Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Amendment No. 1, and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Add a New Discretionary Pegged Order, 43297-43301 [2016-15718]
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Federal Register / Vol. 81, No. 127 / Friday, July 1, 2016 / Notices
Therefore, the Exchange believes the
identification of an Official Bats One
Opening Price or Closing Price in the
Bats One Feed would not impose any
burden on competition not deemed
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
The Exchange has neither solicited
nor received written comments on the
proposed rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (A) Significantly affect
the protection of investors or the public
interest; (B) impose any significant
burden on competition; and (C) by its
terms, become operative for 30 days
from the date on which it was filed or
such shorter time as the Commission
may designate it has become effective
pursuant to Section 19(b)(3)(A) of the
Act 18 and paragraph (f)(6) of Rule 19b–
4 thereunder,19 the Exchange has
designated this rule filing as noncontroversial. The Exchange has given
the Commission written notice of its
intent to file the proposed rule change,
along with a brief description and text
of the proposed rule change at least five
business days prior to the date of filing
of the proposed rule change, or such
shorter time as designated by the
Commission.
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is: (1) Necessary or appropriate in
the public interest; (2) for the protection
of investors; or (3) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
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:
18 15
19 17
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4.
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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–
BatsBZX–2016–27 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–BatsBZX–2016–27. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing 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–
BatsBZX–2016–27 and should be
submitted on or before July 22, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–15582 Filed 6–30–16; 8:45 am]
BILLING CODE 8011–01–P
20 17
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78181; File No. SR–
NYSEArca–2016–44]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of
Amendment No. 1, and Order Granting
Accelerated Approval of a Proposed
Rule Change, as Modified by
Amendment No. 1, To Add a New
Discretionary Pegged Order
June 28, 2016.
I. Introduction
On March 11, 2016, NYSE Arca, Inc.
(‘‘Exchange’’ or ‘‘NYSE Arca’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to amend NYSE Arca Equities
Rule 7.31P(h) to add a new
Discretionary Pegged Order. The
proposed rule change was published for
comment in the Federal Register on
March 30, 2016.3 The Commission
received two comment letters on the
proposed rule change 4 and a response
letter from the Exchange.5 On May 12,
2016, pursuant to Section 19(b)(2) of the
Act,6 the Commission designated a
longer period within which to approve
the proposed rule change, disapprove
the proposed rule change, or institute
proceedings to determine whether to
disapprove the proposed rule change.7
On June 23, 2016, the Exchange filed
Amendment No. 1 to the proposed rule
change.8 The Commission is publishing
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 77441
(March 24, 2016), 81 FR 17749 (‘‘Notice’’).
4 See Letter from Sophia Lee, General Counsel,
IEX Group, Inc. (‘‘IEX’’), to Brent J. Fields,
Secretary, Commission, dated April 15, 2016 (‘‘IEX
Letter’’); Letter from John C. Nagel, Esq., Managing
Director and Sr. Deputy General Counsel, Citadel
LLC (‘‘Citadel’’), to Brent J. Fields, Secretary,
Commission, dated April 20, 2016 (‘‘Citadel
Letter’’).
5 See Letter from Elizabeth K. King, General
Counsel and Corporate Secretary, New York Stock
Exchange, to Brent J. Fields, Secretary, Commission,
dated April 27, 2016 (‘‘Response Letter’’).
6 15 U.S.C. 78s(b)(2).
7 See Securities Exchange Act Release No. 77820,
81 FR 31272 (May 18, 2016). The Commission
designated June 28, 2016, as the date by which it
should approve, disapprove, or institute
proceedings to determine whether to disapprove the
proposed rule change.
8 In Amendment No. 1, the Exchange: (1) Added
subsection (E) to proposed Rule 7.31P(h)(3), which
would provide that if the PBBO (as defined below)
is locked or crossed, both an arriving and resting
Discretionary Pegged Order would wait for a PBBO
that is not locked or crossed before the working
price (as defined below) is adjusted and the order
2 17
CFR 200.30–3(a)(12).
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Federal Register / Vol. 81, No. 127 / Friday, July 1, 2016 / Notices
this notice to solicit comments on
Amendment No. 1 from interested
persons, and is approving the proposed
rule change, as modified by Amendment
No. 1, on an accelerated basis.
II. Description of the Proposed Rule
Change
asabaliauskas on DSK3SPTVN1PROD with NOTICES
The Exchange proposes to amend
NYSE Arca Equites Rule 7.31P(h) to add
a new Discretionary Pegged Order for its
Pillar trading platform. According to the
Exchange, the proposed Discretionary
Pegged Order is based on the
Discretionary Peg Order (‘‘D-Peg Order’’)
proposed by IEX in its Form 1
application seeking registration as a
national securities exchange.9
Proposed Rule 7.31P(h)(3) would
provide that a Discretionary Pegged
Order would be a Pegged Order 10 to buy
(sell) that upon entry to the NYSE Arca
Marketplace 11 would be assigned a
becomes eligible to trade; (2) provided additional
responses to the comment letters; and (3) provided
more information regarding the implementation
date for the proposed rule change. Amendment No.
1 is available at: https://www.sec.gov/comments/srnysearca-2016-44/nysearca201644-4.pdf.
9 See Notice, supra note 3, at 17749. On June 17,
2016, the Commission granted IEX’s application for
registration as a national securities exchange. See
Securities Exchange Act Release No. 78101 (June
17, 2016), 81 FR 41142 (June 23, 2016) (‘‘IEX
Order’’). In its proposal, the Exchange identifies the
substantive differences between the proposed
Discretionary Pegged Order and IEX’s D-Peg Order.
First, the proposed Discretionary Pegged Order
must have a limit price, whereas IEX’s D-Peg Order
is not required to have a limit price. See Notice,
supra note 3, at 17749. Second, the proposed
Discretionary Pegged Order must be Day time-inforce, whereas IEX’s D-Peg order is also permitted
to have certain other times-in-force. See id. Third,
if the PBBO is locked or crossed, both an arriving
and resting Discretionary Pegged Order would wait
for a PBBO that is not locked or crossed before the
working price is adjusted and the order becomes
eligible to trade, whereas IEX’s D-Peg Order can be
priced and traded if the market is locked or crossed.
See Amendment No. 1 at 3–4. In the proposal, the
Exchange also states that, unlike IEX’s D-Peg Order,
the proposed Discretionary Pegged Order would be
based on the PBBO rather than the NBBO. See
Notice, supra note 3, at 17749. According to the
Exchange, the PBBO is the reference price that it
uses for its Pegged Orders under Rule 7.31P(h). The
Commission notes that, in an amendment to IEX’s
exchange application, IEX clarified that its D-Peg
Order is based on the Protected NBBO. See
Investors’ Exchange LLC—Form 1 Application and
Exhibits, Addendum B–1 Comparison to
Amendment No. 1, available at https://
www.sec.gov/rules/other/2016/iex/iex-form-1addendum-b-1-amendments-redline.pdf.
