Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of 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, 60547-60552 [2014-23841]
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Federal Register / Vol. 79, No. 194 / Tuesday, October 7, 2014 / Notices
2014–41, and should be submitted on or
before October 28, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–23835 Filed 10–6–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73282; File No. SR–
NYSEArca–2014–04]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Granting Approval of
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
October 1, 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
20 17
CFR 200.30–3(a)(12).
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’’).
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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 On
May 2, 2014, the Commission instituted
proceedings pursuant to Section
19(b)(2)(B) of the Act 8 to determine
whether to approve or disapprove the
proposed rule change.9 The Order
Instituting Proceedings was published
for comment in the Federal Register on
May 8, 2014.10 The Commission
received an additional response letter
and data submission from NYSE Arca.11
This order approves the proposed rule
change, as modified by Amendment No.
1.
II. Description of the Proposal
NYSE Arca proposed 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 12
and Floor Brokers 13 (collectively,
‘‘Crowd Participants’’) 14 over certain
6 See Letter from Martha Redding, Chief Counsel,
NYSE Euronext, dated April 4, 2014 (‘‘NYSE Arca
Response I’’).
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=FACF4F6772B1316D973F5D4E2
D258ACE?file_no=SR-NYSEArca-2014-04&
seqnum=2.
8 15 U.S.C. 78s(b)(2)(B).
9 See Securities Exchange Act Release No. 72081
(May 2, 2014), 79 FR 26474 (‘‘Order Instituting
Proceedings’’).
10 See Order Instituting Proceedings at 79 FR
26474. The comment period closed on May 29,
2014, and the rebuttal period closed on June 12,
2014. On July 29, 2014, the Commission extended
the time period for the proceedings for the
Commission to determine whether to approve or
disapprove the proposed rule change to October 1,
2014. See Securities Exchange Act Release No.
72703 (July 29, 2014), 79 FR 45535 (August 5,
2014).
11 See Letter from Martha Redding, Chief Counsel,
New York Stock Exchange, dated September 11,
2014 (‘‘NYSE Arca Response II’’). The response
letter included summary data concerning
participation and competition in non-Customer-toCustomer open outcry crossing transactions on
NYSE Arca and NYSE Amex Options and is
available at https://www.sec.gov/comments/srnysearca-2014-04/nysearca201404.shtml.
12 See Rule 6.32 (Market Maker Defined).
13 See Rule 6.43 (Options Floor Broker Defined).
14 The term ‘‘Crowd Participants’’ means the
Market Makers appointed to an option issue under
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60547
equal-priced bids and offers of non–
Customers 15 on the Consolidated
Book 16 during the execution of an order
in open outcry on the Floor 17 of the
Exchange.18
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.19
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 20 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
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).
15 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).
16 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).
17 See Rule 1.1(i).
18 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.
19 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.
20 See supra note 15.
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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
same time protecting Customer interest
on the Consolidated Book, and any
interest that has time priority over such
protected Customer interest.21
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 22).
The Exchange proposed to amend Rule
6.75(a) 23 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.24
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 6.75.25
21 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).
23 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.
24 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.
25 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.
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The Exchange also proposed to
include language in Rule 6.76(d)(4) that
sets forth certain OTP Holder 26
obligations under Section 11(a) of the
Act.27 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.28
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 29 by stating that
Floor Brokers, when crossing two orders
in open outcry, must yield priority to:
(‘‘CBOE’’) and NYSE MKT LLC (‘‘NYSE MKT’’). See
id. (citing CBOE Rule 6.45A(b) and NYSE MKT Rule
964NY(e)).
26 See Rule 1.1(q).
27 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 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).
28 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.
29 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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(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)
to any non-Customer bids or offers on
the Consolidated Book that are priced
better than the proposed execution
price.30 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.31 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.32
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 33 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
Responses
The Commission received ten
comment letters from seven
commenters.34 NYSE Arca submitted a
response to the comment letters and an
additional letter and data submission in
response to the Order Instituting
Proceedings.35
Five of the commenters, four of whom
identified themselves as Crowd
Participants on NYSE Arca,36 generally
were supportive of the proposal to
revise the order of priority of bids and
offers when executing orders in open
outcry.37 Four of these commenters
stated a view that the proposal would
30 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.
31 See Notice, 79 FR at 6259.
32 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.
33 See Notice, 79 FR at 6260.
34 See supra note 5.
35 See supra notes 6 and 11.
36 See Casey Letter (Floor Broker); Alvira Letter
(Market Maker); Hart Letters I and II (Market
Maker); Cutler Letter (Crowd Participant), supra
note 5.
37 See Story Letters I and II; Casey Letter; Alvira
Letter; Hart Letter I and II; and Cutler Letter.
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allow NYSE Arca to compete with other
exchanges that currently have similar
priority rules.38 Three of these
commenters stated that the proposal
would allow Crowd Participants to
compete with bids and offers of nonCustomers on the Consolidated Book,39
and two of them stated that Crowd
Participants were the market
participants most likely to provide
services during times of market
duress.40 Two commenters also noted
that the rule change would maintain
priority for Customer orders resting on
the Consolidated Book.41
Two commenters stated their belief
that the proposal would increase
competition on the floor for orders,42
and one of these commenters noted that
this competition would benefit the
investing public.43 Similarly, two
commenters stated their view that the
proposal would improve investor
executions on the floor.44 One
38 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’’).
