1.5(ee).
4 See Securities Exchange Act Release No. 67726
(August 24, 2012), 77 FR 52771 (August 30, 2012)
(Order Approving the Route Peg Order).
5 The ‘‘EDGX Book’’ is defined as ‘‘the System’s
electronic file of orders.’’ See Exchange Rule 1.5(d).
6 ‘‘Regular Trading Hours’’ is defined as ‘‘the time
between 9:30 a.m. and 4:00 p.m. Eastern Time.’’ See
Exchange Rule 1.5(y).
May 2, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on April 21,
2014, EDGX Exchange, Inc. (‘‘EDGX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the 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
emcdonald on DSK67QTVN1PROD with NOTICES
The text of the proposed rule change
is available on the Exchange’s Internet
Web site at www.directedge.com, at the
Exchange’s principal office, and at the
Public Reference Room of the
Commission.
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Sfmt 4703
26479
posted to the EDGX Book. A Route Peg
Order does not execute at a price that
is inferior to a Protected Quotation, and
is not permitted to execute if the NBBO
is locked or crossed. Any and all
remaining, unexecuted Route Peg
Orders are cancelled at the conclusion
of Regular Trading Hours.
Aggregate Size
As noted above, Route Peg Orders will
currently only trade with routable
orders that are equal to or smaller in
quantity than the order quantity of an
individual Route Peg Order. The
Exchange proposes to amend the
operation of the Route Peg Order to
permit it to execute against routable
orders that are equal to or less than the
aggregate size of the Route Peg Order
interest available at that price. The
Exchange believes this change would
incentivize Users seeking large size
executions to route orders to the
Exchange by increasing opportunities
for executions against Route Peg Orders.
This proposed change to the Route Peg
Order is similar to the operation of the
Nasdaq Stock Market LLC’s (‘‘Nasdaq’’)
Supplemental Order and NYSE Arca,
Inc.’s (‘‘NYSE Arca’’) Tracking Order,
which both only execute if the size of
the incoming order is less than or equal
to the aggregate size of Supplemental
Order or Tracking Order interest
available at that price.7
Minimum Execution Quantity
The Exchange also proposes to amend
the Route Peg Order under Rule 11.5 to
add optional functionality to allow
Users to designate a minimum
execution quantity. As proposed, a
minimum execution quantity on a Route
Peg order will no longer apply where
the number of shares remaining after a
partial execution are less than the
minimum execution quantity. This
proposed change is similar to the
operation of NYSE Arca, Inc.’s Tracking
Order, which permits Tracking Orders
to include a minimum size
requirement.8 The Exchange believes
that providing Users with the option to
designate a minimum quantity for Route
Peg Orders will promote the entry of
7 See Nasdaq Rules 4751(f)(14), 4751(g) and
4757(a)(1)(D); see also NYSE Arca Rule 7.31(f).
8 On NYSE Arca, if the Tracking Order with a
minimum size requirement is executed but not
exhausted and the remaining portion of the
Tracking Order is less than the minimum size
requirement, NYSE Arca would cancel the Tracking
Order. See NYSE Arca Rule 7.31(f). See also
Securities Exchange Act Release No. 71366 (January
22, 2014), 79 FR 4515 (January 28, 2014) (SR–
NYSEArca-2014–01) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change
Amending NYSE Arca Equities Rule 7.31 to Add a
Minimum Execution Size Designation for Tracking
Orders).
E:\FR\FM\08MYN1.SGM
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]]>Agencies
[Federal Register Volume 79, Number 89 (Thursday, May 8, 2014)]
[Notices]
[Pages 26474-26479]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-10535]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72081; File No. SR-NYSEArca-2014-04]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Amendment No. 1 and Order Instituting Proceedings To Determine
Whether To Approve or Disapprove a Proposed Rule Change, as Modified by
Amendment No. 1, To Amend NYSE Arca, Inc.'s Rules by Revising the Order
of Priority of Bids and Offers When Executing Orders in Open Outcry
May 2, 2014.
I. Introduction
On January 15, 2014, NYSE Arca, Inc. (``Exchange'' or ``NYSE
Arca'') 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 revise the order of priority of bids and offers
when executing orders in open outcry. The proposed rule change was
published for comment in the Federal Register on February 3, 2014.\3\
On March 18, 2014, the Commission extended the time period for
Commission action on the proposal to May 2, 2014.\4\ The Commission
received ten comment letters from seven commenters regarding the
proposal,\5\ as well as a response to the comment letters from NYSE
Arca.\6\ On April 29, 2014, the Exchange filed Amendment No. 1 to the
proposed rule change.\7\ The Commission is publishing this notice and
order to solicit comments on the proposed rule change, as modified by
Amendment No. 1, from interested persons and to institute proceedings
pursuant to Section 19(b)(2)(B) of the Act \8\ to determine whether to
approve or disapprove the proposed rule change, as modified by
Amendment No. 1. Institution of proceedings does not indicate that the
Commission has reached any conclusions with respect to the proposed
rule change, nor does it mean that the Commission will ultimately
disapprove the proposed rule change. Rather, as discussed below, the
Commission seeks additional input from interested parties on the
changes to the proposed rule change, as modified by Amendment No. 1.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 71425 (January 28,
2014), 79 FR 6258 (``Notice'').
