Self-Regulatory Organizations; New York Stock Exchange, LLC; Notice of Filing of Proposed Rule Change Making Permanent the Rules of the New Market Model Pilot and the Supplemental Liquidity Providers Pilot, 34717-34727 [2015-14827]
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Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices
All submissions should refer to File
Number SR–EDGX–2015–26. 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 the
filing will also be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–EDGX–
2015–26 and should be submitted on or
before July 8, 2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015–14823 Filed 6–16–15; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–75153; File No. SR–NYSE–
2015–26]
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Self-Regulatory Organizations; New
York Stock Exchange, LLC; Notice of
Filing of Proposed Rule Change
Making Permanent the Rules of the
New Market Model Pilot and the
Supplemental Liquidity Providers Pilot
June 11, 2015.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934
(‘‘Act’’),2 and Rule 19b–4 thereunder,3
15 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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notice is hereby given that on June 4,
2015, New York Stock Exchange LLC
(‘‘NYSE’’ or the ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I and II below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to make
permanent the rules of the New Market
Model Pilot and the Supplemental
Liquidity Providers Pilot. The text of the
proposed rule change is available on the
Exchange’s Web site at www.nyse.com,
at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to make
permanent the rules of New Market
Model Pilot (‘‘NMM Pilot’’) and the
Supplemental Liquidity Providers Pilot
(‘‘SLP Pilot,’’ collectively ‘‘Pilots’’). The
Pilots are currently scheduled to expire
upon the earlier of July 31, 2015 or
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) approval to
make the Pilots permanent.4
Background
In October 2008, the NYSE
implemented significant changes to its
market rules, execution technology, and
4 See Securities Exchange Act Nos. 73919
(December 23, 2014), 79 FR 78930 (December 31,
2014) (SR–NYSE–2014–71) (‘‘NMM Pilot extension
filing’’); 73945 (December 24, 2014), 80 FR 58
(January 2, 2015) (SR–NYSE–2014–72) (‘‘SLP Pilot
extension filing’’).
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34717
the rights and obligations of its market
participants, all of which were designed
to improve execution quality on the
Exchange. Certain of the enhanced
market model changes were
implemented through the NMM Pilot.5
Specifically, and as described in greater
detail below, Rules 72, 104 and the
provisions of Rule 1000 relating to the
Capital Commitment Schedule are the
pilot rules associated with the NMM
Pilot.
As part of the NMM Pilot, NYSE
eliminated the function of specialists on
the Exchange and created a new
category of market participant, the
Designated Market Maker (‘‘DMM’’).6
DMMs, like specialists, have affirmative
obligations to make an orderly market,
including continuous quoting
requirements and obligations to re-enter
the market when reaching across to
execute against trading interest. Unlike
specialists, DMMs have a minimum
quoting requirement 7 in their assigned
securities and no longer have negative
obligations. DMMs are also no longer
agents for public customer orders.8
DMM obligations under the NMM Pilot
are set forth in Rule 104.
In addition, the Exchange
implemented a system change that
allowed a DMM to create a schedule of
additional non-displayed liquidity at
various price points where the DMM is
willing to interact with interest and
provide price improvement to orders in
the Exchange’s system. This schedule is
known as the DMM Capital
Commitment Schedule (‘‘CCS’’) and is
set forth in Rule 1000. CCS provides the
Exchange systems, formerly referred to
as the ‘‘Display Book®’’ 9 with the
amount of shares that the DMM is
willing to trade at price points outside,
5 See Securities Exchange Act No. 58845 (October
24, 2008), 73 FR 64379 (October 29, 2008) (SR–
NYSE–2008–46) (‘‘NMM Pilot Approval Order’’).
6 See Rule 103.
7 See Rule 104.
8 See Rule 60; see also Rules 104 and 1000.
9 The Exchange’s Display Book system is an order
management and execution facility. The Display
Book system receives and displays orders to the
DMMs, contains the order information, and
provides a mechanism to execute and report
transactions and publish the results to the
Consolidated Tape. The Display Book system is
connected to a number of other Exchange systems
for the purposes of comparison, surveillance, and
reporting information to customers and other
market data and national market systems. Because
the Exchange has retired the actual system referred
to as the ‘‘Display Book,’’ but not the functionality
associated with the Display Book, the Exchange
proposes to replace all references to the term
‘‘Display Book’’ in Rules 104 and 1000 with
references either to the term (i) ‘‘Exchange systems’’
when use of the term refers to the Exchange systems
that receive and execute orders, or (ii) ‘‘Exchange
book’’ when use of the term refers to the interest
that has been entered and ranked in Exchange
systems.
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at, and inside the Exchange Best Bid or
Best Offer (‘‘BBO’’). CCS interest is
separate and distinct from other DMM
interest in that it is generally interest of
last resort.
The NMM Pilot further modified the
priority of trading interest, set forth in
Rule 72, which rewards displayed
orders that establish the BBO by giving
such orders priority in execution against
incoming orders. During the operation
of the NMM Pilot, an order or portion
thereof that establishes priority, retains
that priority until such order or portion
of such order is exhausted. Where no
one order has established priority,
shares are distributed among all market
participants on parity.
In addition, the NMM Pilot modified
how orders are allocated among market
participants. Before the NMM Pilot, the
Exchange operated on a parity
allocation model whereby executed
orders were allocated on parity among
market participants, which included
each Floor broker and the orders
collectively represented in Exchange
systems. Because specialists on the
Exchange had both agency obligations to
public customer orders and negative
obligations, their executions yielded to
public customer orders. Under the
NMM Pilot, because DMMs do not have
either agency obligations or negative
obligations, DMMs are an individual
market participant eligible for allocation
under the Exchange’s parity allocation.
Accordingly, for purposes of share
allocation in an execution, Rule 72(c)(ii)
provides that each Floor broker, the
DMM, and orders collectively
represented in Exchange systems (i.e.,
‘‘Book Participant’’) 10 constitute
individual participants for purposes of
parity allocation of executed orders.
In connection with the DMM Pilot,
the NYSE established the SLP Pilot,
which established SLPs as a new class
of market participants to supplement
the liquidity provided by DMMs.11 Rule
107B governs the SLP Pilot.
The Pilots were originally scheduled
to end on October 1, 2009, or such
earlier time as the Commission
determined to make the Pilots’ rules
permanent. The Exchange filed to
extend the operation of the Pilots on
several occasions in order to prepare
this rule filing.12
10 The orders represented in the Book Participant
in aggregate constitute a single participant.
11 See Securities Exchange Act No. 58877
(October 29, 2008), 73 FR 65904 (November 5, 2008)
(SR–NYSE–2008–108) (Notice of Filing’’ [sic]).
12 See NMM pilot extension filing and SLP pilot
extension filing, supra n. 3 [sic].
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Description of Pilot Rules That Would
Become Permanent
Rule 104
Current Rule 104, as amended since
2008, sets forth DMM obligations. Under
Rule 104(a), DMMs registered in one or
more securities traded on the Exchange
are required to engage in a course of
dealings for their own account to assist
in the maintenance of a fair and orderly
market insofar as reasonably practicable.
The responsibilities and duties of a
DMM include:
• Assisting the Exchange by
providing liquidity as needed to provide
a reasonable quotation and by
maintaining continuous two-sided
quotes with a displayed size of at least
one round lot that meets certain metrics
as set forth in the rule;
• Facilitating openings and reopenings in assigned securities, which
may include supplying liquidity as
needed; and
• Facilitating the close of trading for
assigned securities, which may include
supplying liquidity as needed.13
The Rule 104(a)(1) quoting
requirements applicable to DMMs are
two-fold. First, with respect to
maintaining a continuous two-sided
quote with reasonable size, DMM units
must maintain a bid or an offer at the
National Best Bid (‘‘NBB’’) and National
Best Offer (‘‘NBO’’) (collectively,
‘‘inside’’) at least 15% of the trading day
for securities in which the DMM unit is
registered with a consolidated average
daily volume (‘‘CADV’’) of less than one
million shares (‘‘Less Active
Securities’’), and at least 10% for
securities in which the DMM is
registered with a CADV equal to or
greater than one million shares (‘‘More
Active Securities’’).14 These DMM
quoting obligations set forth in Rule
104(a)(1)(A) are unique to the Exchange.
13 In 2015, the Exchange eliminated liquidity
replenishment points (‘‘LRP’’) and the ‘‘gap’’ quote
procedures and amended Rule 104(a) to eliminate
the former DMM obligations to facilitate trading
when an LRP was reached or the gap quote
procedure was being used. See Securities Exchange
Act Release No. 74063 (Jan. 15, 2015), 80 FR 3269
(Jan. 22, 2015) (Notice of Filing).
14 In 2009, the Exchange amended Rule 104(a)(1)
to increase the amount of time that a DMM unit
must maintain a bid and offer at the inside from
10% to 15% for Less Active Securities and from 5%
to 10% for More Active Securities. See Securities
Exchange Act Release No. 60595 (August 31, 2009),
74 FR 46261 (September 8, 2009) (SR–NYSE–2009–
91) (Notice of Filing) (‘‘DMM quoting requirement
filing’’). In 2011, the Exchange amended Rule
104(a)(1) to specify that the quoting percentage
would be based on the consolidated average daily
volume of a security, rather than the average daily
volume of the security on the Exchange. See
Securities Exchange Act Release No. 65865
(December 2, 2011), 76 FR 76799 (December 8,
2011) (SR–NYSE–2011–58) (Notice of Filing).
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Second, DMM units are subject to the
two-sided quoting obligations set forth
in Rule 104(a)(1)(B), which are the
pricing obligations applicable to all
equity market makers market-wide to
maintain a bid and offer a designated
percentage away from the NBB and NBO
at all times.15
Under Rule 104(b), DMM units are
permitted to use algorithms for quoting
and trading consistent with NYSE and
SEC rules. Exchange systems enforce the
proper sequencing of incoming orders
and algorithmically-generated messages.
Except as provided for in the rule, the
DMM unit’s system employing
algorithms has access to information
with respect to orders entered on the
Exchange, Floor Broker agency interest
files or reserve interest, to the extent
such information is publicly available.
DMM unit algorithms receive the same
information with respect to orders
entered on the Exchange, Floor Broker
agency interest files or reserve interest
as is disseminated to the public by the
Exchange and receive such information
no sooner than it is available to other
market participants.16 A DMM unit’s
algorithm may submit trading interest
via CCS interest in accordance with
Rule 1000.
Under Rule 104(c), a DMM unit may
maintain reserve interest consistent
with Exchange rules governing Reserve
Orders. Such reserve interest is eligible
for execution in manual transactions.
Under Rule 104(d), a DMM unit may
provide algorithmically generated price
improvement to all or part of an
incoming order that can be executed at
or within the BBO through the use of
CCS interest. Any orders eligible for
execution in the Exchange’s book at the
price of the DMM unit’s interest trade
on parity with such interest, as does any
displayed interest representing a dQuote enabling such interest to trade at
the same price as the DMM unit’s
interest.
Under Rule 104(e), DMM units must
provide contra-side liquidity as needed
for the execution of odd-lot quantities
that are eligible to be executed as part
of the opening, re-opening, and closing
transactions but remain unpaired after
15 See Securities Exchange Act Release No. 63255
(November 5, 2010), 75 FR 69484 (November 12,
2010) (SR–NYSE–2010–69) (Notice of Filing).
16 In 2013, the Exchange amended Rules 104 and
123C to specify that closings may be effectuated
manually or electronically. See Securities Exchange
Act Release No. 71086 (December 16, 2013), 78 FR
77186 (December 20, 2013) (SR–NYSE–2013–79)
(Notice of Filing). As part of that filing, the
Exchange amended Rules 104(a)(3) and 104(b) to
provide that the DMM algorithm would have access
to aggregate order information relating to Reserve
Interest eligible to participate in a manual
execution.
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the DMM has paired all other eligible
round lot sized interest.
Rule 104(f) sets forth the functions of
DMMs. First, any member who expects
to act as a DMM in any listed stock must
be registered as a DMM in accordance
with Rule 103. Second, a DMM must
maintain, insofar as reasonably
practicable, a fair and orderly market on
the Exchange in the stocks in which he
or she is so acting. Third, the Exchange
supplies DMMs with suggested Depth
Guidelines for each security in which a
DMM is registered, and DMMs are
expected to quote and trade with
reference to the Depth Guidelines.
Finally, DMMs are designated as market
makers on the Exchange for all purposes
under the Act and the rules and
regulations thereunder.
Rule 104(g) governs transactions by
DMMs. Transactions on the Exchange
by a DMM for the DMM’s account must
be effected in a reasonable and orderly
manner in relation to the condition of
the general market and the market in the
particular stock. Rule 104(g) describes
certain permitted transactions,
including neutral transactions and nonconditional transactions, but prohibits
certain other transactions. Specifically,
except as otherwise permitted by Rule
104, during the last ten minutes prior to
the close of trading, a DMM with a long
(short) position in a security is
prohibited from making a purchase
(sale) in such security that results in a
new high (low) price on the Exchange
for the day at the time of the DMM’s
transaction.
Rule 104(h) addresses DMM
transactions in securities that establish
or increase the DMM’s position. A
‘‘Conditional Transaction’’ is a DMM’s
transaction in a security that establishes
or increases a position and reaches
across the market to trade as the contraside to the Exchange-published bid or
offer. Certain Conditional Transactions
may be made by a DMM without
restriction as to price if they are
followed by appropriate re-entry on the
opposite side of the market
commensurate with the size of the
DMM’s transaction. The Exchange
issues guidelines, called price
participation points (‘‘PPP’’), that
identify the price at or before which a
DMM is expected to re-enter the market
after effecting a Conditional
Transaction. Immediate re-entry is
required after certain Conditional
Transactions. However, certain other
Conditional Transactions may be made
without restriction as to price and Rule
104(i) provides that the re-entry
obligations following such Conditional
Transactions would be the same as the
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re-entry obligations for non-conditional
transactions,’’ as set forth in Rule 104(g).
Rule 104(j), which was added in
2013,17 permits a DMM to perform the
following Trading Floor functions:
• Maintain order among Floor brokers
manually trading at the DMM’s assigned
panel;
• Bring Floor brokers together to
facilitate trading, which may include
the DMM as a buyer or seller;
• Assist a Floor broker with respect to
an order by providing information
regarding the status of a Floor broker’s
orders, helping to resolve errors or
questioned trades, adjusting errors, and
cancelling or inputting Floor broker
agency interest on behalf of a Floor
broker; and
• Research the status of orders or
questioned trades on his or her own
initiative or at the request of the
Exchange or a Floor broker when a Floor
broker’s handheld device is not
operational, when there is activity
indicating that a potentially erroneous
order was entered or a potentially
erroneous trade was executed, or when
there otherwise is an indication that
improper activity may be occurring.
The rule also permits the Exchange to
make systems available to a DMM at the
post that display the following
information about securities in which
the DMM is registered: (A) Aggregated
buying and selling interest; (B) the price
and size of any individual order or Floor
broker agency interest file and the
entering and clearing firm information
for such order, except that the display
excludes any order or portion thereof
that a market participant has elected not
to display to a DMM; and (C) post-trade
information. A DMM may not use any
such information in a manner that
would violate Exchange rules or federal
securities laws or regulations. The DMM
may provide market information that is
available to the DMM at the post to (i)
respond to an inquiry from a Floor
broker in the normal course of business
or (ii) visitors to the Trading Floor for
the purpose of demonstrating methods
of trading. However, a Floor broker may
not submit an inquiry pursuant to this
provision by electronic means and the
DMM may not use electronic means to
transmit market information to a Floor
broker in response to a Floor broker’s
inquiry pursuant to this provision.
Rule 104(k) provides that in the event
of an emergency, such as the absence of
the DMM, or when the volume of
business in the particular stock or stocks
17 See Securities Exchange Act Release No. 71175
(December 23, 2013), 78 FR 79534 (December 30,
2013) (SR–NYSE–2013–21) (Order approving
adoption of Rule 104(j)).