39 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’’).
40 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’’).
41 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’’).
42 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).
43 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’’).
44 See Story Letter I (‘‘This rule change will allow
market participants to IMPROVE fills for customers
without creating any disadvantage for other market
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commenter noted that the proposal
would create an advantage for price
improving customers.45
Two commenters expressed concerns
about the proposal.46 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.47 The
commenter believed that such
preference would be a more fair way of
revising the priority of bids and offers.48
This commenter further noted that,
under the Exchange’s proposal, even
small bids from Crowd Participants
would take priority over electronic nonCustomer bids.49 The same commenter
also noted its belief that best execution
is not enhanced by allowing more
exchanges to disadvantage other
traders.50 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.51 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.52
Another commenter also raised
concerns with the proposal.53 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.54 The commenter
remarked, however, that the proposal
apparently was focused on attracting
block cross volume to the Exchange.55
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).
45 See Story Letter II.
46 See Kohen Letters I and II; and SIG Letter.
47 See Kohen Letter I.
48 See Kohen Letter I.
49 See Kohen Letter I (‘‘otherwise Crowd
Participants’ 1 contract or 100 share bid will always
take priority’’).
50 See Kohen Letter II.
51 See Kohen Letter II.
52 See Story Letter II.
53 See SIG Letter.
54 See SIG Letter at 1.
55 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
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The commenter noted that when
NYSE Arca uses the term ‘‘Crowd
Participants,’’ it appears to refer to offfloor 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.56 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.57
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.58 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.59 Given its concerns, the
commenter believed that the proposal
would be detrimental to investors, as
the opportunity for price improvement
would be significantly diminished.60
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.61 The commenter
acknowledged that, as other floor
exchanges have rules that place booked
offers of crowd participants to participate in open
outcry transaction [sic] and therefore promote
larger-sized negotiated transactions’’).
56 See SIG Letter at 2.
57 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.
58 See SIG Letter at 2.
59 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.
60 See SIG Letter at 2–3.
61 See SIG Letter at 3.
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parity interest behind crowd
participants, NYSE Arca’s proposal at
least relates in part to a legitimate
competitive concern for the Exchange.62
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.63 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.64
One commenter who supported the
proposal raised issues with the
arguments made by the commenter who
expressed several concerns regarding
the proposal.65 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 that
the proposal would allow large marketmaking groups like itself to continue to
provide inside markets and actually
trade at those prices on NYSE Arca.66
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.67
NYSE Arca provided a response letter
addressing issues raised by the
commenters.68 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.69
In response to one commenter’s
suggestion that the Exchange adopt a
62 See SIG Letter at 3 (‘‘No doubt, Arca relies
heavily on open outcry crosses for transaction
volume. And, no doubt, the more often that highfrequency 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’’).
63 See SIG Letter at 3.
64 See SIG Letter at 3.
65 See Story Letter II.
66 See Story Letter II.
67 See Story Letter II.
68 See NYSE Arca Response Letter I.
69 See NYSE Arca Response Letter I at 1–4.
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pure size priority model,70 NYSE Arca
stated that a wholesale restructuring of
its priority model was beyond the scope
of the current proposal.71 NYSE Arca
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.72
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.73 NYSE
Arca noted that its rules would continue
to give priority to participants who
display an improved price.74
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.’’ 75 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.76 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.77 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.78
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.79 The Exchange
70 See
Kohen Letters I and II.
NYSE Arca Response Letter I at 2.
72 See NYSE Arca Response Letter I at 2.
73 See NYSE Arca Response Letter I at 2.
74 See NYSE Arca Response Letter I at 2.
75 See NYSE Arca Response Letter I at 2–3.
76 See NYSE Arca Response Letter I at 3.
77 See NYSE Arca Response Letter I at 3.
78 See NYSE Arca Response Letter I at 3.
79 See NYSE Arca Response Letter I at 3.
71 See
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Frm 00107
Fmt 4703
Sfmt 4703
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.80 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.81
After the Commission issued the
Order Instituting Proceedings, NYSE
Arca submitted a second comment
letter, which concerned participation in
open outcry crossing transactions on
NYSE Arca.82 According to the
Exchange, it believed that comparing
data relating to non-Customer-toCustomer Floor crossing transactions on
NYSE Arca with similar data for NYSE
Amex Options, the Exchange’s affiliated
options market that provides priority to
Floor participants over non-Customers
on its electronic book, would support
the argument that the proposed rule
change would create a more robust open
outcry market and benefit investors who
choose to send orders to the Exchange.83
IV. Discussion and Commission
Findings
After careful review of the proposed
rule change as well as the comment
letters and the NYSE Arca response
letter received on the proposal, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
a national securities exchange and, in
particular, with Section 6(b) of the
Act.84 In particular, the Commission
finds that the proposed rule change is
consistent with Section 6(b)(5) of the
Act,85 which requires, among other
things, that the rules of a national
securities exchange be designed to
80 See
NYSE Arca Response Letter I at 3.
NYSE Arca Response Letter I 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. Id.
