Self-Regulatory Organizations; New York Stock Exchange LLC; NYSE MKT, Inc.; Order Approving Proposed Rule Changes Amending Exchange Rule 13 To Make the Add Liquidity Only Modifier Available for Limit Orders, and Make the Day Time-In-Force Condition and Add Liquidity Only Modifier Available for Intermarket Sweep Orders, 62223-62227 [2014-24547]

Download as PDF Federal Register / Vol. 79, No. 200 / Thursday, October 16, 2014 / Notices data to determine if the data would further its business needs. The fee waiver has operated on a pilot basis for two years, and FINRA has not experienced problems with its implementation or administration. FINRA believes that permanently adopting the Pilot, with the same conditions under which it has been operating, preserves these potential benefits for all professionals that participate in a free trial of a vendor data product that includes real-time TRACE transaction data. Any professional that tests data products during a free trial would be eligible for and would benefit from the concurrent FINRA fee waiver, consistent with the previously discussed conditions applicable to eligibility for the fee waiver program. B. Self-Regulatory Organization’s Statement on Burden on Competition FINRA does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The fee waiver program does not unfairly discriminate between or among professionals and members (or other end-users) in that the waiver would be available to any person that participates in a vendor’s free trial that includes real-time TRACE transaction data, subject to the conditions described above. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments were neither solicited nor received. asabaliauskas on DSK5VPTVN1PROD with NOTICES III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act 13 and paragraph (f)(2) of Rule 19b–4 thereunder.14 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. 13 15 14 17 IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– FINRA–2014–043 on the subject line. Paper Comments • Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. All submissions should refer to File Number SR–FINRA–2014–043. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of FINRA. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–FINRA– 2014–043 and should be submitted on or before November 6, 2014. U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(2). VerDate Sep<11>2014 17:19 Oct 15, 2014 Jkt 235001 PO 00000 Frm 00132 Fmt 4703 Sfmt 4703 62223 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.15 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–24546 Filed 10–15–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–73333; File Nos. SR–NYSE– 2014–32 and SR–NYSEMKT–2014–56] Self-Regulatory Organizations; New York Stock Exchange LLC; NYSE MKT, Inc.; Order Approving Proposed Rule Changes Amending Exchange Rule 13 To Make the Add Liquidity Only Modifier Available for Limit Orders, and Make the Day Time-In-Force Condition and Add Liquidity Only Modifier Available for Intermarket Sweep Orders October 9, 2014. I. Introduction On June 27, 2014, New York Stock Exchange LLC (‘‘NYSE’’) and NYSE MKT LLC (‘‘NYSE MKT’’) (each an ‘‘Exchange’’ and together the ‘‘Exchanges’’) each 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 amend its Rule 13 to allow an Add Liquidity Only (‘‘ALO’’) modifier for day limit orders and to allow the day time-in-force condition and ALO modifier for Intermarket Sweep Orders (‘‘ISO’’).3 The proposed rule changes were published for comment in the Federal Register on July 11, 2014.4 On August 21, 2014, the Commission extended the time period in which to approve, disapprove, or institute proceedings to determine whether to disapprove the proposed rule changes to October 9, 2014.5 The Commission received three comment letters from two 15 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 NYSE MKT designates its Rule 13 as ‘‘Rule 13— Equities.’’ All references to NYSE MKT rules in this order are to its equities rules, whether or not the ‘‘—Equities’’ designation is included in the reference. 4 See Securities Exchange Act Release Nos. 72548 (July 7, 2014), 79 FR 40183 (‘‘NYSE Notice’’) and 72547 (July 7, 2014), 79 FR 40169 (‘‘NYSE MKT Notice’’). 5 See Securities Exchange Act Release Nos. 72893 (Aug. 21, 2014), 79 FR 51208 (Aug. 27, 2014) and 72894 (Aug. 21, 2014), 79 FR 51208. 1 15 E:\FR\FM\16OCN1.SGM 16OCN1 62224 Federal Register / Vol. 79, No. 200 / Thursday, October 16, 2014 / Notices commenters on the NYSE Notice.6 On September 30 and October 8, 2014, NYSE submitted letters responding to the comment letters.7 This order approves the proposed rule changes. II. Description of the Proposals asabaliauskas on DSK5VPTVN1PROD with NOTICES A. ALO Modifier for Day Limit Orders Currently, only mid-point passive liquidity (‘‘MPL’’) orders are available with the ALO modifier on the Exchanges.8 The Exchanges propose to allow the use of the ALO modifier for day limit orders.9 As proposed, a limit order on either Exchange designated with the ALO modifier would not route and would not remove liquidity from the Exchange’s book. Limit orders designated with an ALO modifier would be able to participate in the open or close, but the ALO modifier would be disregarded. A limit order with an ALO modifier would be required to represent at least one displayable round lot. If, at the time of entry, a limit order with the ALO modifier were marketable against Exchange interest or would lock or cross a protected quotation in violation of Rule 610(d) of Regulation NMS (‘‘Rule 610(d)’’),10 the Exchange receiving the order would re-price and display the order at one minimum price variation (‘‘MPV’’) below the ‘‘bestpriced sell interest’’ (for bids) or above the ‘‘best-priced buy interest’’ (for 6 See Letter from Haim Bodek, Managing Principal, Decimus Capital Markets, LLC, to Commission, dated September 15, 2014 (‘‘DCM Letter’’); and Letters from Richard A. Tierney III, President and Chief Executive Officer, Bloomberg Tradebook LLC, and Gary Stone, Chief Strategy Officer, Bloomberg Tradebook LLC, to Brent J. Fields, Secretary, Commission, dated September 22, 2014 (‘‘Tradebook Letter I’’) and October 6, 2014 (‘‘Tradebook Letter II’’). The Commission notes that these comment letters address the NYSE proposal only. However, since the NYSE and NYSE MKT proposals are nearly identical, the Commission will treat the comment letters as addressing both the NYSE and the NYSE MKT proposals. 7 See Letter from Martha Redding, Chief Counsel, New York Stock Exchange, to Kevin M. O’Neill, Deputy Secretary, Commission, dated September 30, 2014 (‘‘Response Letter I’’); and Letter from Martha Redding, Chief Counsel, New York Stock Exchange, to Kevin M. O’Neill, Deputy Secretary, Commission, dated October 8, 2014 (‘‘Response Letter II’’). NYSE noted that the Response Letters were submitted in support of both the NYSE and NYSE MKT proposals. 8 See NYSE Rule 13 and NYSE MKT Rule 13— Equities for the definition of MPL orders. MPL orders are currently available with the ALO modifier. 9 The following interest would not be eligible for the ALO modifier: (1) DMM interest entered via the Capital Commitment Schedule; (2) d-Quotes; (3) Sell ‘‘Plus—Buy Minus’’ Orders; (4) Non-Display Reserve Orders or Non-Display Reserve e-Quotes; (5) Retail Orders or Retail Price Improvement Orders; or (6) High-priced securities. These terms and order types are defined in NYSE Rule 1000(a)(vi) and NYSE MKT Rule 1000(a)(vi)— Equities. 