10 The term ‘‘Pegged Order’’ is defined in
Exchange Rule 7.31P(h) as a Limit Order that does
not route with a working price that is pegged to a
dynamic reference price. If the designated reference
price is higher (lower) than the limit price of a
Pegged Order to buy (sell), the working price will
be the limit price of the order.
11 The term ‘‘NYSE Arca Marketplace’’ is defined
in Exchange Rule 1.1(e) as the electronic securities
communications and trading facility designated by
the Board of Directors through which orders of
Users are consolidated for execution and/or display.
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Jkt 238001
working price 12 equal to the lower
(higher) of the midpoint of the PBBO 13
(‘‘Midpoint Price’’) or the limit price of
the order. Any untraded shares of such
order would be assigned a working price
equal to the lower (higher) of the PBB
(PBO) or the order’s limit price and
would automatically be adjusted in
response to changes to the PBB (PBO)
for buy (sell) orders up (down) to the
order’s limit price. In order to trade with
contra-side orders on the NYSE Arca
Book, a Discretionary Pegged Order to
buy (sell) would exercise the least
amount of price discretion necessary
from its working price to its
discretionary price (defined as the lower
(higher) of the Midpoint Price or the
Discretionary Pegged Order’s limit
price), except during periods of quote
instability, as defined in proposed Rule
7.31P(h)(3)(D).
Proposed Rule 7.31P(h)(3)(A) would
provide that Discretionary Pegged
Orders would not be displayed, must be
designated Day, and would be eligible to
be designated for the Core Trading
Session only. Discretionary Pegged
Orders that include a designation for the
Early Trading Session or Late Trading
Session would be rejected.
Proposed Rule 7.31P(h)(3)(B) would
provide that when exercising discretion,
Discretionary Pegged Orders would
maintain their time priority at their
working price as Priority 3—NonDisplay Orders and would be prioritized
behind Priority 3—Non-Display Orders
with a working price equal to the
discretionary price of a Discretionary
Pegged Order at the time of execution.
If multiple Discretionary Pegged Orders
are exercising price discretion during
the same book processing action, they
would maintain their relative time
priority at the discretionary price.
Proposed Rule 7.31P(h)(3)(C) would
provide that a Discretionary Pegged
Order would be eligible to exercise price
discretion to its discretionary price,
except during periods of quote
instability. If the Corporation 14
determines the PBB for a particular
security to be an unstable quote, it
would restrict buy Discretionary Pegged
12 The term ‘‘working price’’ is defined in
Exchange Rule 7.36P(a)(3) as the price at which an
order is eligible to trade at any given time, which
may be different from the limit price or display
price of the order. The term ‘‘limit price’’ is defined
in Exchange Rule 7.36P(a)(2) as the highest (lowest)
specified price at which a Limit Order to buy (sell)
is eligible to trade.
13 The term ‘‘PBBO’’ is defined in Exchange Rule
1.1(dd) as the highest Protected Bid and the lowest
Protected Offer.
14 The term ‘‘Corporation’’ is defined in Exchange
Rule 1.1(k) to mean NYSE Arca Equities, Inc., as
described in NYSE Arca Equities, Inc.’s Certificate
of Incorporation and Bylaws.
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Orders in that security from exercising
price discretion to trade against interest
above the PBB. If the Corporation
determines the PBO for a particular
security to be an unstable quote, it
would restrict sell Discretionary Pegged
Orders in that security from exercising
price discretion to trade against interest
below the PBO.
Proposed Rule 7.31P(h)(3)(D) would
set forth how the Exchange would
determine the quote instability factor
(i.e., the probability of an imminent
change of the current PBB to a lower
price or the current PBO to a higher
price). When the quoting activity meets
predefined criteria and the quote
instability factor is greater than a
defined threshold (‘‘quote instability
threshold’’), the Corporation would treat
the quote as not stable (‘‘quote
instability’’ or ‘‘crumbling quote’’).
When the Corporation determines either
the PBB or the PBO is unstable, the
determination would remain in effect at
that price level for ten milliseconds. The
Corporation would only treat one side of
the PBBO as unstable in a particular
security at any given time.
The Corporation would determine
that there is quote instability or a
crumbling quote when the following
occur: The PBB and PBO are the same
as the PBB and PBO one millisecond
ago; and the PBBO spread is less than
or equal to the thirty-day median PBBO
spread during the Core Trading Session;
and there are more protected quotations
on the far side; and the quote instability
factor is greater than the defined quote
instability threshold.
The quote stability calculation used to
determine the current quote instability
factor would be defined by the
following formula:
1/(1 + e ∧ ¥(C0 + C1 * N + C2 * F +
C3 * N¥1 + C4 * F¥1)).
The Exchange proposes to use the
following quote stability coefficients: C0
= ¥2.39515; C1 = ¥0.76504; C2 =
0.07599; C3 = 0.38374; and C4 =
0.14466. The Exchange proposes to use
the following quote stability variables: N
= the number of protected quotations on
the near side of the market; F = the
number of protected quotations on the
far side of the market; N¥1 = the
number of protected quotations on the
near side of the market one millisecond
ago; and F¥1 = the number of protected
quotations on the far side of the market
one millisecond ago. The Exchange
proposes to use a quote instability
threshold of 0.32.
Pursuant to proposed Rule
7.31P(h)(3)(D)(i)(D)(3), the Exchange
reserves the right to modify the quote
stability coefficients or quote instability
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Federal Register / Vol. 81, No. 127 / Friday, July 1, 2016 / Notices
threshold at any time, subject to the
filing of a proposed rule change with the
Commission.
Proposed Rule 7.31P(h)(3)(E) would
provide that if the PBBO is locked or
crossed, both an arriving and a resting
Discretionary Pegged Order would wait
for a PBBO that is not locked or crossed
before the working price is adjusted and
the order becomes eligible to trade.