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34719
is so great that it cannot be handled by
the DMMs without assistance, a Floor
Governor may authorize a member of
the Exchange who is not registered as a
DMM in such stock to act as temporary
DMM for that day only.
Rule 1000
The provisions of current Rule 1000
relating to CCS, as amended since 2008,
and which are operating as part of the
NMM Pilot, are set forth sections (d)–(g)
of Rule 1000.
Rule 1000(d) provides that for each
security in which it is registered, a
DMM unit may place within Exchange
systems a pool of liquidity to be
available to fill or partially fill 18
incoming orders in automatic
executions, which is CCS. CCS is
designed to be a DMM unit’s
commitment to trade a specified number
of shares at specified price points in
reaction to incoming contra-side
interest. As noted above, CCS interest is
used to trade at the BBO, at prices better
than the BBO, and at prices outside the
BBO. CCS interest supplements
displayed and non-displayed interest of
the DMM in Exchange systems. CCS
interest must be for a minimum of one
round lot of a security and entered at
price points that are at, inside, or away
from the BBO.
Rule 1000(e) governs executions at
and outside the BBO, and specifies how
CCS interest would interact with such
executions. For executions at the BBO,
CCS interest would yield to all other
interest at that price point. For
executions outside the BBO, i.e.,
sweeps, Rule 1000(e)(iii) specifies how
CCS interest could participate to
provide price improvement to the
residual of an order that sweeps. As
provided for in the rule, if an order is
not executed at full at the Exchange
BBO, Exchange systems will calculate
the unfilled volume of the contra-side
order and review the additional
displayed and non-displayed interest,
including CCS interest and protected
quotes on away markets, to determine
the price at which the remaining
volume of the contra-side order can be
executed in full (the ‘‘completion
price’’). Exchange systems will evaluate
the price at which the maximum
volume of CCS interest exists to trade,
and execute the incoming order one
18 The original NMM Pilot permitted CCS to
participate only if it would fill an incoming order.
In 2009, the Exchange amended Rule 1000 to
provide that Exchange systems would access CCS
interest to participate in executions when the
incoming order would only be partially executed.
See Securities Exchange Act Release No. 60671
(September 15, 2009), 74 FR 48327 (September 22,
2009) (SR–NYSE–2009–71) (‘‘CCS Partial Fill
Approval Order’’).
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minimum price variation (as the term is
defined in Rule 62) better than that
price, which is how CCS provides price
improvement. If an order cannot be
executed in full because of the order’s
limit price, or because of an immediateor-cancel time-in-force, CCS interest is
available to partially fill the incoming
order.
Rule 1000(f) specifies how CCS
interest may provide price improvement
inside the BBO with interest arriving in
the Exchange market that:
• Will be eligible to trade at or
through the BBO;
• Will be eligible to trade at the price
of interest in Exchange systems
representing non-displayable reserve
interest of Reserve Orders and Floor
broker agency interest files reserve
interest (‘‘hidden interest’’) or MPL
Orders; or
• Will be eligible to route to away
market interest for execution if [sic] the
total volume of CCS interest, plus dQuote interest in Floor broker agency
interest files, plus any interest
represented by hidden interest, would
be sufficient to fully complete the
arriving interest at a price inside the
BBO. In such an instance, the Exchange
systems determine the price point
inside the BBO at which the maximum
volume of CCS interest trades, taking
into account the volume, if any,
available from d-Quotes and hidden
interest. The arriving interest is
executed at that price, with all interest
(CCS, d-Quote, hidden interest) trading
on parity.
Under Rule 1000(g), CCS interest may
trade with non-marketable 19 interest
where such non-marketable interest
betters the BBO (or cancels in the case
of an arriving IOC order) if the incoming
interest may be executed in full by all
interest available in the Exchange’s
book, including CCS interest and dquotes. Such trade takes place at the
limit price of the arriving nonmarketable interest. All interest trading
with the incoming interest trades on
parity.
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Rule 72
The priority of bids and offers and
allocation of executions is governed by
Rule 72, as amended since 2008. Under
Rule 72(a), when a bid or offer,
including pegging interest,20 is
19 ‘‘Non-marketable’’ means trading interest (i.e.,
displayable and non-displayable) that is at a price
higher than the current Exchange bid (but below the
current Exchange offer) or lower than the current
Exchange offer (but above the current Exchange
bid), including better bids and offers on other
market centers. See Rule 1000(g)(1).
20 In 2012, the Exchange amended Rule 72(a) to
specify that pegging interest may be considered
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established as the only displayable 21
bid or offer made at a particular price
and such bid or offer is the only
displayable interest when such price is
or becomes the BBO (the ‘‘setting
interest’’), such setting interest is
entitled to priority for allocation of
executions at that price as described in
the rule, subject to the provisions below:
(A) Odd-lot orders, including
aggregated odd-lot orders that are
displayable, are not eligible to be setting
interest.22
(B) If at the time displayable interest
of a round lot or greater becomes the
BBO, there is other displayable interest
of a round lot or greater, including
aggregated odd-lot orders that are equal
to or greater than a round lot, at the
price that becomes the BBO, no interest
is considered to be a setting interest,
and, therefore, there is no priority
established.
(C) If at the time displayable interest
of a round lot or greater becomes the
BBO, there is other displayable interest,
the sum of which is less than a round
lot, at the price that becomes the BBO,
the displayable interest of a round lot or
greater is considered the only
displayable bid or offer at that price
point and is therefore established as the
setting interest.
(D) If executions decrement the
setting interest to an odd-lot size, a
round lot or partial round lot order that
joins such remaining odd-lot size order
is not eligible to be the setting interest.
(E) If as a result of cancellation,
interest is or becomes the single
displayable interest of a round lot or
greater at the BBO, it becomes the
setting interest.
(F) Only the portion of setting interest
that is or has been published in the BBO
is entitled to priority allocation of an
execution. That portion of setting
interest that is designated as reserve
setting interest. See Securities Exchange Act
Release No. 68302 (November 27, 2012), 77 FR
71658 (December 3, 2012) (SR–NYSE–2012–65)
(Notice of Filing) (‘‘Pegging filing’’).
21 As used in this rule, the term ‘‘displayable’’
means that portion of interest that could be
published as, or as part of, the BBO, including
pegging interest. Displayable odd-lot orders are
published as part of the BBO if, when aggregated
with other interest available for execution at that
price point, the sum of the odd-lot order and other
interest available at that price point would be equal
to or greater than a round lot. The term ‘‘displayed
interest’’ includes that part of an order that is
published as, or as part of, the BBO, which may
include one or more odd-lot orders.
22 In 2010, the Exchange amended its rules,
including Rule 72, to incorporate the receipt and
execution of odd-lot interest in the round-lot market
and decommission the former Odd Lot System. See
Securities Exchange Act Release No. 62578 (July 27,
2010), 75 FR 45185 (August 2, 2010) (SR–NYSE–
2010–43 and SR–NYSEAmex–2010–53) (‘‘Odd-lot
Approval Order’’).
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interest and therefore not displayed at
the BBO (or not displayable if it
becomes the BBO) is not eligible for
priority allocation of an execution
irrespective of the price of such reserve
interest or the time it is accepted into
Exchange systems. However, if,
following an execution of part or all of
setting interest, such setting interest is
replenished from any reserve interest,
the replenished volume of such setting
interest is entitled to priority if the
setting interest is still the only interest
at the BBO.
(G) If non-pegging interest becomes
the BBO, it is considered the setting
interest even if pegging interest is
pegging to such non-pegging interest,
and it retains its priority even if
subsequently joined at that price by a
pegging interest.
Under Rule 72(b), once priority is
established by the setting interest, such
setting interest retains that priority for
any execution at that price when that
price is at the BBO. If executions
decrement the setting interest to an oddlot size, such remaining portion of the
setting interest retains its priority for
any execution at that price when that
price is the BBO. For any execution of
setting interest that occurs when the
price of the setting interest is not the
BBO, the setting interest does not have
priority and is executed on parity.
Priority of setting interest is not
retained after the close of trading on the
Exchange or following the resumption
of trading in a security after a trading
halt in such security has been invoked
pursuant to Rule 123D or following the
resumption of trading after a trading
halt invoked pursuant to the provisions
of Rule 80B. Priority of the setting
interest is not retained on any portion
of the priority interest that is routed to
an away market and is returned
unexecuted unless such priority interest
is greater than a round lot and the only
other interest at the price point is oddlot orders, the sum of which is less than
a round lot.
Under Rule 72(c), executions are
allocated as follows. An automatically
executing order trades first with the
displayed bid (offer) and, if there is
insufficient displayed volume to fill the
order, trades next with reserve interest.
All reserve interest trades on parity. For
the purpose of share allocation in an
execution, each single Floor broker, the
DMM and orders collectively
represented in Exchange systems
(referred to as ‘‘Book Participant’’)
constitute individual participants. The
orders represented in the Book
Participant in aggregate constitute a
single participant and are allocated
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shares among such orders by means of
time priority with respect to entry.
In any execution at the BBO, a
participant who is the setting interest
receives 15% of the volume of such
executed amount or a minimum of one
round lot, whichever is greater, until
such setting interest has received a
complete execution of its eligible
priority interest. Setting interest that is
decremented to an odd-lot size receives
15% of the volume of such incoming
interest rounded up to the size of the
setting interest, or the size of the
incoming interest, whichever is less.
Following the allocation of an execution
to setting interest as provided above, the
remainder of the executed volume is
allocated to each participant on parity.
The participant with the priority
interest (the setting interest) is included
in such parity allocation. If there is no
setting interest for an execution at the
BBO, allocation of the executed volume
is on parity by participant except as
otherwise set forth in the rule. When an
execution occurs at the BBO, interest
that is displayed in the BBO is allocated
before any interest that is not displayed.
In allocating an execution that involves
setting interest, whether such execution
takes place at the BBO or otherwise, the
volume allocated to the setting interest
is allocated to the interest in the setting
interest that is entitled to priority first.
Shares are allocated in round lots or
the size of the order if less than a round
lot. If the number of shares to be
executed at a price point is insufficient
to allocate round lots to all the
participants eligible to receive an
execution at that price point, or the size
of the order if less than a round lot,
Exchange systems create an allocation
wheel of the eligible participants at that
price point and the available round lot
shares are distributed to the participants
in turn. If an odd-lot sized portion of the
incoming order remains after allocating
all eligible round lots, the remaining
shares are allocated to the next eligible
participant in less than a round lot. On
each trading day, the allocation wheel
for each security is set to begin with the
participant whose interest is entered or
retained first on a time basis. Thereafter,
participants are added to the wheel as
their interest joins existing interest at a
particular price point. If a participant
cancels interest and then rejoins, that
participant joins as the last position on
the wheel at that time. If an odd-lot
allocation completely fills the interest of
a participant, the wheel moves to the
next participant. The allocation wheel
also moves to the next participant where
Exchange systems execute remaining
displayable odd-lot interest prior to
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replenishing the displayable quantity of
a participant.
When an execution occurs outside the
BBO, the interest that is displayable is
allocated before any interest that is nondisplayable (i.e., reserve interest). All
interest that is displayable is on parity
among individual participants’
displayable interest. All interest that is
non-displayable is on parity among
individual participants’ non-displayable
interest. Incoming orders eligible for
execution at price points between the
BBO trade with all available interest at
the price. All NYSE interest available to
participate in the execution (e.g., dquotes, s-quotes, Reserve Orders, and
CCS interest) trade on parity.
DMM interest added intra-day to
participate in a verbal transaction with
a Floor broker or during a slow quote is
allocated shares only after all other
interest eligible for execution at the
price point is executed in full. DMM
interest added at the time of the slow
quote or when verbally trading with a
Floor broker not executed during the
transaction is cancelled.23 However, sQuotes, if any, representing DMM
interest present at the price point prior
to the verbal transaction with a Floor
broker or during a slow quote receive an
allocation on parity as described above.
An order that is modified to reduce the
size of the order retains the time stamp
of original order entry. An order
modified in any other way, such as
increasing the size or changing the price
of the order, receives a new time
stamp.24
Under Rule 72(d), when a member has
an order to buy and an order to sell an
equivalent amount of the same security,
and both orders are ‘‘block’’ orders (i.e.,
at least 10,000 shares or a quantity of
stock having a market value of $200,000
or more, whichever is less) and are not
for the account of such member or
member organization, an account of an
associated person, or an account with
respect to which the member, member
organization, or associated person
thereof exercises investment discretion,
then the member may ‘‘cross’’ those
orders at a price at or within the BBO.25
23 When the Exchange adopted the NMM Pilot in
2008, all DMM interest was on parity. In 2009, the
Exchange amended Rule 72 to add new subsection
(c)(xi) to the rule to remove parity for DMM interest
that verbal transactions with a Floor broker or
during a slow quote. See Securities Exchange Act
Release No. 60287 (July 10, 2009), 74 FR 34817
(July 17, 2009) (SR–NYSE–2009–69) (Notice of
Filing).
24 See Pegging Filing, supra n. 18 [sic] (amending
Rule 72(c) to specify how order modifications
impact the time stamp of an order).
25 In 2011, the Exchange amended Rule 72(d)
regarding agency cross transactions to (i) change the
minimum size of a block order under the rule from
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34721
The member’s bid or offer is entitled to
priority at such cross price, irrespective
of pre-existing displayed bids or offers
on the Exchange at that price. The
member must follow the crossing
procedures of Rule 76, and another
member may trade with either the bid
or offer side of the cross transaction
only to provide a price which is better
than the cross price as to all or part of
such bid or offer. A member who is
providing a better price to one side of
the cross transaction must trade with all
other displayed market interest on the
Exchange at that price before trading
with any part of the cross transaction.
Following a transaction at the improved
price, the member with the agency cross
transaction must follow the crossing
procedures of Rule 76 and complete the
balance of the cross. No member may
break up the proposed cross transaction,
in whole or in part, at the cross price.
No DMM may effect a proprietary
transaction to provide price
improvement to one side or the other of
a cross transaction effected pursuant
Rule 72(d). A transaction effected at the
cross price in reliance on this provision
is printed as ‘‘stopped stock.’’ When a
member effects a transaction under this
provision, the member must, as soon as
practicable after the trade is completed,
complete documentation of the trade as
the Exchange requires.
Rule 107B
Rule 107B, as amended, governs the
SLP Pilot. Under current Rule 107B(a),
an SLP is defined as a member
organization that electronically enters
proprietary orders or quotes from off the
Floor of the Exchange into the systems
and facilities of the Exchange and is
obligated to maintain a bid or an offer
at the National Best Bid (‘‘NBB’’) or the
National Best Offer (‘‘NBO’’) in each
assigned security in round lots
averaging at least 10% of the trading day
and for all assigned SLP securities 26
and to add liquidity of an ADV of more
than a specified percentage of
25,000 to 10,000 shares or a quantity of stock
having a market value of $200,000 or more,
whichever is less, and (ii) conform Rule 72(d) to
Rule 90 to permit a Floor broker to represent a Rule
72(d) crossing transaction on behalf of an
unaffiliated member or member organization. See
Securities Exchange Act Release No. 64334 (April
25, 2011), 76 FR 24078 (April 29, 2011) (SR–NYSE–
2011–18) (Notice of Filing).
26 The SLP Pilot originally required an SLP to
maintain a bid and/or offer at the NBB or NBO
averaging at least 5% of the trading day. Effective
September 25, 2010, the Exchange increased this
quoting requirement to require SLPs to maintain a
bid and/or offer at the NBB or NBO at least 10%
of the trading day. See Securities Exchange Act
Release No. 62791 (August 30, 2010) 75 FR 54411
(September 7, 2010) (SR–NYSE–2010–60) (Notice of
Filing) (‘‘SLP 2010 Filing’’).