10 See 17 CFR 242.610(d). VerDate Sep<11>2014 17:19 Oct 15, 2014 Jkt 235001 offers). The term ‘‘best-priced sell interest’’ refers to the lowest-priced sell interest against which incoming buy interest would be required to execute with or route to, including the receiving Exchange’s displayed offers, NonDisplay Reserve Orders,11 Non-Display Reserve e-Quotes,12 and odd-lot sized sell interest, as well as protected offers on away markets, but not including nondisplayed sell interest that is priced based on the protected best bid or offer (‘‘PBBO’’). The term ‘‘best-priced buy interest’’ refers to the highest-priced buy interest against which incoming sell interest would be required to execute with or route to, including the receiving Exchange’s displayed bids, NonDisplayed Reserve Orders, Non-Display Reserve e-Quotes, and odd-lot sized buy interest, as well as protected bids on away markets, but not including nondisplayed buy interest that is priced based on the PBBO. If, while an ALO limit order to buy is pending, the best-priced sell interest is re-priced higher, the ALO limit order would be re-priced and re-displayed one MPV below the new best-priced sell interest, up to the limit price of the ALO order. If, while an ALO limit order to sell is pending, the best-priced buy interest is re-priced lower, the ALO limit order would be re-priced and redisplayed one MPV above the new bestpriced buy interest, down to the limit price of the ALO order. An ALO limit order would not be re-priced if it is displayed at its limit price or if the bestpriced sell interest is re-priced lower (for bids) or if the best-priced buy interest is re-priced higher (for offers). Each time an ALO limit order is repriced and re-displayed, that order would receive a new time stamp. Limit orders designated with the ALO modifier would not be priced based on resting opposite-side MPL Orders, which are triggered to trade at the midpoint of the PBBO by arriving interest. Limit orders designated with the ALO modifier would not trigger opposite-side MPL Orders to trade. Pegging interest to buy (sell) that is designated with the ALO modifier would not peg to a price that would result in execution before displaying and would instead peg one MPV below (above) the undisplayed Exchange sell (buy) interest against which it would have otherwise executed. 11 A ‘‘Non Displayed Reserve Order’’ is a limit order that is not displayed, but remains available for potential execution against all incoming automatically executing orders until executed in full or cancelled. See NYSE Rule 13 and NYSE MKT Rule 13—Equities. 12 See NYSE Rule 70(f)(II) and NYSE MKT Rule 70(f)(II)—Equities. PO 00000 Frm 00133 Fmt 4703 Sfmt 4703 B. Day Time-in-Force Designation and ALO Modifier for ISOs An ISO is currently defined in NYSE Rule 13 and NYSE MKT Rule 13— Equities as a limit order designated for automatic execution that meets the following requirements: (i) It is identified as an ISO in the manner prescribed by the Exchange; and (ii) simultaneously with the routing of an ISO to the Exchange, one or more additional limit orders, as necessary, are routed to execute against the full displayed size of any protected bid, in the case of a limit order to sell, or the full displayed size of any protected offer, in the case of a limit order to buy, and these additional orders are identified as ISOs. Currently, each Exchange immediately and automatically executes an ISO upon arrival, and the portion not so executed will be immediately and automatically cancelled. Each Exchange proposes to define an ISO as a limit order designated for automatic execution in a particular security that is never routed to an away market, may trade through a protected bid or offer, and will not be rejected or cancelled if it would lock, cross, or be marketable against an away market, provided that it is identified as an ISO and that, simultaneously with the routing of the ISO to the Exchange, one or more additional limit orders, as necessary, are routed to execute against the full displayed size of any protected bid or offer.13 Each Exchange proposes to allow ISOs to operate with a day time-in-force condition (‘‘Day ISO’’). A Day ISO, if marketable upon arrival, would be immediately and automatically executed against the displayed bid (offer) up to its full size in accordance with and to the extent provided by each Exchange’s Rules 1000 to 1004, which address automatic executions of orders, and would then sweep the Display Book, as provided in each Exchange’s Rule 1000(d)(iii). The remaining unexecuted portion, if any, of a Day ISO would be posted to the Exchange’s book at its limit price and would be permitted to lock or cross a protected quotation that was displayed at the time of arrival of the Day ISO. A Day ISO would be required to represent a minimum of one displayable round lot. Day ISOs would 13 See NYSE Rule 19(d)(3) (permitting the display of a quotation that locks or crosses a protected quotation if the locking or crossing quotation was an automated quotation and if the member of the Exchange displaying the automated quotation simultaneously routed an intermarket sweep order to execute against the full displayed size of any locked or crossed protected quotation); NYSE MKT Rule 19(d)(3)—Equities (same). E:\FR\FM\16OCN1.SGM 16OCN1 Federal Register / Vol. 79, No. 200 / Thursday, October 16, 2014 / Notices be available for Minimum Display Reserve Orders and Minimum Display Reserve e-Quotes. Each Exchange also proposes to allow a Day ISO to be designated with an ALO modifier. If, after being posted, a Day ISO would lock or cross a protected quotation in violation of Rule 610(d) of Regulation NMS, each Exchange would re-price and re-display the Day ISO consistent with the proposed ALO modifier for day limit orders. Any such re-pricing would be based on the bestpriced sell interest (for bids) or bestpriced buy interest (for offers), and a Day ISO would receive a new timestamp each time that it was re-priced. A Day ISO designated with an ALO modifier that is marketable against Exchange interest upon arrival would be re-priced and displayed one MPV below the receiving Exchange’s best-priced non-MPL Order sell interest (for bids) or above the Exchange’s best-priced nonMPL Order buy interest (for offers). After being displayed on the Exchange’s book, a Day ISO designated ALO would be re-priced and re-displayed consistent with the proposed ALO modifier. Each Exchange proposes to specify that IOC ISOs and Day ISOs are not available for Sell ‘‘Plus’’—Buy ‘‘Minus’’ Orders or Non-Display Reserve Orders or for Non-Display Reserve e-Quotes and that IOC ISOs are not available for high-priced securities, as defined in each Exchange’s Rule 1000(a)(vi).14 III. Summary of Comments and the Exchanges’ Response As noted above, the Commission received three comment letters from two commenters on the proposed rule changes.15 The commenters generally raised three broad concerns regarding the proposals and urged the Commission to disapprove the filings.16 asabaliauskas on DSK5VPTVN1PROD with NOTICES A. ALO Modifier Would Provide Queue Priority and Encourage Orders That Are Not Bona Fide The first commenter expressed concern that the ALO modifier would 14 Each Exchange also proposes to change certain references in its rules from ‘‘Intermarket Sweep Order’’ to ‘‘ISO.’’ Each Exchange further proposes to define the existing form of an ISO as an ‘‘ISO designated IOC (‘IOC ISO’).’’ 15 See note 6, supra. 16 Both commenters also raised broader issues, arguing that the increasing complexity of market structure, the proliferation of order types, and the alleged use by other exchanges of a Day ISO order type without Commission approval should be considered by the Commission in determining whether to approve or disapprove the Exchanges’ filings. See DCM Letter at 7–8; Tradebook Letter at 8–9. The Commission notes that its obligation with respect to the Exchanges’ proposals is to determine whether they are consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange. VerDate Sep<11>2014 17:19 Oct 15, 2014 Jkt 235001 provide queue priority over ‘‘traditional orders’’ because ALO orders, unlike ‘‘traditional orders,’’ would automatically re-price to a more aggressive price when permissible.17 The Exchanges responded that the ALO modifier would be available to all member organizations, including those that represent agency interest.18 The Exchanges also noted that a limit order designated ALO would receive a new time stamp each time it is re-priced and re-displayed, which the Exchanges believe is consistent with current Exchange rules that provide that an order that is modified to change the price of the order shall receive a new time stamp.19 This commenter also stated its belief that the ALO modifier would encourage the submission of ‘‘overly aggressive’’ orders that are not bona fide, that ‘‘do not reflect the true economics of a security,’’ and whose primary function appears to ‘‘unfairly preference such orders for rebate capture at the most aggressive price possible.’’ 