Self-Regulatory Organizations; NYSE MKT LLC; Order Approving Proposed Rule Change Amending Rule 98 To Adopt a Principles-Based Approach To Prohibit the Misuse of Material Nonpublic Information and Make Conforming Changes to Other Exchange Rules, 39024-39029 [2014-16048]
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Federal Register / Vol. 79, No. 131 / Wednesday, July 9, 2014 / Notices
and it clearly requires that all member
organizations have policies and
procedures that are reasonably designed
to prevent the misuse of material, nonpublic information.42
The Commission notes that the
policies and procedures required
proposed Rule 98 will be subject to
oversight by the Exchange and review
by FINRA, and the Commission
emphasizes that a member organization
operating a DMM unit should be
proactive in assuring that its policies
and procedures reflect the current state
of its business and continue to be
reasonably designed to achieve
compliance with applicable federal
securities law and regulations and with
applicable Exchange and FINRA rules.
Finally, the Commission notes that
existing Exchange rules also prohibit
particular misuses of material, nonpublic information—for example, frontrunning customer orders—and that
FINRA surveillances seek to detect
violations of those rules.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that the
proposed rule change (SR–NYSE–2014–
012), is hereby approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.43
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014–16047 Filed 7–8–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72535; File No. SR–
NYSEMKT–2014–22]
Self-Regulatory Organizations; NYSE
MKT LLC; Order Approving Proposed
Rule Change Amending Rule 98 To
Adopt a Principles-Based Approach To
Prohibit the Misuse of Material
Nonpublic Information and Make
Conforming Changes to Other
Exchange Rules
July 3, 2014.
sroberts on DSK5SPTVN1PROD with NOTICES
On March 18, 2014, NYSE MKT LLC
(the ‘‘Exchange’’ or ‘‘NYSE MKT’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
42 The Commission notes that such policies and
procedures may include the programming and
operation of a member organization’s trading
algorithms to protect against the misuse of material
non-public information.
43 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
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filed with the Securities and Exchange
Commission (the ‘‘Commission’’) a
proposed rule change to amend Rule
98—Equities (‘‘Rule 98’’). The proposed
rule change was published for public
comment in the Federal Register on
April 7, 2014.3 On May 21, 2014, the
Commission designated a longer period
for Commission action on the proposed
rule change.4 The Commission received
one comment on the proposal.5 This
order approves the proposed rule
change.
I. Background and Introduction
The New York Stock Exchange LLC
(‘‘NYSE’’) adopted Rule 98 (‘‘NYSE Rule
98’’) in 1986 when NYSE specialist
firms, which had been independent
member-owned entities, increasingly
became affiliates of larger member
organizations. Because of the specialists’
position in the market, Rule 98 required
an organizational separation between a
specialist and its affiliates. The purpose
of that separation was to eliminate or
control conflicts of interest between the
business activities of affiliates of the
specialist and the specialist’s
responsibilities to the market and to any
customer orders the specialist
represented as agent.6
In 2008, the NYSE amended NYSE
Rule 98 to adopt a more flexible,
principles-based approach that among
other things: (1) Redefined the persons
to whom the Rule applied; (2) allowed
DMM operations to be integrated into
better-capitalized member
organizations; (3) permitted a DMM unit
to share non-trading-related services
with its parent member organization or
approved persons; and (4) provided
flexibility to member organizations and
their approved persons in conducting
risk management of DMM operations.7
The principal effect of the 2008
Amendments was that affiliates of a
DMM unit that were walled-off from the
DMM unit were no longer prohibited
from acting as an options market maker
in a security in which the affiliated
DMM was registered. However, the
amended NYSE Rule 98 continued to
prohibit the integrated unit from
coordinating market making between its
3 Securities Exchange Act Release No. 71837
(Apr. 1, 2014), 75 FR 19146.
4 See Securities Exchange Act Release No. 72202,
79 FR 30671 (May 28, 2014).
5 See Email from Dr. Leee Jackson, Esq. (April 15,
2014) (‘‘Jackson Comment’’). The Commission does
not believe the Jackson Comment raises any
material or substantive issues.
6 See Securities Exchange Act Release No. 23768
(Nov. 3, 1986), 51 FR 41183 (Nov. 13, 1986) (SR–
NYSE–85–25).
7 See Securities Exchange Act Release No. 58328
(Aug. 7, 2008), 34 FR 58328 (Aug. 18, 2008)(SR–
NYSE–2008–45)(‘‘2008 Amendments’’).
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DMM and its options market maker. In
2008, the Exchange (f/k/a NYSE
Alternext US LLC) submitted a
proposed rule change to, among other
things, conform their rules to NYSE
Rule 98.8
The Exchange now proposes to
further amend Rule 98 in order to
provide DMM units with greater
flexibility in structuring their operations
and to move further toward a principlesbased approach and away from
prescribing particular structures for
DMM units. Under this proposed rule
change, certain information barriers
would continue to be required (for
example, between a DMM unit and an
affiliated investment-banking desk), and
other required protections, in addition
to information barriers, would address
the role of DMMs and the trading floor
in the Exchange’s market. Proposed
Rule 98 would, however, contain fewer
prescriptions relating to the structure of
DMM units, and it would instead, like
similar rules relating to market-making
firms on other exchanges,9 impose a
more general requirement that a member
organization operating a DMM unit
maintain and enforce written policies
and procedures reasonably designed,
taking into consideration the nature of
the member organization’s business, (i)
to prevent the misuse of material, nonpublic information by the member
organization or persons associated with
it and (ii) to ensure compliance with
applicable federal laws and regulations
and with Exchange rules.
The Exchange asserts that the instant
proposal should provide member
organizations operating DMM units with
the means to better manage risk across
a firm—for example, by integrating
DMM unit positions and quoting
information with other quotes and
positions by other units within the firm.
The Exchange posits that a member
organization operating a DMM unit, in
the context of risk management 10 and
consistent with protections against the
misuse of material non-public
information,11 should be able to
consider the outstanding quotes of the
8 See Securities Exchange Act Release No. 59022
(Nov. 26, 2008), 73 FR 73683 (Dec. 3, 2008)(SR–
NYSEALTR–2008–10).
9 See, e.g., NYSEArca Equities Rule 6.3 and BATS
Rule 5.5.
10 See e.g., 17 CFR Part 240.15c3–5 (Risk
Management Controls for Brokers or Dealers with
Market Access).
11 See e.g., 15 U.S.C. 78o(g). Section 15(g) of the
Act requires every registered broker or dealer to
‘‘establish, maintain, and enforce written policies
and procedures reasonably designed, taking into
consideration the nature of such broker’s or dealer’s
business, to prevent the misuse . . . of material,
nonpublic information by such broker or dealer or
any person associated with such broker or dealer.’’
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Federal Register / Vol. 79, No. 131 / Wednesday, July 9, 2014 / Notices
DMM unit as well as traded positions
for purposes of calculating net positions
consistent with Rule 200 of Regulation
SHO 12 and calculating intra-day net
capital positions. Further, the Exchange
asserts that a member organization
should be able to integrate its DMM unit
operations with its customer-facing
operations because the instant proposal,
in tandem with existing NYSE MKT
conduct rules,13 FINRA’s ongoing
surveillances for manipulative conduct,
and FINRA’s program to examine
member firms that act as DMMs and to
review and approve their policies and
procedures for complying with Rule 98,
should provide a regulatory framework
that guards customer interests and
protects against the misuse of material
non-public information, while
increasing operational flexibility of
member organizations.
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II. Description of the Proposed
Amendments to Rule 98
Proposed Rule 98(a)(1) provides that
the rule shall apply to all member
organizations seeking to operate a DMM
unit at the Exchange and to any
approved person that may provide
services to a DMM unit.
Proposed Rule 98(b) revises, deletes
and adds certain definitions to provide
member organizations operating a DMM
unit with the flexibility to integrate their
DMM operations with other units of the
firm. Currently, Rule 98 defines the
terms ‘‘non-public order information’’
and ‘‘DMM confidential information’’
separately. Non-public order
information captures any information
relating to order flow at the Exchange—
including verbal indications of interest
made with an expectation of privacy,
electronic order interest, e-quotes,
reserve interest, and information about
imbalances at the Exchange—that is not
publicly-available on a real-time basis
via an Exchange-provided datafeed,
such as NYSE OpenBook®,14 or
otherwise publicly available. ‘‘DMM
12 17 CFR 242.200. Under Regulation SHO,
determination of a seller’s net position is based on
the seller’s positions in the security in all
proprietary accounts. See Exchange Act Release No.
50103 (July 28, 2004), 69 FR 48008, 48010 n.22
(Aug. 6, 2004); see also Exchange Act Release No.
48709 (Oct. 29, 2003), 68 FR 62972, 62991 and
62994 (Nov. 6, 2003); Letter from Richard R.
Lindsey, Director, Division of Market Regulation, to
Roger D. Blanc, Wilkie Farr & Gallagher, SEC NoAction Letter, 1998 SEC No-Act. LEXIS 1038, p. 5
(Nov. 23, 1998); Exchange Act Release No. 30772
(June 3, 1992), 57 FR 24415, 24419 n.47 (June 9,
1992); Exchange Act Release No. 27938 (Apr. 23,
1990), 55 FR 17949, 17950 (Apr. 30, 1990).