\4\ See Securities Exchange Act Release No. 71733 (March 18,
2014), 79 FR 16072 (March 24, 2014).
\5\ See Letter from Darren Story, dated January 29, 2014
(``Story Letter I''); Letter from Abraham Kohen, AK FE Consultants
LLC, dated January 31, 2014 (``Kohen Letter I''); Letter from David
Spack, Chief Compliance Officer, Casey Securities, LLC, dated
February 3, 2014 (``Casey Letter''); Letter from Abraham Kohen, AK
FE Consultants LLC, dated February 4, 2014 (``Kohen Letter II'');
Letter from Angel Alvira, dated February 12, 2014 (``Alvira
Letter''); Letter from Donald Hart, dated February 12, 2014 (``Hart
Letter I''); Letter from Doug Patterson, Chief Compliance Officer,
Cutler Group, LP, dated February 13, 2014 (``Cutler Letter'');
Letter from Donald Hart, dated February 18, 2014 (``Hart Letter
II''); Letter from Gerald D. O'Connell, Chief Regulatory Officer,
Susquehanna International Group, LLP (``SIG''), dated March 14, 2014
(``SIG Letter''); and Letter from Darren Story, dated March 21, 2014
(``Story Letter II'').
\6\ See Letter from Martha Redding, Chief Counsel, NYSE
Euronext, dated April 4, 2014 (``NYSE Arca Response'').
\7\ In Amendment No. 1, the Exchange revised the rule text for
proposed Rule 6.47: (1) To clarify that Floor Brokers, when crossing
two orders in open outcry, may not trade through any non-Customer
bids or offers on the Consolidated Book that are priced better than
the proposed execution price; and (2) to conform the term ``bids and
offers'' to ``bids or offers'' in paragraphs (a) and (c) thereunder.
Amendment No. 1 has been placed in the public comment file for SR-
NYSEArca-2014-04 at https://www.sec.gov/comments/sr-nysearca-2014-04/nysearca201404.shtml (see letter from Martha Redding, Chief Counsel,
NYSE Euronext, to Kevin M. O'Neill, Deputy Secretary, Commission,
dated April 30, 2014) and also is available on the Exchange's Web
site at https://www.nyse.com/nysenotices/nysearca/rule-filings/pdf.action;jsessionid=FACF4F6772B1316D973F5D4E2D258ACE?file--no=SR-
NYSEArca-2014-04&seqnum=2.
\8\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
II. Description of the Proposal
NYSE Arca proposes to amend its rules governing the priority of
bids and offers on its Consolidated Book by revising the order of
priority in open outcry to afford priority to bids and offers
represented by Market Makers \9\ and Floor Brokers \10\ (collectively,
``Crowd Participants'') \11\ over certain equal-priced bids and offers
of non-Customers \12\ on the Consolidated Book \13\ during the
execution of an order in open outcry on the Floor \14\ of the
Exchange.\15\
---------------------------------------------------------------------------
\9\ See Rule 6.32 (Market Maker Defined).
\10\ See Rule 6.43 (Options Floor Broker Defined).
\11\ The term ``Crowd Participants'' means the Market Makers
appointed to an option issue under Rule 6.35, and any Floor Brokers
actively representing orders at the best bid or offer on the
Exchange for a particular option series. See Rule 6.1(b)(38).
\12\ A non-Customer is a market participant who does not meet
the definition of Customer as defined in paragraph (c)(6) of Rule
15c3-1 under the Securities Exchange Act of 1934, 17 CFR 240.15c3-1.
See Rule 6.1(b)(29).
\13\ The Exchange also proposed to make non-substantive changes
to existing rule text contained in Rules 6.47 and 6.75. See Notice,
79 FR at 6260 for a description of these non-substantive changes.
\14\ See Rule 1.1(i).
\15\ The term ``Consolidated Book'' means the Exchange's
electronic book of limit orders for the accounts of Public Customers
and broker-dealers, and Quotes with Size. See Rule 6.1(b)(37).
---------------------------------------------------------------------------
Current Rule 6.75(a) provides that any bids displayed on the
Consolidated Book have priority over same-priced bids represented in
open outcry. Such priority also is described in current Rule 6.47,
which governs crossing orders in open outcry. Floor Broker crossing
transactions, as described in Rule 6.47(a)(3), may not trade ahead of
bids or offers on the Consolidated Book that are priced equal to or
better than the proposed crossing price. The Exchange stated that,
because of this priority afforded to the Consolidated Book, Crowd
Participants who have negotiated a large transaction ultimately might
not be able to participate in its execution.\16\
---------------------------------------------------------------------------
\16\ See Notice, 79 FR at 6258. The Exchange stated that Crowd
Participants could negotiate a transaction with an understanding of
the make-up of bids and offers on the Consolidated Book at the
beginning of open outcry. However, as the trade is executed, the
Consolidated Book could update with newly-arriving electronically-
entered bids and offers that have priority under current Rule
6.75(a). The Exchange noted that, given the speed at which quotes
can flicker in the Consolidated Book, Crowd Participants who have
agreed to a transaction in open outcry do not know if they will
actually participate on the trade until after execution. Id. at
6258-59.