82 See NYSE Arca Response Letter II.
83 See NYSE Arca Response Letter II at 1–2. The
data provided by the Exchange showed that floor
market makers and/or book participants
participated in only 34.5% of the total crossing
contracts executed on the NYSE Arca Floor,
whereas on NYSE Amex Options, such participants
participated in 53.4% of the total crossing contracts
executed. See id. at 2. Although the data did not
describe the actual contract execution participation
percentages for either floor market makers or book
participants, the Exchange believed that the data
showed that, if it had rules similar to other options
exchange trading floors, the Exchange would see an
increase in Floor market maker participation in
Floor crossing transactions. See id.
84 15 U.S.C. 78f(b). In approving this proposed
rule change, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
85 15 U.S.C. 78f(b)(5).
81 See
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asabaliauskas on DSK5VPTVN1PROD with NOTICES
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest; and
not be designed to permit unfair
discrimination between customers,
issuers, brokers or dealers.86
As noted above, the Commission
received ten comment letters from seven
commenters in response to the proposed
rule change.87 Five of the commenters
supported the proposed rule change,88
while two other commenters raised
concerns about whether the Exchange’s
proposed revisions to its rules governing
priority during open outcry were
appropriate, as more fully described
above.89 In its review of the proposal,
the Commission has carefully
considered all of the comments
received. The Commission
acknowledges the concerns raised by
one commenter, as detailed above,90
about the potential impact on
competition resulting from the proposed
change in the Exchange’s rules
governing priority and order allocation
for open outcry transactions. At the
same time, the Commission also
acknowledges the Exchange’s belief that
this proposal will lead to greater
competition for orders and will create a
more robust open outcry market and its
belief that, without the proposal, the
Exchange would be at a competitive
disadvantage compared to other
exchanges that operate trading floors.91
Rule 6.75(a), as proposed to be
revised, describes NYSE Arca’s priority
and order allocation for open outcry
transactions, including procedures to be
86 The Exchange represented that the proposed
rule change is consistent with Section 11(a) of the
Act and the rules thereunder and would not limit
in any way the obligations of OTP Holders to
comply with Section 11(a) or the rules thereunder.
See Notice, 79 FR at 6261. The Exchange also
represented that the proposed rule change raises no
novel issues under Section 11(a) and the rules
thereunder from a compliance, surveillance or
enforcement perspective. See id. The Commission
notes that each member of the Exchange is
responsible for ensuring that its conduct is in
compliance with the requirements of Section 11(a)
of the Act and the rules promulgated thereunder.
87 See supra note 5.
88 See Story Letters I and II; Casey Letter; Alvira
Letter; Hart Letters I and II; and Cutler Letter.
89 See Kohen Letters I and II; and SIG Letter. See
also notes 46–64 and accompanying text describing
the issues and concerns raised by these comments.
90 See supra notes 53–64 and accompanying text.
91 See Notice, 79 FR at 6261.
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followed when there is interest at the
same price in the Consolidated Book as
on the Floor. Rule 6.76(d), as proposed
to be revised, describes NYSE Arca’s
order ranking, display and allocation of
orders on the OX system, and the
priority described in proposed Rule
6.76(d) is consistent with the changes to
Rule 6.75(a). The proposed rules
governing priority during open outcry
transactions on the Exchange’s floor are
similar to the priority rules at other
exchanges with trading floors.92 Rule
6.47, as proposed to be revised,
describes priority and order allocation
for crossing orders in open outcry
transactions. The proposed rules
governing open outcry during crossing
transactions on the Exchange floor are
similar to the rules governing priority in
crossing transactions at other
exchanges.93 Given that other options
exchanges currently have rules that
provide lower priority to non-priority
customer orders on the electronic book
during floor transactions on those
exchanges, including during crossing
transactions, the Exchange’s proposed
revisions to its priority scheme for floor
transactions will allow NYSE Arca to
compete with other floor-based
exchanges that have substantially
similar rules. Accordingly, the
Commission believes that it would be
appropriate and consistent with the Act
92 See, e.g., CBOE Rule 6.45A; NYSE MKT Rules
963NY and 964NY. CBOE Rule 6.45A(b)(i) provides
that, after public customer orders in the electronic
book, in-crowd market participants shall have
second priority and broker-dealer orders in the
electronic book and electronic quotes of MarketMakers shall have third priority. NYSE MKT Rule
963NY(a)–(b) provides that, after Customer orders
displayed on the Consolidated Book, an order in the
crowd shall have priority over a non-Customer
order displayed in the Consolidated Book. NYSE
MKT Rule 964NY(e) further requires that for Floor
Brokers manually representing orders in the trading
crowd, Customer orders in the Consolidated Book
have first priority, ATP Holders of the trading
crowd have second priority and broker-dealers,
Professional Customers (including Quotes with Size
and orders of Market Makers) in the Consolidated
Book have third priority.
93 See, e.g., CBOE Rule 6.74; NYSE MKT Rule
934NY. CBOE Rule 6.74 provides that for purposes
of establishing priority at the same price, bids and
offers of In Crowd Market Participants have first
priority, except with respect to public customer
orders resting in the electronic book; and all other
bids and offers (including bids and offers of brokerdealer orders in the electronic book and electronic
quotes of Market-Makers) have second priority.
NYSE MKT Rule 934NY(b)(3) provides that, for a
non-facilitation cross, if there are bids or offers in
the Consolidated Book better than the proposed
execution price or Customer Orders in the
Consolidated Book priced at the proposed
execution price, the Floor Broker must trade against
such bids or offers in the Consolidated Book. Once
bids or offers in the Book are satisfied, the Floor
Broker may cross the balance of the orders, if any,
to be crossed.