13 See e.g., NYSE MKT Rule 5320—Equities
(‘‘Manning Rule’’).
14 NYSE OpenBook® provides aggregated limitorder volume that has been entered on the
Exchange at price points for all NYSE MKT-traded
securities.
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confidential information’’ refers to
principal or proprietary trading activity
of a DMM unit at the Exchange in the
securities allocated to it pursuant to
Rule 103B—Equities, including the
unit’s positions in those securities,
decisions relating to trading or quoting
in those securities, and any algorithm or
computer system that is responsible for
such trading activity and that interfaces
with Exchange systems.
The Exchange proposes to replace the
term ‘‘non-public information’’ with
‘‘Floor-based non-public information.’’
As discussed in more detail below, the
Exchange proposes to maintain
restrictions in proposed Rule 98(c)(3) to
address the Floor-based activities of
DMM units and proposes to use the
term ‘‘Floor-based non-public order
information’’ to identify the information
those provisions are intended to
protect.15 The Exchange also proposes
to delete the definition of ‘‘DMM
confidential information,’’ arguing that
proposed Rule 98(c)(2) would
sufficiently protect against the misuse of
material non-public information.
Further the Exchange notes that to the
extent a DMM on the Floor may have
access to Floor-based non-public order
information, proposed Rule 98(c)(3)
would continue to specify required
protections against the misuse of such
information by the member
organization.
The Exchange proposes to amend the
term ‘‘DMM unit’’ to mean a trading
unit within a member organization that
is approved pursuant to Rule 103—
Equities to act as a DMM unit, and it
proposes to eliminate the requirement
that a DMM unit be an ‘‘aggregation
unit,’’ which is currently defined to
mean any trading or market-making
department, division or desk that meets
the requirements of the definition of
‘‘independent trading unit’’ pursuant to
Rule 200 of Regulation SHO.16 The
Exchange proposes to decouple the Rule
98 definition from Regulation SHO, in
part because the two rules have different
regulatory purposes.17 Similarly, the
15 The Exchange proposes non-substantive
changes to this definition that it believes better
reflect how its systems currently operate.
Specifically, the Exchange asserts that the concept
of trading in ‘‘slow mode’’ is duplicative of the
remaining rule text, which covers any order
information that is made available to DMMs but
that is not available to other market participants.
16 The Exchange proposes to delete rule
provisions that reference the terms ‘‘aggregation
unit’’ and ‘‘integrated proprietary aggregation unit.’’
See, e.g., Rule 98(c)(2)(B).
17 See 17 CFR 242.200(f). Rule 200(f) of
Regulation SHO sets forth the requirements for
qualifying as an ‘‘independent trading unit’’ for the
purpose of order marking requirements under Rule
200. The Commission notes that a member
organization must comply with the requirements of
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39025
Exchange proposed to delete the term
‘‘integrated proprietary aggregation
unit’’ because this term contemplates a
DMM unit being part of an aggregation
unit that only engages in proprietary
trading activity, which, under the
proposal, would be an organizational
structure that is permitted, but not
required. The Exchange also proposes to
delete the definitions for ‘‘DMM API,’’
‘‘DMM account,’’ ‘‘customer-facing
department,’’ 18 and ‘‘non-trading
related services.’’ 19 The Exchange
asserts that the terms ‘‘DMM API’’ and
‘‘DMM account’’ are obsolete as they
were based on Rule 104 before it was
amended in 2008.20
Proposed Rule 98(c) would govern the
operation of a DMM unit. Proposed Rule
98(c)(1) provides that a member
organization will be permitted to
operate a DMM unit provided that the
member organization has obtained prior
written approval from the Exchange.21
The Exchange notes that all member
organizations currently operating DMM
units already have written policies and
procedures to comply with Rule 98 in
its current form, and such policies and
procedures have been approved by
NYSE Regulation.22 In addition, FINRA
has an exam program that reviews
member organizations operating DMM
units for compliance with such policies
and procedures. Because proposed Rule
98(a) would continue to require
Exchange approval of any policies and
procedures to protect against the misuse
of material nonpublic information, if a
Regulation SHO regardless of how its operations are
structured for purposes of compliance with Rule 98.
18 The Exchange asserts that, because the
proposed rule changes are intended to provide
principles-based requirements for the operation of
a DMM unit, the amended rule would no longer
need to define terms, such as ‘‘customer-facing
department,’’ that support the current, more
prescriptive rule text.
19 Because these protections for Floor-based nonpublic order information are retained in the
proposed revisions to Rule 98 and are applicable to
approved persons pursuant to proposed amended
Rule 98(a)(1), the Exchange asserts that current Rule
98(e), which concerns the sharing of non-trading
related services, is redundant of existing regulatory
requirements governing the operations of a brokerdealer.
20 The Exchange also proposes to delete the
definitions of ‘‘DMM’’ and ‘‘approved person’’ as
duplicative of the definitions set forth in Rules
2(i)—Equities and 2(c)—Equities. The Exchange
proposes to make non-substantive edits to the
definition of ‘‘related products’’ and make
conforming amendments to Rule 2(j)—Equities.
21 Pursuant to Rule 0(c), the term ‘‘Exchange’’
may also mean FINRA staff working on behalf of
the Exchange and NYSE Regulation, Inc. pursuant
to a regulatory services agreement. The Exchange
also proposes to revise Rule 98(c)(1) to replace the
term ‘‘NYSE Regulation, Inc.’’ with the term
‘‘Exchange.’’
22 FINRA currently approves Rule 98 procedures
on behalf of NYSE Regulation, Inc. pursuant to a
regulatory services agreement.
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member organization chose to modify
its DMM operations consistent with
proposed Rule 98, its revised policies
and procedures would be subject to
Exchange review before
implementation. In addition, the
Exchange represents that FINRA would
continue to monitor a member
organization’s compliance with those
policies and procedures consistent with
the current exam-based regulatory
program associated with Rule 98.23
Proposed Rule 98(c)(2) specifies that a
member organization seeking approval
to operate a DMM unit pursuant to Rule
98 must maintain and enforce written
policies and procedures reasonably
designed, taking into consideration the
nature of such member organization’s
business, (i) to prevent the misuse of
material, non-public information by
such member organizations or persons
associated with such member
organization and (ii) to ensure
compliance with applicable federal laws
and regulations and with Exchange
rules.24 Proposed Rule 98(c)(2) also
provides examples of conduct that
would constitute the misuse of material,
non-public information, including, but
not limited to: (A) Trading in any
securities issued by a corporation, or in
any related products, while in
possession of material-non-public
information concerning the issuer; (B)
trading in a security or related product,
while in possession of material nonpublic information concerning
imminent transactions in the security or
related product; or (C) disclosing to
another person or entity any material,
non-public information involving a
corporation whose shares are publicly
traded or an imminent transaction in an
underlying security or related product
for the purpose of facilitating the
possible misuse of such material, nonpublic information.
Proposed Rule 98(c)(3) pertains to
restrictions on trading for member
organizations operating a DMM unit.
Proposed Rule 98(c)(3)(A) would
generally provide that a member
organization shall protect against the
misuse of Floor-based non-public order
information. The rule would further
23 The Exchange represents that FINRA currently
has surveillances designed to monitor for
manipulative activity and the Exchange asserts that,
because DMM market-making activity is not
materially different from market-making on other
exchanges, these existing programs are reasonably
designed to address any concerns that may be
raised by a DMM unit being integrated with existing
market-making operations.
24 Proposed Rule 98(c)(2) is based on NYSE Arca
Equities Rule 6.3 (Prevention of the Misuse of
Material Nonpublic Information) and BATS Rule
5.5 (Prevention of the Misuse of Material, NonPublic Information).
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specify that only the Floor-based
employees of the DMM unit and
individuals responsible for the direct
supervision of the DMM unit’s Floorbased operations may have access (as
permitted pursuant to Rule 104) to
Floor-based non-public order
information.
Proposed Rule 98(c)(3)(B) specifies
the restrictions applicable to employees
of the DMM unit while on the trading
floor. Proposed Rule 98(c)(3)(B)(i)
provides that, while on the trading floor
of the Exchange, employees of the DMM
unit, except as provided for in Rule
36.30—Equities, may trade only DMM
securities and may do so only on or
through the systems and facilities of the
Exchange, as permitted by Exchange
Rules. Proposed Rule 98(c)(3)(B)(ii)
would specify that while on the trading
floor, Floor-based employees may not
communicate with individuals or
systems responsible for making trading
decisions for related products or for
away-market trading in DMM securities.
Proposed Rule 98(c)(3)(B)(iii) adds a
new restriction that while on the trading
floor, employees of the DMM unit shall
not have access to customer information
or the DMM unit’s position in related
products.