---------------------------------------------------------------------------
The Exchange proposed to restructure its priority rules so that
bids and offers of Crowd Participants would have priority over equal-
priced bids and offers of non-Customers on the Consolidated Book that
are ranked in time priority behind any equal-priced Customer bids and
offers on the Consolidated Book. Equal-priced Customer \17\ interest
would continue to be afforded priority over Crowd Participants in the
execution of an open outcry transaction. In addition, consistent with
the existing price/time priority presently applicable to bids and
offers on the Consolidated Book, equal-priced non-Customer bids and
offers ranked in time priority ahead of Customer interest also would be
afforded priority over Crowd Participants in the execution of an open
outcry transaction. In the Exchange's view, the proposed rule change
strikes the appropriate balance between encouraging larger negotiated
transactions in open outcry, while at the
[[Page 26475]]
same time protecting Customer interest on the Consolidated Book, and
any interest that has time priority over such protected Customer
interest.\18\
---------------------------------------------------------------------------
\17\ See supra note 12.
\18\ See Notice, 79 FR at 6259.
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To effect this change to its floor priority rules, the proposal
would amend the Exchange's rules as follows. As noted above, Rule
6.75(a) presently states that the highest bid shall have priority but
where two or more bids for the same option contract represent the
highest price and one such bid is displayed on the Consolidated Book,
such bid shall have priority over any bid at the post (i.e., the
Trading Crowd.) \19\ The Exchange proposed to amend Rule 6.75(a) \20\
by limiting the priority of bids in the Consolidated Book over bids in
the Trading Crowd solely to those bids for Customers along with non-
Customers that are ranked in time priority ahead of such Customers.\21\
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\19\ The term ``Trading Crowd'' means all Market Makers who hold
an appointment in the option classes at the trading post where such
trading crowd is located and all Market Makers who regularly effect
transactions in person for their Market Maker accounts at that
trading post, but generally will consist of the individuals present
at the trading post. See Rule 6.1(b)(30).
\20\ The Exchange noted that the changes made to Rule 6.75(a)
dealing with the priority of ``bids'' also would effect a
corresponding change to the meaning of Rule 6.75(b) dealing with
``offers,'' although there would be no change to the rule text in
Rule 6.75(b). See Notice, 79 FR at 6259.
\21\ See Notice, 79 FR at 6259-60 for examples illustrating how
the Exchange's priority and allocation rules would be applied under
the proposed rule change.
---------------------------------------------------------------------------
Rule 6.76 presently governs order ranking, display and allocation
of orders on the NYSE Arca Options platform (``OX system''). The
Exchange proposed new paragraph (d) to Rule 6.76 that would set forth
the priority of bids and offers on the Consolidated Book against orders
executed through open outcry in the Trading Crowd. The proposed text
provides a step-by step-description of the order of priority to be
afforded bids and offers of both Customers and non-Customers on the
Consolidated Book. The Exchange noted that the priority scheme
described in proposed Rule 6.76(d) is consistent with the proposed
changes to Rule 6.75.\22\
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\22\ See Notice, 79 FR at 6259. According to the Exchange, the
inclusion of a description of open outcry priority procedures in
Rule 6.76 would serve as a useful cross reference to Rule 6.75. The
Exchange stated that including such a cross reference is consistent
with similar rule structures by the Chicago Board Options Exchange,
Inc. (``CBOE'') and NYSE MKT LLC (``NYSE MKT''). See id. (citing
CBOE Rule 6.45A(b) and NYSE MKT Rule 964NY(e)).
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The Exchange also proposed to include language in Rule 6.76(d)(4)
that sets forth certain OTP Holder \23\ obligations under Section 11(a)
of the Act.\24\ The proposed rule text states that, notwithstanding the
priority scheme set forth in proposed Rule 6.76(d)(2), an OTP Holder
effecting a transaction on the Floor for its own account, the account
of an associated person, or an account with respect to which it or an
associated person has investment discretion pursuant to the ``G Rule''
must still yield priority to any equal-priced non-OTP Holder bids or
offers on the Consolidated Book.\25\
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\23\ See Rule 1.1(q).