PO 00000
Frm 00108
Fmt 4703
Sfmt 4703
60551
to approve the Exchange’s proposed rule
change.94
As noted above, one commenter
remarked that it had submitted a
Petition for Rulemaking with the
Commission that asserts 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 their respective option
classes.95 Although the Petition for
Rulemaking raises concerns involving
how orders are crossed on options
exchange floors, the recommendations
in the Petition for Rulemaking 96 are
beyond the scope of the Commission’s
consideration in connection with the
instant proposed rule change. However,
Commission staff will evaluate the
Petition for Rulemaking and how best to
address the concerns raised therein.
94 As noted above, the Exchange’s proposal is
intended to bring its floor priority rules for crossing
orders in line with the floor priority rules of certain
other options exchanges. However, the Commission
is aware of the concerns, as expressed by
commenters, that the rules of an options trading
floor should allow for sufficient competition for
orders. This concern is one that the Commission
staff intends to continue to evaluate in the context
of its ongoing empirical consideration of market
structure. For example, there currently is relatively
little information available about the extent and
nature of floor crossing transactions. The
Commission staff, however, expects that an
exchange with a trading floor, as part of its
regulatory obligations, will monitor the extent to
which competition is maintained in floor crossing
transactions. One way an exchange could do so
would be to assess periodically the level of
participation in such crossing transactions by
market makers and other market participants, aside
from the firm that initiated the cross, and review
whether its rules appropriately allow for such
competition. In addition, the Commission reminds
broker-dealers that the duty of best execution
requires them to assess periodically the quality of
competing markets to assure that order flow is
directed to the markets providing the most
beneficial terms for their customer orders. See, e.g.,
Order Execution Obligations, Securities Exchange
Act Release No. 37619A (September 6, 1996), 61 FR
48290 at 48322–33 (September 12, 1996). Brokerdealers must examine their procedures for seeking
to obtain best execution in light of market and
technology changes and modify those practices if
necessary to enable their customers to obtain the
best reasonably available prices. See id. at 48323.
In doing so, broker-dealers must take into account
price improvement opportunities, and whether
different markets may be more suitable for different
types of orders or particular securities. See id.
95 See supra note 59 and accompanying text.
96 The Petition for Rulemaking requests, among
other things, that the Commission require each
floor-based U.S. options exchange to provide an
electronic-cross auction mechanism for all
multiply-listed options traded on its trading floor
and ensure that the mechanism is made
electronically accessible from on and off the trading
floor by qualified members and that all block-sized
matched option crosses involving customer orders
be auctioned through such mechanism. See Petition
for Rulemaking regarding Option Floor Crosses,
supra note 59.
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Federal Register / Vol. 79, No. 194 / Tuesday, October 7, 2014 / Notices
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,97 that the
proposed rule change, as modified by
Amendment No. 1, (SR–NYSEArca–
2014–04) is approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.98
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–23841 Filed 10–6–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
[Release No. 34–73281; File No. SR–
NYSEArca–2014–110]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of Proposed
Rule Change Amending Rule 6.2A To
Authorize the Exchange To Share Any
User-Designated Risk Settings in
Exchange Systems With the Clearing
Member That Clears Transactions on
Behalf of the User
October 1, 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
September 19, 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 selfregulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
asabaliauskas on DSK5VPTVN1PROD with NOTICES
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to amend
Rule 6.2A (Access to and Conduct on
OX) to authorize the Exchange to share
any User-designated risk settings in
Exchange systems with the Clearing
Member that clears transactions on
behalf of the User. 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.
97 15
U.S.C. 78s(b)(2).
98 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
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17:15 Oct 06, 2014
Jkt 235001
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.
1. Purpose
The Exchange proposes to amend
Rule 6.2A (Access to and Conduct on
OX) to authorize the Exchange to share
any User-designated risk settings in
Exchange systems with the Clearing
Member that clears transactions on
behalf of the User.
Rule 6.2A states that ‘‘[u]nless
otherwise provided in the Rules, no one
but a User shall effect any transaction
on OX.’’ 4 OX is ‘‘the Exchange’s
electronic order delivery, execution and
reporting system for designated option
issues through which orders and quotes
of Users are consolidated for execution
and/or display.’’ 5 The Exchange
proposes to amend the current rule by
adding the following sentence: ‘‘The
Exchange may share any Userdesignated risk settings in OX with the
Clearing Member that clears
transactions on behalf of the User.’’ 6 A
‘‘User’’ is ‘‘any OTP Holder, OTP Firm
or Sponsored Participant that is
authorized to obtain access to OX
pursuant to Rule 6.2A.’’ 7
Each User that transacts through a
Clearing Member on the Exchange
executes a Clearing Letter of Consent,
which ‘‘shall be deemed a letter of
guarantee, letter of authorization, or
notice of consent pursuant to NYSE
Arca Rules and may be relied upon by
NYSE Arca, Inc., the [National
Securities Clearing Corporation], the
[Options Clearing Corporation], and
their respective members.’’ 8 The
See Rule 6.2A.
See Rule 6.1A(13) [sic].