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consolidated average daily volume
(‘‘CADV’’) in all NYSE-listed securities,
as set forth in the Exchange’s Price List,
on a monthly basis.27 An SLP can be
either a proprietary trading unit of a
member organization (‘‘SLP-Prop’’) or a
registered market maker at the Exchange
(‘‘SLMM’’).28
Under Rule 107B(b), when an SLP
posts liquidity on the Exchange and
such liquidity is executed against an
inbound order, the SLP receives a
financial rebate for that executed
transaction as set forth in the
Exchange’s Price List, subject to the
non-regulatory penalty provision
described in Rule 107B(k).29 The SLP
receives credit toward the financial
rebate for executions of displayed and
non-displayed liquidity (e.g., reserve
and dark orders) posted in round lots in
its assigned securities only.
Under Rule 107B(c), to qualify as an
SLP-Prop, a member organization must
have:
(1) Adequate technology to support
electronic trading through the systems
and facilities of the Exchange;
(2) mnemonics that identify to the
Exchange SLP-Prop trading activity in
assigned SLP securities;
(3) adequate trading infrastructure
and staff to support SLP trading activity;
(4) quoting and volume performance
that demonstrates an ability to meet the
10% average quoting requirement in
each assigned security and the ADV
requirement of more than a specified
percentage of CADV in all NYSE-listed
securities for all assigned SLP securities
on a monthly basis;
(5) a disciplinary history that is
consistent with just and equitable
business practices; and
27 In the SLP 2010 Filing, the Exchange
introduced a monthly volume requirement for SLPs
of an average daily volume (‘‘ADV’’) of more than
10 million shares. See SLP 2010 Filing, supra n. 26.
Effective September 1, 2012, the Exchange amended
the monthly volume requirement to require instead
that SLPs meet an ADV that is a specified
percentage of the NYSE CADV and amended the
Exchange’s Price List to specify the applicable
percentage of NYSE CADV for the monthly volume
requirement. See Securities Exchange Act Release
No. 67759 (August 30, 2012), 77 FR 54939
(September 6, 2012) (SR–NYSE–2012–38) (Notice of
Filing).
28 The SLP Pilot was originally available only for
a proprietary trading unit of a member organization.
In 2012, the Exchange amended Rule 107B to add
a class of SLPs that are registered as market makers
on the Exchange and subject to the market-wide
equity market maker quoting obligations. See
Securities Exchange Act Release No. 67154 (June 7,
2012), 77 FR 35455 (June 13, 2012) (SR–NYSE–
2012–10) (Approval Order).
29 In the SLP 2010 Filing, the Exchange modified
the non-regulatory penalties to align them to the
changes in the quoting and volume requirements for
SLPs. See SLP 2010 Filing, supra no. 26. The
Exchange proposes a non-substantive amendment
to Rule 107B(b) to correct the cross-reference in the
Rule from subparagraph (j) to subparagraph (k).
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(6) the business unit of the member
organization acting as an SLP-Prop must
have in place adequate information
barriers between the SLP-Prop unit and
the member organization’s customer,
research, and investment banking
business.
A member organization may register
as an SLMM in one or more securities
traded on the Exchange in order to assist
in the maintenance of a fair and orderly
market insofar as reasonably practicable.
To qualify as an SLMM, a member
organization must meet the all of the
requirements for an SLP-Prop set forth
above, except item (2) relating to
mnemonics. If approved as an SLMM,
the member organization must (i)
maintain continuous, two-sided trading
interest in assigned securities (‘‘TwoSided Obligation’’) and meet certain
pricing obligations as set forth in the
rule; (ii) maintain minimum net capital
in accordance with SEC Rule 15c3–1;
and (iii) maintain unique mnemonics
specifically dedicated to SLMM activity,
which may not be used for trading in
securities other than SLP securities
assigned to the SLMM.
Rule 107B(e) sets forth the application
process for SLPs. If an applicant is
disapproved or disqualified, such
applicant may request an appeal of such
disapproval or disqualification by the
SLP Panel as provided in the rule and/
or reapply for SLP status three months
after the month in which the applicant
received the disapproval or
disqualification notice. Rule 107B(f)
describes how an SLP may voluntarily
withdraw from such status.
Rule 107B(g) and (h) set forth the
calculations for determining whether an
SLP is meeting its 10% quoting
requirement and monthly volume
requirement. An SLP may post nondisplayed liquidity; however, such
liquidity is not counted as credit toward
the 10% quoting requirement. In
addition, tick sensitive orders (i.e., ‘‘Sell
Plus’’, ‘‘Buy Minus’’ and ‘‘Buy Minus
Zero Plus’’) do not count as credit
toward the 10% quoting requirement.
Rule 107B(i) governs the assignment
of securities to SLPs. Rule 107B(j)
provides that SLPs may only enter
orders electronically from off the Floor
of the Exchange and may only enter
such orders directly into Exchange
systems and facilities designated for this
purpose. SLMM quotes and orders may
be for the account of the SLMM in either
a proprietary or principal capacity on
behalf of affiliated or unaffiliated
persons and SLP-Prop orders must only
be for the proprietary account of the
SLP-Prop member organization. Rule
107B(k) sets forth non-regulatory
penalties that apply if an SLP fails to
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meet its quoting requirements and sets
forth procedures for reapplication. Rule
107B(l) sets forth provisions for
appealing non-regulatory penalties.
Rationale for Making Pilots Permanent
The Exchange adopted the NMM Pilot
in part to adapt the Exchange’s model to
the equities market environment in
place in 2008. At that time, the more
electronic market had fundamentally
altered the Exchange’s traditional
trading environment, in which price
discovery had taken place largely, and
almost exclusively, on the Floor of the
Exchange. As the trading information
that was previously only available on
the Floor of the Exchange shifted to
become widely available via electronic
means, together with increased
fragmentation in the market, the
Exchange believed that the NMM Pilot
would provide a more robust trading
model on the Floor where market
participants could compete on more
equal footing relative to their
responsibilities to the market.30 With
the NMM Pilot, the Exchange would
continue to provide a quality market
that maintains both a competitive
market maker responsible for providing
liquidity to the market and the element
of human judgment that is particularly
valuable in less liquid securities, reopenings, and closings. The Exchange
sought, and believes it has attained, the
appropriate balance among market
participants that retains a role for
liquidity providers responsible for
maintaining fair and orderly markets,
i.e., DMMs, together with agents on the
Floor and off-Floor participants. The
Exchange adopted the SLP Pilot to
encourage an additional pool of
liquidity at the Exchange.
As noted in the NMM Pilot approval
order, the Commission had concerns
regarding certain aspects of the
Exchange’s proposal and approved it on
a pilot basis. The Commission further
stated that before it would decide to
make the NMM Pilot permanent, the
Exchange must provide data and
analysis on the impact of the NMM
Pilot. The metrics requested by the
Commission include: (i) DMM time at
the NBBO by security; (ii) the effective
spread by security; (iii) the DMM
volume broken out by DMM interest
type (e.g., CCS, s-Quote); (iv) the average
depth at the NBBO by market
participant (DMMs, Floor brokers, and
orders represented in the Exchange’s
book); (v) the ratio of (i) shares not
executed in Exchange systems due to
30 See Securities Exchange Act Release No. 58184
(July 17, 2009 [sic]), 73 FR 42853 (July 23, 2008)
(NMM Pilot Filing).
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DMM execution due to (ii) the shares
executed by the DMM; and (vi) effective
spread for (a) orders that involve DMM
liquidity provisions and (b) orders that
are executed without DMM liquidity
(for similar order size categories).31 In
compliance with this requirement, the
Exchange has been providing the abovedescribed metrics to the Commission’s
Division of Trading and Markets and
Office of Economic and Risk Analysis
on a monthly basis.
Since adopting the NMM Pilot, the
Exchange believes that the equities
market has continued to undergo
significant changes that require a fresh
look at the basis for whether the NMM
Pilot should be approved on a
permanent basis. Rather than looking at
the specific metrics identified above, the
Exchange believes that looking more
holistically at the Exchange’s
performance relative to the equities
market in general demonstrates the
continued value of the NMM and SLP
Pilots and basis for permanent approval
of the pilots. In particular, the
continued impact of Regulation NMS,
which had been in effect for only one
year when the Exchange filed for the
NMM Pilot, together with additional
technological advancements and
competitive forces since 2008 have
fundamentally altered the way the
market functions and how market
participants interact. Some of the major
developments include the significant
rise in off-exchange trading from 22% in
2009 to 34% in 2014; the proliferation
of over 50 trading venues, including
four additional registered equities
exchanges since October 2008; and the
increasing segmentation of client order
flow onto private dark markets.32
The Exchange believes that the shifts
in market share of traded volume among
venues demonstrate the robust
competition among markets. In
particular, the following chart shows a
snapshot of how market share of traded
volume on registered exchanges has
declined since 2009 and shifted to the
TRF, which reports transactions that
occur off of registered exchanges.33
TABLE 1—TAPE A MARKET SHARE DEVELOPMENTS
NYSE
(%)
F
2009
2010
2011
2012
2013
2014
......
......
......
......
......
......
25.0
24.4
24.3
21.4
22.1
22.4
NYSE
Arca
(%)
13.4
11.9
10.5
10.0
8.4
8.3
FINRA
TRI *
(%)
Nasdaq
(%)
Nasdaq
BX
(%)
Nasdaq
PSX
(%)
BATS Z
(%)
BATS Y
(%)
EDGA *
(%)
EDGX **
(%)
15.5
13.6
13.3
12.8
11.6
13.1
1.9
3.6
2.3
2.6
2.3
2.4
0.0
0.1
0.7
0.7
0.5
0.4
8.5
7.5
6.9
7.5
7.1
6.8
0.0
0.2
2.3
3.1
1.9
3.0
0.0
2.0
3.6
2.4
2.8
2.5
10.4
7.6
5.5
6.3
6.9
5.9
22.5
27.3
29.8
32.3
35.3
34.7
ISE
(%)
1.9
0.8
0.0
0.0
0.0
0.0
NSX
(%)
0.6
0.5
0.5
0.3
0.4
0.1
CHX
(%)
0.3
0.3
0.2
0.3
0.4
0.4
CBSX
(%)
0.1
0.1
0.1
0.4
0.4
0.1
* Includes ADF and adjusted for EDGA/EDGX launch.
* EDGA and EDGX are combined into EDGX for Jan. 2009 through July 2010, as Direct Edge didn’t break them out prior to receiving exchange status.
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While these statistics demonstrate
that all exchanges, including the
Exchange, have faced challenges in the
last six years, the Exchange believes that
the NMM and SLP Pilots have enabled
the Exchange to remain competitive
during this period. As demonstrated in
the chart above, notwithstanding the
competing market forces, the Exchange’s
market share has remained relatively
stable.
The Exchange further notes that it
adopted the NMM and SLP Pilots
during a period of high trading volumes.
Since the global financial crisis of 2008–
2009, there has been a significant drop
in volume and volatility in cash equities
markets. A case in point, Tape A CADV
fell 41% from 5.64 billion in 2009 to
3.33 billion shares in 2014.
Additionally, the VIX volatility index,
which is an industry-standard measure
of market volatility, fell from a daily
average of 31.5% in 2009 to 14.2 in
2014.
31 See NMM Pilot Approval Order, supra n. 5 at
64387.
32 In a speech on October 2, 2013, Chair Mary Jo
White noted that ‘‘[a] steadily increasing percentage
of trading occurs in ‘dark’ venues, which now
appear to execute more than half of the orders of
long-term investors,’’ Mary Jo White, Chair,
Securities and Exchange Commission, Speech at
Securities Traders Association 80th Annual Market
Structure Conference (Oct. 2, 2013) (available at
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TABLE 2—TAPE A VOLUME AND VIX®
As overall trading volume and
volatility falls, the demand for the
liquidity continuously provided by
market makers’ [sic] falls, which leads
to thinner profit margins for market
makers. This impact can be
demonstrated, in part, by the significant
changes in the firms operating as DMMs
since the Exchange adopted the NMM
Pilot. In October 2008, the Exchange
had six firms operating as specialists:
Bank of America Corp. (‘‘BAC’’),
Barclays Capital, Inc. (‘‘Barclays’’), Bear
Wagner Specialists, LLC (‘‘Bear
Wagner’’), Goldman, Sachs and Co
(‘‘Goldman Sachs,’’ operating Spear,
Leads & Kellogg, LLC), Kellogg
Specialist Group (‘‘Kellogg), and
LaBranche & Company (‘‘Labranche’’).
Six years later, only one of those firms
still operates as a DMM, Barclays. Below
are key changes within the NYSE DMM
universe:
• In March 2009, Barclays acquired
Bear Wagner’s DMM business, with Bear
Wagner exiting the business.
• In January 2010, Barclays acquired
LaBranche’s DMM business, with
LaBranche exiting the business.
• In February 2010, Getco Securities,
LLC (‘‘Getco’’) became an NYSE DMM.
• In December 2010, Knight Capital
Group, Inc. (‘‘Knight’’) acquired
Kellogg’s NYSE and NYSE MKT DMM
business, with Kellogg exiting the
business.
• In November 2011, Getco acquired
BAC’s DMM business, with BAC exiting
the business.
• In December 2011, J. Streicher & Co,
an NYSE MKT DMM, became an NYSE
DMM.
• In April 2012, Virtu Financial
(‘‘Virtu’’) became a NYSE DMM (in
https://www.sec.gov/News/Speech/Detail/Speech/
1370539857459#.VNoXc_nF_AQ). The Commission
also noted the fragmentation of the equities markets
in its 2010 Concept Release on Equity Market
Structure. See Securities Exchange Act Release No.
61358, 75 FR 3594 (Jan. 21, 2010). See also, Staff
of the Division of Trading and Markets,
Commission, Equity Market Structure Literature
Review, Part I: Market Fragmentation, Oct. 7, 2013,
(available at: https://www.sec.gov/marketstructure/
research/fragmentation-lit-review-100713.pdf) and
Tuttle, Laura, Alternative Trading Systems:
Description of ATS Trading in National Market
System Stocks (available at https://www.sec.gov/
marketstructure/research/alternative-tradingsystems-march-2014.pdf.)
33 The market share percentages set forth in Table
1 are based on trades reported to the Consolidated
Tape Association and via Crossing Session II on the
Exchange pursuant to Rule 902(a)(iii).
CADV
2009
2010
2011
2012
2013
2014
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..................................
..................................
..................................
..................................
..................................
..................................
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5.68
4.87
4.37
3.66
3.40
3.39
Sfmt 4703
VIX®
31.5
22.6
24.3
17.8
14.2
14.2
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2011, Virtu entered the DMM business
by acquiring Cohen Capital Group, an
NYSE MKT DMM).
• In November 2012, Brendan Cryan
& Co, an NYSE MKT DMM, became an
NYSE DMM.
• In July 2013, Knight and Getco
merged to become KCG Americas.
• In August 2014, IMC Financial
Markets acquired Goldman’s DMM
business, with Goldman exiting the
business.
In this challenging environment, the
Exchange believes that the operation of
the NMM Pilot has helped the Exchange
better serve the needs of investors by
maintaining high market-quality
standards. Specifically, the NMM Pilot
allowed the Exchange’s former
specialists to compete in today’s fully
electronic trading environment,
continuing to provide contribute to
market quality. Moreover, while there
has been turnover in who comprises the
DMM community, the Exchange
believes that the operation of the NMM
Pilot has been instrumental in attracting
new entrants to the business as the
former specialists have exited.34
With respect to how DMMs operate,
the Exchange believes that the NMM
Pilot strikes the appropriate balance
between DMM benefits and obligations.