\24\ Specifically, pursuant to Section 11(a)(1)(G) of the
Exchange Act and Rule 11a1-1(T) thereunder (the ``G Rule''), an OTP
Holder may effect transactions on the Floor for its own account, the
account of an associated person, or an account with respect to which
it or an associated person has investment discretion, provided that
such transaction yields priority in execution to orders for the
account of persons who are not OTP Holders or associated with OTP
Holders. See 15 U.S.C. 78k(a)(1)(G) and 17 CFR 11a1-1(T). The
Exchange stated that the proposed rule text is based on the rules of
the Chicago CBOE and NYSE MKT on behalf of NYSE Amex Options. See
Notice, 79 FR at 6259 (citing CBOE Rule 6.45A(b)(i)(D) and NYSE MKT
Rule 910NY).
\25\ According to the Exchange, at this time, no OTP Holder that
currently operates on the Exchange's Floor as a Floor Broker enters
orders for its own account, the account of an associated person, or
an account with respect to which it or an associated person has
investment discretion. The Exchange stated, however, that the
Financial Industry Regulatory Authority, Inc. on behalf of NYSE
Regulation, Inc., monitors whether Floor Brokers comply with Section
11(a) of the Act. See id.
---------------------------------------------------------------------------
Rule 6.47 outlines the procedures used when a Floor Broker attempts
to cross two orders in open outcry. Currently, Floor Brokers must trade
against all equal-priced Customer and non-Customer bids and offers in
the Consolidated Book before effecting a cross transaction in the
Trading Crowd. The Exchange proposed to revise Rule 6.47 to conform the
priority rules applicable to open outcry cross transactions to the
proposed changes described above. Accordingly, the Exchange proposed to
amend the procedures for the crossing scenarios described in Rule 6.47
\26\ by stating that Floor Brokers, when crossing two orders in open
outcry, must yield priority to: (1) Any Customer bids or offers on the
Consolidated Book that are priced equal to or better than the proposed
execution price and to any non-Customer bids or offers on the
Consolidated Book that are ranked ahead of such equal or better-priced
Customer bids or offers; and (2) to any non-Customer bids or offers on
the Consolidated Book that are priced better than the proposed
execution price.\27\ The Exchange noted that Floor Brokers would be
required to trade against equal and better-priced Customer bids or
offers on the Consolidated Book, any better-priced bids or offers of
non-Customers on the Consolidated Book and any non-Customer bids or
offers that are ranked ahead of equal-priced Customer bids or offers,
before attempting a cross transaction.\28\ Consistent with proposed
Rule 6.75(a), Floor Brokers would not be required to trade against
equal-priced non-Customer bids and offers that are ranked behind such
Customer and non-Customer bids and offers.\29\
---------------------------------------------------------------------------
\26\ The crossing scenarios described in Rule 6.47 are: (a) Non-
Facilitation (Regular Way) Crosses; (b) Facilitation Procedures; (c)
Crossing Solicited Orders; (d) Mid-Point Cross; and (e) Customer-to-
Customer Cross. The Exchange did not propose any change to Rule
6.47(d) relating to Mid-Point Cross, and thus Mid-Point Cross
transactions would not be affected by the proposed rule change.
Telephone conversation between Glenn Gsell, Managing Director, NYSE
Arca and Commission staff, dated April 23, 2014.
\27\ See Notice, 79 FR at 6259-60 for examples illustrating the
proposed priority changes as applicable for Non-Facilitation and
Facilitation Crosses. See also Amendment No. 1, supra note 7.
\28\ See Notice, 79 FR at 6259.
\29\ The Exchange stated its belief that affording priority to
Crowd Participants ahead of such non-Customer interest on the
Consolidated Book would create an increased incentive for block-
sized transactions on the Floor. See Notice, 79 FR at 6259.
---------------------------------------------------------------------------
The Exchange stated that it would announce the implementation date
of the proposed rule change by Trader Update to be published no later
than 90 days following approval \30\ and the implementation date would
be no later than 90 days following the issuance of the Trader Update.
---------------------------------------------------------------------------
\30\ See Notice, 79 FR at 6260.
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III. Comment Letters and NYSE Arca's Response
The Commission received ten comment letters from seven
commenters.\31\ NYSE Arca submitted a response to the comment
letters.\32\
---------------------------------------------------------------------------
\31\ See supra note 5.
\32\ See supra note 6.
---------------------------------------------------------------------------
Five of the commenters, four of whom identified themselves as Crowd
Participants on NYSE Arca,\33\ generally were supportive of the
proposal to revise the order of priority of bids and offers when
executing orders in open outcry.\34\ Four of these commenters stated a
view that the proposal would allow NYSE Arca to compete with other
exchanges that currently have similar priority rules.\35\ Three of
these
[[Page 26476]]
commenters stated that the proposal would allow Crowd Participants to
compete with bids and offers of non-Customers on the Consolidated
Book,\36\ and two of them stated that Crowd Participants were the
market participants most likely to provide services during times of
market duress.\37\ Two commenters also noted that the rule change would
maintain priority for Customer orders resting on the Consolidated
Book.\38\
---------------------------------------------------------------------------
\33\ See Casey Letter (Floor Broker); Alvira Letter (Market
Maker); Hart Letters I and II (Market Maker); Cutler Letter (Crowd
Participant), supra note 5.