6 See proposed Rule 6.2A.
7 See Rule 6.1A(19) [sic].
8 See NYSE Arca Options OTP Application,
Section 8 (Clearing Letter of Consent), available
here, https://www.nyse.com/publicdocs/nyse/
markets/arca-options/NYSE_Arca_Options_OTP_
Firm_Application.pdf.
4
Exchange believes that because Clearing
Members that execute a Clearing Letter
of Consent guarantee all transactions of
those Users, and therefore bear the risk
associated with those transactions, it is
appropriate for Clearing Members to
have knowledge of what risk settings a
User may utilize within Exchange
systems.
At this time, the risk settings covered
by this proposal are set forth in Rule
6.40 (Risk Limitation Mechanism).9
Pursuant to Rule 6.40(b)–(d), Users may
set certain risk control thresholds in the
Risk Limitation Mechanism, which are
designed to mitigate the potential risks
of multiple executions against a User’s
trading interest that, in today’s highly
automated and electronic trading
environment, can occur simultaneously
across multiple series and multiple
option classes. As proposed, the
Exchange may share a User’s Risk
Limitation Mechanism settings with the
Clearing Member that guarantees the
User’s transactions on the Exchange,
and therefore has a financial interest in
understanding the risk tolerance of the
User.
Because the Clearing Letter of Consent
codifies relationships between each
User and Clearing Member, the
Exchange is on notice of which Clearing
Members have relationships with which
Users. The proposed rule change would
simply provide the Exchange with
authority to directly provide Clearing
Members with information that may
otherwise be available to such Clearing
Members by virtue of their relationship
with the respective Users.
2. Statutory Basis
The statutory basis for the proposed
rule change is Section 6(b)(5) of the
Securities Exchange Act of 1934 (the
‘‘Act’’), in general, and furthers the
objectives of Section 6(b)(5),10 which
requires the rules of an exchange 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.
The Exchange believes that the
proposed rule change removes
impediments to and perfects the
mechanism of a free and open market by
codifying that the Exchange can directly
5
PO 00000
Frm 00109
Fmt 4703
Sfmt 4703
9 The Exchange may adopt additional rules
providing for User-enabled risk settings that would
be covered under this proposal. The Exchange will
announce via Trader Update any additional risk
settings (i.e., other than Rule 6.40(b)–(d)) that are
adopted and covered by proposed Rule 6.2A.
10 15 U.S.C. 78f(b)(5).
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]]>Agencies
[Federal Register Volume 79, Number 194 (Tuesday, October 7, 2014)]
[Notices]
[Pages 60547-60552]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-23841]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73282; File No. SR-NYSEArca-2014-04]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval of 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
October 1, 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\ On May 2, 2014, the Commission instituted
proceedings pursuant to Section 19(b)(2)(B) of the Act \8\ to determine
whether to approve or disapprove the proposed rule change.\9\ The Order
Instituting Proceedings was published for comment in the Federal
Register on May 8, 2014.\10\ The Commission received an additional
response letter and data submission from NYSE Arca.\11\ This order
approves 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 I'').
\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).
\9\ See Securities Exchange Act Release No. 72081 (May 2, 2014),
79 FR 26474 (``Order Instituting Proceedings'').
\10\ See Order Instituting Proceedings at 79 FR 26474. The
comment period closed on May 29, 2014, and the rebuttal period
closed on June 12, 2014. On July 29, 2014, the Commission extended
the time period for the proceedings for the Commission to determine
whether to approve or disapprove the proposed rule change to October
1, 2014. See Securities Exchange Act Release No. 72703 (July 29,
2014), 79 FR 45535 (August 5, 2014).
\11\ See Letter from Martha Redding, Chief Counsel, New York
Stock Exchange, dated September 11, 2014 (``NYSE Arca Response
II''). The response letter included summary data concerning
participation and competition in non-Customer-to-Customer open
outcry crossing transactions on NYSE Arca and NYSE Amex Options and
is available at https://www.sec.gov/comments/sr-nysearca-2014-04/nysearca201404.shtml.
---------------------------------------------------------------------------
II. Description of the Proposal
NYSE Arca proposed 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 \12\ and Floor Brokers \13\ (collectively,
``Crowd Participants'') \14\ over certain equal-priced bids and offers
of non-Customers \15\ on the Consolidated Book \16\ during the
execution of an order in open outcry on the Floor \17\ of the
Exchange.\18\
---------------------------------------------------------------------------
\12\ See Rule 6.32 (Market Maker Defined).
\13\ See Rule 6.43 (Options Floor Broker Defined).
\14\ 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).
\15\ 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).
\16\ 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).
\17\ See Rule 1.1(i).
\18\ 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.
---------------------------------------------------------------------------
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.\19\
---------------------------------------------------------------------------
\19\ 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.
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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 \20\ 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
[[Page 60548]]
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 same time protecting Customer
interest on the Consolidated Book, and any interest that has time
priority over such protected Customer interest.\21\
---------------------------------------------------------------------------
\20\ See supra note 15.
\21\ See Notice, 79 FR at 6259.
---------------------------------------------------------------------------
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 \22\). The Exchange proposed to amend Rule 6.75(a) \23\
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.\24\
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\22\ 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).
\23\ 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.
\24\ 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.