20 The Exchanges responded that aggressively priced orders ‘‘improve the public quote and provide better prices to contra-side interest’’ and stated that these are precisely the type of orders they are trying to promote.21 Additionally, Exchanges disagreed with the commenter’s belief that these types of orders are not bona fide because, according to the Exchanges, a member bears the risk of its order being re-priced to its limit price and being executed at that price.22 B. The ALO Modifier Would Allow the Detection of Hidden Orders The first commenter stated its belief that participants could use limit orders with the ALO modifier to detect hidden orders at the Exchanges by analyzing price-sliding confirmation messages. This commenter argued that, unlike comparable order types at other exchanges, an order with the ALO modifier is permitted to ‘‘forward-tick price-slide to establish prices when the hidden order on the contra-side is canceled, thereby leaking information about this hidden order.’’ 23 The 17 See DCM Letter at 3–4. The commenter did not define ‘‘traditional orders.’’ 18 See Response Letter I at 4. 19 See NYSE Notice, supra note 4, at 40185, and NYSE MKT Notice, supra note 4, at 40171. See also Response Letter I at 4–5 (providing examples of how re-pricing and the assignment of new time stamps would work and citing NYSE Rule 72(c)). 20 See DCM Letter at 4. 21 See Response Letter I at 4. 22 Id. 23 See DCM Letter at 4. The commenter also expressed its belief that the ALO modifier is inadequately disclosed to market participants. The PO 00000 Frm 00134 Fmt 4703 Sfmt 4703 62225 Exchanges responded that, because of the minimum display quantity requirement for limit orders with the ALO modifier and the related risk of a round-lot execution, it would be costprohibitive to use this functionality to probe for hidden interest.24 The Exchanges further argued that the benefit associated with the proposed functionality (i.e., displayed liquidity at the Exchanges that is available to provide price improvement to incoming orders) outweighs the potential cost that a market participant could determine the existence, though not the depth, of hidden interest at a price.25 C. The Day ISO and Day ISO ALO Order Types Are Inconsistent With Rule 610 of Regulation NMS The first commenter expressed its belief that the proposed Day ISO ALO would encourage orders that lock or cross protected quotations, because the order type is designed to be accepted by the Exchanges at aggressive prices in conditions where high-frequency traders actually lock or cross away markets or appear to lock or cross away markets, thus defeating the intended purpose of ISOs to be ‘‘routed to execute’’ in such conditions.26 The second commenter stated its belief that Day ISO and Day ISO ALO order types would violate Rule 610(d) of Regulation NMS.27 This commenter argued that ensuring compliance with the prohibition against locking and crossing markets pursuant to Rule 610(d) is solely a self-regulatory organization (‘‘SRO’’) obligation,28 and that only an SRO is allowed to ‘‘ship and post’’ (i.e., transmit an order to attempt to execute against a displayed quotation while posting a quotation that could lock or cross the displayed quotation).29 This commenter further stated its belief that the Exchanges are improperly attempting to transfer to member firms the obligations of the Exchanges to reasonably avoid locking and crossing quotations, arguing that the Exchanges responded that the proposed rule text provided full disclosure. 24 See Response Letter I at 5. 25 See Response Letter I at 4. 26 See DCM Letter at 5. 27 See Tradebook Letter I at 4–5. 28 See Tradebook Letter I at 5. This commenter argued that Regulation NMS prohibits an SRO from considering as cleared a protected quote in existence at the time a Day ISO arrives at the SRO. See id. 29 See Tradebook Letter II at 6. The commenter believes that this interpretation is consistent with the Regulation NMS guidance on Rules 610 and 611 set forth in Question 5.02 in Responses to Frequently Asked Questions Concerning Rule 611 and 610 of Regulation NMS (‘‘NMS Guidance’’), available at https://www.sec.gov/divisions/ marketreg/nmsfaq610-11.htm#sec5. E:\FR\FM\16OCN1.SGM 16OCN1 62226 Federal Register / Vol. 79, No. 200 / Thursday, October 16, 2014 / Notices asabaliauskas on DSK5VPTVN1PROD with NOTICES receipt of an ISO does not absolve the Exchanges from the responsibility of checking the market before posting any remaining portion of that ISO.30 And this commenter asserted that the Exchanges’ treatment of reserve interest creates a ‘‘systemic violation of Rule 610,’’ arguing that the proposed Day ISOs would not actually clear certain protected quotes because they would not interact with reserve interest behind the displayed portion of the protected quote.31 The Exchanges responded that the proposed order functionalities are consistent with approved rules on other exchanges, as well as Rule 610(d) and the NMS Guidance issued by the Commission’s Division of Trading and Markets.32 The Exchanges argued that there is not an absolute prohibition on exchanges displaying locking or crossing quotations, provided that the resulting locked or crossed market is consistent with an approved exception to Rule 610(d).33 The Exchanges stated that their Rule 19 has long included several exceptions permitting locking or crossing quotations, such as the ISO exception, and the receipt of an ISO signals that such an order qualifies for an exception, consistent with Rule 610(d).34 The Exchanges stated that inherent in the ISO exception to their respective rules against locking and crossing quotations is that an ISO would be displayed, and thus could lock or cross a protected quotation.35 The Exchanges also responded that the NMS Guidance does not support the second commenter’s argument that the reference to ‘‘market participants’’ in the response to Question 5.02 of the NMS Guidance (ISO Exception to SRO Lock/ Cross Rules) refers only to SROs and that, therefore, only SROs have the ability to ‘‘ship and post.’’ 36 The Exchanges further argued that such an 30 See Tradebook Letter II at 6. The commenter further stated its belief that the Commission should evaluate the proposal based on whether it is consistent with the requirements of the Act, and not rely on the Exchange’s response that the Exchanges ` would be at a competitive disadvantage vis-a-vis other exchanges. See Tradebook Letter II at 3. 31 See Tradebook Letter I at 6–8. This commenter asserts that certain exchanges update displayed interest with remaining reserve interest on an ‘‘instantaneous’’ basis and that, therefore, the Exchanges should not be able to post a Day ISO order that would lock or cross a replenished protected quote. 32 See Response Letter I at 6; see also NMS Guidance, supra note 29. 33 See Response Letter I at 7; Response Letter II at 3. 34 See Response Letter I at 7. The Commission notes that NYSE MKT Rule 19—Equities contains the same provisions as NYSE Rule 19. 35 See Response Letter I at 7; Response Letter II at 3. 36 See Response Letter II at 3. VerDate Sep<11>2014 17:19 Oct 15, 2014 Jkt 235001 interpretation would not only call into question the current use of ISOs by broker-dealers,37 but would be inconsistent with the Commission’s past approval of a rule filing by another exchange.38 With respect to the reserve portion of protected quotes, the Exchanges argued that the unexecuted portion of a Day ISO would be posted on the Exchanges’ books ‘‘at its limit price and would lock or cross a protected quotation that was displayed at the time of the arrival of the Day ISO.’’ 39 IV. Discussion and Commission Findings After carefully considering the proposals, the comments submitted, and the Exchanges’ responses to the comments, the Commission finds that the proposed rule changes are consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.40 In particular, the Commission finds that the proposals are consistent with Section 6(b)(5) of the Act,41 which requires, among other things, that the Exchanges’ rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Commission does not believe that the ALO modifier for limit orders would provide unjustified queue priority or that it would encourage the submission of orders that are not bona fide. Limit orders with the ALO modifier will be fully executable at the prices at which they are priced and re-priced and are therefore bona fide orders. In addition, limit orders with the ALO modifier will receive queue priority only at the prices for which they are fully executable, which is a justifiable means of assigning queue priority that is commonly used by exchanges. Moreover, the Commission notes that the Exchanges would assign a new time stamp (and thus new time 37 Id. 38 The Exchanges cite the Commission’s approval of an NYSE Arca rule filing that provides for the display of the remaining balance of an ISO that is not marked ‘‘immediate or cancel.’’ See Response Letter I at 6 (citing Securities Exchange Act Release No. 54549 (Sept. 29, 2006), 71 FR 59179 (Oct. 6, 2006) (SR–NYSEArca–2006–49)). 39 See Response Letter I at 7–8 (emphasis in original). 40 In approving the proposals, the Commission has considered the proposed rules’ impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 41 15 U.S.C. 78f(b)(5). PO 00000 Frm 00135 Fmt 4703 Sfmt 4703 priority) on such orders whenever they are re-priced and re-displayed, which would prevent these orders from stepping in front of orders that are already on the Exchanges’ order books, and that the ALO order modifier would be available for day limit orders submitted by any exchange member. The ALO modifier for day limit orders is designed to be used to provide liquidity on the Exchanges at aggressive prices, rather than to remove liquidity, and the Commission notes that the proposals would require that limit orders with the ALO modifier represent at least one round lot, which should promote orders that are not of insignificant odd-lot size. Thus, the Commission believes that these proposals have the potential to allow market participants to aggressively compete with each other to offer better prices to contra-side trading interest. The Commission also believes that the requirement that an ALO limit order have a minimum size of one round lot should reduce the economic incentives for a submitting firm to attempt to use this order type to detect the presence of hidden interest on the Exchanges. The Commission also notes that, unlike hidden orders, the ALO limit order is designed to provide displayed liquidity to the market and thereby contribute to public price discovery—an objective that is fully consistent with the Act.42 Accordingly, the Exchanges have determined to offer an order type that promotes displayed liquidity, while adding the minimum size requirement in an effort to minimize the potential for the order type to be used to detect the existence of undisplayed interest. The Commission also finds that the proposed Day ISO and Day ISO ALO order types are consistent with Rule 610(d) of Regulation NMS. The NMS Guidance previously issued by Commission’s Division of Trading and Markets clearly contemplates that not all ISOs would be immediate-or-cancel orders.43 The NMS Guidance provides that, if a trading center chooses not to cancel the portion of ISOs that cannot be executed immediately, ‘‘its rules will need to address appropriately the subsequent handling of the unexecuted portions.’’ 44 More generally, Rule 610 of Regulation NMS requires, among other 42 See, e.g., Section 11A(a)(1)(C)(iii) and (iv) of the Exchange Act (objectives for the national market system include assuring the availability of information with respect to quotations in securities and the practicability of brokers executing investors’ orders in the best market). 43 See NMS Guidance, supra note 29 (Response to Question 3.01, ‘‘Handling Unexecuted Portions of ISOs’’). 44 Id. E:\FR\FM\16OCN1.SGM 16OCN1 Federal Register / Vol. 79, No. 200 / Thursday, October 16, 2014 / Notices things, that each SRO adopt, maintain, and enforce written rules that prohibit its members from engaging in a pattern or practice of displaying quotations that lock or cross protected quotations.45 The Exchanges have adopted rules pursuant to Rule 610, and their rules include an ISO exception.46 Under the ISO exception, market participants are permitted to ‘‘ship and post.’’ The exchanges have not proposed to amend this exception. Under the Exchanges’ proposed amendments to their rules, the Day ISO subjected to an Exchange would be immediately executed against the Exchange’s displayed quote, and then the remainder, if any, would be posted to the book, where it may lock or cross a protected quotation that is displayed at the time the Day ISO arrives. Under the ‘‘ship and post’’ exception, the market participants submitting the Day ISO would have to send one or more additional ISOs to execute against the protected quotations on other exchanges that would be locked or crossed, and thus, the Day ISO is consistent with Rule 610 of Regulation NMS. The Day ISO with the ALO modifier would function in a similar manner as the day limit order with the ALO modifier and the Day ISO, including re-pricing and re-displaying. For the reasons discussed above, the Commission finds that the Exchanges’ proposals are consistent with the Act. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,47 that the proposed rule changes SR–NYSE–2014– 32 and SR–NYSEMKT–2014–56, be and hereby are, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.48 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–24547 Filed 10–15–14; 8:45 am] asabaliauskas on DSK5VPTVN1PROD with NOTICES BILLING CODE 8011–01–P 45 See 17 CFR 242.610(d). NYSE Rule 19; NYSE MKT Rule 19— Equities. 47 15 U.S.C. 78s(b)(2). 48 17 CFR 200.30–3(a)(12). SECURITIES AND EXCHANGE COMMISSION [Release No. 34–73329; File No. SR– NYSEARCA–2014–115] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending NYSE Arca Retail Liquidity Program and NYSE Arca Equities Rule 7.44 To Provide That Retail Price Improvement Orders That Are Not Priced Better Than the Best Protected Bid or Best Protected Offer Will Not Be Rejected Upon Entry October 9, 2014. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that, on October 1, 2014, NYSE Arca, Inc. (‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend NYSE Arca Equities Rule 7.44 to provide that Retail Price Improvement Orders that are not priced better than the best protected bid or best protected offer will not be rejected upon entry. The text of the proposed rule change is available on the Exchange’s Web site at www.nyse.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. 46 See VerDate Sep<11>2014 17:19 Oct 15, 2014 Jkt 235001 1 15 U.S.C. 78s(b)(1). U.S.C. 78a. 3 17 CFR 240.19b–4. 2 15 PO 00000 Frm 00136 Fmt 4703 Sfmt 4703 62227 A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange is proposing to amend NYSE Arca Equities Rule 7.44 (‘‘Rule 7.44’’) to provide that Retail Price Improvement Orders (‘‘RPI’’) that are not priced better than the best protected bid (‘‘PBB’’) or best protected offer (‘‘PBO’’) will not be rejected upon entry. Rule 7.44 sets forth the Exchange’s pilot Retail Liquidity Program (the ‘‘Program’’).4 Under the Program, ETP Holders are able to provide price improvement to Retail Orders, as defined in Rule 7.44(a)(3) and (k), by submitting an RPI, which is nondisplayed liquidity in NYSE Arca-listed securities and UTP Securities, excluding NYSE-listed (Tape A) securities, that is priced more aggressively than the PBBO by at least $0.001 per share and that is identified as an RPI in a manner prescribed by the Exchange. RPIs are entered at a single limit price, rather than being pegged to the PBBO; however, RPIs can be designated as a Mid-Point Passive Liquidity (‘‘MPL’’) Order, in which case the order will reprice as the PBBO changes.5 RPIs remain non-displayed and only execute against Retail Orders. Rule 7.44(a)(4) currently provides that an order that is identified as an RPI but is not priced better than the PBB or PBO will be rejected upon entry. The Exchange proposes to amend Rule 7.44(a)(4) to permit entry of RPI’s that are not priced better than the PBB or PBO. The Exchange believes that by accepting all RPIs, regardless of price, the Exchange will expand the interest that would be available to provide price improvement for Retail Orders, particularly if the PBB or PBO moves such that an RPI that otherwise would have been rejected could become priceimproving interest. To effect this change, the Exchange proposes to delete the third sentence of Rule 7.44(a)(4) that provides for such inferior-priced RPIs to be rejected upon entry. The Exchange further proposes to amend the fourth sentence of Rule 7.44(a)(4) to conform the rule text to this proposed change. Specifically, the current rule text provides that ‘‘[a] previously entered RPI that becomes priced at or inferior to the PBBO will not be eligible to interact with incoming 4 See Securities Exchange Act Release No. 71176 (Dec. 23, 2013), 78 FR 79524 (Dec. 30, 2013) (SR– NYSEArca–2013–107). 5 RPIs not designated as MPL Orders would alternatively need to be designated as a Passive Liquidity (‘‘PL’’) Order. E:\FR\FM\16OCN1.SGM 16OCN1