Importantly, while DMMs do not need
to yield to orders on the Book, under the
NMM Pilot, DMMs continue to be
subject to Exchange-specific affirmative
obligations to maintain a fair and
orderly market that are not imposed on
any other cash equity market
participant. These obligations include
maintaining a quote at the inside a
specified percentage of the day,35
supplying liquidity as needed to
facilitate openings and closings,36
maintaining price continuity with
reasonable depth in all of their
registered securities,37 and re-entering
the market if taking liquidity to increase
a trading position.38 Similarly, the SLP
Pilot has created a separate class of
liquidity providers at the Exchange,
with differing incentives, to supplement
the liquidity provided by the DMMs,
which further supports the Exchange’s
market quality.
The Exchange believes that by
operating under its NMM and SLP
Pilots, it offers a diverse and unique
population of market participants,
including DMMs, SLPs, Floor brokers,
and other off-Floor market participants,
that allow it to more effectively compete
for order flow, with superior market
quality. The Exchange believes that an
important market quality measure is
how much liquidity an exchange
provides. In today’s fragmented equity
model, the market quality of displayed
venues varies widely. The Exchange
believes, however, that it continues to
be a leader in liquidity providing among
registered exchanges, which is due to
the ongoing operation of the NMM and
SLP Pilots.
The chart below highlights six key
market-quality metrics that measure best
price and liquidity in Exchange-listed
securities. Best prices are measured by
assessing Exchange bid/ask spreads,
percentage of time at best prices, and
percentage time alone at the best prices.
Liquidity is measured by looking at
market share, most displayed shares at
the best prices, and percentage of time
at the best prices with the greatest
displayed size. As set forth in the table
below, the Exchange ranks first in each
of these metrics.
NYSE-LISTED SECURITIES (TAPE A)—DECEMBER 2014
All securities (equal weighted)
Market
share
(volume
weighted)
asabaliauskas on DSK5VPTVN1PROD with NOTICES
NYSE ...............................................................................
Nasdaq .............................................................................
NYSE Arca .......................................................................
BZX ..................................................................................
EDGX ...............................................................................
BYX ..................................................................................
Nasdaq BX .......................................................................
EDGA ...............................................................................
23.4
13.6
8.0
7.7
5.0
3.6
1.8
2.8
Average
quoted
spread
(time
weighted)
48.5
311.6
710.4
463.8
382.1
551.1
68.7
850.6
Displayed
shares at
NBBO
1071.9
451.6
409.6
294.3
326.6
107.7
59.2
94.9
The Exchange notes that DMMs and
SLPs have been important contributors
to the Exchange’s performance,
particularly at setting the NBBO. For
example, during September 2014,
DMMs and SLPs (including SLMMs)
accounted for over 38% of the liquidityproviding volume on the Exchange. In
addition, during 2014, DMMs have
averaged quoting at the inside almost
30% of the time and DMMs provided an
average of 14.6% of the Exchange’s size.
In 2014, 8.3% of DMM volume executed
was from quotes that improved the
NBBO at the time the quote was entered.
This represents an improvement since
2009, when only 2.7% of DMM volume
improved the NBBO.
The Exchange believes that key
changes to the NMM Pilot support the
continued operation of the pilot in the
ever-changing equities environment. For
example, as noted above, in 2009, the
Exchange amended Rule 104(a)(1) to
34 The Exchange notes that in 2008, it also
amended its rules governing the operation of
DMMs, in particular, Rule 98, to enable specialists,
and now DMMs, to better integrate their NYSE
market-making operations with market-making
activities on other markets. See Securities Exchange
Act Release No. 58328 (Aug. 7, 2008), 73 FR 48260
(Aug. 18, 2008) (SR–NYSE–2008–45) (Approval
Order); see also Securities Exchange Act Release
No. 72534 (July 3, 2014), 79 FR 39019 (July 9, 2014)
(SR–NYSE–2014–12) (Order approving
amendments to Rule 98 to adopt a principles-based
approach to prohibit the misuse of material nonpublic information).
35 See NYSE Rule 104(a)(1)(A).
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Frm 00119
Fmt 4703
Sfmt 4703
% Time at
NBBO
74.0
47.3
42.9
31.2
29.5
21.2
15.7
19.2
% Time
best price &
largest size
45.8
17.5
12.0
6.7
9.4
2.5
2.0
2.0
% Time
alone at
NBBO
19.6
4.2
3.0
1.5
3.1
0.6
0.2
0.3
increase the amount of time that a DMM
unit must maintain a bid and offer at the
inside from 10% to 15% for Less Active
Securities and from 5% to 10% for More
Active Securities.39 During the same
period, the Exchange also amended Rule
1000 to permit CCS to provide a partial
fill to an incoming order.40
After the DMM’s quoting requirement
was increased, DMM share of intraday
provide activity increased, from 18.82%
in July 2009, before the quoting change,
36 See
NYSE Rule 104(a)(2)–(3).
NYSE Rule 104(f)(ii).
38 See NYSE Rule 104(h).
39 See DMM quoting requirement filing, supra n.
14.
40 See CCS Partial Fill Approval Order, supra n.
18.
37 See
E:\FR\FM\17JNN1.SGM
17JNN1
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to 20.03% in September 2009. The
Exchange noted a concurrent decline in
DMM CCS volume during this same
time from 9.32% to 6.94% of DMM
activity. The Exchange believes that the
decrease in CCS activity was related to
a corresponding increase in the DMM
displayed quoting activity. During the
same period, the Exchange experienced
a drop in NYSE shares routed to away
markets from 7.8% in July 2009 to 7.1%
in September 2009, to 6.6 in October
2009. The Exchange believes that the
decline in shares routed away is
attributable in part to both to the
increased quoting requirement, because
DMMs represented the best quote in the
market more frequently, and the ability
for CCS to partially fill incoming orders,
thereby obviating the need to route such
orders to away markets. Accordingly,
the Exchange believes that these
changes to the NMM Pilot contributed
to the ongoing market quality at the
Exchange.
SLPs likewise represent a substantial
share of the Exchange’s intraday
liquidity-providing volume.
Participation in the SLP Pilot has grown
steadily since inception. When first
launched, only 497 symbols were
covered by an SLP. By the end of
September 2014, nearly every Exchange
symbol, including operating companies,
preferred stocks, warrants, rights and all
other issue types, had at least one SLP
quoting in it. In December 2014,
approximately 45% of these symbols
had at least one SLP quoting at the
inside at least 10% of the time.
Through December 2014, SLPs
represented 25.2% of liquidityproviding execution. The Exchange
notes that SLPs have been a solid
contributor to liquidity in less-active
issues, and now account for 13.3% of
the liquidity-providing volume in issues
outside of the Exchange’s 1,000 most
active issues.
The following chart shows both the
increase in number of symbols assigned
to SLPs during the course of the pilot,
and the number of SLP symbols in
which at least one SLP is at the NBB or
NBO at least 10% of the time. The first
two columns represent a count of all
SLP/symbol pairs where the average
time at the NBB or NBO (referred to in
the chart as NBBO) was 10%. For
example, if symbol XYZ were assigned
to three SLPs, of which two met the
10% NBBO quoting requirement, the
count for ‘‘Total’’ column would be
three, and the count for the ‘‘NBBO
>10%’’ column would be two. The right
two columns show the number of
distinct symbols that are covered by and
reached 10% NBBO by at least one SLP.
SLP SYMBOLS AND QUOTING
Total
asabaliauskas on DSK5VPTVN1PROD with NOTICES
Dec–08
Dec–09
Dec–10
Dec–11
Dec–12
Dec–13
Dec–14
.............................................................................................................
.............................................................................................................
.............................................................................................................
.............................................................................................................
.............................................................................................................
.............................................................................................................
.............................................................................................................
The Exchange notes that
notwithstanding the significant changes
the U.S. equities market has undergone
since 2008, the statistics the Exchange
committed to track in connection with
the NMM Pilot demonstrate that the
pilot rules have been effective at
improving the Exchange’s effective
spread on marketable orders, the
percentage of time that the DMMs quote
at the NBBO and the percentage of
DMM participation in total trading
volume. Specifically,
• Effective spreads on all marketable
orders, which ranged from 10 to 18.5
basis points from August to December
2008, have remained below 10 basis
points since September 2009 and ranged
from 6.7 to 8.2 basis points from
November 2013 to November 2014.
Effective spreads have declined for all
order size categories from 100–9999
shares.
• The percentage of time that DMMs
were quoting at the NBBO, which
ranged from 9.9% to 19% from August
to December 2008, have exceeded 20%
since that time and ranged from 31.3%
to 39.2% in the period from November
2013 to November 2014.
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18:47 Jun 16, 2015
Jkt 235001
501
4,328
6,509
6,599
7,971
10,352
8,572
For these reasons, the Exchange
believes that the Pilots’ rules, as
amended, should be made permanent.
The Exchange also proposes to delete
Rule 104T, which is the pre-NMM Pilot
version of Rule 104. Rule 104T remains
in the Exchange’s rule book, but is not
operational. With permanent approval
of current Rule 104, the need to retain
Rule 104T is mooted. The Exchange also
proposes to delete Supplementary
Material to Rule 104, and related
reference to that Supplementary
Material in Rule 104(a)(2), because that
rule text was intended to be in effect
only through October 30, 2009.41
Finally, the Exchange proposes to
replace the reference to ‘‘NYSE
Regulation’s Division of Market
Surveillance’’ in Rule 104(k) with a
reference to the Exchange. Pursuant to
Rule 0, references to the Exchange may
mean references to NYSE Regulation or
FINRA, which performs certain
regulatory services to the Exchange
pursuant to a Regulatory Services
Agreement.
41 See Securities Exchange Act Release No. 60573
(Aug. 26, 2009), 74 FR 45500 (Sept. 2, 2009) (SR–
NYSE–2009–86) (Notice of Filing).
PO 00000
Frm 00120
Fmt 4703
Sfmt 4703
NBBO>10%
Distinct
symbols
332
2,864
4,079
3,293
3,340
2,845
3,458
497
1,242
1,404
1,478
1,909
3,218
3,262
Distinct NBBO
>10%
335
1,199
1,302
1,019
1,377
1,125
1,481
The Exchange notes that the proposed
change is not otherwise intended to
address any other issues and the
Exchange is not aware of any problems
that member organizations would have
in complying with the proposed rule
change.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6(b) of the Act,42 in general, and
furthers the objectives of Section 6(b)(5)
of the Act,43 in particular, because it is
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities, to
remove impediments to, and perfect the
mechanisms of, a free and open market
and a national market system and, in
general, to protect investors and the
public interest and because it is not
designed to permit unfair
42 15
43 15
E:\FR\FM\17JNN1.SGM
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
17JNN1
asabaliauskas on DSK5VPTVN1PROD with NOTICES
34726
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discrimination between customers,
issuers, brokers, or dealers.
The Exchange believes the proposed
rule change is consistent with these
principles because it seeks to make
permanent Pilots and associated rule
changes that were previously approved
by the Commission as pilots, that the
Exchange has subsequently provided
data and analysis to the Commission,
and that this data and analysis, as well
as the further analysis in this filing,
clearly shows that the Pilots have
operated as intended and are consistent
with the Act.
The Exchange also believes the
proposed rule change is designed to
facilitate transactions in securities and
to remove impediments to, and perfect
the mechanisms of, a free and open
market and a national market system
because making the Pilots permanent
would provide market participants with
a trading venue that encourages the
addition of liquidity, facilitates the
trading of larger orders more efficiently,
and operates to reward aggressive
liquidity providers. The monthly
statistics provided by the Exchange to
the Commission staff over more than
five years demonstrate that the NMM
Pilot has improved market quality by
numerous measures. Similarly, the
Exchange believes the data show that
the SLP program has appropriately
rewarded aggressive liquidity providers
in the market. The Exchange believes
that making both of these Pilots
permanent would encourage the
additional utilization of, and interaction
with, the NYSE and provide customers
with the premier venue for price
discovery, liquidity, competitive quotes,
and price improvement.
In addition, the Exchange believes
that making the NMM and SLP Pilots
permanent would promote just and
equitable principles of trade and remove
impediments to and perfect the
mechanism of a free and open market
because the rules strike the appropriate
balance between the obligations and
benefits of the Exchange’s market
participants. For example, while DMMs
no longer have agency responsibilities
to the Book, they retain a number of
affirmative obligations that are unique
to the Exchange, including meeting
Exchange-only quoting requirements,
supplying liquidity as needed when
facilitating openings and closings, and
maintaining depth and continuity in
their listed securities. Given these
obligations, the Exchange believes it is
appropriate to classify DMMs as a
separate participant in the parity
allocation wheel. The Exchange notes
that it has been operating under this
model since 2009, and the above-cited
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18:47 Jun 16, 2015
Jkt 235001
market statistics demonstrate that
within the highly competitive cash
equities market, the Exchange’s model,
including DMM parity, has enabled the
Exchange to maintain execution quality
for all investors on the Exchange.
Finally, the Exchange believes that it
is subject to significant competitive
forces, as described below in the
Exchange’s statement regarding the
burden on competition. For these
reasons, the Exchange believes that the
proposal is consistent with the Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
In accordance with Section 6(b)(8) of
the Act,44 the Exchange believes that the
proposed rule change would not impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange believes that making the
Pilots permanent would continue to
foster competition among liquidity
providers and maintain execution
quality on the Exchange. The Exchange
believes that the data supplied to the
Commission and experience gained over
more than six years have demonstrated
the efficacy of the Pilots, and as such,
they should be made permanent.
Finally, the Exchange notes that it
operates in a highly competitive market
in which market participants can easily
direct their orders to competing venues,
including off-exchange venues. In such
an environment, the Exchange must
continually review, and consider
adjusting the services it offers and the
requirements it imposes to remain
competitive with other U.S. equity
exchanges. For the reasons described
above, the Exchange believes that the
proposed rule change reflects this
competitive environment.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register, or such longer period up to 90
days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
44 15
PO 00000
U.S.C. 78f(b)(8).
Frm 00121
Fmt 4703
Sfmt 4703
(A) By order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–NYSE–2015–26 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 20549–1090.
All submissions should refer to File
Number SR–NYSE–2015–26. 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 the
filing also will be available for
inspection and copying at the principal
offices of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–NYSE–
2015–26, and should be submitted on or
before July 8, 2015.
E:\FR\FM\17JNN1.SGM
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Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.45
Robert W. Errett,
Deputy Secretary.
7000. CLEARING, TRANSACTION AND
ORDER DATA REQUIREMENTS, AND
FACILITY CHARGES
*
*
*
*
*
[FR Doc. 2015–14827 Filed 6–16–15; 8:45 am]
7400. ORDER AUDIT TRAIL SYSTEM
BILLING CODE 8011–01–P
*
[Release No. 34–75160; File No. SR–FINRA–
2015–016]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change Relating to Exemptions
From the Order Audit Trail System
Recording and Reporting
Requirements
June 11, 2015.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 10,
2015, Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III below, which Items have been
prepared by FINRA. FINRA has
designated the proposed rule change as
constituting a ‘‘non-controversial’’ rule
change under paragraph (f)(6) of Rule
19b–4 under the Act,3 which renders
the proposal effective upon receipt of
this filing by the Commission. 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
asabaliauskas on DSK5VPTVN1PROD with NOTICES
*
*
*
7470. Exemption to the Order Recording
and Data Transmission Requirements
SECURITIES AND EXCHANGE
COMMISSION
FINRA is proposing to amend Rule
7470 to extend for four years FINRA’s
ability to exempt certain members from
the recording and reporting
requirements of the Order Audit Trail
System (‘‘OATS’’) Rules (‘‘OATS
Rules’’) for manual orders received by
the member.
Below is the text of the proposed rule
change. Proposed new language is in
italics; proposed deletions are in
brackets.
*
*
*
*
*
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 17 CFR 240.19b–4(f)(6).
*
(a) through (b) No Change.
(c) This Rule shall be in effect until
July 10, 2019[2015].