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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.\25\
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\25\ 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 \26\ obligations under Section 11(a)
of the Act.\27\ 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.\28\
---------------------------------------------------------------------------
\26\ See Rule 1.1(q).
\27\ 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 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).
\28\ 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
\29\ 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.\30\ 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.\31\ 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.\32\
---------------------------------------------------------------------------
\29\ 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.
\30\ 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.
\31\ See Notice, 79 FR at 6259.
\32\ 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 \33\ and the implementation date would
be no later than 90 days following the issuance of the Trader Update.
---------------------------------------------------------------------------
\33\ See Notice, 79 FR at 6260.
---------------------------------------------------------------------------
III. Comment Letters and NYSE Arca's Responses
The Commission received ten comment letters from seven
commenters.\34\ NYSE Arca submitted a response to the comment letters
and an additional letter and data submission in response to the Order
Instituting Proceedings.\35\
---------------------------------------------------------------------------
\34\ See supra note 5.
\35\ See supra notes 6 and 11.
---------------------------------------------------------------------------
Five of the commenters, four of whom identified themselves as Crowd
Participants on NYSE Arca,\36\ generally were supportive of the
proposal to revise the order of priority of bids and offers when
executing orders in open outcry.\37\ Four of these commenters stated a
view that the proposal would
[[Page 60549]]
allow NYSE Arca to compete with other exchanges that currently have
similar priority rules.\38\ Three of these commenters stated that the
proposal would allow Crowd Participants to compete with bids and offers
of non-Customers on the Consolidated Book,\39\ and two of them stated
that Crowd Participants were the market participants most likely to
provide services during times of market duress.\40\ Two commenters also
noted that the rule change would maintain priority for Customer orders
resting on the Consolidated Book.\41\
---------------------------------------------------------------------------
\36\ See Casey Letter (Floor Broker); Alvira Letter (Market
Maker); Hart Letters I and II (Market Maker); Cutler Letter (Crowd
Participant), supra note 5.
\37\ See Story Letters I and II; Casey Letter; Alvira Letter;
Hart Letter I and II; and Cutler Letter.
\38\ 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'').
\39\ 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'').
\40\ 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'').
\41\ 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,\42\ and one of these commenters
noted that this competition would benefit the investing public.\43\
Similarly, two commenters stated their view that the proposal would
improve investor executions on the floor.\44\ One commenter noted that
the proposal would create an advantage for price improving
customers.\45\
---------------------------------------------------------------------------
\42\ 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).
\43\ 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'').
\44\ 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).
\45\ See Story Letter II.
---------------------------------------------------------------------------
Two commenters expressed concerns about the proposal.\46\ 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.\47\ The
commenter believed that such preference would be a more fair way of
revising the priority of bids and offers.\48\ This commenter further
noted that, under the Exchange's proposal, even small bids from Crowd
Participants would take priority over electronic non-Customer bids.\49\
The same commenter also noted its belief that best execution is not
enhanced by allowing more exchanges to disadvantage other traders.\50\
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.\51\ 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.\52\
---------------------------------------------------------------------------
\46\ See Kohen Letters I and II; and SIG Letter.
\47\ See Kohen Letter I.
\48\ See Kohen Letter I.
\49\ See Kohen Letter I (``otherwise Crowd Participants' 1
contract or 100 share bid will always take priority'').
\50\ See Kohen Letter II.
\51\ See Kohen Letter II.
\52\ See Story Letter II.
---------------------------------------------------------------------------
Another commenter also raised concerns with the proposal.\53\ 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.\54\ The commenter remarked, however, that the
proposal apparently was focused on attracting block cross volume to the
Exchange.\55\
---------------------------------------------------------------------------
\53\ See SIG Letter.
\54\ See SIG Letter at 1.
\55\ 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.\56\ 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.\57\
---------------------------------------------------------------------------
\56\ See SIG Letter at 2.
\57\ 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.\58\ 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.\59\ Given its concerns, the commenter believed
that the proposal would be detrimental to investors, as the opportunity
for price improvement would be significantly diminished.\60\
---------------------------------------------------------------------------
\58\ See SIG Letter at 2.
\59\ 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.
\60\ 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.\61\ The commenter acknowledged that, as other floor exchanges
have rules that place booked
[[Page 60550]]
parity interest behind crowd participants, NYSE Arca's proposal at
least relates in part to a legitimate competitive concern for the
Exchange.\62\ 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.\63\ 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.\64\
---------------------------------------------------------------------------
\61\ See SIG Letter at 3.
\62\ 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'').
\63\ See SIG Letter at 3.
\64\ 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.\65\ 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 that the proposal would allow large market-making groups
like itself to continue to provide inside markets and actually trade at
those prices on NYSE Arca.\66\ 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.\67\
---------------------------------------------------------------------------
\65\ See Story Letter II.
\66\ See Story Letter II.
\67\ See Story Letter II.
---------------------------------------------------------------------------
NYSE Arca provided a response letter addressing issues raised by
the commenters.\68\ 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.\69\
---------------------------------------------------------------------------
\68\ See NYSE Arca Response Letter I.
\69\ See NYSE Arca Response Letter I at 1-4.
---------------------------------------------------------------------------
In response to one commenter's suggestion that the Exchange adopt a
pure size priority model,\70\ NYSE Arca stated that a wholesale
restructuring of its priority model was beyond the scope of the current
proposal.\71\ 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.\72\
---------------------------------------------------------------------------
\70\ See Kohen Letters I and II.