Proposed Rule 98(c)(3)(C) would
provide that a Floor-based employee of
a DMM unit who moves to a location off
the trading floor of the Exchange, or any
person who provides risk management
oversight or supervision of the Floorbased operations of the DMM unit and
becomes aware of Floor-based nonpublic order information, shall not (1)
make such information available to
customers, (2) make such information
available to individuals or systems
responsible for making trading decisions
in DMM securities in away markets or
related products, or (3) use any such
information in connection with making
trading decisions in DMM securities in
away markets or related products. The
proposed rule would cover an
individual that leaves the trading floor,
as well as a manager providing oversight
or supervision of the Floor-based
operations of the DMM unit. The
Exchange’s proposed amendments to
Rule 98 would replace the concept of a
person having ‘‘access to’’ information
with that of a person being ‘‘aware of’’
information,25 asserting that the change
will clarify the governing standard for
member organizations and make Rule 98
generally more consistent with federal
25 The concept of a person having ‘‘access to’’
information is incorporated into several subsections
of current Rule 98. See, e.g., current Rule
98(c)(2)(E)(i), (d)(2)(B), and (f)(1)(A)(3).
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rules.26 The Exchange also argues that a
person cannot misuse material, nonpublic information unless the person is
‘‘aware of’’ that information.
Proposed Rule 98(c)(3)(C) would also
maintain and consolidate the
Exchange’s current ‘‘wall-crossing’’
provisions related to a non-Floor based
individual who becomes aware of Floorbased non-public order information.
Proposed Rule 98(c)(3)(D) would
provide that a DMM unit may make
available to a Floor broker associated or
affiliated with an approved person or
member organization any information
that the DMM would be permitted
under Exchange rules to provide to an
unaffiliated Floor Broker.
Proposed Rule 98(c)(4) would provide
that any interest entered by the DMM
unit in DMM securities at the Exchange
must be entered through systems that
identify such interest as DMM interest.
The Exchange asserts it is unnecessary
to prescribe or require specific systems
that a DMM unit must use, but this rule
would require that the DMM unit’s
interest be identifiable and available for
Exchange review through the system
that the DMM unit elects to use.
Proposed Rule 98(c)(5) would require
that a member organization provide the
Exchange with real-time unit position
information for any trading in DMM
securities by the DMM unit and any
independent trading unit.27 The
Exchange represents that this provision
should enhance its ability to monitor for
Rule 104 compliance.28 For example, if
a DMM unit is part of an independent
trading unit that engages in trading on
other markets in DMM securities, the
member organization’s real-time
position update would need to
incorporate any away-market
transactions in DMM securities by that
independent trading unit.
Proposed Rule 98(c)(6) would specify
that a DMM unit may not operate as a
specialist or market maker on the
Exchange or the NYSE Amex Options
LLC (‘‘NYSE Amex Options’’) equities
or options trading floors in related
products, unless specifically permitted
26 See 17 CFR 240.10b5–1(b) (specifying that a
purchase or sale of securities constitutes trading on
the basis of material nonpublic information when
the person making the purchase or sale was aware
of the material nonpublic information when the
person made the purchase or sale).
27 The Exchange proposes to delete Rule 98(d)(4)
from the rule both because the Exchange does not
believe it needs to separately identify DMM audit
trail requirements and because Rule 132B—Equities
no longer exists.
28 Rule 104 obligations relate to whether a DMM
is long or short and are applicable to the DMM
unit’s position in DMM securities together with any
position of a Regulation SHO independent trading
unit of which the DMM unit may be included.
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Federal Register / Vol. 79, No. 131 / Wednesday, July 9, 2014 / Notices
in Exchange rules.29 The Exchange
notes that a member organization that
operates a DMM unit may be a specialist
or market maker on NYSE Amex
Options, provided that it maintains
appropriate information barriers.
Currently, Rule 98 permits an integrated
proprietary aggregation unit to engage in
options market making (electronic only),
provided that the DMM unit is walled
off from the options market making
trading desk.
Proposed Rule 98(c)(7) would
maintain the existing requirement that
the member organization maintain
information barriers between the DMM
unit and any investment banking or
research departments. Proposed Rule
98(c)(7) would also continue to provide
that no DMM or DMM unit may be
directly supervised or controlled by an
individual associated with an approved
person or the member organization who
is assigned to any investment banking or
research departments.
Proposed Rule 98(d) would specify
that DMM rules would only apply to the
DMM unit’s quoting or trading in their
DMM securities for their own accounts
at the Exchange. The Exchange
represents that this provision is
intended to clarify that DMM rule
restrictions are not applicable to any
customer orders routed to the Exchange
by that member organization as agent.
The Exchange proposes to delete in its
entirety Rule 98(e), which concerns the
sharing of non-trading related services.
The Exchange states that the focus of
proposed Rule 98 on protecting against
the misuse of material non-public
information obviates the need to specify
how a member organization or an
approved person provides back-office
support operations, such as clearing,
stock loan, and compliance, for the
DMM unit. Rather, the Exchange asserts
that how a member organization or
approved person provides back-office
operations to the DMM unit should not
differ from how such services are
provided to other trading units within
that member organization or approved
person. The Exchange also notes that, if
a person in the member organization or
an approved person is providing nontrading related services to the DMM unit
and, as a result of such relationship,
becomes aware of Floor-based nonpublic order information, such person
would be subject to the wall-crossing
provisions of proposed Rule 98(c)(3)(C),
which is applicable to any person who
is aware of such information. In
29 Currently, the Exchange represents, the only
time that a DMM unit may engage in market making
in a related products is pursuant to Rule 504(b)(5)—
Equities.
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addition, the Exchange notes that the
protections for Floor-based non-public
order information are retained in the
proposed revisions to Rule 98 and are
applicable to approved persons
pursuant to proposed amended Rule
98(a)(1). The Exchange proposes
conforming amendments to Rule
36.30—Equities.
As part of the proposed restructuring
of Rule 98, current Rule 98(g) would be
renumbered as proposed Rule 98(e),
existing Rule 98(h) would be
renumbered as proposed Rule 98(f), and
existing Rule 98(j) would be
renumbered as proposed Rule 98(g). The
Exchange proposes conforming changes
to these sections, such as updating
cross-references and changing the rule’s
reference to ‘‘the Division of Market
Surveillance’’ and ‘‘NYSE Regulation’’
to a reference to ‘‘the Exchange.’’ 30
The Exchange proposes to delete Rule
98 Former, as well as any references
thereto, because it is obsolete: All DMM
firms operate pursuant to the current
Rule 98.31 In addition, the Exchange
proposes to amend Rule 105—Equities
to delete Rule 105(b)–(d) and the
Guidelines for DMM’s Registered
Security Option and Single Stock
Futures Transactions Pursuant to Rule
105 (‘‘Rule 105 Guidelines’’) and to
make conforming amendments to Rule
36.30—Equities.32 Rule 105 currently
sets forth hedging guidelines to permit
a DMM to trade from the trading floor
listed options or single-stock futures
that overlie DMM securities. Under Rule
98(f)(1), a DMM unit can obtain an
exemption from the Rule 105 Guidelines
to trade options or futures, provided
that such trading is conducted by a
walled-off, off-Floor trading desk.
Under the proposed revisions to Rule
98, a DMM unit would no longer need
to apply for an exemption from Rule 105
trading restrictions because, as
discussed above, while on the trading
floor, Floor-based employees may trade
only DMM securities (i.e., they may not
trade in related products) and may trade
only on or through the systems and
facilities of the Exchange. Because there
would not be any Floor-based trading in
listed options or single-stock futures,
the Rule 105 Guidelines specifying how
such Floor-based trading may occur
30 Pursuant to Rule 0, the reference to the
Exchange in this rule may also mean FINRA.
31 See e.g., Rules 98A Former—Equities, 99
Former—Equities, and 104T(a)(Former)—Equities
and supplementary material .13 (Former), Rule
900—Equities, Rule 98(a) and 105—Equities.
32 The Exchange proposes to amend Rule 105(a)—
Equities to clarify that the restriction on pool
dealing applies to the DMM unit for securities
registered to that unit and revise the title of that rule
accordingly.
PO 00000
Frm 00178
Fmt 4703
Sfmt 4703
39027
would be moot. Accordingly, the
Exchange proposes to delete these rules.
In addition, because DMM units no
longer have their own customers, the
Exchange proposes to delete in its
entirety the DMM Booth Wire Policy,
which is set forth in Rule 123B—
Equities and which is now obsolete.
III. Commission Findings
After careful consideration, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
a national securities exchange.33 The
Commission believes that the proposal
is consistent with Section 6(b)(5) 34 in
particular in that it is designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in facilitating
transactions in securities, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
Generally, the Exchange proposes to
amend Rule 98 in order to provide
DMM units with greater flexibility in
structuring their operations, moving
further toward a principles-based
approach and away from prescribing
particular structures. Under the
proposed rule change, certain
information barriers would continue to
be required,35 but amended Rule 98
would generally contain fewer
prescriptions than current Rule 98 and
would instead require that a member
organization operating a DMM unit
maintain and enforce written policies
and procedures reasonably designed,
taking into consideration the nature of
the member organization’s business, (i)
to prevent the misuse of material, nonpublic information by the member
organization or persons associated with
it and (ii) to ensure compliance with
applicable federal laws and regulations
and with Exchange rules.36 The
Exchange represents that the instant
proposed rule change prescribes specific
protections that reflect the unique role
of DMMs and the trading floor at the
Exchange, while treating the off-floor
market-making activity of member
organizations with DMM units similarly
to the rules that govern equity market
33 In approving this rule change, the Commission
notes that it has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
34 15 U.S.C. 78f(b)(5).