*
*
*
*
*
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The OATS Rules impose obligations
on FINRA members to record in
electronic form and report to FINRA on
a daily basis certain information with
respect to orders originated, received,
transmitted, modified, canceled, or
executed by members relating to OTC
equity securities and NMS stocks. OATS
captures this order information and
integrates it with quote and transaction
information to create a time-sequenced
record of orders, quotes, and
transactions. This information is then
used by FINRA staff to conduct
surveillance and investigations of
member firms for violations of FINRA
rules and federal securities laws and
regulations.
On September 28, 2005, the SEC
approved amendments to the OATS
Rules that, among other things, gave
FINRA the authority to grant exemptive
relief from the OATS reporting
requirements for manual orders.4 In
2006, FINRA’s exemptive authority was
expanded to include the authority to
exempt manual orders received by
members from the OATS recording
45 17
1 15
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18:47 Jun 16, 2015
4 See Securities Exchange Act Release No. 52521
(September 28, 2005), 70 FR 57909 (October 4,
2005).
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Frm 00122
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34727
requirements.5 Under Rule 7470, at a
minimum, members must meet the
following criteria to be eligible to
request an exemption from the OATS
recording and reporting requirements
for manual orders: (1) the member and
current control affiliates and associated
persons of the member have not been
subject within the last five years to any
final disciplinary action, and within the
last ten years to any disciplinary action
involving fraud; (2) the member has
annual revenues of less than $2 million;
(3) the member does not conduct any
market making activities in any security
subject to the OATS Rules; (4) the
member does not execute principal
transactions with its customers (with
limited exceptions for principal
transactions executed pursuant to error
corrections); and (5) the member does
not conduct clearing or carrying
activities for other firms.6 An exemption
granted by FINRA pursuant to Rule
7470 is for a maximum of two years;
however, a member that continues to
meet the criteria may request
subsequent exemptions at or prior to the
expiration of a grant of exemptive
relief.7
Rule 7470 also includes a sunset
provision. As initially adopted, the
exemptive provision expired as of July
10, 2011, which was five years from the
original effective date of the rule.8 In
2011, FINRA filed a proposed rule
change to extend the sunset provision
until July 10, 2015, noting that FINRA
adopted this exemptive authority so that
it would have the ability to grant relief
to members that meet certain criteria in
situations where, for example, the
reporting of order information would be
unduly burdensome for the member or
where temporary relief from the OATS
Rules, in the form of additional time to
achieve compliance, would permit the
members to avoid unnecessary expense
or hardship.9 FINRA noted that these
concerns continued to be present for
many firms and concluded it was
appropriate to allow firms that have
received an exemption from OATS to
continue to rely on their current
exemption (or request an additional
two-year exemption) until the scope and
5 See Securities Exchange Act Release No. 53580
(March 30, 2006), 71 FR 17529 (April 6, 2006). In
2006, the exemptive provision was also relocated
from NASD Rule 6955(d) to NASD Rule 6958. As
of December 15, 2008, NASD Rule 6958 was
renumbered as FINRA Rule 7470. See FINRA
Regulatory Notice 08–57 (October 2008).
6 See Rule 7470(a).
7 See Rule 7470(b).
8 See Securities Exchange Act Release No. 52521
(September 28, 2005), 70 FR 57909 (October 4,
2005).
9 See Securities Exchange Act Release No. 64717
(June 21, 2011), 76 FR 37384 (June 27, 2011).
E:\FR\FM\17JNN1.SGM
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]]>Agencies
[Federal Register Volume 80, Number 116 (Wednesday, June 17, 2015)]
[Notices]
[Pages 34717-34727]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-14827]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-75153; File No. SR-NYSE-2015-26]
Self-Regulatory Organizations; New York Stock Exchange, LLC;
Notice of Filing of Proposed Rule Change Making Permanent the Rules of
the New Market Model Pilot and the Supplemental Liquidity Providers
Pilot
June 11, 2015.
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 June 4, 2015, New York Stock Exchange LLC (``NYSE'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C.78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to make permanent the rules of the New Market
Model Pilot and the Supplemental Liquidity Providers Pilot. The text of
the proposed rule change is available on the Exchange's Web site at
www.nyse.com, at the principal office of the Exchange, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to make permanent the rules of New Market
Model Pilot (``NMM Pilot'') and the Supplemental Liquidity Providers
Pilot (``SLP Pilot,'' collectively ``Pilots''). The Pilots are
currently scheduled to expire upon the earlier of July 31, 2015 or
Securities and Exchange Commission (``SEC'' or ``Commission'') approval
to make the Pilots permanent.\4\
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\4\ See Securities Exchange Act Nos. 73919 (December 23, 2014),
79 FR 78930 (December 31, 2014) (SR-NYSE-2014-71) (``NMM Pilot
extension filing''); 73945 (December 24, 2014), 80 FR 58 (January 2,
2015) (SR-NYSE-2014-72) (``SLP Pilot extension filing'').
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Background
In October 2008, the NYSE implemented significant changes to its
market rules, execution technology, and the rights and obligations of
its market participants, all of which were designed to improve
execution quality on the Exchange. Certain of the enhanced market model
changes were implemented through the NMM Pilot.\5\ Specifically, and as
described in greater detail below, Rules 72, 104 and the provisions of
Rule 1000 relating to the Capital Commitment Schedule are the pilot
rules associated with the NMM Pilot.
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\5\ See Securities Exchange Act No. 58845 (October 24, 2008), 73
FR 64379 (October 29, 2008) (SR-NYSE-2008-46) (``NMM Pilot Approval
Order'').
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As part of the NMM Pilot, NYSE eliminated the function of
specialists on the Exchange and created a new category of market
participant, the Designated Market Maker (``DMM'').\6\ DMMs, like
specialists, have affirmative obligations to make an orderly market,
including continuous quoting requirements and obligations to re-enter
the market when reaching across to execute against trading interest.
Unlike specialists, DMMs have a minimum quoting requirement \7\ in
their assigned securities and no longer have negative obligations. DMMs
are also no longer agents for public customer orders.\8\ DMM
obligations under the NMM Pilot are set forth in Rule 104.
---------------------------------------------------------------------------
\6\ See Rule 103.
\7\ See Rule 104.
\8\ See Rule 60; see also Rules 104 and 1000.
---------------------------------------------------------------------------
In addition, the Exchange implemented a system change that allowed
a DMM to create a schedule of additional non-displayed liquidity at
various price points where the DMM is willing to interact with interest
and provide price improvement to orders in the Exchange's system. This
schedule is known as the DMM Capital Commitment Schedule (``CCS'') and
is set forth in Rule 1000. CCS provides the Exchange systems, formerly
referred to as the ``Display Book[reg]'' \9\ with the amount of shares
that the DMM is willing to trade at price points outside,
[[Page 34718]]
at, and inside the Exchange Best Bid or Best Offer (``BBO''). CCS
interest is separate and distinct from other DMM interest in that it is
generally interest of last resort.
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\9\ The Exchange's Display Book system is an order management
and execution facility. The Display Book system receives and
displays orders to the DMMs, contains the order information, and
provides a mechanism to execute and report transactions and publish
the results to the Consolidated Tape. The Display Book system is
connected to a number of other Exchange systems for the purposes of
comparison, surveillance, and reporting information to customers and
other market data and national market systems. Because the Exchange
has retired the actual system referred to as the ``Display Book,''
but not the functionality associated with the Display Book, the
Exchange proposes to replace all references to the term ``Display
Book'' in Rules 104 and 1000 with references either to the term (i)
``Exchange systems'' when use of the term refers to the Exchange
systems that receive and execute orders, or (ii) ``Exchange book''
when use of the term refers to the interest that has been entered
and ranked in Exchange systems.
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The NMM Pilot further modified the priority of trading interest,
set forth in Rule 72, which rewards displayed orders that establish the
BBO by giving such orders priority in execution against incoming
orders. During the operation of the NMM Pilot, an order or portion
thereof that establishes priority, retains that priority until such
order or portion of such order is exhausted. Where no one order has
established priority, shares are distributed among all market
participants on parity.
In addition, the NMM Pilot modified how orders are allocated among
market participants. Before the NMM Pilot, the Exchange operated on a
parity allocation model whereby executed orders were allocated on
parity among market participants, which included each Floor broker and
the orders collectively represented in Exchange systems. Because
specialists on the Exchange had both agency obligations to public
customer orders and negative obligations, their executions yielded to
public customer orders. Under the NMM Pilot, because DMMs do not have
either agency obligations or negative obligations, DMMs are an
individual market participant eligible for allocation under the
Exchange's parity allocation. Accordingly, for purposes of share
allocation in an execution, Rule 72(c)(ii) provides that each Floor
broker, the DMM, and orders collectively represented in Exchange
systems (i.e., ``Book Participant'') \10\ constitute individual
participants for purposes of parity allocation of executed orders.
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\10\ The orders represented in the Book Participant in aggregate
constitute a single participant.
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In connection with the DMM Pilot, the NYSE established the SLP
Pilot, which established SLPs as a new class of market participants to
supplement the liquidity provided by DMMs.\11\ Rule 107B governs the
SLP Pilot.
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\11\ See Securities Exchange Act No. 58877 (October 29, 2008),
73 FR 65904 (November 5, 2008) (SR-NYSE-2008-108) (Notice of
Filing'' [sic]).
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The Pilots were originally scheduled to end on October 1, 2009, or
such earlier time as the Commission determined to make the Pilots'
rules permanent. The Exchange filed to extend the operation of the
Pilots on several occasions in order to prepare this rule filing.\12\
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\12\ See NMM pilot extension filing and SLP pilot extension
filing, supra n. 3 [sic].
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Description of Pilot Rules That Would Become Permanent
Rule 104
Current Rule 104, as amended since 2008, sets forth DMM
obligations. Under Rule 104(a), DMMs registered in one or more
securities traded on the Exchange are required to engage in a course of
dealings for their own account to assist in the maintenance of a fair
and orderly market insofar as reasonably practicable. The
responsibilities and duties of a DMM include:
Assisting the Exchange by providing liquidity as needed to
provide a reasonable quotation and by maintaining continuous two-sided
quotes with a displayed size of at least one round lot that meets
certain metrics as set forth in the rule;
Facilitating openings and re-openings in assigned
securities, which may include supplying liquidity as needed; and
Facilitating the close of trading for assigned securities,
which may include supplying liquidity as needed.\13\
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\13\ In 2015, the Exchange eliminated liquidity replenishment
points (``LRP'') and the ``gap'' quote procedures and amended Rule
104(a) to eliminate the former DMM obligations to facilitate trading
when an LRP was reached or the gap quote procedure was being used.
See Securities Exchange Act Release No. 74063 (Jan. 15, 2015), 80 FR
3269 (Jan. 22, 2015) (Notice of Filing).
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The Rule 104(a)(1) quoting requirements applicable to DMMs are two-
fold. First, with respect to maintaining a continuous two-sided quote
with reasonable size, DMM units must maintain a bid or an offer at the
National Best Bid (``NBB'') and National Best Offer (``NBO'')
(collectively, ``inside'') at least 15% of the trading day for
securities in which the DMM unit is registered with a consolidated
average daily volume (``CADV'') of less than one million shares (``Less
Active Securities''), and at least 10% for securities in which the DMM
is registered with a CADV equal to or greater than one million shares
(``More Active Securities'').\14\ These DMM quoting obligations set
forth in Rule 104(a)(1)(A) are unique to the Exchange. Second, DMM
units are subject to the two-sided quoting obligations set forth in
Rule 104(a)(1)(B), which are the pricing obligations applicable to all
equity market makers market-wide to maintain a bid and offer a
designated percentage away from the NBB and NBO at all times.\15\
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\14\ In 2009, the Exchange amended Rule 104(a)(1) to increase
the amount of time that a DMM unit must maintain a bid and offer at
the inside from 10% to 15% for Less Active Securities and from 5% to
10% for More Active Securities. See Securities Exchange Act Release
No. 60595 (August 31, 2009), 74 FR 46261 (September 8, 2009) (SR-
NYSE-2009-91) (Notice of Filing) (``DMM quoting requirement
filing''). In 2011, the Exchange amended Rule 104(a)(1) to specify
that the quoting percentage would be based on the consolidated
average daily volume of a security, rather than the average daily
volume of the security on the Exchange. See Securities Exchange Act
Release No. 65865 (December 2, 2011), 76 FR 76799 (December 8, 2011)
(SR-NYSE-2011-58) (Notice of Filing).
\15\ See Securities Exchange Act Release No. 63255 (November 5,
2010), 75 FR 69484 (November 12, 2010) (SR-NYSE-2010-69) (Notice of
Filing).
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Under Rule 104(b), DMM units are permitted to use algorithms for
quoting and trading consistent with NYSE and SEC rules. Exchange
systems enforce the proper sequencing of incoming orders and
algorithmically-generated messages. Except as provided for in the rule,
the DMM unit's system employing algorithms has access to information
with respect to orders entered on the Exchange, Floor Broker agency
interest files or reserve interest, to the extent such information is
publicly available. DMM unit algorithms receive the same information
with respect to orders entered on the Exchange, Floor Broker agency
interest files or reserve interest as is disseminated to the public by
the Exchange and receive such information no sooner than it is
available to other market participants.\16\ A DMM unit's algorithm may
submit trading interest via CCS interest in accordance with Rule 1000.
---------------------------------------------------------------------------
\16\ In 2013, the Exchange amended Rules 104 and 123C to specify
that closings may be effectuated manually or electronically. See
Securities Exchange Act Release No. 71086 (December 16, 2013), 78 FR
77186 (December 20, 2013) (SR-NYSE-2013-79) (Notice of Filing). As
part of that filing, the Exchange amended Rules 104(a)(3) and 104(b)
to provide that the DMM algorithm would have access to aggregate
order information relating to Reserve Interest eligible to
participate in a manual execution.
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Under Rule 104(c), a DMM unit may maintain reserve interest
consistent with Exchange rules governing Reserve Orders. Such reserve
interest is eligible for execution in manual transactions.
Under Rule 104(d), a DMM unit may provide algorithmically generated
price improvement to all or part of an incoming order that can be
executed at or within the BBO through the use of CCS interest. Any
orders eligible for execution in the Exchange's book at the price of
the DMM unit's interest trade on parity with such interest, as does any
displayed interest representing a d-Quote enabling such interest to
trade at the same price as the DMM unit's interest.
Under Rule 104(e), DMM units must provide contra-side liquidity as
needed for the execution of odd-lot quantities that are eligible to be
executed as part of the opening, re-opening, and closing transactions
but remain unpaired after
[[Page 34719]]
the DMM has paired all other eligible round lot sized interest.
Rule 104(f) sets forth the functions of DMMs. First, any member who
expects to act as a DMM in any listed stock must be registered as a DMM
in accordance with Rule 103. Second, a DMM must maintain, insofar as
reasonably practicable, a fair and orderly market on the Exchange in
the stocks in which he or she is so acting. Third, the Exchange
supplies DMMs with suggested Depth Guidelines for each security in
which a DMM is registered, and DMMs are expected to quote and trade
with reference to the Depth Guidelines. Finally, DMMs are designated as
market makers on the Exchange for all purposes under the Act and the
rules and regulations thereunder.
Rule 104(g) governs transactions by DMMs. Transactions on the
Exchange by a DMM for the DMM's account must be effected in a
reasonable and orderly manner in relation to the condition of the
general market and the market in the particular stock. Rule 104(g)
describes certain permitted transactions, including neutral
transactions and non-conditional transactions, but prohibits certain
other transactions. Specifically, except as otherwise permitted by Rule
104, during the last ten minutes prior to the close of trading, a DMM
with a long (short) position in a security is prohibited from making a
purchase (sale) in such security that results in a new high (low) price
on the Exchange for the day at the time of the DMM's transaction.