\71\ See NYSE Arca Response Letter I at 2.
\72\ See NYSE Arca Response Letter I 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.\73\ NYSE
Arca noted that its rules would continue to give priority to
participants who display an improved price.\74\
---------------------------------------------------------------------------
\73\ See NYSE Arca Response Letter I at 2.
\74\ See NYSE Arca Response Letter I 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.'' \75\ 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.\76\ 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.\77\ 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.\78\
---------------------------------------------------------------------------
\75\ See NYSE Arca Response Letter I at 2-3.
\76\ See NYSE Arca Response Letter I at 3.
\77\ See NYSE Arca Response Letter I at 3.
\78\ See NYSE Arca Response Letter I 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.\79\ 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.\80\ 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.\81\
---------------------------------------------------------------------------
\79\ See NYSE Arca Response Letter I at 3.
\80\ See NYSE Arca Response Letter I at 3.
\81\ See NYSE Arca Response Letter I 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. Id.
---------------------------------------------------------------------------
After the Commission issued the Order Instituting Proceedings, NYSE
Arca submitted a second comment letter, which concerned participation
in open outcry crossing transactions on NYSE Arca.\82\ According to the
Exchange, it believed that comparing data relating to non-Customer-to-
Customer Floor crossing transactions on NYSE Arca with similar data for
NYSE Amex Options, the Exchange's affiliated options market that
provides priority to Floor participants over non-Customers on its
electronic book, would support the argument that the proposed rule
change would create a more robust open outcry market and benefit
investors who choose to send orders to the Exchange.\83\
---------------------------------------------------------------------------
\82\ See NYSE Arca Response Letter II.
\83\ See NYSE Arca Response Letter II at 1-2. The data provided
by the Exchange showed that floor market makers and/or book
participants participated in only 34.5% of the total crossing
contracts executed on the NYSE Arca Floor, whereas on NYSE Amex
Options, such participants participated in 53.4% of the total
crossing contracts executed. See id. at 2. Although the data did not
describe the actual contract execution participation percentages for
either floor market makers or book participants, the Exchange
believed that the data showed that, if it had rules similar to other
options exchange trading floors, the Exchange would see an increase
in Floor market maker participation in Floor crossing transactions.
See id.
---------------------------------------------------------------------------
IV. Discussion and Commission Findings
After careful review of the proposed rule change as well as the
comment letters and the NYSE Arca response letter received on the
proposal, the Commission finds that the proposed rule change is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange
and, in particular, with Section 6(b) of the Act.\84\ In particular,
the Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\85\ which requires, among other things,
that the rules of a national securities exchange be designed to
[[Page 60551]]
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest; and not be designed to
permit unfair discrimination between customers, issuers, brokers or
dealers.\86\
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\84\ 15 U.S.C. 78f(b). In approving this proposed rule change,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\85\ 15 U.S.C. 78f(b)(5).
\86\ The Exchange represented that the proposed rule change is
consistent with Section 11(a) of the Act and the rules thereunder
and would not limit in any way the obligations of OTP Holders to
comply with Section 11(a) or the rules thereunder. See Notice, 79 FR
at 6261. The Exchange also represented that the proposed rule change
raises no novel issues under Section 11(a) and the rules thereunder
from a compliance, surveillance or enforcement perspective. See id.
The Commission notes that each member of the Exchange is responsible
for ensuring that its conduct is in compliance with the requirements
of Section 11(a) of the Act and the rules promulgated thereunder.
---------------------------------------------------------------------------
As noted above, the Commission received ten comment letters from
seven commenters in response to the proposed rule change.\87\ Five of
the commenters supported the proposed rule change,\88\ while two other
commenters raised concerns about whether the Exchange's proposed
revisions to its rules governing priority during open outcry were
appropriate, as more fully described above.\89\ In its review of the
proposal, the Commission has carefully considered all of the comments
received. The Commission acknowledges the concerns raised by one
commenter, as detailed above,\90\ about the potential impact on
competition resulting from the proposed change in the Exchange's rules
governing priority and order allocation for open outcry transactions.
At the same time, the Commission also acknowledges the Exchange's
belief that this proposal will lead to greater competition for orders
and will create a more robust open outcry market and its belief that,
without the proposal, the Exchange would be at a competitive
disadvantage compared to other exchanges that operate trading
floors.\91\
---------------------------------------------------------------------------
\87\ See supra note 5.
\88\ See Story Letters I and II; Casey Letter; Alvira Letter;
Hart Letters I and II; and Cutler Letter.
\89\ See Kohen Letters I and II; and SIG Letter. See also notes
46-64 and accompanying text describing the issues and concerns
raised by these comments.
\90\ See supra notes 53-64 and accompanying text.
\91\ See Notice, 79 FR at 6261.