\34\ See Story Letter I; Casey Letter; Alvira Letter; Hart
Letter I; Cutler Letter; Hart Letter II; and Story Letter II.
\35\ See Casey Letter (``The Proposal would still leave Arca
Crowd Participants at a slight disadvantage to crowd participants on
CBOE and Amex, but would go a long way towards leveling the playing
field''); Alvira Letter (``I would like to see us in a competitive
balance with the AMEX who have already implemented the change'');
Cutler Letter (``AMEX and CBOE currently have similar rules in
place''); and Hart Letter II (``This would enable the PCX to level
the rules with other exchanges''). See also SIG Letter (``the
proposal at least relates in part to a legitimate competitive
concern'').
\36\ See Casey Letter (``The current market structure leaves
NYSE Arca Crowd Participants and their customers at a distinct
disadvantage . . . to non-customer professional traders, including
High Frequency Traders''); Hart Letter I (``This rule disadvantages
floor based market makers, which are the only ones providing
liquidity when the markets are under duress''); and Cutler Letter
(``This Proposed Rule change will level the competitive balance
between floor market makers and electronic non-customer professional
traders'').
\37\ See Hart Letter I (``market makers . . . are the only ones
providing liquidity when the markets are under duress'') and Story
Letter II (``Perhaps one of the most compelling arguments for floor
based market-makers is that they are required to stand in and make
two-sided markets in volatile environments. They cannot just turn
off the machines and walk away'').
\38\ See Story Letter I (``It will allow for price discovery and
improvement, but at the same time maintaining protection for
customer orders resting on the order book'') and Casey Letter (``As
Crowd Participants will still be required to interact with any
Customer orders in the Consolidated Book, public Customers will not
be adversely affected'').
---------------------------------------------------------------------------
Two commenters stated their belief that the proposal would increase
competition on the floor for orders,\39\ and one of these commenters
noted that this competition would benefit the investing public.\40\
Similarly, two commenters stated their view that the proposal would
improve investor executions on the floor.\41\ One commenter noted that
the proposal would create an advantage for price improving
customers.\42\
---------------------------------------------------------------------------
\39\ See Casey Letter (``The Proposal, by creating more uniform
open outcry priority rules across floors, will increase competition
for execution of these negotiated transactions'') and Story Letter
II (``This filing will create an advantage for price improving
CUSTOMER orders'') (emphasis in original).
\40\ See Casey Letter (``Increasing competition in financial
markets is nearly always beneficial for investors; the Proposal
would increase competition among options floor brokers, and would
ultimately benefit the investing public'').
\41\ See Story Letter I (``This rule change will allow market
participants to IMPROVE fills for customers without creating any
disadvantage for other market participants'') and Casey Letter
(``The execution of sizeable negotiated transactions in listed
options is an important service provided to investors almost
exclusively by the few remaining options Floor Brokers. The Proposal
. . . will provide investors with greater flexibility, greater
access to liquidity, and lower execution costs'') (emphasis in
original).
\42\ See Story Letter II.
---------------------------------------------------------------------------
Two commenters expressed concerns about the proposal.\43\ One
commenter stated its view that the proposal would disenfranchise and
disadvantage certain market participants, and suggested instead that
the Exchange give size preference for equal bid prices.\44\ The
commenter believed that such preference would be a more fair way of
revising the priority of bids and offers.\45\ This commenter further
noted that, under the Exchange's proposal, even small bids from Crowd
Participants would take priority over electronic non-Customer bids.\46\
The same commenter also noted its belief that best execution is not
enhanced by allowing more exchanges to disadvantage other traders.\47\
The commenter suggested that, regardless of the merits of high
frequency trading, there was no reason to disadvantage all non-
Customers by giving priority to one class of traders that would allow
them to jump ahead of the queue.\48\ One commenter who supported the
proposal took issue with views expressed by this commenter and noted
that current NYSE Arca rules are structured so as to disadvantage on-
floor market makers.\49\
---------------------------------------------------------------------------
\43\ See Kohen Letter I; Kohen II; and SIG Letter.
\44\ See Kohen Letter I.
\45\ See Kohen Letter I.
\46\ See Kohen Letter I (``otherwise Crowd Participants' 1
contract or 100 share bid will always take priority'').
\47\ See Kohen Letter II.
\48\ See Kohen Letter II.
\49\ See Story Letter II.
---------------------------------------------------------------------------
Another commenter also raised concerns with the proposal.\50\ The
commenter acknowledged that the proposal would reduce the number of
instances where high-frequency, non-Customer orders arriving on to the
book could cause Crowd Participants to be ``scaled-back'' from agreed
upon negotiated amounts. The commenter acknowledged that this ``scaling
back'' currently presented certain operational and hedging challenges
to Crowd Participants.\51\ The commenter remarked, however, that the
proposal apparently was focused on attracting block cross volume to the
Exchange.\52\
---------------------------------------------------------------------------
\50\ See SIG Letter.