35 See proposed Rules 98(c)(3) and 98(c)(7).
36 See proposed Rule 98(c)(2).
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makers on NYSE Arca, Nasdaq, and
BATS.37
In particular, proposed Rule 98(a)
provides that a member organization
will be permitted to operate a DMM unit
provided that the member organization
has obtained prior written approval
from the Exchange. The Exchange
represents that, although all member
organizations currently operating DMM
units under Rule 98 have written
policies and procedures that have been
approved by NYSE Regulation, Inc., the
policies and procedures of member
organizations that choose to modify
their DMM operations consistent with
proposed Rule 98 would be subject to
Exchange review prior to
implementation. In addition, the
Exchange represents that FINRA would
continue to monitor member
organizations for compliance with such
policies and procedures consistent with
the current exam-based regulatory
program associated with Rule 98.
Proposed Rule 98(c)(2) would replace
the current, more prescriptive approach
of current Rule 98 and would provide
member organizations operating a DMM
unit with greater organizational and
operational flexibility, while still
requiring that member organizations
comply with their existing regulatory
obligations. Specifically, proposed
Exchange Rule 98(c)(2) would require a
member organization seeking approval
to operate a DMM unit to maintain and
enforce written policies and procedures
reasonably designed, taking into
consideration the nature of such
member organization’s business, (i) to
prevent the misuse of material, nonpublic information by such member
organizations or persons associated with
such member organization and (ii) to
ensure compliance with applicable
federal laws and regulations and with
Exchange rules. In addition, proposed
Rule 98(c)(2) would specify that
conduct constituting the misuse of
material, non-public information
includes, but is not limited to: (A)
Trading in any securities issued by a
corporation, or in any related product,
while in possession of material-non37 See Securities Exchange Act Release No. 60604
(Sept. 2, 2009), 76 FR 46272 (Sept. 8, 2009) (SR–
NYSEArca–2009–78) (Order approving elimination
of NYSE Arca rule that required market makers to
establish and maintain specifically prescribed
information barriers, including discussion of NYSE
Arca and Nasdaq rules) (‘‘NYSE Arca Order’’). See
also Securities Exchange Act Release No. 61574
(Feb. 23, 2010), 75 FR 9455 (Mar. 2, 2010) (SR–
BATS–2010–003) (Order approving amendments to
BATS Exchange, Inc. (‘‘BATS’’) Rule 5.5 to move to
a principles-based approach to protecting against
the misuse of material, non-public information, and
noting that the proposed change is consistent with
the approaches of NYSE Arca and Nasdaq) (‘‘BATS
Order’’).
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20:08 Jul 08, 2014
Jkt 232001
public information concerning the
issuer; or (B) trading in a security or
related product, while in possession of
material non-public information
concerning imminent transactions in the
security or related product; or (C)
disclosing to another person or entity
any material, non-public information
involving a corporation whose shares
are publicly traded or an imminent
transaction in an underlying security or
related product for the purpose of
facilitating the possible misuse of such
material, non-public information.
Although the Exchange proposes to
move to a more principles-based
approach, and although certain
information barriers may no longer be
required, the Commission notes, and the
Exchange acknowledges, that a member
organization’s business model or
business activities may dictate that an
information barrier or functional
separation be part of the appropriate set
of policies and procedures that would
be reasonably designed to achieve
compliance with applicable securities
laws and regulations and with
applicable Exchange rules.38 In
addition, the Commission notes that all
member organizations of the Exchange
are subject to the requirements of
Section 15(g) of the Act, regardless of
how their operations are structured.39
The Commission notes that amended
Rule 98 would delete the defined term
‘‘DMM confidential information’’ and
would replace the defined term ‘‘nonpublic information’’ with the term
‘‘Floor-based non-public information.’’
In the Commission’s view, these
definitional modifications should not
reduce investor protections or market
integrity. Instead, consistent with
proposed Rule 98(c)(2) and Section
15(g) of the Act,40 member organizations
will continue to have obligations to
implement reasonably designed policies
and procedures to prevent the misuse of
material, non-public information, and
they will continue to be subject to
Exchange rules regarding front-running,
limit-order display, and trading ahead,
as well as FINRA surveillances to detect
violations of these rules.
The Commission notes that proposed
Rule 98(c)(2) is substantially similar to
38 This aspect of Exchange’s proposal and of the
Commission’s findings is consistent with similar
rules at other exchanges. See NYSE Arca Order at
46275 and BATS Order at 9459.
39 15 U.S.C. 78o(g). Section 15(g) of the Act
requires brokers and dealers to ‘‘establish, maintain,
and enforce written policies and procedures
reasonably designed, taking into consideration the
nature of such broker’s or dealer’s business, to
prevent the misuse . . . of material, nonpublic
information by such broker or dealer or any person
associated with such broker or dealer.’’
40 15 U.S.C. 78o(g).
PO 00000
Frm 00179
Fmt 4703
Sfmt 4703
and expressly based on NYSE Arca Rule
6.3 and BATS Rule 5.5. The Exchange’s
market structure, however differs from
that of NYSE Arca and BATS, in that the
Exchange continues to have a physical
trading floor. Accordingly, the
Commission believes that it is
appropriate that proposed Rule 98
continues to include certain
prescriptions that address the role of the
DMM and the trading floor in its market.
Specifically, as described above,
proposed Rule 98(c)(3) relates to
restrictions on trading for member
organizations operating a DMM unit;
proposed Rule 98(c)(4) would provide
that any interest entered by the DMM
unit in DMM securities at the Exchange
must be entered through systems that
identify such interest as DMM interest;
proposed Rule 98(c)(5) would require
that a member organization provide the
Exchange with real-time unit position
information for any trading in DMM
securities by the DMM unit and any
independent trading unit; proposed
Rule 98(c)(6) would specify that a DMM
unit may not operate as a specialist or
market maker on the Exchange or the
NYSE MKT equities or options trading
floors in related products, unless
specifically permitted in Exchange
rules; and proposed Rule 98(c)(7) would
maintain the existing requirement that
the member organization maintain
information barriers between the DMM
unit and any investment banking or
research departments.
Under this proposed rule change,
member organizations could integrate
DMM units with other trading
operations within the member
organization, including, if applicable, a
customer-facing operation. The
Commission notes that a DMM unit that
is integrated with other market-making
operations would be subject to existing
rules that prohibit member
organizations from disadvantaging their
customers or other market participants
by improperly capitalizing on a member
organization’s access to the receipt of
material, non-public information. For
instance, Rule 5320 generally prohibits
a member organization from trading for
its own account ahead of customer
orders, which means that a member
organization operating both a DMM
unit, which engages in trading for its
own account, and customer-facing
operations would need to comply with
the Manning Rule 41 or meet one of the
specified exceptions.42 Moreover, the
41 See
Manning Rule, supra note 13.
Rule 5320 further provides that, if a
member organization trades at a price for its own
account ahead of the customer order, it must
execute the customer order up to the size and at a
42 Exchange
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sroberts on DSK5SPTVN1PROD with NOTICES
Commission notes that (1) the Exchange
has represented that FINRA currently
has surveillances designed to monitor
for manipulative activity, that DMM
market-making activity off the trading
floor is not materially different from
market-making on other exchanges, and
that, therefore, the existing regulatory
framework is reasonably designed to
address any concerns that may be raised
by a DMM unit being integrated with
market-making operations and (2) the
Exchange has represented that FINRA
currently conducts a program that
approves and examines Rule 98 policies
and procedures.
The Commission believes that the
proposed rule change is consistent with
the Act. The principles-based regulatory
approach in the proposal is
substantially similar to the existing
regulatory approach of NYSE Arca and
BATS, while also accounting for the
market structure differences (i.e., the
role of DMM units and the trading floor
on the Exchange) that raise additional
regulatory and policy considerations.
While proposed Rule 98 permits
member organizations greater flexibility
in structuring their business and
compliance operations, the rule
continues to require the maintenance of
certain appropriate information barriers,
and it clearly requires that all member
organizations have policies and
procedures that are reasonably designed
to prevent the misuse of material, nonpublic information.43
The Commission notes that the
policies and procedures required
proposed Rule 98 will be subject to
oversight by the Exchange and review
by FINRA, and the Commission
emphasizes that a member organization
operating a DMM unit should be
proactive in assuring that its policies
and procedures reflect the current state
of its business and continue to be
reasonably designed to achieve
compliance with applicable federal
securities law and regulations and with
applicable Exchange and FINRA rules.
Finally, the Commission notes that
existing Exchange rules also prohibit
particular misuses of material, nonpublic information—for example, frontrunning customer orders—and that
FINRA surveillances seek to detect
violations of those rules.
price that is the same as, or better than, the price
at which the organization traded for its own
account.
43 The Commission notes that such policies and
procedures may include the programming and
operation of a member organization’s trading
algorithms to protect against the misuse of material
non-public information.
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IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that the
proposed rule change (SR–NYSEMKT–
2014–22), is hereby approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.44
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014–16048 Filed 7–8–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72525; File No. SR–
NYSEArca-2014–74]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Amending NYSE Arca
Options Fee Schedule Relating to
Manual Executions by Firms and
Broker Dealers
July 2, 2014.
Pursuant to Section 19(b)(1)1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on July 1,
2014, NYSE Arca, Inc. (the ‘‘Exchange’’
or ‘‘NYSE Arca’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to amend the
NYSE Arca Options Fee Schedule (‘‘Fee
Schedule’’) relating to Manual
Executions by Firms and Broker Dealers.