Agencies

[Federal Register Volume 79, Number 200 (Thursday, October 16, 2014)]
[Notices]
[Pages 62223-62227]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-24547]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73333; File Nos. SR-NYSE-2014-32 and SR-NYSEMKT-2014-
56]


Self-Regulatory Organizations; New York Stock Exchange LLC; NYSE 
MKT, Inc.; Order Approving Proposed Rule Changes Amending Exchange Rule 
13 To Make the Add Liquidity Only Modifier Available for Limit Orders, 
and Make the Day Time-In-Force Condition and Add Liquidity Only 
Modifier Available for Intermarket Sweep Orders

October 9, 2014.

I. Introduction

    On June 27, 2014, New York Stock Exchange LLC (``NYSE'') and NYSE 
MKT LLC (``NYSE MKT'') (each an ``Exchange'' and together the 
``Exchanges'') each 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 amend its Rule 13 to allow an Add Liquidity 
Only (``ALO'') modifier for day limit orders and to allow the day time-
in-force condition and ALO modifier for Intermarket Sweep Orders 
(``ISO'').\3\ The proposed rule changes were published for comment in 
the Federal Register on July 11, 2014.\4\ On August 21, 2014, the 
Commission extended the time period in which to approve, disapprove, or 
institute proceedings to determine whether to disapprove the proposed 
rule changes to October 9, 2014.\5\ The Commission received three 
comment letters from two

[[Page 62224]]

commenters on the NYSE Notice.\6\ On September 30 and October 8, 2014, 
NYSE submitted letters responding to the comment letters.\7\ This order 
approves the proposed rule changes.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ NYSE MKT designates its Rule 13 as ``Rule 13--Equities.'' 
All references to NYSE MKT rules in this order are to its equities 
rules, whether or not the ``--Equities'' designation is included in 
the reference.
    \4\ See Securities Exchange Act Release Nos. 72548 (July 7, 
2014), 79 FR 40183 (``NYSE Notice'') and 72547 (July 7, 2014), 79 FR 
40169 (``NYSE MKT Notice'').
    \5\ See Securities Exchange Act Release Nos. 72893 (Aug. 21, 
2014), 79 FR 51208 (Aug. 27, 2014) and 72894 (Aug. 21, 2014), 79 FR 
51208.
    \6\ See Letter from Haim Bodek, Managing Principal, Decimus 
Capital Markets, LLC, to Commission, dated September 15, 2014 (``DCM 
Letter''); and Letters from Richard A. Tierney III, President and 
Chief Executive Officer, Bloomberg Tradebook LLC, and Gary Stone, 
Chief Strategy Officer, Bloomberg Tradebook LLC, to Brent J. Fields, 
Secretary, Commission, dated September 22, 2014 (``Tradebook Letter 
I'') and October 6, 2014 (``Tradebook Letter II''). The Commission 
notes that these comment letters address the NYSE proposal only. 
However, since the NYSE and NYSE MKT proposals are nearly identical, 
the Commission will treat the comment letters as addressing both the 
NYSE and the NYSE MKT proposals.
    \7\ See Letter from Martha Redding, Chief Counsel, New York 
Stock Exchange, to Kevin M. O'Neill, Deputy Secretary, Commission, 
dated September 30, 2014 (``Response Letter I''); and Letter from 
Martha Redding, Chief Counsel, New York Stock Exchange, to Kevin M. 
O'Neill, Deputy Secretary, Commission, dated October 8, 2014 
(``Response Letter II''). NYSE noted that the Response Letters were 
submitted in support of both the NYSE and NYSE MKT proposals.
---------------------------------------------------------------------------

II. Description of the Proposals

A. ALO Modifier for Day Limit Orders

    Currently, only mid-point passive liquidity (``MPL'') orders are 
available with the ALO modifier on the Exchanges.\8\ The Exchanges 
propose to allow the use of the ALO modifier for day limit orders.\9\ 
As proposed, a limit order on either Exchange designated with the ALO 
modifier would not route and would not remove liquidity from the 
Exchange's book. Limit orders designated with an ALO modifier would be 
able to participate in the open or close, but the ALO modifier would be 
disregarded. A limit order with an ALO modifier would be required to 
represent at least one displayable round lot.
---------------------------------------------------------------------------