\51\ See SIG Letter at 1.
\52\ See SIG Letter at 1 (``This focus is made apparent by Arca
when it asserts that the new rule . . . will provide greater
opportunity for bids and offers of crowd participants to participate
in open outcry transaction [sic] and therefore promote larger-sized
negotiated transactions'').
---------------------------------------------------------------------------
The commenter noted that when NYSE Arca uses the term ``Crowd
Participants,'' it appears to refer to off-floor trading houses that
attempt to internalize, in large part, block orders from institutional
customers (i.e., clean cross orders). The commenter acknowledged that
this term also includes option market makers on the NYSE Arca Floor,
but stated its view that the market maker participation in such orders
is often minimal as a percentage of the total order size.\53\ The
commenter stated that the majority of available market maker liquidity
at the Exchange is represented by a group of off-floor market maker
firms that are collectively responsible for over 90% of displayed
liquidity in multiply traded options, rather than on-floor market
makers.\54\
---------------------------------------------------------------------------
\53\ See SIG Letter at 2.
\54\ See SIG Letter at 2. The commenter remarked that, due to
the off-floor market makers, electronic crossing systems for block
sized orders generally have shown to be a better alternative to
floor crosses, at least on a transparency and price competition
basis. Id.
---------------------------------------------------------------------------
The commenter further stated its view that the proposal would
attract more clean-cross type orders that it believes would further
insulate customer interest from competition by parties other than crowd
participants.\55\ In its view, because such negotiations usually occur
outside the view of off-floor market makers, the crosses often occur at
prices that have not been sufficiently vetted by those most likely to
offer price improvement.\56\ Given its concerns, the commenter believed
that the proposal would be detrimental to investors, as the opportunity
for price improvement would be significantly diminished.\57\
---------------------------------------------------------------------------
\55\ See SIG Letter at 2.
\56\ See SIG Letter at 2. The commenter also noted that it had
submitted a Petition for Rulemaking filed with the Commission in
April 2013. The commenter represented that, in that petition,
several market making firms (including the commenter) asserted their
belief that exchanges with trading floors would generate better
priced executions for customers if they required crosses to be
auctioned through electronic systems that included off-floor
registered market makers in the respective option classes. See
Petition for Rulemaking Regarding Option Floor Crosses, File No. 4-
662 (April 22, 2013), available at https://www.sec.gov/rules/petitions/2013/petn4-662.pdf.
\57\ See SIG Letter at 2-3.
---------------------------------------------------------------------------
The commenter stated that the proposal did not provide an
explanation regarding how more crowd participation in larger-sized
block floor crosses would benefit customers or the market in
general.\58\ The commenter acknowledged that, as other floor exchanges
have rules that place booked parity interest behind crowd participants,
NYSE Arca's proposal at least relates in part to a legitimate
competitive concern for the Exchange.\59\
[[Page 26477]]
However, the commenter stated that it was important that exchanges give
sufficient reason why a proposed rule is not injurious to customers or
the market in general, and that the Exchange's proposal fails to give
such reasons, perhaps, as the commenter opined, because there were none
to give.\60\ The commenter requested that the Commission establish the
reasoning behind the Exchange's desire to increase block-cross volume
and the reasons, if any, for NYSE Arca's belief that more (and cleaner)
block floor crosses were good for investors.\61\
---------------------------------------------------------------------------
\58\ See SIG Letter at 3.
\59\ See SIG Letter at 3 (``No doubt, Arca relies heavily on
open outcry crosses for transaction volume. And, no doubt, the more
often that high-frequency professional booked orders break-up
``matched'' floor crosses, the more likely it becomes that off-floor
facilitating firms will send their orders to other exchanges to be
crossed'').
\60\ See SIG Letter at 3.
\61\ See SIG Letter at 3.
---------------------------------------------------------------------------
One commenter who supported the proposal raised issues with the
arguments made by the commenter who expressed several concerns
regarding the proposal.\62\ The commenter who supported the proposal
stated that the other commenter's concerns were misguided and unfounded
because the proposal would allow for price improvement on any size
order, whether large or not. The commenter who supported the proposal
also noted the proposal would allow large market-making groups like
that commenter to continue to provide inside markets and actually trade
at those prices on NYSE Arca.\63\ The commenter who supported the
proposal disagreed with the suggestion that the proposal was
necessarily about attracting clean-crosses outside the view of off-
floor market makers, and stated its belief that the rule was designed
to provide opportunity to improve markets.\64\
---------------------------------------------------------------------------
\62\ See Story Letter II.
\63\ See Story Letter II.
\64\ See Story Letter II.