The Exchange anticipates that it will
announce the implementation date of
the proposed rule change by the fourth
quarter of 2016.15
asabaliauskas on DSK3SPTVN1PROD with NOTICES
III. Summary of Comments and
Response to Comments
The Commission received two
comment letters opposing the proposed
rule change and a response letter and an
amendment from the Exchange.16
One commenter points out that, as
noted by the Exchange, the proposed
Discretionary Pegged Order is a copy of
the D-Peg Order that the commenter
created, which has been offered since
November 2014 by the IEX Alternative
Trading System.17 This commenter
states its belief that the D-Peg Order is
a useful order type that can protect
investors, if implemented properly.18
However, this commenter questions the
effectiveness of the proposed
Discretionary Pegged Order, and states
that it should not be approved unless
the Exchange amends the proposal and
provides additional justifications to
show that the order type would work as
purported.19 Specifically, this
commenter states that the Exchange
would not be in a position to deliver the
benefits as claimed if it continues to
offer co-location and microwave
services to fast market participants
because the Exchange would not be able
to effectively update the order during a
crumbling quote faster than the market
participant trying to pick off the order.20
This commenter also questions whether
the Exchange understands the use of the
proposed order type and expresses
concern that the implementation of
order types that are not well thoughtthrough can increase systemic risk and
may have adverse impacts on investor
protection.21 According to the
commenter, the D-Peg formula was
calculated based on the location of its
systems in Weehawken, NJ, and its
unique latency profile, and it makes
little sense to apply the same formula to
15 See
Amendment No. 1 at 5.
supra notes 4, 5, and 8.
17 See IEX Letter at 1.
18 See id.
19 See id., at 1–3.
20 See id., at 2.
21 See id., at 2–3.
16 See
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19:05 Jun 30, 2016
Jkt 238001
orders on the Exchange located in
Mahwah, NJ.22 Finally, this commenter
argues that the Exchange should adopt
a different name for the proposed order
type to avoid confusion and
misrepresentation regarding the nature
of the order type.23
Another commenter also opposes the
proposed rule change. According to this
commenter, Commission approval of
exchanges’ use of predictive order types
such as the proposed Discretionary
Pegged Order would result in rapidly
increasing order type complexity, which
would reduce market resilience and
make markets more opaque for all
investors.24 The commenter states its
belief that the utility of these order
types is marginal and does not outweigh
the additional complexity that these
order types would impose on the
market.25 This commenter also
expresses concerns regarding how the
Commission could or would effectively
review and police additional predictive
order types as they emerge and evolve,
and whether the Commission would
propose guidance or limitations on how
predictive order types may operate.26
Finally, this commenter states that
predictive order types encroach on the
traditional role of broker-dealers by
using inherent competitive advantages
that exchanges have over brokerdealers.27
In response to comments, the
Exchange indicates that the proposed
Discretionary Pegged Order is a
competitive response to IEX’s D-Peg
Order.28 The Exchange states that the
22 See
id., at 2.
id., at 3. In its letter, the commenter also
responds to the Exchange’s comments on the D-Peg
Order, which were set forth in the Notice. See id.,
at 2. As noted above, the Commission granted IEX’s
application for registration as a national securities
exchange, which included the D-Peg Order. See
supra note 9. This order does not address comments
and responses related to IEX’s D-Peg Order.
24 See Citadel Letter at 1. This commenter notes
that the proposed Discretionary Pegged Order is
virtually identical to IEX’s D-Peg Order. See id. The
commenter notes that it explained its concerns in
more detail in its comment letter on IEX’s exchange
application. See Letter from John C. Nagel, Esq.,
Managing Director and Sr. Deputy General Counsel,
Citadel LLC, to Brent J. Fields, Secretary,
Commission, dated April 14, 2016.
25 See Citadel Letter at 2.
26 See id.
27 See id. In the context of IEX’s D-Peg Order and
the proposed Discretionary Pegged Order, the
Exchange also requests that the Commission
articulate the boundaries of when an exchange may
or may not offer services that are otherwise
performed by broker-dealers and when it would be
appropriate for an exchange to monitor the quality
of the prices in a market to determine how to price
an order, and raises the issue of whether these order
types are consistent with the Commission’s
previous disapproval of Nasdaq’s benchmark
orders. See Response Letter at 2–4. See also Notice,
supra note 3, at 17751.
28 See Response Letter at 3–4.
23 See
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43299
proposed calculation to determine
whether a quote is unstable is a
straightforward determination that does
not require inbound order flow to be
intentionally delayed to be effective.29
According to the Exchange, while an
intentionally-delayed market may
prevent arriving interest from
interacting with pegged orders
immediately, it does not believe that
processing market data updates and
inbound orders out of phase (as with
IEX) or simultaneously (as proposed by
the Exchange) would materially alter the
effectiveness of the proposed
functionality.30 The Exchange also
states its belief that the benefits of the
proposed functionality would be the
same regardless of the relative speed.31
Moreover, according to the Exchange,
the proposed Discretionary Pegged
Order would be an optional order type,
and if market participants do not believe
that the quote instability formula
appropriately predicts market
movement, they do not have to use the
order type.32 The Exchange states that,
over time and based on client feedback,
it would consider changes to the
specific formula used to assess the
quality of the market or would consider
offering additional types of
Discretionary Pegged Orders to serve the
trading needs of different market
participants, subject to filing separate
proposed rule changes with the
Commission.33 Finally, the Exchange
states that it does not anticipate that the
proposed order type would have any
disruptive effects on the overall
market.34
IV. Commission Findings
After careful review, the Commission
finds that the proposed rule change, as
modified by Amendment No. 1, is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange.35 In particular, the
29 See
Amendment No. 1 at 4.
id.
31 See id.
32 See Response Letter at 4–5 and Amendment
No. 1 at 4. The Exchange states its belief that the
effectiveness of a particular order type in serving
the trading needs of market participants should be
market-driven. See Response Letter at 4.
33 See Response Letter at 4. In its response letter,
the Exchange also provides additional comments on
IEX’s exchange application. As noted above, the
Commission granted IEX’s exchange application,
and this order does not address comments and
responses related to IEX’s D-Peg Order. See supra
note 9.
34 See Amendment No. 1 at 4.
35 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
30 See
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asabaliauskas on DSK3SPTVN1PROD with NOTICES
Commission finds that the proposed
rule change, as modified by Amendment
No. 1, is consistent with Section 6(b)(5)
of the Act,36 which requires, among
other things, that the rules of a national
securities exchange be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
As noted above, the proposed
Discretionary Pegged Order is based on
IEX’s D-Peg Order, although there are
some differences between the two
orders.37 First, unlike IEX’s D-Peg
Order, the proposed Discretionary
Pegged Order must have a limit price.38
The Commission notes that this is not
a novel aspect for this type of order
because IEX’s D-Peg Order is also
permitted to have a limit price, although
it is not required to have one.39 Second,
unlike IEX’s D-Peg Order, the proposed
Discretionary Pegged Order must have a
Day time-in-force.40 The Commission
similarly notes that this is not a novel
aspect for this type of order because
IEX’s D-Peg Order is also permitted to
have the Day time-in-force, although it
is permitted to have certain other timesin-force as well.41 Third, if the PBBO is
locked or crossed, an arriving or resting
Discretionary Pegged Order would wait
for a PBBO that is not locked or crossed
before the working price is adjusted and
the order becomes eligible to trade,42
whereas IEX’s D-Peg Order can be
priced and traded if the market is locked
or crossed.43 The Commission notes that
the proposed treatment of Discretionary
Pegged Orders when the market is
locked or crossed is consistent with
Exchange Rule 7.31P(h)(1)(B), which
governs the treatment of other nondisplayed pegged orders on the
Exchange (i.e., Market Pegged Orders)
when the market is locked or crossed.