    \8\ See NYSE Rule 13 and NYSE MKT Rule 13--Equities for the 
definition of MPL orders. MPL orders are currently available with 
the ALO modifier.
    \9\ The following interest would not be eligible for the ALO 
modifier: (1) DMM interest entered via the Capital Commitment 
Schedule; (2) d-Quotes; (3) Sell ``Plus--Buy Minus'' Orders; (4) 
Non-Display Reserve Orders or Non-Display Reserve e-Quotes; (5) 
Retail Orders or Retail Price Improvement Orders; or (6) High-priced 
securities. These terms and order types are defined in NYSE Rule 
1000(a)(vi) and NYSE MKT Rule 1000(a)(vi)--Equities.
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    If, at the time of entry, a limit order with the ALO modifier were 
marketable against Exchange interest or would lock or cross a protected 
quotation in violation of Rule 610(d) of Regulation NMS (``Rule 
610(d)''),\10\ the Exchange receiving the order would re-price and 
display the order at one minimum price variation (``MPV'') below the 
``best-priced sell interest'' (for bids) or above the ``best-priced buy 
interest'' (for offers). The term ``best-priced sell interest'' refers 
to the lowest-priced sell interest against which incoming buy interest 
would be required to execute with or route to, including the receiving 
Exchange's displayed offers, Non-Display Reserve Orders,\11\ Non-
Display Reserve e-Quotes,\12\ and odd-lot sized sell interest, as well 
as protected offers on away markets, but not including non-displayed 
sell interest that is priced based on the protected best bid or offer 
(``PBBO''). The term ``best-priced buy interest'' refers to the 
highest-priced buy interest against which incoming sell interest would 
be required to execute with or route to, including the receiving 
Exchange's displayed bids, Non-Displayed Reserve Orders, Non-Display 
Reserve e-Quotes, and odd-lot sized buy interest, as well as protected 
bids on away markets, but not including non-displayed buy interest that 
is priced based on the PBBO.
---------------------------------------------------------------------------

    \10\ See 17 CFR 242.610(d).
    \11\ A ``Non Displayed Reserve Order'' is a limit order that is 
not displayed, but remains available for potential execution against 
all incoming automatically executing orders until executed in full 
or cancelled. See NYSE Rule 13 and NYSE MKT Rule 13--Equities.
    \12\ See NYSE Rule 70(f)(II) and NYSE MKT Rule 70(f)(II)--
Equities.
---------------------------------------------------------------------------

    If, while an ALO limit order to buy is pending, the best-priced 
sell interest is re-priced higher, the ALO limit order would be re-
priced and re-displayed one MPV below the new best-priced sell 
interest, up to the limit price of the ALO order. If, while an ALO 
limit order to sell is pending, the best-priced buy interest is re-
priced lower, the ALO limit order would be re-priced and re-displayed 
one MPV above the new best-priced buy interest, down to the limit price 
of the ALO order. An ALO limit order would not be re-priced if it is 
displayed at its limit price or if the best-priced sell interest is re-
priced lower (for bids) or if the best-priced buy interest is re-priced 
higher (for offers). Each time an ALO limit order is re-priced and re-
displayed, that order would receive a new time stamp.
    Limit orders designated with the ALO modifier would not be priced 
based on resting opposite-side MPL Orders, which are triggered to trade 
at the midpoint of the PBBO by arriving interest. Limit orders 
designated with the ALO modifier would not trigger opposite-side MPL 
Orders to trade.
    Pegging interest to buy (sell) that is designated with the ALO 
modifier would not peg to a price that would result in execution before 
displaying and would instead peg one MPV below (above) the undisplayed 
Exchange sell (buy) interest against which it would have otherwise 
executed.

B. Day Time-in-Force Designation and ALO Modifier for ISOs

    An ISO is currently defined in NYSE Rule 13 and NYSE MKT Rule 13--
Equities as a limit order designated for automatic execution that meets 
the following requirements: (i) It is identified as an ISO in the 
manner prescribed by the Exchange; and (ii) simultaneously with the 
routing of an ISO to the Exchange, one or more additional limit orders, 
as necessary, are routed to execute against the full displayed size of 
any protected bid, in the case of a limit order to sell, or the full 
displayed size of any protected offer, in the case of a limit order to 
buy, and these additional orders are identified as ISOs. Currently, 
each Exchange immediately and automatically executes an ISO upon 
arrival, and the portion not so executed will be immediately and 
automatically cancelled.
    Each Exchange proposes to define an ISO as a limit order designated 
for automatic execution in a particular security that is never routed 
to an away market, may trade through a protected bid or offer, and will 
not be rejected or cancelled if it would lock, cross, or be marketable 
against an away market, provided that it is identified as an ISO and 
that, simultaneously with the routing of the ISO to the Exchange, one 
or more additional limit orders, as necessary, are routed to execute 
against the full displayed size of any protected bid or offer.\13\
---------------------------------------------------------------------------

    \13\ See NYSE Rule 19(d)(3) (permitting the display of a 
quotation that locks or crosses a protected quotation if the locking 
or crossing quotation was an automated quotation and if the member 
of the Exchange displaying the automated quotation simultaneously 
routed an intermarket sweep order to execute against the full 
displayed size of any locked or crossed protected quotation); NYSE 
MKT Rule 19(d)(3)--Equities (same).
---------------------------------------------------------------------------

    Each Exchange proposes to allow ISOs to operate with a day time-in-
force condition (``Day ISO''). A Day ISO, if marketable upon arrival, 
would be immediately and automatically executed against the displayed 
bid (offer) up to its full size in accordance with and to the extent 
provided by each Exchange's Rules 1000 to 1004, which address automatic 
executions of orders, and would then sweep the Display Book, as 
provided in each Exchange's Rule 1000(d)(iii). The remaining unexecuted 
portion, if any, of a Day ISO would be posted to the Exchange's book at 
its limit price and would be permitted to lock or cross a protected 
quotation that was displayed at the time of arrival of the Day ISO. A 
Day ISO would be required to represent a minimum of one displayable 
round lot. Day ISOs would

[[Page 62225]]

be available for Minimum Display Reserve Orders and Minimum Display 
Reserve e-Quotes.
    Each Exchange also proposes to allow a Day ISO to be designated 
with an ALO modifier. If, after being posted, a Day ISO would lock or 
cross a protected quotation in violation of Rule 610(d) of Regulation 
NMS, each Exchange would re-price and re-display the Day ISO consistent 
with the proposed ALO modifier for day limit orders. Any such re-
pricing would be based on the best-priced sell interest (for bids) or 
best-priced buy interest (for offers), and a Day ISO would receive a 
new timestamp each time that it was re-priced.
    A Day ISO designated with an ALO modifier that is marketable 
against Exchange interest upon arrival would be re-priced and displayed 
one MPV below the receiving Exchange's best-priced non-MPL Order sell 
interest (for bids) or above the Exchange's best-priced non-MPL Order 
buy interest (for offers). After being displayed on the Exchange's 
book, a Day ISO designated ALO would be re-priced and re-displayed 
consistent with the proposed ALO modifier.
    Each Exchange proposes to specify that IOC ISOs and Day ISOs are 
not available for Sell ``Plus''--Buy ``Minus'' Orders or Non-Display 
Reserve Orders or for Non-Display Reserve e-Quotes and that IOC ISOs 
are not available for high-priced securities, as defined in each 
Exchange's Rule 1000(a)(vi).\14\
---------------------------------------------------------------------------

    \14\ Each Exchange also proposes to change certain references in 
its rules from ``Intermarket Sweep Order'' to ``ISO.'' Each Exchange 
further proposes to define the existing form of an ISO as an ``ISO 
designated IOC (`IOC ISO').''
---------------------------------------------------------------------------

III. Summary of Comments and the Exchanges' Response

    As noted above, the Commission received three comment letters from 
two commenters on the proposed rule changes.\15\ The commenters 
generally raised three broad concerns regarding the proposals and urged 
the Commission to disapprove the filings.\16\
---------------------------------------------------------------------------