The Exchange proposes to implement
the fee change effective July 1, 2014.
The text of the proposed rule change is
available on the Exchange’s Web site at
www.nyse.com, at the principal office of
the Exchange, and at the Commission’s
Public Reference Room.
PO 00000
44 17
CFR 200.30–3(a)(12).
U.S.C.78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
Frm 00180
Fmt 4703
Sfmt 4703
39029
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of this filing is to modify
the Exchange’s fees on Firm and Broker
Dealer Manual Executions to provide a
lower rate in certain select symbols.
Currently, a Firm or Broker Dealer
order executed Manually on the Floor of
the Exchange that is not facilitating a
Customer is charged $0.25 per contract.4
The Exchange is proposing a rate of
$0.12 per contract for Firm and Broker
Dealer orders for select symbols that are
active issues with narrow spreads and a
competitive distribution of market share
among the exchanges.5 Initially, the
Exchange proposes to include only
options transactions in VXX (iPath S&P
500 VIX Short Term Futures Exchange
Traded Note) in the select symbols,
although the Exchange may add or
remove symbols from the eligible
symbol list with subsequent filings with
the Securities and Exchange
Commission (‘‘Commission’’).6
4 Firm and Broker Dealer orders that facilitate a
Customer are charged $0.00.
5 The Exchange notes that the practice of
providing additional incentives to increase order
flow in high volume symbols is, and has been,
commonly practiced in the options markets. See,
e.g., International Securities Exchange, LLC (‘‘ISE’’),
Schedule of Fees, available here, https://
www.ise.com/assets/documents/OptionsExchange/
legal/fee/ISE_fee_schedule.pdf, p. 6 (providing
reduced fee rates for order flow in Select Symbols);
NASDAQ OMX PHLX, Pricing Schedule, available
here, https://www.nasdaqtrader.com/
Micro.aspx?id=phlxpricing, Section I (providing a
rebate for adding liquidity in SPY); NYSE Arca, Inc.
Fees Schedule, available here, https://
www.theice.com/publicdocs/nyse/markets/arcaoptions/NYSE_Arca_Options_Fee_Schedule.pdf
(section titled ‘‘Customer Monthly Posting Credit
Tiers and Qualifications for Executions in Penny
Pilot Issues’’).
6 VXX is a Penny Pilot Issue in the top 10 by
Customer volume from January 2, 2014 through
May 31, 2014, with market share spread fairly
evenly amongst five of the 12 exchanges, and with
15% of transactions by contract volume involving
Continued
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]]>Agencies
[Federal Register Volume 79, Number 131 (Wednesday, July 9, 2014)]
[Notices]
[Pages 39024-39029]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-16048]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72535; File No. SR-NYSEMKT-2014-22]
Self-Regulatory Organizations; NYSE MKT LLC; Order Approving
Proposed Rule Change Amending Rule 98 To Adopt a Principles-Based
Approach To Prohibit the Misuse of Material Nonpublic Information and
Make Conforming Changes to Other Exchange Rules
July 3, 2014.
On March 18, 2014, NYSE MKT LLC (the ``Exchange'' or ``NYSE MKT''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ filed with the Securities
and Exchange Commission (the ``Commission'') a proposed rule change to
amend Rule 98--Equities (``Rule 98''). The proposed rule change was
published for public comment in the Federal Register on April 7,
2014.\3\ On May 21, 2014, the Commission designated a longer period for
Commission action on the proposed rule change.\4\ The Commission
received one comment on the proposal.\5\ This order approves the
proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 71837 (Apr. 1, 2014), 75
FR 19146.
\4\ See Securities Exchange Act Release No. 72202, 79 FR 30671
(May 28, 2014).
\5\ See Email from Dr. Leee Jackson, Esq. (April 15, 2014)
(``Jackson Comment''). The Commission does not believe the Jackson
Comment raises any material or substantive issues.
---------------------------------------------------------------------------
I. Background and Introduction
The New York Stock Exchange LLC (``NYSE'') adopted Rule 98 (``NYSE
Rule 98'') in 1986 when NYSE specialist firms, which had been
independent member-owned entities, increasingly became affiliates of
larger member organizations. Because of the specialists' position in
the market, Rule 98 required an organizational separation between a
specialist and its affiliates. The purpose of that separation was to
eliminate or control conflicts of interest between the business
activities of affiliates of the specialist and the specialist's
responsibilities to the market and to any customer orders the
specialist represented as agent.\6\
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 23768 (Nov. 3,
1986), 51 FR 41183 (Nov. 13, 1986) (SR-NYSE-85-25).
---------------------------------------------------------------------------
In 2008, the NYSE amended NYSE Rule 98 to adopt a more flexible,
principles-based approach that among other things: (1) Redefined the
persons to whom the Rule applied; (2) allowed DMM operations to be
integrated into better-capitalized member organizations; (3) permitted
a DMM unit to share non-trading-related services with its parent member
organization or approved persons; and (4) provided flexibility to
member organizations and their approved persons in conducting risk
management of DMM operations.\7\ The principal effect of the 2008
Amendments was that affiliates of a DMM unit that were walled-off from
the DMM unit were no longer prohibited from acting as an options market
maker in a security in which the affiliated DMM was registered.
However, the amended NYSE Rule 98 continued to prohibit the integrated
unit from coordinating market making between its DMM and its options
market maker. In 2008, the Exchange (f/k/a NYSE Alternext US LLC)
submitted a proposed rule change to, among other things, conform their
rules to NYSE Rule 98.\8\
---------------------------------------------------------------------------
\7\ See Securities Exchange Act Release No. 58328 (Aug. 7,
2008), 34 FR 58328 (Aug. 18, 2008)(SR-NYSE-2008-45)(``2008
Amendments'').
\8\ See Securities Exchange Act Release No. 59022 (Nov. 26,
2008), 73 FR 73683 (Dec. 3, 2008)(SR-NYSEALTR-2008-10).
---------------------------------------------------------------------------
The Exchange now proposes to further amend Rule 98 in order to
provide DMM units with greater flexibility in structuring their
operations and to move further toward a principles-based approach and
away from prescribing particular structures for DMM units. Under this
proposed rule change, certain information barriers would continue to be
required (for example, between a DMM unit and an affiliated investment-
banking desk), and other required protections, in addition to
information barriers, would address the role of DMMs and the trading
floor in the Exchange's market. Proposed Rule 98 would, however,
contain fewer prescriptions relating to the structure of DMM units, and
it would instead, like similar rules relating to market-making firms on
other exchanges,\9\ impose a more general requirement that a member
organization operating a DMM unit maintain and enforce written policies
and procedures reasonably designed, taking into consideration the
nature of the member organization's business, (i) to prevent the misuse
of material, non-public information by the member organization or
persons associated with it and (ii) to ensure compliance with
applicable federal laws and regulations and with Exchange rules.
---------------------------------------------------------------------------
\9\ See, e.g., NYSEArca Equities Rule 6.3 and BATS Rule 5.5.
---------------------------------------------------------------------------
The Exchange asserts that the instant proposal should provide
member organizations operating DMM units with the means to better
manage risk across a firm--for example, by integrating DMM unit
positions and quoting information with other quotes and positions by
other units within the firm. The Exchange posits that a member
organization operating a DMM unit, in the context of risk management
\10\ and consistent with protections against the misuse of material
non-public information,\11\ should be able to consider the outstanding
quotes of the
[[Page 39025]]
DMM unit as well as traded positions for purposes of calculating net
positions consistent with Rule 200 of Regulation SHO \12\ and
calculating intra-day net capital positions. Further, the Exchange
asserts that a member organization should be able to integrate its DMM
unit operations with its customer-facing operations because the instant
proposal, in tandem with existing NYSE MKT conduct rules,\13\ FINRA's
ongoing surveillances for manipulative conduct, and FINRA's program to
examine member firms that act as DMMs and to review and approve their
policies and procedures for complying with Rule 98, should provide a
regulatory framework that guards customer interests and protects
against the misuse of material non-public information, while increasing
operational flexibility of member organizations.
---------------------------------------------------------------------------
\10\ See e.g., 17 CFR Part 240.15c3-5 (Risk Management Controls
for Brokers or Dealers with Market Access).
\11\ See e.g., 15 U.S.C. 78o(g). Section 15(g) of the Act
requires every registered broker or dealer to ``establish, maintain,
and enforce written policies and procedures reasonably designed,
taking into consideration the nature of such broker's or dealer's
business, to prevent the misuse . . . of material, nonpublic
information by such broker or dealer or any person associated with
such broker or dealer.''
\12\ 17 CFR 242.200. Under Regulation SHO, determination of a
seller's net position is based on the seller's positions in the
security in all proprietary accounts. See Exchange Act Release No.
50103 (July 28, 2004), 69 FR 48008, 48010 n.22 (Aug. 6, 2004); see
also Exchange Act Release No. 48709 (Oct. 29, 2003), 68 FR 62972,
62991 and 62994 (Nov. 6, 2003); Letter from Richard R. Lindsey,
Director, Division of Market Regulation, to Roger D. Blanc, Wilkie
Farr & Gallagher, SEC No-Action Letter, 1998 SEC No-Act. LEXIS 1038,
p. 5 (Nov. 23, 1998); Exchange Act Release No. 30772 (June 3, 1992),
57 FR 24415, 24419 n.47 (June 9, 1992); Exchange Act Release No.
27938 (Apr. 23, 1990), 55 FR 17949, 17950 (Apr. 30, 1990).