---------------------------------------------------------------------------
NYSE Arca provided a response letter addressing issues raised by
the commenters.\65\ NYSE Arca emphasized that the proposal would align
the rules of the Exchange with other U.S. options exchange trading
floors, but with a unique caveat that any non-Customer electronic
interest with time priority over a Customer order in the Book also
would maintain priority over floor participants.\66\
---------------------------------------------------------------------------
\65\ See NYSE Arca Response Letter.
\66\ See NYSE Arca Response Letter at 1-4.
---------------------------------------------------------------------------
In response to one commenter's suggestion that the Exchange adopt a
pure size priority model,\67\ NYSE Arca stated that a wholesale
restructuring of its priority model was beyond the scope of the current
proposal.\68\ NYSE Arca further noted its view that such a model would
unduly disadvantage small size retail customer orders by allowing
later-arriving professional participants willing to trade a larger
quantity to be accorded priority.\69\
---------------------------------------------------------------------------
\67\ See Kohen Letters I and II.
\68\ See NYSE Arca Response Letter at 2.
\69\ See NYSE Arca Response Letter at 2.
---------------------------------------------------------------------------
In response to one commenter who expressed several concerns
regarding the proposal, NYSE Arca stated that the concerns about the
practice of crossing institutional orders without electronic
participants providing price improvement was unrelated to the proposal
to allocate priority among participants at the same price.\70\ NYSE
Arca noted that its rules would continue to give priority to
participants who display an improved price.\71\
---------------------------------------------------------------------------
\70\ See NYSE Arca Response Letter at 2.
\71\ See NYSE Arca Response Letter at 2.
---------------------------------------------------------------------------
NYSE Arca disagreed with that commenter's suggestion that the
proposal would attract more clean-cross type orders, noting that the
proposal was intended to promote liquidity and price discovery, and
stated that nothing would ``insulate customer interest from competition
by parties other than crowd participants.'' \72\ NYSE Arca stated that
the proposal is intended to promote liquidity and price discovery on
the Exchange by adopting a priority structure that would be similar to,
but more favorable for electronic non-Customer participants than, the
priority structure that exists on other U.S. options trading
floors.\73\ The Exchange pointed out that the execution price would
have to be equal to or better than the NBBO and that Crowd Participants
would have to yield to superior electronic bids or offers.\74\ NYSE
Arca stated further that the proposal would not reduce the ability or
incentive for any participant to improve its displayed quote
electronically, as the proposal only would impact the allocation of
orders among multiple participants at the same price.\75\
---------------------------------------------------------------------------
\72\ See NYSE Arca Response Letter at 2-3.
\73\ See NYSE Arca Response Letter at 3.
\74\ See NYSE Arca Response Letter at 3.
\75\ See NYSE Arca Response Letter at 3.
---------------------------------------------------------------------------
In response to the commenter's request that the Exchange explain
why more (and cleaner) block floor crosses are good for investors, the
Exchange noted its view that institutional trading desks provide a
valuable service by providing liquidity to their customers for block-
size orders.\76\ The Exchange stated, however, that it did not believe
that the total level of larger-size block floor crosses in the industry
would increase as a result of its proposal.\77\ The Exchange noted that
other trading floors currently execute existing institutional block
cross volume, and the Exchange's goal was to offer an alternative venue
for such executions.\78\
---------------------------------------------------------------------------
\76\ See NYSE Arca Response Letter at 3.
\77\ See NYSE Arca Response Letter at 3.
\78\ See NYSE Arca Response Letter at 3. The Exchange also
provided examples where a firm looking to facilitate its customer
order might choose to send the order to an exchange other than NYSE
Arca under the Exchange's current priority rules.
---------------------------------------------------------------------------
IV. Proceedings To Determine Whether To Disapprove SR-NYSEArca-2014-04
and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \79\ to determine whether the proposed rule
change should be approved or disapproved.\80\ Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues that are raised by the proposal and are discussed below. As
noted above, institution of proceedings does not indicate that the
Commission has reached any conclusions with respect to any of the
issues involved. Rather, as described in greater detail below, the
Commission seeks and encourages interested persons to comment on the
proposal, as modified by Amendment No. 1, and provide the Commission
with additional comment to inform the Commission's analysis whether to
approve or disapprove the proposed rule change, as modified by
Amendment No. 1.
---------------------------------------------------------------------------
\79\ 15 U.S.C. 78s(b)(2)(B).
\80\ Section 19(b)(2)(B) of the Act provides that proceedings to
determine whether to disapprove a proposed rule change must be
concluded within 180 days of the date of publication of notice of
the filing of the proposed rule change. The time for conclusion of
the proceedings may be extended for up to an additional 60 days if
the Commission finds good cause for such extension and publishes its
reasons for so finding or if the self-regulatory organization
consents to the extension.
---------------------------------------------------------------------------
Pursuant to Section 19(b)(2)(B) of the Act, the Commission is
providing notice of the grounds for disapproval under consideration. In
particular, Section 6(b)(5) of the Act \81\ requires that the rules of
an exchange be designed, among other things, to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system and, in general,
to protect investors and the public interest; and are not designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers. In addition, Section 6(b)(8) of the Act \82\ requires that
rules of an exchange do not impose any burden on competition not
[[Page 26478]]
necessary or appropriate in furtherance of the Act.