Rule 104(h) addresses DMM transactions in securities that establish
or increase the DMM's position. A ``Conditional Transaction'' is a
DMM's transaction in a security that establishes or increases a
position and reaches across the market to trade as the contra-side to
the Exchange-published bid or offer. Certain Conditional Transactions
may be made by a DMM without restriction as to price if they are
followed by appropriate re-entry on the opposite side of the market
commensurate with the size of the DMM's transaction. The Exchange
issues guidelines, called price participation points (``PPP''), that
identify the price at or before which a DMM is expected to re-enter the
market after effecting a Conditional Transaction. Immediate re-entry is
required after certain Conditional Transactions. However, certain other
Conditional Transactions may be made without restriction as to price
and Rule 104(i) provides that the re-entry obligations following such
Conditional Transactions would be the same as the re-entry obligations
for non-conditional transactions,'' as set forth in Rule 104(g).
Rule 104(j), which was added in 2013,\17\ permits a DMM to perform
the following Trading Floor functions:
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\17\ See Securities Exchange Act Release No. 71175 (December 23,
2013), 78 FR 79534 (December 30, 2013) (SR-NYSE-2013-21) (Order
approving adoption of Rule 104(j)).
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Maintain order among Floor brokers manually trading at the
DMM's assigned panel;
Bring Floor brokers together to facilitate trading, which
may include the DMM as a buyer or seller;
Assist a Floor broker with respect to an order by
providing information regarding the status of a Floor broker's orders,
helping to resolve errors or questioned trades, adjusting errors, and
cancelling or inputting Floor broker agency interest on behalf of a
Floor broker; and
Research the status of orders or questioned trades on his
or her own initiative or at the request of the Exchange or a Floor
broker when a Floor broker's handheld device is not operational, when
there is activity indicating that a potentially erroneous order was
entered or a potentially erroneous trade was executed, or when there
otherwise is an indication that improper activity may be occurring.
The rule also permits the Exchange to make systems available to a
DMM at the post that display the following information about securities
in which the DMM is registered: (A) Aggregated buying and selling
interest; (B) the price and size of any individual order or Floor
broker agency interest file and the entering and clearing firm
information for such order, except that the display excludes any order
or portion thereof that a market participant has elected not to display
to a DMM; and (C) post-trade information. A DMM may not use any such
information in a manner that would violate Exchange rules or federal
securities laws or regulations. The DMM may provide market information
that is available to the DMM at the post to (i) respond to an inquiry
from a Floor broker in the normal course of business or (ii) visitors
to the Trading Floor for the purpose of demonstrating methods of
trading. However, a Floor broker may not submit an inquiry pursuant to
this provision by electronic means and the DMM may not use electronic
means to transmit market information to a Floor broker in response to a
Floor broker's inquiry pursuant to this provision.
Rule 104(k) provides that in the event of an emergency, such as the
absence of the DMM, or when the volume of business in the particular
stock or stocks is so great that it cannot be handled by the DMMs
without assistance, a Floor Governor may authorize a member of the
Exchange who is not registered as a DMM in such stock to act as
temporary DMM for that day only.
Rule 1000
The provisions of current Rule 1000 relating to CCS, as amended
since 2008, and which are operating as part of the NMM Pilot, are set
forth sections (d)-(g) of Rule 1000.
Rule 1000(d) provides that for each security in which it is
registered, a DMM unit may place within Exchange systems a pool of
liquidity to be available to fill or partially fill \18\ incoming
orders in automatic executions, which is CCS. CCS is designed to be a
DMM unit's commitment to trade a specified number of shares at
specified price points in reaction to incoming contra-side interest. As
noted above, CCS interest is used to trade at the BBO, at prices better
than the BBO, and at prices outside the BBO. CCS interest supplements
displayed and non-displayed interest of the DMM in Exchange systems.
CCS interest must be for a minimum of one round lot of a security and
entered at price points that are at, inside, or away from the BBO.
---------------------------------------------------------------------------
\18\ The original NMM Pilot permitted CCS to participate only if
it would fill an incoming order. In 2009, the Exchange amended Rule
1000 to provide that Exchange systems would access CCS interest to
participate in executions when the incoming order would only be
partially executed. See Securities Exchange Act Release No. 60671
(September 15, 2009), 74 FR 48327 (September 22, 2009) (SR-NYSE-
2009-71) (``CCS Partial Fill Approval Order'').
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Rule 1000(e) governs executions at and outside the BBO, and
specifies how CCS interest would interact with such executions. For
executions at the BBO, CCS interest would yield to all other interest
at that price point. For executions outside the BBO, i.e., sweeps, Rule
1000(e)(iii) specifies how CCS interest could participate to provide
price improvement to the residual of an order that sweeps. As provided
for in the rule, if an order is not executed at full at the Exchange
BBO, Exchange systems will calculate the unfilled volume of the contra-
side order and review the additional displayed and non-displayed
interest, including CCS interest and protected quotes on away markets,
to determine the price at which the remaining volume of the contra-side
order can be executed in full (the ``completion price''). Exchange
systems will evaluate the price at which the maximum volume of CCS
interest exists to trade, and execute the incoming order one
[[Page 34720]]
minimum price variation (as the term is defined in Rule 62) better than
that price, which is how CCS provides price improvement. If an order
cannot be executed in full because of the order's limit price, or
because of an immediate-or-cancel time-in-force, CCS interest is
available to partially fill the incoming order.
Rule 1000(f) specifies how CCS interest may provide price
improvement inside the BBO with interest arriving in the Exchange
market that:
Will be eligible to trade at or through the BBO;
Will be eligible to trade at the price of interest in
Exchange systems representing non-displayable reserve interest of
Reserve Orders and Floor broker agency interest files reserve interest
(``hidden interest'') or MPL Orders; or
Will be eligible to route to away market interest for
execution if [sic] the total volume of CCS interest, plus d-Quote
interest in Floor broker agency interest files, plus any interest
represented by hidden interest, would be sufficient to fully complete
the arriving interest at a price inside the BBO. In such an instance,
the Exchange systems determine the price point inside the BBO at which
the maximum volume of CCS interest trades, taking into account the
volume, if any, available from d-Quotes and hidden interest. The
arriving interest is executed at that price, with all interest (CCS, d-
Quote, hidden interest) trading on parity.
Under Rule 1000(g), CCS interest may trade with non-marketable \19\
interest where such non-marketable interest betters the BBO (or cancels
in the case of an arriving IOC order) if the incoming interest may be
executed in full by all interest available in the Exchange's book,
including CCS interest and d-quotes. Such trade takes place at the
limit price of the arriving non-marketable interest. All interest
trading with the incoming interest trades on parity.
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\19\ ``Non-marketable'' means trading interest (i.e.,
displayable and non-displayable) that is at a price higher than the
current Exchange bid (but below the current Exchange offer) or lower
than the current Exchange offer (but above the current Exchange
bid), including better bids and offers on other market centers. See
Rule 1000(g)(1).
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Rule 72
The priority of bids and offers and allocation of executions is
governed by Rule 72, as amended since 2008. Under Rule 72(a), when a
bid or offer, including pegging interest,\20\ is established as the
only displayable \21\ bid or offer made at a particular price and such
bid or offer is the only displayable interest when such price is or
becomes the BBO (the ``setting interest''), such setting interest is
entitled to priority for allocation of executions at that price as
described in the rule, subject to the provisions below:
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\20\ In 2012, the Exchange amended Rule 72(a) to specify that
pegging interest may be considered setting interest. See Securities
Exchange Act Release No. 68302 (November 27, 2012), 77 FR 71658
(December 3, 2012) (SR-NYSE-2012-65) (Notice of Filing) (``Pegging
filing'').
\21\ As used in this rule, the term ``displayable'' means that
portion of interest that could be published as, or as part of, the
BBO, including pegging interest. Displayable odd-lot orders are
published as part of the BBO if, when aggregated with other interest
available for execution at that price point, the sum of the odd-lot
order and other interest available at that price point would be
equal to or greater than a round lot. The term ``displayed
interest'' includes that part of an order that is published as, or
as part of, the BBO, which may include one or more odd-lot orders.
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(A) Odd-lot orders, including aggregated odd-lot orders that are
displayable, are not eligible to be setting interest.\22\
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\22\ In 2010, the Exchange amended its rules, including Rule 72,
to incorporate the receipt and execution of odd-lot interest in the
round-lot market and decommission the former Odd Lot System. See
Securities Exchange Act Release No. 62578 (July 27, 2010), 75 FR
45185 (August 2, 2010) (SR-NYSE-2010-43 and SR-NYSEAmex-2010-53)
(``Odd-lot Approval Order'').
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(B) If at the time displayable interest of a round lot or greater
becomes the BBO, there is other displayable interest of a round lot or
greater, including aggregated odd-lot orders that are equal to or
greater than a round lot, at the price that becomes the BBO, no
interest is considered to be a setting interest, and, therefore, there
is no priority established.
(C) If at the time displayable interest of a round lot or greater
becomes the BBO, there is other displayable interest, the sum of which
is less than a round lot, at the price that becomes the BBO, the
displayable interest of a round lot or greater is considered the only
displayable bid or offer at that price point and is therefore
established as the setting interest.
(D) If executions decrement the setting interest to an odd-lot
size, a round lot or partial round lot order that joins such remaining
odd-lot size order is not eligible to be the setting interest.
(E) If as a result of cancellation, interest is or becomes the
single displayable interest of a round lot or greater at the BBO, it
becomes the setting interest.
(F) Only the portion of setting interest that is or has been
published in the BBO is entitled to priority allocation of an
execution. That portion of setting interest that is designated as
reserve interest and therefore not displayed at the BBO (or not
displayable if it becomes the BBO) is not eligible for priority
allocation of an execution irrespective of the price of such reserve
interest or the time it is accepted into Exchange systems. However, if,
following an execution of part or all of setting interest, such setting
interest is replenished from any reserve interest, the replenished
volume of such setting interest is entitled to priority if the setting
interest is still the only interest at the BBO.
(G) If non-pegging interest becomes the BBO, it is considered the
setting interest even if pegging interest is pegging to such non-
pegging interest, and it retains its priority even if subsequently
joined at that price by a pegging interest.
Under Rule 72(b), once priority is established by the setting
interest, such setting interest retains that priority for any execution
at that price when that price is at the BBO. If executions decrement
the setting interest to an odd-lot size, such remaining portion of the
setting interest retains its priority for any execution at that price
when that price is the BBO. For any execution of setting interest that
occurs when the price of the setting interest is not the BBO, the
setting interest does not have priority and is executed on parity.
Priority of setting interest is not retained after the close of
trading on the Exchange or following the resumption of trading in a
security after a trading halt in such security has been invoked
pursuant to Rule 123D or following the resumption of trading after a
trading halt invoked pursuant to the provisions of Rule 80B. Priority
of the setting interest is not retained on any portion of the priority
interest that is routed to an away market and is returned unexecuted
unless such priority interest is greater than a round lot and the only
other interest at the price point is odd-lot orders, the sum of which
is less than a round lot.
Under Rule 72(c), executions are allocated as follows. An
automatically executing order trades first with the displayed bid
(offer) and, if there is insufficient displayed volume to fill the
order, trades next with reserve interest. All reserve interest trades
on parity. For the purpose of share allocation in an execution, each
single Floor broker, the DMM and orders collectively represented in
Exchange systems (referred to as ``Book Participant'') constitute
individual participants. The orders represented in the Book Participant
in aggregate constitute a single participant and are allocated
[[Page 34721]]
shares among such orders by means of time priority with respect to
entry.
In any execution at the BBO, a participant who is the setting
interest receives 15% of the volume of such executed amount or a
minimum of one round lot, whichever is greater, until such setting
interest has received a complete execution of its eligible priority
interest. Setting interest that is decremented to an odd-lot size
receives 15% of the volume of such incoming interest rounded up to the
size of the setting interest, or the size of the incoming interest,
whichever is less. Following the allocation of an execution to setting
interest as provided above, the remainder of the executed volume is
allocated to each participant on parity. The participant with the
priority interest (the setting interest) is included in such parity
allocation. If there is no setting interest for an execution at the
BBO, allocation of the executed volume is on parity by participant
except as otherwise set forth in the rule. When an execution occurs at
the BBO, interest that is displayed in the BBO is allocated before any
interest that is not displayed. In allocating an execution that
involves setting interest, whether such execution takes place at the
BBO or otherwise, the volume allocated to the setting interest is
allocated to the interest in the setting interest that is entitled to
priority first.
Shares are allocated in round lots or the size of the order if less
than a round lot. If the number of shares to be executed at a price
point is insufficient to allocate round lots to all the participants
eligible to receive an execution at that price point, or the size of
the order if less than a round lot, Exchange systems create an
allocation wheel of the eligible participants at that price point and
the available round lot shares are distributed to the participants in
turn. If an odd-lot sized portion of the incoming order remains after
allocating all eligible round lots, the remaining shares are allocated
to the next eligible participant in less than a round lot. On each
trading day, the allocation wheel for each security is set to begin
with the participant whose interest is entered or retained first on a
time basis. Thereafter, participants are added to the wheel as their
interest joins existing interest at a particular price point. If a
participant cancels interest and then rejoins, that participant joins
as the last position on the wheel at that time. If an odd-lot
allocation completely fills the interest of a participant, the wheel
moves to the next participant. The allocation wheel also moves to the
next participant where Exchange systems execute remaining displayable
odd-lot interest prior to replenishing the displayable quantity of a
participant.
When an execution occurs outside the BBO, the interest that is
displayable is allocated before any interest that is non-displayable
(i.e., reserve interest). All interest that is displayable is on parity
among individual participants' displayable interest. All interest that
is non-displayable is on parity among individual participants' non-
displayable interest. Incoming orders eligible for execution at price
points between the BBO trade with all available interest at the price.
All NYSE interest available to participate in the execution (e.g., d-
quotes, s-quotes, Reserve Orders, and CCS interest) trade on parity.
DMM interest added intra-day to participate in a verbal transaction
with a Floor broker or during a slow quote is allocated shares only
after all other interest eligible for execution at the price point is
executed in full. DMM interest added at the time of the slow quote or
when verbally trading with a Floor broker not executed during the
transaction is cancelled.\23\ However, s-Quotes, if any, representing
DMM interest present at the price point prior to the verbal transaction
with a Floor broker or during a slow quote receive an allocation on
parity as described above. An order that is modified to reduce the size
of the order retains the time stamp of original order entry. An order
modified in any other way, such as increasing the size or changing the
price of the order, receives a new time stamp.\24\
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\23\ When the Exchange adopted the NMM Pilot in 2008, all DMM
interest was on parity. In 2009, the Exchange amended Rule 72 to add
new subsection (c)(xi) to the rule to remove parity for DMM interest
that verbal transactions with a Floor broker or during a slow quote.
See Securities Exchange Act Release No. 60287 (July 10, 2009), 74 FR
34817 (July 17, 2009) (SR-NYSE-2009-69) (Notice of Filing).
\24\ See Pegging Filing, supra n. 18 [sic] (amending Rule 72(c)
to specify how order modifications impact the time stamp of an
order).
---------------------------------------------------------------------------
Under Rule 72(d), when a member has an order to buy and an order to
sell an equivalent amount of the same security, and both orders are
``block'' orders (i.e., at least 10,000 shares or a quantity of stock
having a market value of $200,000 or more, whichever is less) and are
not for the account of such member or member organization, an account
of an associated person, or an account with respect to which the
member, member organization, or associated person thereof exercises
investment discretion, then the member may ``cross'' those orders at a
price at or within the BBO.\25\ The member's bid or offer is entitled
to priority at such cross price, irrespective of pre-existing displayed
bids or offers on the Exchange at that price. The member must follow
the crossing procedures of Rule 76, and another member may trade with
either the bid or offer side of the cross transaction only to provide a
price which is better than the cross price as to all or part of such
bid or offer. A member who is providing a better price to one side of
the cross transaction must trade with all other displayed market
interest on the Exchange at that price before trading with any part of
the cross transaction. Following a transaction at the improved price,
the member with the agency cross transaction must follow the crossing
procedures of Rule 76 and complete the balance of the cross. No member
may break up the proposed cross transaction, in whole or in part, at
the cross price. No DMM may effect a proprietary transaction to provide
price improvement to one side or the other of a cross transaction
effected pursuant Rule 72(d). A transaction effected at the cross price
in reliance on this provision is printed as ``stopped stock.'' When a
member effects a transaction under this provision, the member must, as
soon as practicable after the trade is completed, complete
documentation of the trade as the Exchange requires.