The Commission notes that, according
to the Exchange, the proposed
Discretionary Pegged Order would assist
ETP Holders in obtaining best execution
for their customers by limiting
executions at the Midpoint Price when
the PBBO is not stable, and by reducing
the potential to execute at a stale
price.44 Moreover, the Commission
36 15
U.S.C. 78f(b)(5).
supra note 9.
38 See Notice, supra note 3, at 17749.
39 See IEX Rule 11.190(b)(10)(E).
40 See Notice, supra note 3, at 17749.
41 See IEX Rule 11.190(b)(10)(B).
42 See Amendment No. 1 at 3–4.
43 See IEX Rule 11.190(h)(3).
44 See Notice, supra note 3, at 17751.
notes that, in response to the comments,
the Exchange acknowledges that an
intentionally-delayed market may
prevent arriving interest from
interacting with pegged orders
immediately, but states its belief that the
proposed Discretionary Pegged Order
would be effective, notwithstanding the
differences in speed between the
Exchange and IEX.45
With respect to questions regarding
whether the proposed Discretionary
Pegged Order would perform a function
that is typically performed by brokerdealers, and whether approval of the
proposed Discretionary Pegged Order
would be inconsistent with the
Commission’s prior disapproval of
Nasdaq’s ‘‘benchmark orders,’’ the
Commission notes that, as with IEX’s
rules governing the D-Peg Order,
proposed Rule 7.31P(h)(3) would
delineate the specific conditions under
which a Discretionary Pegged Order
would or would not be eligible to
execute up (down) to the Midpoint Price
by setting forth the formula that the
Exchange would use to determine quote
stability. Also, as with IEX’s D-Peg
Order, the Exchange would encode in
its rule the totality of the discretionary
feature of the proposed Discretionary
Pegged Order. As the Exchange notes in
the proposal, the manner by which it
would monitor the quality of the quotes
would be objective and transparent, as
set forth in the proposed rule.46 As with
IEX’s D-Peg Order, the Commission does
not believe that the hardcoded
conditionality of the proposed order
type would provide the Exchange with
actual discretion or the ability to
exercise individualized judgment when
executing an order. The Commission
also notes that the Exchange would be
required to submit a proposed rule
change pursuant to Section 19(b) of the
Act prior to implementing any changes
to the proposed order. Moreover, as
with IEX’s D-Peg Order, the Commission
believes that the proposed Discretionary
Pegged Order is distinguishable from
Nasdaq’s benchmark orders and does
not implicate the same issues.47
With respect to a commenter’s
concern that approval of the proposed
Discretionary Pegged Order would lead
to the proliferation of complex
predictive order types, the Commission
notes that new exchange proposed order
types are subject to the rule filing
process of Section 19(b) of the Act and
37 See
VerDate Sep<11>2014
19:05 Jun 30, 2016
Jkt 238001
45 See supra notes 29–34 and accompanying text
(discussing in more detail the Exchange’s response
to comments).
46 See Notice, supra note 3, at 17751.
47 See IEX Order, supra note 9, at 41153
(discussing in more detail the differences between
IEX’s D-Peg Order and Nasdaq’s benchmark orders).
PO 00000
Frm 00119
Fmt 4703
Sfmt 4703
Rule 19b–4 under the Act, and the
standards in Section 6(b) of the Act,
among other provisions.48
With respect to a commenter’s request
that the Exchange use a different name
for the proposed order in order to avoid
confusion and misrepresentation
regarding the nature of the order,49 the
Commission notes that the functionality
of the proposed Discretionary Pegged
Order is specifically delineated in
proposed Rule 7.31P(h)(3). Moreover,
the Commission notes that, currently,
order types on different exchanges with
nearly identical names may function
differently.50 As a result, the
Commission does not believe the
Exchange’s use of the name
‘‘Discretionary Pegged Order’’ raises
regulatory concerns.
Finally, the Commission notes that
existing exchanges offer both discretion
and pegging functionalities, including
the combination of both of those
functionalities in a single order type.51
As with IEX’s D-Peg Order, the
proposed discretion functionality would
be turned ‘‘on’’ or ‘‘off’’ depending on
the Exchange’s quote stability
determination. Because the Exchange
has encoded in its rule the totality of the
discretionary feature of the proposed
Discretionary Pegged Order, the
Commission believes the proposed
order type is a close variant of the
discretion and pegging functionality
that currently exist on other exchanges.
Based on the foregoing and the
Exchange’s representations, the
Commission believes that the proposed
rule change, as modified by Amendment
No. 1, is consistent with the Act.
V. Solicitation of Comments on
Amendment No. 1
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether Amendment No. 1 to
the proposed rule change is consistent
with the Act. Comments may be
48 See
also Form 19b–4, General Instructions.
its comment letter, this commenter
references its ‘‘Patent-Pending ‘DYNAMIC PEG
ORDERS IN AN ELECTRONIC TRADING SYSTEM’
in the U.S. patent application number 14/799,975,
priority to August 22, 2014.’’ However, this
commenter states that its comment letter ‘‘speaks to
deficiencies in NYSE’s application in light of
current market structure and is not intended to
address, comment on or waive our property rights
in the D-peg invention or related subject matter.’’
See IEX Letter at note 2. In issuing this order, the
Commission expresses no view with respect to
these matters.
50 See, e.g., Exchange Rule 7.31P(h)(2) (describing
the Exchange’s ‘‘Primary Pegged Order’’) and IEX
Rules 11.190(a)(3) and (b)(8) (describing IEX’s
‘‘primary peg order’’).
51 See, e.g., Nasdaq Rule 4703(g).
49 In
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Federal Register / Vol. 81, No. 127 / Friday, July 1, 2016 / Notices
submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSEArca–2016–44 on the subject line.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
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–NYSEArca–2016–44. 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
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–
NYSEArca–2016–44 and should be
submitted on or before July 22, 2016.