---------------------------------------------------------------------------
Rule 6.75(a), as proposed to be revised, describes NYSE Arca's
priority and order allocation for open outcry transactions, including
procedures to be followed when there is interest at the same price in
the Consolidated Book as on the Floor. Rule 6.76(d), as proposed to be
revised, describes NYSE Arca's order ranking, display and allocation of
orders on the OX system, and the priority described in proposed Rule
6.76(d) is consistent with the changes to Rule 6.75(a). The proposed
rules governing priority during open outcry transactions on the
Exchange's floor are similar to the priority rules at other exchanges
with trading floors.\92\ Rule 6.47, as proposed to be revised,
describes priority and order allocation for crossing orders in open
outcry transactions. The proposed rules governing open outcry during
crossing transactions on the Exchange floor are similar to the rules
governing priority in crossing transactions at other exchanges.\93\
Given that other options exchanges currently have rules that provide
lower priority to non-priority customer orders on the electronic book
during floor transactions on those exchanges, including during crossing
transactions, the Exchange's proposed revisions to its priority scheme
for floor transactions will allow NYSE Arca to compete with other
floor-based exchanges that have substantially similar rules.
Accordingly, the Commission believes that it would be appropriate and
consistent with the Act to approve the Exchange's proposed rule
change.\94\
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\92\ See, e.g., CBOE Rule 6.45A; NYSE MKT Rules 963NY and 964NY.
CBOE Rule 6.45A(b)(i) provides that, after public customer orders in
the electronic book, in-crowd market participants shall have second
priority and broker-dealer orders in the electronic book and
electronic quotes of Market-Makers shall have third priority. NYSE
MKT Rule 963NY(a)-(b) provides that, after Customer orders displayed
on the Consolidated Book, an order in the crowd shall have priority
over a non-Customer order displayed in the Consolidated Book. NYSE
MKT Rule 964NY(e) further requires that for Floor Brokers manually
representing orders in the trading crowd, Customer orders in the
Consolidated Book have first priority, ATP Holders of the trading
crowd have second priority and broker-dealers, Professional
Customers (including Quotes with Size and orders of Market Makers)
in the Consolidated Book have third priority.
\93\ See, e.g., CBOE Rule 6.74; NYSE MKT Rule 934NY. CBOE Rule
6.74 provides that for purposes of establishing priority at the same
price, bids and offers of In Crowd Market Participants have first
priority, except with respect to public customer orders resting in
the electronic book; and all other bids and offers (including bids
and offers of broker-dealer orders in the electronic book and
electronic quotes of Market-Makers) have second priority. NYSE MKT
Rule 934NY(b)(3) provides that, for a non-facilitation cross, if
there are bids or offers in the Consolidated Book better than the
proposed execution price or Customer Orders in the Consolidated Book
priced at the proposed execution price, the Floor Broker must trade
against such bids or offers in the Consolidated Book. Once bids or
offers in the Book are satisfied, the Floor Broker may cross the
balance of the orders, if any, to be crossed.
\94\ As noted above, the Exchange's proposal is intended to
bring its floor priority rules for crossing orders in line with the
floor priority rules of certain other options exchanges. However,
the Commission is aware of the concerns, as expressed by commenters,
that the rules of an options trading floor should allow for
sufficient competition for orders. This concern is one that the
Commission staff intends to continue to evaluate in the context of
its ongoing empirical consideration of market structure. For
example, there currently is relatively little information available
about the extent and nature of floor crossing transactions. The
Commission staff, however, expects that an exchange with a trading
floor, as part of its regulatory obligations, will monitor the
extent to which competition is maintained in floor crossing
transactions. One way an exchange could do so would be to assess
periodically the level of participation in such crossing
transactions by market makers and other market participants, aside
from the firm that initiated the cross, and review whether its rules
appropriately allow for such competition. In addition, the
Commission reminds broker-dealers that the duty of best execution
requires them to assess periodically the quality of competing
markets to assure that order flow is directed to the markets
providing the most beneficial terms for their customer orders. See,
e.g., Order Execution Obligations, Securities Exchange Act Release
No. 37619A (September 6, 1996), 61 FR 48290 at 48322-33 (September
12, 1996). Broker-dealers must examine their procedures for seeking
to obtain best execution in light of market and technology changes
and modify those practices if necessary to enable their customers to
obtain the best reasonably available prices. See id. at 48323. In
doing so, broker-dealers must take into account price improvement
opportunities, and whether different markets may be more suitable
for different types of orders or particular securities. See id.
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As noted above, one commenter remarked that it had submitted a
Petition for Rulemaking with the Commission that asserts 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 their
respective option classes.\95\ Although the Petition for Rulemaking
raises concerns involving how orders are crossed on options exchange
floors, the recommendations in the Petition for Rulemaking \96\ are
beyond the scope of the Commission's consideration in connection with
the instant proposed rule change. However, Commission staff will
evaluate the Petition for Rulemaking and how best to address the
concerns raised therein.
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\95\ See supra note 59 and accompanying text.
\96\ The Petition for Rulemaking requests, among other things,
that the Commission require each floor-based U.S. options exchange
to provide an electronic-cross auction mechanism for all multiply-
listed options traded on its trading floor and ensure that the
mechanism is made electronically accessible from on and off the
trading floor by qualified members and that all block-sized matched
option crosses involving customer orders be auctioned through such
mechanism. See Petition for Rulemaking regarding Option Floor
Crosses, supra note 59.
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[[Page 60552]]
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\97\ that the proposed rule change, as modified by Amendment No. 1,
(SR-NYSEArca-2014-04) is approved.
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\97\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\98\
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\98\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-23841 Filed 10-6-14; 8:45 am]
BILLING CODE 8011-01-P