---------------------------------------------------------------------------
\25\ In 2011, the Exchange amended Rule 72(d) regarding agency
cross transactions to (i) change the minimum size of a block order
under the rule from 25,000 to 10,000 shares or a quantity of stock
having a market value of $200,000 or more, whichever is less, and
(ii) conform Rule 72(d) to Rule 90 to permit a Floor broker to
represent a Rule 72(d) crossing transaction on behalf of an
unaffiliated member or member organization. See Securities Exchange
Act Release No. 64334 (April 25, 2011), 76 FR 24078 (April 29, 2011)
(SR-NYSE-2011-18) (Notice of Filing).
---------------------------------------------------------------------------
Rule 107B
Rule 107B, as amended, governs the SLP Pilot. Under current Rule
107B(a), an SLP is defined as a member organization that electronically
enters proprietary orders or quotes from off the Floor of the Exchange
into the systems and facilities of the Exchange and is obligated to
maintain a bid or an offer at the National Best Bid (``NBB'') or the
National Best Offer (``NBO'') in each assigned security in round lots
averaging at least 10% of the trading day and for all assigned SLP
securities \26\ and to add liquidity of an ADV of more than a specified
percentage of
[[Page 34722]]
consolidated average daily volume (``CADV'') in all NYSE-listed
securities, as set forth in the Exchange's Price List, on a monthly
basis.\27\ An SLP can be either a proprietary trading unit of a member
organization (``SLP-Prop'') or a registered market maker at the
Exchange (``SLMM'').\28\
---------------------------------------------------------------------------
\26\ The SLP Pilot originally required an SLP to maintain a bid
and/or offer at the NBB or NBO averaging at least 5% of the trading
day. Effective September 25, 2010, the Exchange increased this
quoting requirement to require SLPs to maintain a bid and/or offer
at the NBB or NBO at least 10% of the trading day. See Securities
Exchange Act Release No. 62791 (August 30, 2010) 75 FR 54411
(September 7, 2010) (SR-NYSE-2010-60) (Notice of Filing) (``SLP 2010
Filing'').
\27\ In the SLP 2010 Filing, the Exchange introduced a monthly
volume requirement for SLPs of an average daily volume (``ADV'') of
more than 10 million shares. See SLP 2010 Filing, supra n. 26.
Effective September 1, 2012, the Exchange amended the monthly volume
requirement to require instead that SLPs meet an ADV that is a
specified percentage of the NYSE CADV and amended the Exchange's
Price List to specify the applicable percentage of NYSE CADV for the
monthly volume requirement. See Securities Exchange Act Release No.
67759 (August 30, 2012), 77 FR 54939 (September 6, 2012) (SR-NYSE-
2012-38) (Notice of Filing).
\28\ The SLP Pilot was originally available only for a
proprietary trading unit of a member organization. In 2012, the
Exchange amended Rule 107B to add a class of SLPs that are
registered as market makers on the Exchange and subject to the
market-wide equity market maker quoting obligations. See Securities
Exchange Act Release No. 67154 (June 7, 2012), 77 FR 35455 (June 13,
2012) (SR-NYSE-2012-10) (Approval Order).
---------------------------------------------------------------------------
Under Rule 107B(b), when an SLP posts liquidity on the Exchange and
such liquidity is executed against an inbound order, the SLP receives a
financial rebate for that executed transaction as set forth in the
Exchange's Price List, subject to the non-regulatory penalty provision
described in Rule 107B(k).\29\ The SLP receives credit toward the
financial rebate for executions of displayed and non-displayed
liquidity (e.g., reserve and dark orders) posted in round lots in its
assigned securities only.
---------------------------------------------------------------------------
\29\ In the SLP 2010 Filing, the Exchange modified the non-
regulatory penalties to align them to the changes in the quoting and
volume requirements for SLPs. See SLP 2010 Filing, supra no. 26. The
Exchange proposes a non-substantive amendment to Rule 107B(b) to
correct the cross-reference in the Rule from subparagraph (j) to
subparagraph (k).
---------------------------------------------------------------------------
Under Rule 107B(c), to qualify as an SLP-Prop, a member
organization must have:
(1) Adequate technology to support electronic trading through the
systems and facilities of the Exchange;
(2) mnemonics that identify to the Exchange SLP-Prop trading
activity in assigned SLP securities;
(3) adequate trading infrastructure and staff to support SLP
trading activity;
(4) quoting and volume performance that demonstrates an ability to
meet the 10% average quoting requirement in each assigned security and
the ADV requirement of more than a specified percentage of CADV in all
NYSE-listed securities for all assigned SLP securities on a monthly
basis;
(5) a disciplinary history that is consistent with just and
equitable business practices; and
(6) the business unit of the member organization acting as an SLP-
Prop must have in place adequate information barriers between the SLP-
Prop unit and the member organization's customer, research, and
investment banking business.
A member organization may register as an SLMM in one or more
securities traded on the Exchange in order to assist in the maintenance
of a fair and orderly market insofar as reasonably practicable. To
qualify as an SLMM, a member organization must meet the all of the
requirements for an SLP-Prop set forth above, except item (2) relating
to mnemonics. If approved as an SLMM, the member organization must (i)
maintain continuous, two-sided trading interest in assigned securities
(``Two-Sided Obligation'') and meet certain pricing obligations as set
forth in the rule; (ii) maintain minimum net capital in accordance with
SEC Rule 15c3-1; and (iii) maintain unique mnemonics specifically
dedicated to SLMM activity, which may not be used for trading in
securities other than SLP securities assigned to the SLMM.
Rule 107B(e) sets forth the application process for SLPs. If an
applicant is disapproved or disqualified, such applicant may request an
appeal of such disapproval or disqualification by the SLP Panel as
provided in the rule and/or reapply for SLP status three months after
the month in which the applicant received the disapproval or
disqualification notice. Rule 107B(f) describes how an SLP may
voluntarily withdraw from such status.
Rule 107B(g) and (h) set forth the calculations for determining
whether an SLP is meeting its 10% quoting requirement and monthly
volume requirement. An SLP may post non-displayed liquidity; however,
such liquidity is not counted as credit toward the 10% quoting
requirement. In addition, tick sensitive orders (i.e., ``Sell Plus'',
``Buy Minus'' and ``Buy Minus Zero Plus'') do not count as credit
toward the 10% quoting requirement.
Rule 107B(i) governs the assignment of securities to SLPs. Rule
107B(j) provides that SLPs may only enter orders electronically from
off the Floor of the Exchange and may only enter such orders directly
into Exchange systems and facilities designated for this purpose. SLMM
quotes and orders may be for the account of the SLMM in either a
proprietary or principal capacity on behalf of affiliated or
unaffiliated persons and SLP-Prop orders must only be for the
proprietary account of the SLP-Prop member organization. Rule 107B(k)
sets forth non-regulatory penalties that apply if an SLP fails to meet
its quoting requirements and sets forth procedures for reapplication.
Rule 107B(l) sets forth provisions for appealing non-regulatory
penalties.
Rationale for Making Pilots Permanent
The Exchange adopted the NMM Pilot in part to adapt the Exchange's
model to the equities market environment in place in 2008. At that
time, the more electronic market had fundamentally altered the
Exchange's traditional trading environment, in which price discovery
had taken place largely, and almost exclusively, on the Floor of the
Exchange. As the trading information that was previously only available
on the Floor of the Exchange shifted to become widely available via
electronic means, together with increased fragmentation in the market,
the Exchange believed that the NMM Pilot would provide a more robust
trading model on the Floor where market participants could compete on
more equal footing relative to their responsibilities to the
market.\30\ With the NMM Pilot, the Exchange would continue to provide
a quality market that maintains both a competitive market maker
responsible for providing liquidity to the market and the element of
human judgment that is particularly valuable in less liquid securities,
re-openings, and closings. The Exchange sought, and believes it has
attained, the appropriate balance among market participants that
retains a role for liquidity providers responsible for maintaining fair
and orderly markets, i.e., DMMs, together with agents on the Floor and
off-Floor participants. The Exchange adopted the SLP Pilot to encourage
an additional pool of liquidity at the Exchange.
---------------------------------------------------------------------------
\30\ See Securities Exchange Act Release No. 58184 (July 17,
2009 [sic]), 73 FR 42853 (July 23, 2008) (NMM Pilot Filing).
---------------------------------------------------------------------------
As noted in the NMM Pilot approval order, the Commission had
concerns regarding certain aspects of the Exchange's proposal and
approved it on a pilot basis. The Commission further stated that before
it would decide to make the NMM Pilot permanent, the Exchange must
provide data and analysis on the impact of the NMM Pilot. The metrics
requested by the Commission include: (i) DMM time at the NBBO by
security; (ii) the effective spread by security; (iii) the DMM volume
broken out by DMM interest type (e.g., CCS, s-Quote); (iv) the average
depth at the NBBO by market participant (DMMs, Floor brokers, and
orders represented in the Exchange's book); (v) the ratio of (i) shares
not executed in Exchange systems due to
[[Page 34723]]
DMM execution due to (ii) the shares executed by the DMM; and (vi)
effective spread for (a) orders that involve DMM liquidity provisions
and (b) orders that are executed without DMM liquidity (for similar
order size categories).\31\ In compliance with this requirement, the
Exchange has been providing the above-described metrics to the
Commission's Division of Trading and Markets and Office of Economic and
Risk Analysis on a monthly basis.
---------------------------------------------------------------------------
\31\ See NMM Pilot Approval Order, supra n. 5 at 64387.
---------------------------------------------------------------------------
Since adopting the NMM Pilot, the Exchange believes that the
equities market has continued to undergo significant changes that
require a fresh look at the basis for whether the NMM Pilot should be
approved on a permanent basis. Rather than looking at the specific
metrics identified above, the Exchange believes that looking more
holistically at the Exchange's performance relative to the equities
market in general demonstrates the continued value of the NMM and SLP
Pilots and basis for permanent approval of the pilots. In particular,
the continued impact of Regulation NMS, which had been in effect for
only one year when the Exchange filed for the NMM Pilot, together with
additional technological advancements and competitive forces since 2008
have fundamentally altered the way the market functions and how market
participants interact. Some of the major developments include the
significant rise in off-exchange trading from 22% in 2009 to 34% in
2014; the proliferation of over 50 trading venues, including four
additional registered equities exchanges since October 2008; and the
increasing segmentation of client order flow onto private dark
markets.\32\
---------------------------------------------------------------------------
\32\ In a speech on October 2, 2013, Chair Mary Jo White noted
that ``[a] steadily increasing percentage of trading occurs in
`dark' venues, which now appear to execute more than half of the
orders of long-term investors,'' Mary Jo White, Chair, Securities
and Exchange Commission, Speech at Securities Traders Association
80th Annual Market Structure Conference (Oct. 2, 2013) (available at
https://www.sec.gov/News/Speech/Detail/Speech/1370539857459#.VNoXc_nF_AQ). The Commission also noted the
fragmentation of the equities markets in its 2010 Concept Release on
Equity Market Structure. See Securities Exchange Act Release No.
61358, 75 FR 3594 (Jan. 21, 2010). See also, Staff of the Division
of Trading and Markets, Commission, Equity Market Structure
Literature Review, Part I: Market Fragmentation, Oct. 7, 2013,
(available at: https://www.sec.gov/marketstructure/research/fragmentation-lit-review-100713.pdf) and Tuttle, Laura, Alternative
Trading Systems: Description of ATS Trading in National Market
System Stocks (available at https://www.sec.gov/marketstructure/research/alternative-trading-systems-march-2014.pdf.)
---------------------------------------------------------------------------
The Exchange believes that the shifts in market share of traded
volume among venues demonstrate the robust competition among markets.
In particular, the following chart shows a snapshot of how market share
of traded volume on registered exchanges has declined since 2009 and
shifted to the TRF, which reports transactions that occur off of
registered exchanges.\33\
---------------------------------------------------------------------------
\33\ The market share percentages set forth in Table 1 are based
on trades reported to the Consolidated Tape Association and via
Crossing Session II on the Exchange pursuant to Rule 902(a)(iii).
Table 1--Tape A Market Share Developments
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NYSE FINRA
F NYSE Arca TRI * Nasdaq Nasdaq Nasdaq BATS Z BATS Y EDGA * EDGX ** ISE (%) NSX (%) CHX (%) CBSX
(%) (%) (%) (%) BX (%) PSX (%) (%) (%) (%) (%) (%)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2009................................................ 25.0 13.4 22.5 15.5 1.9 0.0 8.5 0.0 0.0 10.4 1.9 0.6 0.3 0.1
2010................................................ 24.4 11.9 27.3 13.6 3.6 0.1 7.5 0.2 2.0 7.6 0.8 0.5 0.3 0.1
2011................................................ 24.3 10.5 29.8 13.3 2.3 0.7 6.9 2.3 3.6 5.5 0.0 0.5 0.2 0.1
2012................................................ 21.4 10.0 32.3 12.8 2.6 0.7 7.5 3.1 2.4 6.3 0.0 0.3 0.3 0.4
2013................................................ 22.1 8.4 35.3 11.6 2.3 0.5 7.1 1.9 2.8 6.9 0.0 0.4 0.4 0.4
2014................................................ 22.4 8.3 34.7 13.1 2.4 0.4 6.8 3.0 2.5 5.9 0.0 0.1 0.4 0.1
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* Includes ADF and adjusted for EDGA/EDGX launch.
* EDGA and EDGX are combined into EDGX for Jan. 2009 through July 2010, as Direct Edge didn't break them out prior to receiving exchange status.
While these statistics demonstrate that all exchanges, including
the Exchange, have faced challenges in the last six years, the Exchange
believes that the NMM and SLP Pilots have enabled the Exchange to
remain competitive during this period. As demonstrated in the chart
above, notwithstanding the competing market forces, the Exchange's
market share has remained relatively stable.
The Exchange further notes that it adopted the NMM and SLP Pilots
during a period of high trading volumes. Since the global financial
crisis of 2008-2009, there has been a significant drop in volume and
volatility in cash equities markets. A case in point, Tape A CADV fell
41% from 5.64 billion in 2009 to 3.33 billion shares in 2014.
Additionally, the VIX volatility index, which is an industry-standard
measure of market volatility, fell from a daily average of 31.5% in
2009 to 14.2 in 2014.
Table 2--Tape A Volume and VIX[supreg]
------------------------------------------------------------------------
CADV VIX[supreg]
------------------------------------------------------------------------
2009.............................................. 5.68 31.5
2010.............................................. 4.87 22.6
2011.............................................. 4.37 24.3
2012.............................................. 3.66 17.8
2013.............................................. 3.40 14.2
2014.............................................. 3.39 14.2
------------------------------------------------------------------------
As overall trading volume and volatility falls, the demand for the
liquidity continuously provided by market makers' [sic] falls, which
leads to thinner profit margins for market makers. This impact can be
demonstrated, in part, by the significant changes in the firms
operating as DMMs since the Exchange adopted the NMM Pilot. In October
2008, the Exchange had six firms operating as specialists: Bank of
America Corp. (``BAC''), Barclays Capital, Inc. (``Barclays''), Bear
Wagner Specialists, LLC (``Bear Wagner''), Goldman, Sachs and Co
(``Goldman Sachs,'' operating Spear, Leads & Kellogg, LLC), Kellogg
Specialist Group (``Kellogg), and LaBranche & Company (``Labranche'').