VI. Accelerated Approval of the
Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment No. 1, prior to
the 30th day after the date of
publication of notice of Amendment No.
1 in the Federal Register. In
Amendment No. 1, the Exchange added
subsection (E) to proposed Rule
7.31P(h)(3), which would provide that if
the PBBO is locked or crossed, both an
VerDate Sep<11>2014
19:05 Jun 30, 2016
Jkt 238001
arriving and resting Discretionary
Pegged Order would wait for a PBBO
that is not locked or crossed before the
working price is adjusted and the order
becomes eligible to trade. As noted
above, this aspect of the proposed
Discretionary Pegged Order is consistent
with Exchange Rule 7.31P(h)(1)(B),
which governs the treatment of other
non-displayed pegged orders on the
Exchange (i.e., Market Pegged Orders)
when the market is locked or crossed. In
Amendment No. 1, the Exchange also
provided additional responses to the
comment letters and provided more
information regarding the
implementation date for the proposed
rule change. These two changes do not
alter the substance of the proposed rule
change. Accordingly, the Commission
finds good cause, pursuant to Section
19(b)(2) of the Act,52 to approve the
proposed rule change, as modified by
Amendment No. 1, on an accelerated
basis.
VII. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,53 that the
proposed rule change (SR–NYSEArca–
2016–44), as modified by Amendment
No. 1, be, and it hereby is, approved on
an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.54
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–15718 Filed 6–30–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No. IC–
32163; File No. 812–14523]
MainStay Funds Trust, et al.; Notice of
Application
June 27, 2016.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice of an application for an
order pursuant to: (a) Section 6(c) of the
Investment Company Act of 1940
(‘‘Act’’) granting an exemption from
sections 18(f) and 21(b) of the Act; (b)
section 12(d)(1)(J) of the Act granting an
exemption from section 12(d)(1) of the
Act; (c) sections 6(c) and 17(b) of the
Act granting an exemption from sections
17(a)(1), 17(a)(2) and 17(a)(3) of the Act;
and (d) section 17(d) of the Act and rule
AGENCY:
52 15
U.S.C. 78s(b)(2).
53 Id.
54 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00120
Fmt 4703
Sfmt 4703
43301
17d–1 under the Act to permit certain
joint arrangements and transactions.
Summary of the Application:
Applicants request an order that would
permit certain registered open-end
management investment companies to
participate in a joint lending and
borrowing facility.
Applicants: MainStay Funds Trust,
The MainStay Funds and MainStay VP
Funds Trust (each a ‘‘Trust’’ and
collectively the ‘‘Trusts’’) and New York
Life Investment Management LLC
(‘‘New York Life Investments’’).
Filing Dates: The application was
filed on July 30, 2015, and amended on
September 28, 2015, January 19, 2016,
May 12, 2016, and June 20, 2016.
Hearing or Notification of Hearing: An
order granting the requested relief will
be issued unless the Commission orders
a hearing. Interested persons may
request a hearing by writing to the
Commission’s Secretary and serving
applicants with a copy of the request,
personally or by mail. Hearing requests
should be received by the Commission
by 5:30 p.m. on July 22, 2016 and
should be accompanied by proof of
service on the applicants, in the form of
an affidavit, or, for lawyers, a certificate
of service. Pursuant to rule 0–5 under
the Act, hearing requests should state
the nature of the writer’s interest, any
facts bearing upon the desirability of a
hearing on the matter, the reason for the
request, and the issues contested.
Persons who wish to be notified of a
hearing may request notification by
writing to the Commission’s Secretary.
ADDRESSES: Secretary, U.S. Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090;
Applicants: New York Life Investment
Management LLC, 51 Madison Avenue,
New York, NY 10010.
FOR FURTHER INFORMATION CONTACT:
Robert Shapiro, Senior Counsel, at (202)
551–7758 or Mary Kay Frech, Branch
Chief, at (202) 551–6821 (Division of
Investment Management, Chief
Counsel’s Office).
SUPPLEMENTARY INFORMATION: The
following is a summary of the
application. The complete application
may be obtained via the Commission’s
Web site by searching for the file
number, or an applicant using the
Company name box, at https://
www.sec.gov/search/search.htm or by
calling (202) 551–8090.
Applicants’ Representations
1. Each Trust is organized as a
Massachusetts business trust or a
Delaware statutory trust and is
registered under the Act as an open-end
E:\FR\FM\01JYN1.SGM
01JYN1
]]>Agencies
[Federal Register Volume 81, Number 127 (Friday, July 1, 2016)]
[Notices]
[Pages 43297-43301]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-15718]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78181; File No. SR-NYSEArca-2016-44]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Amendment No. 1, and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 1, To Add a New
Discretionary Pegged Order
June 28, 2016.
I. Introduction
On March 11, 2016, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
amend NYSE Arca Equities Rule 7.31P(h) to add a new Discretionary
Pegged Order. The proposed rule change was published for comment in the
Federal Register on March 30, 2016.\3\ The Commission received two
comment letters on the proposed rule change \4\ and a response letter
from the Exchange.\5\ On May 12, 2016, pursuant to Section 19(b)(2) of
the Act,\6\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change.\7\ On June 23, 2016, the Exchange filed Amendment
No. 1 to the proposed rule change.\8\ The Commission is publishing
[[Page 43298]]
this notice to solicit comments on Amendment No. 1 from interested
persons, and is approving the proposed rule change, as modified by
Amendment No. 1, on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 77441 (March 24,
2016), 81 FR 17749 (``Notice'').
\4\ See Letter from Sophia Lee, General Counsel, IEX Group, Inc.
(``IEX''), to Brent J. Fields, Secretary, Commission, dated April
15, 2016 (``IEX Letter''); Letter from John C. Nagel, Esq., Managing
Director and Sr. Deputy General Counsel, Citadel LLC (``Citadel''),
to Brent J. Fields, Secretary, Commission, dated April 20, 2016
(``Citadel Letter'').
\5\ See Letter from Elizabeth K. King, General Counsel and
Corporate Secretary, New York Stock Exchange, to Brent J. Fields,
Secretary, Commission, dated April 27, 2016 (``Response Letter'').
\6\ 15 U.S.C. 78s(b)(2).
\7\ See Securities Exchange Act Release No. 77820, 81 FR 31272
(May 18, 2016). The Commission designated June 28, 2016, as the date
by which it should approve, disapprove, or institute proceedings to
determine whether to disapprove the proposed rule change.