\13\ See e.g., NYSE MKT Rule 5320--Equities (``Manning Rule'').
---------------------------------------------------------------------------
II. Description of the Proposed Amendments to Rule 98
Proposed Rule 98(a)(1) provides that the rule shall apply to all
member organizations seeking to operate a DMM unit at the Exchange and
to any approved person that may provide services to a DMM unit.
Proposed Rule 98(b) revises, deletes and adds certain definitions
to provide member organizations operating a DMM unit with the
flexibility to integrate their DMM operations with other units of the
firm. Currently, Rule 98 defines the terms ``non-public order
information'' and ``DMM confidential information'' separately. Non-
public order information captures any information relating to order
flow at the Exchange--including verbal indications of interest made
with an expectation of privacy, electronic order interest, e-quotes,
reserve interest, and information about imbalances at the Exchange--
that is not publicly-available on a real-time basis via an Exchange-
provided datafeed, such as NYSE OpenBook[supreg],\14\ or otherwise
publicly available. ``DMM confidential information'' refers to
principal or proprietary trading activity of a DMM unit at the Exchange
in the securities allocated to it pursuant to Rule 103B--Equities,
including the unit's positions in those securities, decisions relating
to trading or quoting in those securities, and any algorithm or
computer system that is responsible for such trading activity and that
interfaces with Exchange systems.
---------------------------------------------------------------------------
\14\ NYSE OpenBook[supreg] provides aggregated limit-order
volume that has been entered on the Exchange at price points for all
NYSE MKT-traded securities.
---------------------------------------------------------------------------
The Exchange proposes to replace the term ``non-public
information'' with ``Floor-based non-public information.'' As discussed
in more detail below, the Exchange proposes to maintain restrictions in
proposed Rule 98(c)(3) to address the Floor-based activities of DMM
units and proposes to use the term ``Floor-based non-public order
information'' to identify the information those provisions are intended
to protect.\15\ The Exchange also proposes to delete the definition of
``DMM confidential information,'' arguing that proposed Rule 98(c)(2)
would sufficiently protect against the misuse of material non-public
information. Further the Exchange notes that to the extent a DMM on the
Floor may have access to Floor-based non-public order information,
proposed Rule 98(c)(3) would continue to specify required protections
against the misuse of such information by the member organization.
---------------------------------------------------------------------------
\15\ The Exchange proposes non-substantive changes to this
definition that it believes better reflect how its systems currently
operate. Specifically, the Exchange asserts that the concept of
trading in ``slow mode'' is duplicative of the remaining rule text,
which covers any order information that is made available to DMMs
but that is not available to other market participants.
---------------------------------------------------------------------------
The Exchange proposes to amend the term ``DMM unit'' to mean a
trading unit within a member organization that is approved pursuant to
Rule 103--Equities to act as a DMM unit, and it proposes to eliminate
the requirement that a DMM unit be an ``aggregation unit,'' which is
currently defined to mean any trading or market-making department,
division or desk that meets the requirements of the definition of
``independent trading unit'' pursuant to Rule 200 of Regulation
SHO.\16\ The Exchange proposes to decouple the Rule 98 definition from
Regulation SHO, in part because the two rules have different regulatory
purposes.\17\ Similarly, the Exchange proposed to delete the term
``integrated proprietary aggregation unit'' because this term
contemplates a DMM unit being part of an aggregation unit that only
engages in proprietary trading activity, which, under the proposal,
would be an organizational structure that is permitted, but not
required. The Exchange also proposes to delete the definitions for
``DMM API,'' ``DMM account,'' ``customer-facing department,'' \18\ and
``non-trading related services.'' \19\ The Exchange asserts that the
terms ``DMM API'' and ``DMM account'' are obsolete as they were based
on Rule 104 before it was amended in 2008.\20\
---------------------------------------------------------------------------
\16\ The Exchange proposes to delete rule provisions that
reference the terms ``aggregation unit'' and ``integrated
proprietary aggregation unit.'' See, e.g., Rule 98(c)(2)(B).
\17\ See 17 CFR 242.200(f). Rule 200(f) of Regulation SHO sets
forth the requirements for qualifying as an ``independent trading
unit'' for the purpose of order marking requirements under Rule 200.
The Commission notes that a member organization must comply with the
requirements of Regulation SHO regardless of how its operations are
structured for purposes of compliance with Rule 98.
\18\ The Exchange asserts that, because the proposed rule
changes are intended to provide principles-based requirements for
the operation of a DMM unit, the amended rule would no longer need
to define terms, such as ``customer-facing department,'' that
support the current, more prescriptive rule text.
\19\ Because these protections for Floor-based non-public order
information are retained in the proposed revisions to Rule 98 and
are applicable to approved persons pursuant to proposed amended Rule
98(a)(1), the Exchange asserts that current Rule 98(e), which
concerns the sharing of non-trading related services, is redundant
of existing regulatory requirements governing the operations of a
broker-dealer.
\20\ The Exchange also proposes to delete the definitions of
``DMM'' and ``approved person'' as duplicative of the definitions
set forth in Rules 2(i)--Equities and 2(c)--Equities. The Exchange
proposes to make non-substantive edits to the definition of
``related products'' and make conforming amendments to Rule 2(j)--
Equities.
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Proposed Rule 98(c) would govern the operation of a DMM unit.
Proposed Rule 98(c)(1) provides that a member organization will be
permitted to operate a DMM unit provided that the member organization
has obtained prior written approval from the Exchange.\21\ The Exchange
notes that all member organizations currently operating DMM units
already have written policies and procedures to comply with Rule 98 in
its current form, and such policies and procedures have been approved
by NYSE Regulation.\22\ In addition, FINRA has an exam program that
reviews member organizations operating DMM units for compliance with
such policies and procedures. Because proposed Rule 98(a) would
continue to require Exchange approval of any policies and procedures to
protect against the misuse of material nonpublic information, if a
[[Page 39026]]
member organization chose to modify its DMM operations consistent with
proposed Rule 98, its revised policies and procedures would be subject
to Exchange review before implementation. In addition, the Exchange
represents that FINRA would continue to monitor a member organization's
compliance with those policies and procedures consistent with the
current exam-based regulatory program associated with Rule 98.\23\
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\21\ Pursuant to Rule 0(c), the term ``Exchange'' may also mean
FINRA staff working on behalf of the Exchange and NYSE Regulation,
Inc. pursuant to a regulatory services agreement. The Exchange also
proposes to revise Rule 98(c)(1) to replace the term ``NYSE
Regulation, Inc.'' with the term ``Exchange.''
\22\ FINRA currently approves Rule 98 procedures on behalf of
NYSE Regulation, Inc. pursuant to a regulatory services agreement.
\23\ The Exchange represents that FINRA currently has
surveillances designed to monitor for manipulative activity and the
Exchange asserts that, because DMM market-making activity is not
materially different from market-making on other exchanges, these
existing programs are reasonably designed to address any concerns
that may be raised by a DMM unit being integrated with existing
market-making operations.
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Proposed Rule 98(c)(2) specifies that a member organization seeking
approval to operate a DMM unit pursuant to Rule 98 must maintain and
enforce written policies and procedures reasonably designed, taking
into consideration the nature of such member organization's business,
(i) to prevent the misuse of material, non-public information by such
member organizations or persons associated with such member
organization and (ii) to ensure compliance with applicable federal laws
and regulations and with Exchange rules.\24\ Proposed Rule 98(c)(2)
also provides examples of conduct that would constitute the misuse of
material, non-public information, including, but not limited to: (A)
Trading in any securities issued by a corporation, or in any related
products, while in possession of material-non-public information
concerning the issuer; (B) trading in a security or related product,
while in possession of material non-public information concerning
imminent transactions in the security or related product; or (C)
disclosing to another person or entity any material, non-public
information involving a corporation whose shares are publicly traded or
an imminent transaction in an underlying security or related product
for the purpose of facilitating the possible misuse of such material,
non-public information.
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\24\ Proposed Rule 98(c)(2) is based on NYSE Arca Equities Rule
6.3 (Prevention of the Misuse of Material Nonpublic Information) and
BATS Rule 5.5 (Prevention of the Misuse of Material, Non-Public
Information).
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Proposed Rule 98(c)(3) pertains to restrictions on trading for
member organizations operating a DMM unit. Proposed Rule 98(c)(3)(A)
would generally provide that a member organization shall protect
against the misuse of Floor-based non-public order information. The
rule would further specify that only the Floor-based employees of the
DMM unit and individuals responsible for the direct supervision of the
DMM unit's Floor-based operations may have access (as permitted
pursuant to Rule 104) to Floor-based non-public order information.