Six years later, only one of those firms still operates as a DMM,
Barclays. Below are key changes within the NYSE DMM universe:
In March 2009, Barclays acquired Bear Wagner's DMM
business, with Bear Wagner exiting the business.
In January 2010, Barclays acquired LaBranche's DMM
business, with LaBranche exiting the business.
In February 2010, Getco Securities, LLC (``Getco'') became
an NYSE DMM.
In December 2010, Knight Capital Group, Inc. (``Knight'')
acquired Kellogg's NYSE and NYSE MKT DMM business, with Kellogg exiting
the business.
In November 2011, Getco acquired BAC's DMM business, with
BAC exiting the business.
In December 2011, J. Streicher & Co, an NYSE MKT DMM,
became an NYSE DMM.
In April 2012, Virtu Financial (``Virtu'') became a NYSE
DMM (in
[[Page 34724]]
2011, Virtu entered the DMM business by acquiring Cohen Capital Group,
an NYSE MKT DMM).
In November 2012, Brendan Cryan & Co, an NYSE MKT DMM,
became an NYSE DMM.
In July 2013, Knight and Getco merged to become KCG
Americas.
In August 2014, IMC Financial Markets acquired Goldman's
DMM business, with Goldman exiting the business.
In this challenging environment, the Exchange believes that the
operation of the NMM Pilot has helped the Exchange better serve the
needs of investors by maintaining high market-quality standards.
Specifically, the NMM Pilot allowed the Exchange's former specialists
to compete in today's fully electronic trading environment, continuing
to provide contribute to market quality. Moreover, while there has been
turnover in who comprises the DMM community, the Exchange believes that
the operation of the NMM Pilot has been instrumental in attracting new
entrants to the business as the former specialists have exited.\34\
---------------------------------------------------------------------------
\34\ The Exchange notes that in 2008, it also amended its rules
governing the operation of DMMs, in particular, Rule 98, to enable
specialists, and now DMMs, to better integrate their NYSE market-
making operations with market-making activities on other markets.
See Securities Exchange Act Release No. 58328 (Aug. 7, 2008), 73 FR
48260 (Aug. 18, 2008) (SR-NYSE-2008-45) (Approval Order); see also
Securities Exchange Act Release No. 72534 (July 3, 2014), 79 FR
39019 (July 9, 2014) (SR-NYSE-2014-12) (Order approving amendments
to Rule 98 to adopt a principles-based approach to prohibit the
misuse of material non-public information).
---------------------------------------------------------------------------
With respect to how DMMs operate, the Exchange believes that the
NMM Pilot strikes the appropriate balance between DMM benefits and
obligations. Importantly, while DMMs do not need to yield to orders on
the Book, under the NMM Pilot, DMMs continue to be subject to Exchange-
specific affirmative obligations to maintain a fair and orderly market
that are not imposed on any other cash equity market participant. These
obligations include maintaining a quote at the inside a specified
percentage of the day,\35\ supplying liquidity as needed to facilitate
openings and closings,\36\ maintaining price continuity with reasonable
depth in all of their registered securities,\37\ and re-entering the
market if taking liquidity to increase a trading position.\38\
Similarly, the SLP Pilot has created a separate class of liquidity
providers at the Exchange, with differing incentives, to supplement the
liquidity provided by the DMMs, which further supports the Exchange's
market quality.
---------------------------------------------------------------------------
\35\ See NYSE Rule 104(a)(1)(A).
\36\ See NYSE Rule 104(a)(2)-(3).
\37\ See NYSE Rule 104(f)(ii).
\38\ See NYSE Rule 104(h).
---------------------------------------------------------------------------
The Exchange believes that by operating under its NMM and SLP
Pilots, it offers a diverse and unique population of market
participants, including DMMs, SLPs, Floor brokers, and other off-Floor
market participants, that allow it to more effectively compete for
order flow, with superior market quality. The Exchange believes that an
important market quality measure is how much liquidity an exchange
provides. In today's fragmented equity model, the market quality of
displayed venues varies widely. The Exchange believes, however, that it
continues to be a leader in liquidity providing among registered
exchanges, which is due to the ongoing operation of the NMM and SLP
Pilots.
The chart below highlights six key market-quality metrics that
measure best price and liquidity in Exchange-listed securities. Best
prices are measured by assessing Exchange bid/ask spreads, percentage
of time at best prices, and percentage time alone at the best prices.
Liquidity is measured by looking at market share, most displayed shares
at the best prices, and percentage of time at the best prices with the
greatest displayed size. As set forth in the table below, the Exchange
ranks first in each of these metrics.
NYSE-Listed Securities (Tape A)--December 2014
----------------------------------------------------------------------------------------------------------------
All securities (equal weighted)
-----------------------------------------------------------------------------------------------------------------
Average
Market quoted Displayed % Time best % Time
share spread shares at % Time at price & alone at
(volume (time NBBO NBBO largest NBBO
weighted) weighted) size
----------------------------------------------------------------------------------------------------------------
NYSE.............................. 23.4 48.5 1071.9 74.0 45.8 19.6
Nasdaq............................ 13.6 311.6 451.6 47.3 17.5 4.2
NYSE Arca......................... 8.0 710.4 409.6 42.9 12.0 3.0
BZX............................... 7.7 463.8 294.3 31.2 6.7 1.5
EDGX.............................. 5.0 382.1 326.6 29.5 9.4 3.1
BYX............................... 3.6 551.1 107.7 21.2 2.5 0.6
Nasdaq BX......................... 1.8 68.7 59.2 15.7 2.0 0.2
EDGA.............................. 2.8 850.6 94.9 19.2 2.0 0.3
----------------------------------------------------------------------------------------------------------------
The Exchange notes that DMMs and SLPs have been important
contributors to the Exchange's performance, particularly at setting the
NBBO. For example, during September 2014, DMMs and SLPs (including
SLMMs) accounted for over 38% of the liquidity-providing volume on the
Exchange. In addition, during 2014, DMMs have averaged quoting at the
inside almost 30% of the time and DMMs provided an average of 14.6% of
the Exchange's size. In 2014, 8.3% of DMM volume executed was from
quotes that improved the NBBO at the time the quote was entered. This
represents an improvement since 2009, when only 2.7% of DMM volume
improved the NBBO.
The Exchange believes that key changes to the NMM Pilot support the
continued operation of the pilot in the ever-changing equities
environment. For example, as noted above, in 2009, the Exchange amended
Rule 104(a)(1) to increase the amount of time that a DMM unit must
maintain a bid and offer at the inside from 10% to 15% for Less Active
Securities and from 5% to 10% for More Active Securities.\39\ During
the same period, the Exchange also amended Rule 1000 to permit CCS to
provide a partial fill to an incoming order.\40\
---------------------------------------------------------------------------
\39\ See DMM quoting requirement filing, supra n. 14.
\40\ See CCS Partial Fill Approval Order, supra n. 18.
---------------------------------------------------------------------------
After the DMM's quoting requirement was increased, DMM share of
intraday provide activity increased, from 18.82% in July 2009, before
the quoting change,
[[Page 34725]]
to 20.03% in September 2009. The Exchange noted a concurrent decline in
DMM CCS volume during this same time from 9.32% to 6.94% of DMM
activity. The Exchange believes that the decrease in CCS activity was
related to a corresponding increase in the DMM displayed quoting
activity. During the same period, the Exchange experienced a drop in
NYSE shares routed to away markets from 7.8% in July 2009 to 7.1% in
September 2009, to 6.6 in October 2009. The Exchange believes that the
decline in shares routed away is attributable in part to both to the
increased quoting requirement, because DMMs represented the best quote
in the market more frequently, and the ability for CCS to partially
fill incoming orders, thereby obviating the need to route such orders
to away markets. Accordingly, the Exchange believes that these changes
to the NMM Pilot contributed to the ongoing market quality at the
Exchange.
SLPs likewise represent a substantial share of the Exchange's
intraday liquidity-providing volume. Participation in the SLP Pilot has
grown steadily since inception. When first launched, only 497 symbols
were covered by an SLP. By the end of September 2014, nearly every
Exchange symbol, including operating companies, preferred stocks,
warrants, rights and all other issue types, had at least one SLP
quoting in it. In December 2014, approximately 45% of these symbols had
at least one SLP quoting at the inside at least 10% of the time.
Through December 2014, SLPs represented 25.2% of liquidity-
providing execution. The Exchange notes that SLPs have been a solid
contributor to liquidity in less-active issues, and now account for
13.3% of the liquidity-providing volume in issues outside of the
Exchange's 1,000 most active issues.
The following chart shows both the increase in number of symbols
assigned to SLPs during the course of the pilot, and the number of SLP
symbols in which at least one SLP is at the NBB or NBO at least 10% of
the time. The first two columns represent a count of all SLP/symbol
pairs where the average time at the NBB or NBO (referred to in the
chart as NBBO) was 10%. For example, if symbol XYZ were assigned to
three SLPs, of which two met the 10% NBBO quoting requirement, the
count for ``Total'' column would be three, and the count for the ``NBBO
>10%'' column would be two. The right two columns show the number of
distinct symbols that are covered by and reached 10% NBBO by at least
one SLP.
SLP Symbols and Quoting
----------------------------------------------------------------------------------------------------------------
Distinct Distinct NBBO
Total NBBO>10% symbols >10%
----------------------------------------------------------------------------------------------------------------
Dec-08.......................................... 501 332 497 335
Dec-09.......................................... 4,328 2,864 1,242 1,199
Dec-10.......................................... 6,509 4,079 1,404 1,302
Dec-11.......................................... 6,599 3,293 1,478 1,019
Dec-12.......................................... 7,971 3,340 1,909 1,377
Dec-13.......................................... 10,352 2,845 3,218 1,125
Dec-14.......................................... 8,572 3,458 3,262 1,481
----------------------------------------------------------------------------------------------------------------
The Exchange notes that notwithstanding the significant changes the
U.S. equities market has undergone since 2008, the statistics the
Exchange committed to track in connection with the NMM Pilot
demonstrate that the pilot rules have been effective at improving the
Exchange's effective spread on marketable orders, the percentage of
time that the DMMs quote at the NBBO and the percentage of DMM
participation in total trading volume. Specifically,
Effective spreads on all marketable orders, which ranged
from 10 to 18.5 basis points from August to December 2008, have
remained below 10 basis points since September 2009 and ranged from 6.7
to 8.2 basis points from November 2013 to November 2014. Effective
spreads have declined for all order size categories from 100-9999
shares.
The percentage of time that DMMs were quoting at the NBBO,
which ranged from 9.9% to 19% from August to December 2008, have
exceeded 20% since that time and ranged from 31.3% to 39.2% in the
period from November 2013 to November 2014.
For these reasons, the Exchange believes that the Pilots' rules, as
amended, should be made permanent. The Exchange also proposes to delete
Rule 104T, which is the pre-NMM Pilot version of Rule 104. Rule 104T
remains in the Exchange's rule book, but is not operational. With
permanent approval of current Rule 104, the need to retain Rule 104T is
mooted. The Exchange also proposes to delete Supplementary Material to
Rule 104, and related reference to that Supplementary Material in Rule
104(a)(2), because that rule text was intended to be in effect only
through October 30, 2009.\41\ Finally, the Exchange proposes to replace
the reference to ``NYSE Regulation's Division of Market Surveillance''
in Rule 104(k) with a reference to the Exchange. Pursuant to Rule 0,
references to the Exchange may mean references to NYSE Regulation or
FINRA, which performs certain regulatory services to the Exchange
pursuant to a Regulatory Services Agreement.
---------------------------------------------------------------------------
\41\ See Securities Exchange Act Release No. 60573 (Aug. 26,
2009), 74 FR 45500 (Sept. 2, 2009) (SR-NYSE-2009-86) (Notice of
Filing).
---------------------------------------------------------------------------
The Exchange notes that the proposed change is not otherwise
intended to address any other issues and the Exchange is not aware of
any problems that member organizations would have in complying with the
proposed rule change.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\42\ in general, and furthers the
objectives of Section 6(b)(5) of the Act,\43\ in particular, because it
is designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to, and
perfect the mechanisms of, a free and open market and a national market
system and, in general, to protect investors and the public interest
and because it is not designed to permit unfair
[[Page 34726]]
discrimination between customers, issuers, brokers, or dealers.
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\42\ 15 U.S.C. 78f(b).
\43\ 15 U.S.C. 78f(b)(5).
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The Exchange believes the proposed rule change is consistent with
these principles because it seeks to make permanent Pilots and
associated rule changes that were previously approved by the Commission
as pilots, that the Exchange has subsequently provided data and
analysis to the Commission, and that this data and analysis, as well as
the further analysis in this filing, clearly shows that the Pilots have
operated as intended and are consistent with the Act.
The Exchange also believes the proposed rule change is designed to
facilitate transactions in securities and to remove impediments to, and
perfect the mechanisms of, a free and open market and a national market
system because making the Pilots permanent would provide market
participants with a trading venue that encourages the addition of
liquidity, facilitates the trading of larger orders more efficiently,
and operates to reward aggressive liquidity providers. The monthly
statistics provided by the Exchange to the Commission staff over more
than five years demonstrate that the NMM Pilot has improved market
quality by numerous measures. Similarly, the Exchange believes the data
show that the SLP program has appropriately rewarded aggressive
liquidity providers in the market. The Exchange believes that making
both of these Pilots permanent would encourage the additional
utilization of, and interaction with, the NYSE and provide customers
with the premier venue for price discovery, liquidity, competitive
quotes, and price improvement.
In addition, the Exchange believes that making the NMM and SLP
Pilots permanent would promote just and equitable principles of trade
and remove impediments to and perfect the mechanism of a free and open
market because the rules strike the appropriate balance between the
obligations and benefits of the Exchange's market participants. For
example, while DMMs no longer have agency responsibilities to the Book,
they retain a number of affirmative obligations that are unique to the
Exchange, including meeting Exchange-only quoting requirements,
supplying liquidity as needed when facilitating openings and closings,
and maintaining depth and continuity in their listed securities. Given
these obligations, the Exchange believes it is appropriate to classify
DMMs as a separate participant in the parity allocation wheel. The
Exchange notes that it has been operating under this model since 2009,
and the above-cited market statistics demonstrate that within the
highly competitive cash equities market, the Exchange's model,
including DMM parity, has enabled the Exchange to maintain execution
quality for all investors on the Exchange.
Finally, the Exchange believes that it is subject to significant
competitive forces, as described below in the Exchange's statement
regarding the burden on competition. For these reasons, the Exchange
believes that the proposal is consistent with the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
In accordance with Section 6(b)(8) of the Act,\44\ the Exchange
believes that the proposed rule change would not impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act. The Exchange believes that making the Pilots
permanent would continue to foster competition among liquidity
providers and maintain execution quality on the Exchange. The Exchange
believes that the data supplied to the Commission and experience gained
over more than six years have demonstrated the efficacy of the Pilots,
and as such, they should be made permanent. Finally, the Exchange notes
that it operates in a highly competitive market in which market
participants can easily direct their orders to competing venues,
including off-exchange venues. In such an environment, the Exchange
must continually review, and consider adjusting the services it offers
and the requirements it imposes to remain competitive with other U.S.
equity exchanges. For the reasons described above, the Exchange
believes that the proposed rule change reflects this competitive
environment.
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\44\ 15 U.S.C. 78f(b)(8).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register, or such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NYSE-2015-26 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 20549-1090.
All submissions should refer to File Number SR-NYSE-2015-26. 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 the filing also will be available
for inspection and copying at the principal offices of the Exchange.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-NYSE-2015-26,
and should be submitted on or before July 8, 2015.
[[Page 34727]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\45\
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\45\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-14827 Filed 6-16-15; 8:45 am]
BILLING CODE 8011-01-P