\8\ In Amendment No. 1, the Exchange: (1) Added subsection (E)
to proposed Rule 7.31P(h)(3), which would provide that if the PBBO
(as defined below) is locked or crossed, both an arriving and
resting Discretionary Pegged Order would wait for a PBBO that is not
locked or crossed before the working price (as defined below) is
adjusted and the order becomes eligible to trade; (2) provided
additional responses to the comment letters; and (3) provided more
information regarding the implementation date for the proposed rule
change. Amendment No. 1 is available at: https://www.sec.gov/comments/sr-nysearca-2016-44/nysearca201644-4.pdf.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
The Exchange proposes to amend NYSE Arca Equites Rule 7.31P(h) to
add a new Discretionary Pegged Order for its Pillar trading platform.
According to the Exchange, the proposed Discretionary Pegged Order is
based on the Discretionary Peg Order (``D-Peg Order'') proposed by IEX
in its Form 1 application seeking registration as a national securities
exchange.\9\
---------------------------------------------------------------------------
\9\ See Notice, supra note 3, at 17749. On June 17, 2016, the
Commission granted IEX's application for registration as a national
securities exchange. See Securities Exchange Act Release No. 78101
(June 17, 2016), 81 FR 41142 (June 23, 2016) (``IEX Order''). In its
proposal, the Exchange identifies the substantive differences
between the proposed Discretionary Pegged Order and IEX's D-Peg
Order. First, the proposed Discretionary Pegged Order must have a
limit price, whereas IEX's D-Peg Order is not required to have a
limit price. See Notice, supra note 3, at 17749. Second, the
proposed Discretionary Pegged Order must be Day time-in-force,
whereas IEX's D-Peg order is also permitted to have certain other
times-in-force. See id. Third, if the PBBO is locked or crossed,
both an arriving and resting Discretionary Pegged Order would wait
for a PBBO that is not locked or crossed before the working price is
adjusted and the order becomes eligible to trade, whereas IEX's D-
Peg Order can be priced and traded if the market is locked or
crossed. See Amendment No. 1 at 3-4. In the proposal, the Exchange
also states that, unlike IEX's D-Peg Order, the proposed
Discretionary Pegged Order would be based on the PBBO rather than
the NBBO. See Notice, supra note 3, at 17749. According to the
Exchange, the PBBO is the reference price that it uses for its
Pegged Orders under Rule 7.31P(h). The Commission notes that, in an
amendment to IEX's exchange application, IEX clarified that its D-
Peg Order is based on the Protected NBBO. See Investors' Exchange
LLC--Form 1 Application and Exhibits, Addendum B-1 Comparison to
Amendment No. 1, available at https://www.sec.gov/rules/other/2016/iex/iex-form-1-addendum-b-1-amendments-redline.pdf.
---------------------------------------------------------------------------
Proposed Rule 7.31P(h)(3) would provide that a Discretionary Pegged
Order would be a Pegged Order \10\ to buy (sell) that upon entry to the
NYSE Arca Marketplace \11\ would be assigned a working price \12\ equal
to the lower (higher) of the midpoint of the PBBO \13\ (``Midpoint
Price'') or the limit price of the order. Any untraded shares of such
order would be assigned a working price equal to the lower (higher) of
the PBB (PBO) or the order's limit price and would automatically be
adjusted in response to changes to the PBB (PBO) for buy (sell) orders
up (down) to the order's limit price. In order to trade with contra-
side orders on the NYSE Arca Book, a Discretionary Pegged Order to buy
(sell) would exercise the least amount of price discretion necessary
from its working price to its discretionary price (defined as the lower
(higher) of the Midpoint Price or the Discretionary Pegged Order's
limit price), except during periods of quote instability, as defined in
proposed Rule 7.31P(h)(3)(D).
---------------------------------------------------------------------------
\10\ The term ``Pegged Order'' is defined in Exchange Rule
7.31P(h) as a Limit Order that does not route with a working price
that is pegged to a dynamic reference price. If the designated
reference price is higher (lower) than the limit price of a Pegged
Order to buy (sell), the working price will be the limit price of
the order.
\11\ The term ``NYSE Arca Marketplace'' is defined in Exchange
Rule 1.1(e) as the electronic securities communications and trading
facility designated by the Board of Directors through which orders
of Users are consolidated for execution and/or display.
\12\ The term ``working price'' is defined in Exchange Rule
7.36P(a)(3) as the price at which an order is eligible to trade at
any given time, which may be different from the limit price or
display price of the order. The term ``limit price'' is defined in
Exchange Rule 7.36P(a)(2) as the highest (lowest) specified price at
which a Limit Order to buy (sell) is eligible to trade.
\13\ The term ``PBBO'' is defined in Exchange Rule 1.1(dd) as
the highest Protected Bid and the lowest Protected Offer.
---------------------------------------------------------------------------
Proposed Rule 7.31P(h)(3)(A) would provide that Discretionary
Pegged Orders would not be displayed, must be designated Day, and would
be eligible to be designated for the Core Trading Session only.
Discretionary Pegged Orders that include a designation for the Early
Trading Session or Late Trading Session would be rejected.
Proposed Rule 7.31P(h)(3)(B) would provide that when exercising
discretion, Discretionary Pegged Orders would maintain their time
priority at their working price as Priority 3--Non-Display Orders and
would be prioritized behind Priority 3--Non-Display Orders with a
working price equal to the discretionary price of a Discretionary
Pegged Order at the time of execution. If multiple Discretionary Pegged
Orders are exercising price discretion during the same book processing
action, they would maintain their relative time priority at the
discretionary price.
Proposed Rule 7.31P(h)(3)(C) would provide that a Discretionary
Pegged Order would be eligible to exercise price discretion to its
discretionary price, except during periods of quote instability. If the
Corporation \14\ determines the PBB for a particular security to be an
unstable quote, it would restrict buy Discretionary Pegged Orders in
that security from exercising price discretion to trade against
interest above the PBB. If the Corporation determines the PBO for a
particular security to be an unstable quote, it would restrict sell
Discretionary Pegged Orders in that security from exercising price
discretion to trade against interest below the PBO.
---------------------------------------------------------------------------
\14\ The term ``Corporation'' is defined in Exchange Rule 1.1(k)
to mean NYSE Arca Equities, Inc., as described in NYSE Arca
Equities, Inc.'s Certificate of Incorporation and Bylaws.
---------------------------------------------------------------------------
Proposed Rule 7.31P(h)(3)(D) would set forth how the Exchange would
determine the quote instability factor (i.e., the probability of an
imminent change of the current PBB to a lower price or the current PBO
to a higher price). When the quoting activity meets predefined criteria
and the quote instability factor is greater than a defined threshold
(``quote instability threshold''), the Corporation would treat the
quote as not stable (``quote instability'' or ``crumbling quote'').