    \15\ See note 6, supra.
    \16\ Both commenters also raised broader issues, arguing that 
the increasing complexity of market structure, the proliferation of 
order types, and the alleged use by other exchanges of a Day ISO 
order type without Commission approval should be considered by the 
Commission in determining whether to approve or disapprove the 
Exchanges' filings. See DCM Letter at 7-8; Tradebook Letter at 8-9. 
The Commission notes that its obligation with respect to the 
Exchanges' proposals is to determine whether they are consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.
---------------------------------------------------------------------------

A. ALO Modifier Would Provide Queue Priority and Encourage Orders That 
Are Not Bona Fide

    The first commenter expressed concern that the ALO modifier would 
provide queue priority over ``traditional orders'' because ALO orders, 
unlike ``traditional orders,'' would automatically re-price to a more 
aggressive price when permissible.\17\ The Exchanges responded that the 
ALO modifier would be available to all member organizations, including 
those that represent agency interest.\18\ The Exchanges also noted that 
a limit order designated ALO would receive a new time stamp each time 
it is re-priced and re-displayed, which the Exchanges believe is 
consistent with current Exchange rules that provide that an order that 
is modified to change the price of the order shall receive a new time 
stamp.\19\
---------------------------------------------------------------------------

    \17\ See DCM Letter at 3-4. The commenter did not define 
``traditional orders.''
    \18\ See Response Letter I at 4.
    \19\ See NYSE Notice, supra note 4, at 40185, and NYSE MKT 
Notice, supra note 4, at 40171. See also Response Letter I at 4-5 
(providing examples of how re-pricing and the assignment of new time 
stamps would work and citing NYSE Rule 72(c)).
---------------------------------------------------------------------------

    This commenter also stated its belief that the ALO modifier would 
encourage the submission of ``overly aggressive'' orders that are not 
bona fide, that ``do not reflect the true economics of a security,'' 
and whose primary function appears to ``unfairly preference such orders 
for rebate capture at the most aggressive price possible.'' \20\ The 
Exchanges responded that aggressively priced orders ``improve the 
public quote and provide better prices to contra-side interest'' and 
stated that these are precisely the type of orders they are trying to 
promote.\21\ Additionally, Exchanges disagreed with the commenter's 
belief that these types of orders are not bona fide because, according 
to the Exchanges, a member bears the risk of its order being re-priced 
to its limit price and being executed at that price.\22\
---------------------------------------------------------------------------

    \20\ See DCM Letter at 4.
    \21\ See Response Letter I at 4.
    \22\ Id.
---------------------------------------------------------------------------

B. The ALO Modifier Would Allow the Detection of Hidden Orders

    The first commenter stated its belief that participants could use 
limit orders with the ALO modifier to detect hidden orders at the 
Exchanges by analyzing price-sliding confirmation messages. This 
commenter argued that, unlike comparable order types at other 
exchanges, an order with the ALO modifier is permitted to ``forward-
tick price-slide to establish prices when the hidden order on the 
contra-side is canceled, thereby leaking information about this hidden 
order.'' \23\ The Exchanges responded that, because of the minimum 
display quantity requirement for limit orders with the ALO modifier and 
the related risk of a round-lot execution, it would be cost-prohibitive 
to use this functionality to probe for hidden interest.\24\ The 
Exchanges further argued that the benefit associated with the proposed 
functionality (i.e., displayed liquidity at the Exchanges that is 
available to provide price improvement to incoming orders) outweighs 
the potential cost that a market participant could determine the 
existence, though not the depth, of hidden interest at a price.\25\
---------------------------------------------------------------------------

    \23\ See DCM Letter at 4. The commenter also expressed its 
belief that the ALO modifier is inadequately disclosed to market 
participants. The Exchanges responded that the proposed rule text 
provided full disclosure.
    \24\ See Response Letter I at 5.
    \25\ See Response Letter I at 4.
---------------------------------------------------------------------------

C. The Day ISO and Day ISO ALO Order Types Are Inconsistent With Rule 
610 of Regulation NMS

    The first commenter expressed its belief that the proposed Day ISO 
ALO would encourage orders that lock or cross protected quotations, 
because the order type is designed to be accepted by the Exchanges at 
aggressive prices in conditions where high-frequency traders actually 
lock or cross away markets or appear to lock or cross away markets, 
thus defeating the intended purpose of ISOs to be ``routed to execute'' 
in such conditions.\26\
---------------------------------------------------------------------------

    \26\ See DCM Letter at 5.
---------------------------------------------------------------------------

    The second commenter stated its belief that Day ISO and Day ISO ALO 
order types would violate Rule 610(d) of Regulation NMS.\27\ This 
commenter argued that ensuring compliance with the prohibition against 
locking and crossing markets pursuant to Rule 610(d) is solely a self-
regulatory organization (``SRO'') obligation,\28\ and that only an SRO 
is allowed to ``ship and post'' (i.e., transmit an order to attempt to 
execute against a displayed quotation while posting a quotation that 
could lock or cross the displayed quotation).\29\ This commenter 
further stated its belief that the Exchanges are improperly attempting 
to transfer to member firms the obligations of the Exchanges to 
reasonably avoid locking and crossing quotations, arguing that the

[[Page 62226]]

receipt of an ISO does not absolve the Exchanges from the 
responsibility of checking the market before posting any remaining 
portion of that ISO.\30\ And this commenter asserted that the 
Exchanges' treatment of reserve interest creates a ``systemic violation 
of Rule 610,'' arguing that the proposed Day ISOs would not actually 
clear certain protected quotes because they would not interact with 
reserve interest behind the displayed portion of the protected 
quote.\31\
---------------------------------------------------------------------------

    \27\ See Tradebook Letter I at 4-5.
    \28\ See Tradebook Letter I at 5. This commenter argued that 
Regulation NMS prohibits an SRO from considering as cleared a 
protected quote in existence at the time a Day ISO arrives at the 
SRO. See id.
    \29\ See Tradebook Letter II at 6. The commenter believes that 
this interpretation is consistent with the Regulation NMS guidance 
on Rules 610 and 611 set forth in Question 5.02 in Responses to 
Frequently Asked Questions Concerning Rule 611 and 610 of Regulation 
NMS (``NMS Guidance''), available at https://www.sec.gov/divisions/marketreg/nmsfaq610-11.htm#sec5.
    \30\ See Tradebook Letter II at 6. The commenter further stated 
its belief that the Commission should evaluate the proposal based on 
whether it is consistent with the requirements of the Act, and not 
rely on the Exchange's response that the Exchanges would be at a 
competitive disadvantage vis-[agrave]-vis other exchanges. See 
Tradebook Letter II at 3.
    \31\ See Tradebook Letter I at 6-8. This commenter asserts that 
certain exchanges update displayed interest with remaining reserve 
interest on an ``instantaneous'' basis and that, therefore, the 
Exchanges should not be able to post a Day ISO order that would lock 
or cross a replenished protected quote.
---------------------------------------------------------------------------