Proposed Rule 98(c)(3)(B) specifies the restrictions applicable to
employees of the DMM unit while on the trading floor. Proposed Rule
98(c)(3)(B)(i) provides that, while on the trading floor of the
Exchange, employees of the DMM unit, except as provided for in Rule
36.30--Equities, may trade only DMM securities and may do so only on or
through the systems and facilities of the Exchange, as permitted by
Exchange Rules. Proposed Rule 98(c)(3)(B)(ii) would specify that while
on the trading floor, Floor-based employees may not communicate with
individuals or systems responsible for making trading decisions for
related products or for away-market trading in DMM securities. Proposed
Rule 98(c)(3)(B)(iii) adds a new restriction that while on the trading
floor, employees of the DMM unit shall not have access to customer
information or the DMM unit's position in related products.
Proposed Rule 98(c)(3)(C) would provide that a Floor-based employee
of a DMM unit who moves to a location off the trading floor of the
Exchange, or any person who provides risk management oversight or
supervision of the Floor-based operations of the DMM unit and becomes
aware of Floor-based non-public order information, shall not (1) make
such information available to customers, (2) make such information
available to individuals or systems responsible for making trading
decisions in DMM securities in away markets or related products, or (3)
use any such information in connection with making trading decisions in
DMM securities in away markets or related products. The proposed rule
would cover an individual that leaves the trading floor, as well as a
manager providing oversight or supervision of the Floor-based
operations of the DMM unit. The Exchange's proposed amendments to Rule
98 would replace the concept of a person having ``access to''
information with that of a person being ``aware of'' information,\25\
asserting that the change will clarify the governing standard for
member organizations and make Rule 98 generally more consistent with
federal rules.\26\ The Exchange also argues that a person cannot misuse
material, non-public information unless the person is ``aware of'' that
information.
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\25\ The concept of a person having ``access to'' information is
incorporated into several subsections of current Rule 98. See, e.g.,
current Rule 98(c)(2)(E)(i), (d)(2)(B), and (f)(1)(A)(3).
\26\ See 17 CFR 240.10b5-1(b) (specifying that a purchase or
sale of securities constitutes trading on the basis of material
nonpublic information when the person making the purchase or sale
was aware of the material nonpublic information when the person made
the purchase or sale).
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Proposed Rule 98(c)(3)(C) would also maintain and consolidate the
Exchange's current ``wall-crossing'' provisions related to a non-Floor
based individual who becomes aware of Floor-based non-public order
information.
Proposed Rule 98(c)(3)(D) would provide that a DMM unit may make
available to a Floor broker associated or affiliated with an approved
person or member organization any information that the DMM would be
permitted under Exchange rules to provide to an unaffiliated Floor
Broker.
Proposed Rule 98(c)(4) would provide that any interest entered by
the DMM unit in DMM securities at the Exchange must be entered through
systems that identify such interest as DMM interest. The Exchange
asserts it is unnecessary to prescribe or require specific systems that
a DMM unit must use, but this rule would require that the DMM unit's
interest be identifiable and available for Exchange review through the
system that the DMM unit elects to use.
Proposed Rule 98(c)(5) would require that a member organization
provide the Exchange with real-time unit position information for any
trading in DMM securities by the DMM unit and any independent trading
unit.\27\ The Exchange represents that this provision should enhance
its ability to monitor for Rule 104 compliance.\28\ For example, if a
DMM unit is part of an independent trading unit that engages in trading
on other markets in DMM securities, the member organization's real-time
position update would need to incorporate any away-market transactions
in DMM securities by that independent trading unit.
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\27\ The Exchange proposes to delete Rule 98(d)(4) from the rule
both because the Exchange does not believe it needs to separately
identify DMM audit trail requirements and because Rule 132B--
Equities no longer exists.
\28\ Rule 104 obligations relate to whether a DMM is long or
short and are applicable to the DMM unit's position in DMM
securities together with any position of a Regulation SHO
independent trading unit of which the DMM unit may be included.
---------------------------------------------------------------------------
Proposed Rule 98(c)(6) would specify that a DMM unit may not
operate as a specialist or market maker on the Exchange or the NYSE
Amex Options LLC (``NYSE Amex Options'') equities or options trading
floors in related products, unless specifically permitted
[[Page 39027]]
in Exchange rules.\29\ The Exchange notes that a member organization
that operates a DMM unit may be a specialist or market maker on NYSE
Amex Options, provided that it maintains appropriate information
barriers. Currently, Rule 98 permits an integrated proprietary
aggregation unit to engage in options market making (electronic only),
provided that the DMM unit is walled off from the options market making
trading desk.
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\29\ Currently, the Exchange represents, the only time that a
DMM unit may engage in market making in a related products is
pursuant to Rule 504(b)(5)--Equities.
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Proposed Rule 98(c)(7) would maintain the existing requirement that
the member organization maintain information barriers between the DMM
unit and any investment banking or research departments. Proposed Rule
98(c)(7) would also continue to provide that no DMM or DMM unit may be
directly supervised or controlled by an individual associated with an
approved person or the member organization who is assigned to any
investment banking or research departments.
Proposed Rule 98(d) would specify that DMM rules would only apply
to the DMM unit's quoting or trading in their DMM securities for their
own accounts at the Exchange. The Exchange represents that this
provision is intended to clarify that DMM rule restrictions are not
applicable to any customer orders routed to the Exchange by that member
organization as agent.
The Exchange proposes to delete in its entirety Rule 98(e), which
concerns the sharing of non-trading related services. The Exchange
states that the focus of proposed Rule 98 on protecting against the
misuse of material non-public information obviates the need to specify
how a member organization or an approved person provides back-office
support operations, such as clearing, stock loan, and compliance, for
the DMM unit. Rather, the Exchange asserts that how a member
organization or approved person provides back-office operations to the
DMM unit should not differ from how such services are provided to other
trading units within that member organization or approved person. The
Exchange also notes that, if a person in the member organization or an
approved person is providing non-trading related services to the DMM
unit and, as a result of such relationship, becomes aware of Floor-
based non-public order information, such person would be subject to the
wall-crossing provisions of proposed Rule 98(c)(3)(C), which is
applicable to any person who is aware of such information. In addition,
the Exchange notes that the protections for Floor-based non-public
order information are retained in the proposed revisions to Rule 98 and
are applicable to approved persons pursuant to proposed amended Rule
98(a)(1). The Exchange proposes conforming amendments to Rule 36.30--
Equities.
As part of the proposed restructuring of Rule 98, current Rule
98(g) would be renumbered as proposed Rule 98(e), existing Rule 98(h)
would be renumbered as proposed Rule 98(f), and existing Rule 98(j)
would be renumbered as proposed Rule 98(g). The Exchange proposes
conforming changes to these sections, such as updating cross-references
and changing the rule's reference to ``the Division of Market
Surveillance'' and ``NYSE Regulation'' to a reference to ``the
Exchange.'' \30\
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\30\ Pursuant to Rule 0, the reference to the Exchange in this
rule may also mean FINRA.
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The Exchange proposes to delete Rule 98 Former, as well as any
references thereto, because it is obsolete: All DMM firms operate
pursuant to the current Rule 98.\31\ In addition, the Exchange proposes
to amend Rule 105--Equities to delete Rule 105(b)-(d) and the
Guidelines for DMM's Registered Security Option and Single Stock
Futures Transactions Pursuant to Rule 105 (``Rule 105 Guidelines'') and
to make conforming amendments to Rule 36.30--Equities.\32\ Rule 105
currently sets forth hedging guidelines to permit a DMM to trade from
the trading floor listed options or single-stock futures that overlie
DMM securities. Under Rule 98(f)(1), a DMM unit can obtain an exemption
from the Rule 105 Guidelines to trade options or futures, provided that
such trading is conducted by a walled-off, off-Floor trading desk.
---------------------------------------------------------------------------
\31\ See e.g., Rules 98A Former--Equities, 99 Former--Equities,
and 104T(a)(Former)--Equities and supplementary material .13
(Former), Rule 900--Equities, Rule 98(a) and 105--Equities.
\32\ The Exchange proposes to amend Rule 105(a)--Equities to
clarify that the restriction on pool dealing applies to the DMM unit
for securities registered to that unit and revise the title of that
rule accordingly.
---------------------------------------------------------------------------
Under the proposed revisions to Rule 98, a DMM unit would no longer
need to apply for an exemption from Rule 105 trading restrictions
because, as discussed above, while on the trading floor, Floor-based
employees may trade only DMM securities (i.e., they may not trade in
related products) and may trade only on or through the systems and
facilities of the Exchange. Because there would not be any Floor-based
trading in listed options or single-stock futures, the Rule 105
Guidelines specifying how such Floor-based trading may occur would be
moot. Accordingly, the Exchange proposes to delete these rules.
In addition, because DMM units no longer have their own customers,
the Exchange proposes to delete in its entirety the DMM Booth Wire
Policy, which is set forth in Rule 123B--Equities and which is now
obsolete.
III. Commission Findings
After careful consideration, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
exchange.\33\ The Commission believes that the proposal is consistent
with Section 6(b)(5) \34\ in particular in that it is designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
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\33\ In approving this rule change, the Commission notes that it
has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\34\ 15 U.S.C. 78f(b)(5).