When the Corporation determines either the PBB or the PBO is unstable,
the determination would remain in effect at that price level for ten
milliseconds. The Corporation would only treat one side of the PBBO as
unstable in a particular security at any given time.
The Corporation would determine that there is quote instability or
a crumbling quote when the following occur: The PBB and PBO are the
same as the PBB and PBO one millisecond ago; and the PBBO spread is
less than or equal to the thirty-day median PBBO spread during the Core
Trading Session; and there are more protected quotations on the far
side; and the quote instability factor is greater than the defined
quote instability threshold.
The quote stability calculation used to determine the current quote
instability factor would be defined by the following formula:
1/(1 + e [supcaret] -(C0 + C1 * N + C2 * F + C3 * N-1 + C4 * F-1)).
The Exchange proposes to use the following quote stability
coefficients: C0 = -2.39515; C1 = -0.76504; C2 = 0.07599; C3 = 0.38374;
and C4 = 0.14466. The Exchange proposes to use the following quote
stability variables: N = the number of protected quotations on the near
side of the market; F = the number of protected quotations on the far
side of the market; N-1 = the number of protected quotations on the
near side of the market one millisecond ago; and F-1 = the number of
protected quotations on the far side of the market one millisecond ago.
The Exchange proposes to use a quote instability threshold of 0.32.
Pursuant to proposed Rule 7.31P(h)(3)(D)(i)(D)(3), the Exchange
reserves the right to modify the quote stability coefficients or quote
instability
[[Page 43299]]
threshold at any time, subject to the filing of a proposed rule change
with the Commission.
Proposed Rule 7.31P(h)(3)(E) would provide that if the PBBO is
locked or crossed, both an arriving and a resting Discretionary Pegged
Order would wait for a PBBO that is not locked or crossed before the
working price is adjusted and the order becomes eligible to trade.
The Exchange anticipates that it will announce the implementation
date of the proposed rule change by the fourth quarter of 2016.\15\
---------------------------------------------------------------------------
\15\ See Amendment No. 1 at 5.
---------------------------------------------------------------------------
III. Summary of Comments and Response to Comments
The Commission received two comment letters opposing the proposed
rule change and a response letter and an amendment from the
Exchange.\16\
---------------------------------------------------------------------------
\16\ See supra notes 4, 5, and 8.
---------------------------------------------------------------------------
One commenter points out that, as noted by the Exchange, the
proposed Discretionary Pegged Order is a copy of the D-Peg Order that
the commenter created, which has been offered since November 2014 by
the IEX Alternative Trading System.\17\ This commenter states its
belief that the D-Peg Order is a useful order type that can protect
investors, if implemented properly.\18\ However, this commenter
questions the effectiveness of the proposed Discretionary Pegged Order,
and states that it should not be approved unless the Exchange amends
the proposal and provides additional justifications to show that the
order type would work as purported.\19\ Specifically, this commenter
states that the Exchange would not be in a position to deliver the
benefits as claimed if it continues to offer co-location and microwave
services to fast market participants because the Exchange would not be
able to effectively update the order during a crumbling quote faster
than the market participant trying to pick off the order.\20\ This
commenter also questions whether the Exchange understands the use of
the proposed order type and expresses concern that the implementation
of order types that are not well thought-through can increase systemic
risk and may have adverse impacts on investor protection.\21\ According
to the commenter, the D-Peg formula was calculated based on the
location of its systems in Weehawken, NJ, and its unique latency
profile, and it makes little sense to apply the same formula to orders
on the Exchange located in Mahwah, NJ.\22\ Finally, this commenter
argues that the Exchange should adopt a different name for the proposed
order type to avoid confusion and misrepresentation regarding the
nature of the order type.\23\
---------------------------------------------------------------------------
\17\ See IEX Letter at 1.
\18\ See id.
\19\ See id., at 1-3.
\20\ See id., at 2.
\21\ See id., at 2-3.
\22\ See id., at 2.
\23\ See id., at 3. In its letter, the commenter also responds
to the Exchange's comments on the D-Peg Order, which were set forth
in the Notice. See id., at 2. As noted above, the Commission granted
IEX's application for registration as a national securities
exchange, which included the D-Peg Order. See supra note 9. This
order does not address comments and responses related to IEX's D-Peg
Order.
---------------------------------------------------------------------------
Another commenter also opposes the proposed rule change. According
to this commenter, Commission approval of exchanges' use of predictive
order types such as the proposed Discretionary Pegged Order would
result in rapidly increasing order type complexity, which would reduce
market resilience and make markets more opaque for all investors.\24\
The commenter states its belief that the utility of these order types
is marginal and does not outweigh the additional complexity that these
order types would impose on the market.\25\ This commenter also
expresses concerns regarding how the Commission could or would
effectively review and police additional predictive order types as they
emerge and evolve, and whether the Commission would propose guidance or
limitations on how predictive order types may operate.\26\ Finally,
this commenter states that predictive order types encroach on the
traditional role of broker-dealers by using inherent competitive
advantages that exchanges have over broker-dealers.\27\
---------------------------------------------------------------------------
\24\ See Citadel Letter at 1. This commenter notes that the
proposed Discretionary Pegged Order is virtually identical to IEX's
D-Peg Order. See id. The commenter notes that it explained its
concerns in more detail in its comment letter on IEX's exchange
application. See Letter from John C. Nagel, Esq., Managing Director
and Sr. Deputy General Counsel, Citadel LLC, to Brent J. Fields,
Secretary, Commission, dated April 14, 2016.
\25\ See Citadel Letter at 2.
\26\ See id.
\27\ See id. In the context of IEX's D-Peg Order and the
proposed Discretionary Pegged Order, the Exchange also requests that
the Commission articulate the boundaries of when an exchange may or
may not offer services that are otherwise performed by broker-
dealers and when it would be appropriate for an exchange to monitor
the quality of the prices in a market to determine how to price an
order, and raises the issue of whether these order types are
consistent with the Commission's previous disapproval of Nasdaq's
benchmark orders. See Response Letter at 2-4. See also Notice, supra
note 3, at 17751.