    The Exchanges responded that the proposed order functionalities are 
consistent with approved rules on other exchanges, as well as Rule 
610(d) and the NMS Guidance issued by the Commission's Division of 
Trading and Markets.\32\ The Exchanges argued that there is not an 
absolute prohibition on exchanges displaying locking or crossing 
quotations, provided that the resulting locked or crossed market is 
consistent with an approved exception to Rule 610(d).\33\ The Exchanges 
stated that their Rule 19 has long included several exceptions 
permitting locking or crossing quotations, such as the ISO exception, 
and the receipt of an ISO signals that such an order qualifies for an 
exception, consistent with Rule 610(d).\34\ The Exchanges stated that 
inherent in the ISO exception to their respective rules against locking 
and crossing quotations is that an ISO would be displayed, and thus 
could lock or cross a protected quotation.\35\
---------------------------------------------------------------------------

    \32\ See Response Letter I at 6; see also NMS Guidance, supra 
note 29.
    \33\ See Response Letter I at 7; Response Letter II at 3.
    \34\ See Response Letter I at 7. The Commission notes that NYSE 
MKT Rule 19--Equities contains the same provisions as NYSE Rule 19.
    \35\ See Response Letter I at 7; Response Letter II at 3.
---------------------------------------------------------------------------

    The Exchanges also responded that the NMS Guidance does not support 
the second commenter's argument that the reference to ``market 
participants'' in the response to Question 5.02 of the NMS Guidance 
(ISO Exception to SRO Lock/Cross Rules) refers only to SROs and that, 
therefore, only SROs have the ability to ``ship and post.'' \36\ The 
Exchanges further argued that such an interpretation would not only 
call into question the current use of ISOs by broker-dealers,\37\ but 
would be inconsistent with the Commission's past approval of a rule 
filing by another exchange.\38\ With respect to the reserve portion of 
protected quotes, the Exchanges argued that the unexecuted portion of a 
Day ISO would be posted on the Exchanges' books ``at its limit price 
and would lock or cross a protected quotation that was displayed at the 
time of the arrival of the Day ISO.'' \39\
---------------------------------------------------------------------------

    \36\ See Response Letter II at 3.
    \37\ Id.
    \38\ The Exchanges cite the Commission's approval of an NYSE 
Arca rule filing that provides for the display of the remaining 
balance of an ISO that is not marked ``immediate or cancel.'' See 
Response Letter I at 6 (citing Securities Exchange Act Release No. 
54549 (Sept. 29, 2006), 71 FR 59179 (Oct. 6, 2006) (SR-NYSEArca-
2006-49)).
    \39\ See Response Letter I at 7-8 (emphasis in original).
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    After carefully considering the proposals, the comments submitted, 
and the Exchanges' responses to the comments, the Commission finds that 
the proposed rule changes are consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to a national 
securities exchange.\40\ In particular, the Commission finds that the 
proposals are consistent with Section 6(b)(5) of the Act,\41\ which 
requires, among other things, that the Exchanges' rules be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \40\ In approving the proposals, the Commission has considered 
the proposed rules' impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \41\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission does not believe that the ALO modifier for limit 
orders would provide unjustified queue priority or that it would 
encourage the submission of orders that are not bona fide. Limit orders 
with the ALO modifier will be fully executable at the prices at which 
they are priced and re-priced and are therefore bona fide orders. In 
addition, limit orders with the ALO modifier will receive queue 
priority only at the prices for which they are fully executable, which 
is a justifiable means of assigning queue priority that is commonly 
used by exchanges. Moreover, the Commission notes that the Exchanges 
would assign a new time stamp (and thus new time priority) on such 
orders whenever they are re-priced and re-displayed, which would 
prevent these orders from stepping in front of orders that are already 
on the Exchanges' order books, and that the ALO order modifier would be 
available for day limit orders submitted by any exchange member. The 
ALO modifier for day limit orders is designed to be used to provide 
liquidity on the Exchanges at aggressive prices, rather than to remove 
liquidity, and the Commission notes that the proposals would require 
that limit orders with the ALO modifier represent at least one round 
lot, which should promote orders that are not of insignificant odd-lot 
size. Thus, the Commission believes that these proposals have the 
potential to allow market participants to aggressively compete with 
each other to offer better prices to contra-side trading interest.
    The Commission also believes that the requirement that an ALO limit 
order have a minimum size of one round lot should reduce the economic 
incentives for a submitting firm to attempt to use this order type to 
detect the presence of hidden interest on the Exchanges. The Commission 
also notes that, unlike hidden orders, the ALO limit order is designed 
to provide displayed liquidity to the market and thereby contribute to 
public price discovery--an objective that is fully consistent with the 
Act.\42\ Accordingly, the Exchanges have determined to offer an order 
type that promotes displayed liquidity, while adding the minimum size 
requirement in an effort to minimize the potential for the order type 
to be used to detect the existence of undisplayed interest.
---------------------------------------------------------------------------

    \42\ See, e.g., Section 11A(a)(1)(C)(iii) and (iv) of the 
Exchange Act (objectives for the national market system include 
assuring the availability of information with respect to quotations 
in securities and the practicability of brokers executing investors' 
orders in the best market).
---------------------------------------------------------------------------

    The Commission also finds that the proposed Day ISO and Day ISO ALO 
order types are consistent with Rule 610(d) of Regulation NMS. The NMS 
Guidance previously issued by Commission's Division of Trading and 
Markets clearly contemplates that not all ISOs would be immediate-or-
cancel orders.\43\ The NMS Guidance provides that, if a trading center 
chooses not to cancel the portion of ISOs that cannot be executed 
immediately, ``its rules will need to address appropriately the 
subsequent handling of the unexecuted portions.'' \44\ More generally, 
Rule 610 of Regulation NMS requires, among other

[[Page 62227]]

things, that each SRO adopt, maintain, and enforce written rules that 
prohibit its members from engaging in a pattern or practice of 
displaying quotations that lock or cross protected quotations.\45\
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    \43\ See NMS Guidance, supra note 29 (Response to Question 3.01, 
``Handling Unexecuted Portions of ISOs'').
    \44\ Id.
    \45\ See 17 CFR 242.610(d).
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    The Exchanges have adopted rules pursuant to Rule 610, and their 
rules include an ISO exception.\46\ Under the ISO exception, market 
participants are permitted to ``ship and post.'' The exchanges have not 
proposed to amend this exception. Under the Exchanges' proposed 
amendments to their rules, the Day ISO subjected to an Exchange would 
be immediately executed against the Exchange's displayed quote, and 
then the remainder, if any, would be posted to the book, where it may 
lock or cross a protected quotation that is displayed at the time the 
Day ISO arrives. Under the ``ship and post'' exception, the market 
participants submitting the Day ISO would have to send one or more 
additional ISOs to execute against the protected quotations on other 
exchanges that would be locked or crossed, and thus, the Day ISO is 
consistent with Rule 610 of Regulation NMS. The Day ISO with the ALO 
modifier would function in a similar manner as the day limit order with 
the ALO modifier and the Day ISO, including re-pricing and re-
displaying.
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    \46\ See NYSE Rule 19; NYSE MKT Rule 19--Equities.
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    For the reasons discussed above, the Commission finds that the 
Exchanges' proposals are consistent with the Act.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\47\ that the proposed rule changes SR-NYSE-2014-32 and SR-NYSEMKT-
2014-56, be and hereby are, approved.
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    \47\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\48\
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    \48\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-24547 Filed 10-15-14; 8:45 am]
BILLING CODE 8011-01-P
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