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Generally, the Exchange proposes to amend Rule 98 in order to
provide DMM units with greater flexibility in structuring their
operations, moving further toward a principles-based approach and away
from prescribing particular structures. Under the proposed rule change,
certain information barriers would continue to be required,\35\ but
amended Rule 98 would generally contain fewer prescriptions than
current Rule 98 and would instead require that a member organization
operating a DMM unit maintain and enforce written policies and
procedures reasonably designed, taking into consideration the nature of
the member organization's business, (i) to prevent the misuse of
material, non-public information by the member organization or persons
associated with it and (ii) to ensure compliance with applicable
federal laws and regulations and with Exchange rules.\36\ The Exchange
represents that the instant proposed rule change prescribes specific
protections that reflect the unique role of DMMs and the trading floor
at the Exchange, while treating the off-floor market-making activity of
member organizations with DMM units similarly to the rules that govern
equity market
[[Page 39028]]
makers on NYSE Arca, Nasdaq, and BATS.\37\
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\35\ See proposed Rules 98(c)(3) and 98(c)(7).
\36\ See proposed Rule 98(c)(2).
\37\ See Securities Exchange Act Release No. 60604 (Sept. 2,
2009), 76 FR 46272 (Sept. 8, 2009) (SR-NYSEArca-2009-78) (Order
approving elimination of NYSE Arca rule that required market makers
to establish and maintain specifically prescribed information
barriers, including discussion of NYSE Arca and Nasdaq rules)
(``NYSE Arca Order''). See also Securities Exchange Act Release No.
61574 (Feb. 23, 2010), 75 FR 9455 (Mar. 2, 2010) (SR-BATS-2010-003)
(Order approving amendments to BATS Exchange, Inc. (``BATS'') Rule
5.5 to move to a principles-based approach to protecting against the
misuse of material, non-public information, and noting that the
proposed change is consistent with the approaches of NYSE Arca and
Nasdaq) (``BATS Order'').
---------------------------------------------------------------------------
In particular, proposed Rule 98(a) provides that a member
organization will be permitted to operate a DMM unit provided that the
member organization has obtained prior written approval from the
Exchange. The Exchange represents that, although all member
organizations currently operating DMM units under Rule 98 have written
policies and procedures that have been approved by NYSE Regulation,
Inc., the policies and procedures of member organizations that choose
to modify their DMM operations consistent with proposed Rule 98 would
be subject to Exchange review prior to implementation. In addition, the
Exchange represents that FINRA would continue to monitor member
organizations for compliance with such policies and procedures
consistent with the current exam-based regulatory program associated
with Rule 98.
Proposed Rule 98(c)(2) would replace the current, more prescriptive
approach of current Rule 98 and would provide member organizations
operating a DMM unit with greater organizational and operational
flexibility, while still requiring that member organizations comply
with their existing regulatory obligations. Specifically, proposed
Exchange Rule 98(c)(2) would require a member organization seeking
approval to operate a DMM unit to maintain and enforce written policies
and procedures reasonably designed, taking into consideration the
nature of such member organization's business, (i) to prevent the
misuse of material, non-public information by such member organizations
or persons associated with such member organization and (ii) to ensure
compliance with applicable federal laws and regulations and with
Exchange rules. In addition, proposed Rule 98(c)(2) would specify that
conduct constituting the misuse of material, non-public information
includes, but is not limited to: (A) Trading in any securities issued
by a corporation, or in any related product, while in possession of
material-non-public information concerning the issuer; or (B) trading
in a security or related product, while in possession of material non-
public information concerning imminent transactions in the security or
related product; or (C) disclosing to another person or entity any
material, non-public information involving a corporation whose shares
are publicly traded or an imminent transaction in an underlying
security or related product for the purpose of facilitating the
possible misuse of such material, non-public information. Although the
Exchange proposes to move to a more principles-based approach, and
although certain information barriers may no longer be required, the
Commission notes, and the Exchange acknowledges, that a member
organization's business model or business activities may dictate that
an information barrier or functional separation be part of the
appropriate set of policies and procedures that would be reasonably
designed to achieve compliance with applicable securities laws and
regulations and with applicable Exchange rules.\38\ In addition, the
Commission notes that all member organizations of the Exchange are
subject to the requirements of Section 15(g) of the Act, regardless of
how their operations are structured.\39\
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\38\ This aspect of Exchange's proposal and of the Commission's
findings is consistent with similar rules at other exchanges. See
NYSE Arca Order at 46275 and BATS Order at 9459.
\39\ 15 U.S.C. 78o(g). Section 15(g) of the Act requires brokers
and dealers to ``establish, maintain, and enforce written policies
and procedures reasonably designed, taking into consideration the
nature of such broker's or dealer's business, to prevent the misuse
. . . of material, nonpublic information by such broker or dealer or
any person associated with such broker or dealer.''
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The Commission notes that amended Rule 98 would delete the defined
term ``DMM confidential information'' and would replace the defined
term ``non-public information'' with the term ``Floor-based non-public
information.'' In the Commission's view, these definitional
modifications should not reduce investor protections or market
integrity. Instead, consistent with proposed Rule 98(c)(2) and Section
15(g) of the Act,\40\ member organizations will continue to have
obligations to implement reasonably designed policies and procedures to
prevent the misuse of material, non-public information, and they will
continue to be subject to Exchange rules regarding front-running,
limit-order display, and trading ahead, as well as FINRA surveillances
to detect violations of these rules.
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\40\ 15 U.S.C. 78o(g).
---------------------------------------------------------------------------
The Commission notes that proposed Rule 98(c)(2) is substantially
similar to and expressly based on NYSE Arca Rule 6.3 and BATS Rule 5.5.
The Exchange's market structure, however differs from that of NYSE Arca
and BATS, in that the Exchange continues to have a physical trading
floor. Accordingly, the Commission believes that it is appropriate that
proposed Rule 98 continues to include certain prescriptions that
address the role of the DMM and the trading floor in its market.
Specifically, as described above, proposed Rule 98(c)(3) relates to
restrictions on trading for member organizations operating a DMM unit;
proposed Rule 98(c)(4) would provide that any interest entered by the
DMM unit in DMM securities at the Exchange must be entered through
systems that identify such interest as DMM interest; proposed Rule
98(c)(5) would require that a member organization provide the Exchange
with real-time unit position information for any trading in DMM
securities by the DMM unit and any independent trading unit; proposed
Rule 98(c)(6) would specify that a DMM unit may not operate as a
specialist or market maker on the Exchange or the NYSE MKT equities or
options trading floors in related products, unless specifically
permitted in Exchange rules; and proposed Rule 98(c)(7) would maintain
the existing requirement that the member organization maintain
information barriers between the DMM unit and any investment banking or
research departments.
Under this proposed rule change, member organizations could
integrate DMM units with other trading operations within the member
organization, including, if applicable, a customer-facing operation.
The Commission notes that a DMM unit that is integrated with other
market-making operations would be subject to existing rules that
prohibit member organizations from disadvantaging their customers or
other market participants by improperly capitalizing on a member
organization's access to the receipt of material, non-public
information. For instance, Rule 5320 generally prohibits a member
organization from trading for its own account ahead of customer orders,
which means that a member organization operating both a DMM unit, which
engages in trading for its own account, and customer-facing operations
would need to comply with the Manning Rule \41\ or meet one of the
specified exceptions.\42\ Moreover, the
[[Page 39029]]
Commission notes that (1) the Exchange has represented that FINRA
currently has surveillances designed to monitor for manipulative
activity, that DMM market-making activity off the trading floor is not
materially different from market-making on other exchanges, and that,
therefore, the existing regulatory framework is reasonably designed to
address any concerns that may be raised by a DMM unit being integrated
with market-making operations and (2) the Exchange has represented that
FINRA currently conducts a program that approves and examines Rule 98
policies and procedures.
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\41\ See Manning Rule, supra note 13.
\42\ Exchange Rule 5320 further provides that, if a member
organization trades at a price for its own account ahead of the
customer order, it must execute the customer order up to the size
and at a price that is the same as, or better than, the price at
which the organization traded for its own account.
---------------------------------------------------------------------------
The Commission believes that the proposed rule change is consistent
with the Act. The principles-based regulatory approach in the proposal
is substantially similar to the existing regulatory approach of NYSE
Arca and BATS, while also accounting for the market structure
differences (i.e., the role of DMM units and the trading floor on the
Exchange) that raise additional regulatory and policy considerations.
While proposed Rule 98 permits member organizations greater flexibility
in structuring their business and compliance operations, the rule
continues to require the maintenance of certain appropriate information
barriers, and it clearly requires that all member organizations have
policies and procedures that are reasonably designed to prevent the
misuse of material, non-public information.\43\
---------------------------------------------------------------------------
\43\ The Commission notes that such policies and procedures may
include the programming and operation of a member organization's
trading algorithms to protect against the misuse of material non-
public information.
---------------------------------------------------------------------------
The Commission notes that the policies and procedures required
proposed Rule 98 will be subject to oversight by the Exchange and
review by FINRA, and the Commission emphasizes that a member
organization operating a DMM unit should be proactive in assuring that
its policies and procedures reflect the current state of its business
and continue to be reasonably designed to achieve compliance with
applicable federal securities law and regulations and with applicable
Exchange and FINRA rules. Finally, the Commission notes that existing
Exchange rules also prohibit particular misuses of material, non-public
information--for example, front-running customer orders--and that FINRA
surveillances seek to detect violations of those rules.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-NYSEMKT-2014-22), is hereby approved.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\44\
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\44\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014-16048 Filed 7-8-14; 8:45 am]
BILLING CODE 8011-01-P