---------------------------------------------------------------------------
\81\ 15 U.S.C. 78f(b)(5).
\82\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
NYSE Arca's proposal would revise the order of priority of bids and
offers during the execution of orders in open outcry on NYSE Arca's
Floor. The Exchange proposed to restructure its priority rules so that
bids and offers of Crowd Participants would have priority over equal-
priced bids and offers of Customer bids and offers on the Consolidated
Book and bids and offers of non-Customers on the Consolidated Book that
are ranked in time priority behind any equal-priced Customer bids and
offers on the Consolidated Book. Thus, equal-priced Customer interest
would continue to be afforded priority over Crowd Participants in the
execution of an open outcry transaction. In addition, consistent with
the existing price/time priority presently applicable to bids and
offers on the Consolidated Book, equal-priced non-Customer bids and
offers ranked in time priority ahead of Customer interest also would be
afforded priority over Crowd Participants in the execution of an open
outcry transaction.
The Exchange believes that its proposal strikes the appropriate
balance between encouraging larger negotiated transactions in open
outcry, while at the same time protecting Customer interest on the
Consolidated Book, and any interest that has time priority over such
protected Customer interest. The Exchange believes that larger-sized
negotiated transactions will in turn lead to greater competition for
orders, creating a more robust open outcry market and benefiting
investors who choose to send orders to the Exchange. In the Exchange's
view, the proposal would align its rules governing priority during open
outcry transactions with the floor priority rules of other U.S. options
exchanges, except that any non-Customer interest in the Consolidated
Book with time priority over a booked Customer order would maintain
priority over the trading crowd.
As detailed above, five commenters favored the proposal,\83\ and
two commenters expressed concerns about the proposal.\84\ One of these
commenters stated its view that the Exchange had not provided an
explanation regarding how more crowd participation in larger-sized
block floor crosses would benefit customers or the market in
general.\85\ This commenter stated its belief that the proposal would
further insulate customer interest from competition by off-floor market
makers that primarily display their liquidity electronically, who the
commenter believes would be most likely to offer price improvement. The
other commenter who questioned the proposal believed that the proposal
could disenfranchise and disadvantage certain market participants and
suggest that size preference be given for equal bid prices. The
Exchange in response stated that the first commenter's concerns were
entirely unrelated to the proposal and that the proposal was instead
intended to promote liquidity and price discovery, and that the second
commenter's suggestion on size priority was beyond the scope of the
proposal.
---------------------------------------------------------------------------
\83\ See supra note 33.
\84\ See supra note 43.
\85\ See SIG Letter.
---------------------------------------------------------------------------
The Commission believes that questions are raised as to whether
NYSE Arca's proposal is consistent with: (1) The requirements of
Section 6(b)(5) of the Act, including whether the Exchange's proposed
revisions to its rules regarding the order of priority in open outcry
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest; and are not designed to permit unfair discrimination
between customers, issuers, brokers, or dealers; and (2) the
requirements of Section 6(b)(8) of the Act, including whether the
Exchange's proposed revisions to its rules regarding the order or
priority in open outcry impose any unnecessary or inappropriate burden
on competition. The Commission believes that the issues raised by the
proposed rule change can benefit from additional consideration and
evaluation.
V. Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data and arguments with respect to the
concerns identified above, as well as any others they may have with the
proposal, as modified by Amendment No. 1. In particular, the Commission
invites the written views of interested persons concerning whether the
proposed rule change, as modified by Amendment No. 1, is inconsistent
with Sections 6(b)(5) and 6(b)(8) or any other provision of the Act, or
the rules and regulations thereunder. Although there do not appear to
be any issues relevant to approval or disapproval that would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\86\
---------------------------------------------------------------------------
\86\ Section 19(b) (2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
---------------------------------------------------------------------------
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1 and regarding whether the proposed
rule change, as modified by Amendment No. 1, should be approved or
disapproved by May 29, 2014. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by June 12,
2014. Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NYSEArca-2014-04 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-NYSEArca-2014-04. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method.
The Commission will post all comments on the Commission's Internet
Web site (https://www.sec.gov/rules/sro.shtml). Copies of the
submission, all subsequent amendments, all written statements with
respect to the proposed rule change that are filed with the Commission,
and all written communications relating to the proposed rule change
between the Commission and any person, other than those that may be
withheld from the public in accordance with the provisions of 5 U.S.C.
552, will be available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street NE., Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change;
[[Page 26479]]
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-NYSEArca-2014-04 and
should be submitted on or before May 29, 2014. If comments are
received, any rebuttal comments should be submitted by June 12, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\87\
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\87\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-10535 Filed 5-7-14; 8:45 am]
BILLING CODE 8011-01-P