---------------------------------------------------------------------------
In response to comments, the Exchange indicates that the proposed
Discretionary Pegged Order is a competitive response to IEX's D-Peg
Order.\28\ The Exchange states that the proposed calculation to
determine whether a quote is unstable is a straightforward
determination that does not require inbound order flow to be
intentionally delayed to be effective.\29\ According to the Exchange,
while an intentionally-delayed market may prevent arriving interest
from interacting with pegged orders immediately, it does not believe
that processing market data updates and inbound orders out of phase (as
with IEX) or simultaneously (as proposed by the Exchange) would
materially alter the effectiveness of the proposed functionality.\30\
The Exchange also states its belief that the benefits of the proposed
functionality would be the same regardless of the relative speed.\31\
Moreover, according to the Exchange, the proposed Discretionary Pegged
Order would be an optional order type, and if market participants do
not believe that the quote instability formula appropriately predicts
market movement, they do not have to use the order type.\32\ The
Exchange states that, over time and based on client feedback, it would
consider changes to the specific formula used to assess the quality of
the market or would consider offering additional types of Discretionary
Pegged Orders to serve the trading needs of different market
participants, subject to filing separate proposed rule changes with the
Commission.\33\ Finally, the Exchange states that it does not
anticipate that the proposed order type would have any disruptive
effects on the overall market.\34\
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\28\ See Response Letter at 3-4.
\29\ See Amendment No. 1 at 4.
\30\ See id.
\31\ See id.
\32\ See Response Letter at 4-5 and Amendment No. 1 at 4. The
Exchange states its belief that the effectiveness of a particular
order type in serving the trading needs of market participants
should be market-driven. See Response Letter at 4.
\33\ See Response Letter at 4. In its response letter, the
Exchange also provides additional comments on IEX's exchange
application. As noted above, the Commission granted IEX's exchange
application, and this order does not address comments and responses
related to IEX's D-Peg Order. See supra note 9.
\34\ See Amendment No. 1 at 4.
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IV. Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\35\ In particular, the
[[Page 43300]]
Commission finds that the proposed rule change, as modified by
Amendment No. 1, is consistent with Section 6(b)(5) of the Act,\36\
which requires, among other things, that the rules of a national
securities exchange be designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general, to protect
investors and the public interest.
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\35\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\36\ 15 U.S.C. 78f(b)(5).
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As noted above, the proposed Discretionary Pegged Order is based on
IEX's D-Peg Order, although there are some differences between the two
orders.\37\ First, unlike IEX's D-Peg Order, the proposed Discretionary
Pegged Order must have a limit price.\38\ The Commission notes that
this is not a novel aspect for this type of order because IEX's D-Peg
Order is also permitted to have a limit price, although it is not
required to have one.\39\ Second, unlike IEX's D-Peg Order, the
proposed Discretionary Pegged Order must have a Day time-in-force.\40\
The Commission similarly notes that this is not a novel aspect for this
type of order because IEX's D-Peg Order is also permitted to have the
Day time-in-force, although it is permitted to have certain other
times-in-force as well.\41\ Third, if the PBBO is locked or crossed, an
arriving or resting Discretionary Pegged Order would wait for a PBBO
that is not locked or crossed before the working price is adjusted and
the order becomes eligible to trade,\42\ whereas IEX's D-Peg Order can
be priced and traded if the market is locked or crossed.\43\ The
Commission notes that the proposed treatment of Discretionary Pegged
Orders when the market is locked or crossed is consistent with Exchange
Rule 7.31P(h)(1)(B), which governs the treatment of other non-displayed
pegged orders on the Exchange (i.e., Market Pegged Orders) when the
market is locked or crossed.
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\37\ See supra note 9.
\38\ See Notice, supra note 3, at 17749.
\39\ See IEX Rule 11.190(b)(10)(E).
\40\ See Notice, supra note 3, at 17749.
\41\ See IEX Rule 11.190(b)(10)(B).
\42\ See Amendment No. 1 at 3-4.
\43\ See IEX Rule 11.190(h)(3).
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The Commission notes that, according to the Exchange, the proposed
Discretionary Pegged Order would assist ETP Holders in obtaining best
execution for their customers by limiting executions at the Midpoint
Price when the PBBO is not stable, and by reducing the potential to
execute at a stale price.\44\ Moreover, the Commission notes that, in
response to the comments, the Exchange acknowledges that an
intentionally-delayed market may prevent arriving interest from
interacting with pegged orders immediately, but states its belief that
the proposed Discretionary Pegged Order would be effective,
notwithstanding the differences in speed between the Exchange and
IEX.\45\
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\44\ See Notice, supra note 3, at 17751.
\45\ See supra notes 29-34 and accompanying text (discussing in
more detail the Exchange's response to comments).
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With respect to questions regarding whether the proposed
Discretionary Pegged Order would perform a function that is typically
performed by broker-dealers, and whether approval of the proposed
Discretionary Pegged Order would be inconsistent with the Commission's
prior disapproval of Nasdaq's ``benchmark orders,'' the Commission
notes that, as with IEX's rules governing the D-Peg Order, proposed
Rule 7.31P(h)(3) would delineate the specific conditions under which a
Discretionary Pegged Order would or would not be eligible to execute up
(down) to the Midpoint Price by setting forth the formula that the
Exchange would use to determine quote stability. Also, as with IEX's D-
Peg Order, the Exchange would encode in its rule the totality of the
discretionary feature of the proposed Discretionary Pegged Order. As
the Exchange notes in the proposal, the manner by which it would
monitor the quality of the quotes would be objective and transparent,
as set forth in the proposed rule.\46\ As with IEX's D-Peg Order, the
Commission does not believe that the hardcoded conditionality of the
proposed order type would provide the Exchange with actual discretion
or the ability to exercise individualized judgment when executing an
order. The Commission also notes that the Exchange would be required to
submit a proposed rule change pursuant to Section 19(b) of the Act
prior to implementing any changes to the proposed order. Moreover, as
with IEX's D-Peg Order, the Commission believes that the proposed
Discretionary Pegged Order is distinguishable from Nasdaq's benchmark
orders and does not implicate the same issues.\47\
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\46\ See Notice, supra note 3, at 17751.
\47\ See IEX Order, supra note 9, at 41153 (discussing in more
detail the differences between IEX's D-Peg Order and Nasdaq's
benchmark orders).
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With respect to a commenter's concern that approval of the proposed
Discretionary Pegged Order would lead to the proliferation of complex
predictive order types, the Commission notes that new exchange proposed
order types are subject to the rule filing process of Section 19(b) of
the Act and Rule 19b-4 under the Act, and the standards in Section 6(b)
of the Act, among other provisions.\48\
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\48\ See also Form 19b-4, General Instructions.
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With respect to a commenter's request that the Exchange use a
different name for the proposed order in order to avoid confusion and
misrepresentation regarding the nature of the order,\49\ the Commission
notes that the functionality of the proposed Discretionary Pegged Order
is specifically delineated in proposed Rule 7.31P(h)(3). Moreover, the
Commission notes that, currently, order types on different exchanges
with nearly identical names may function differently.\50\ As a result,
the Commission does not believe the Exchange's use of the name
``Discretionary Pegged Order'' raises regulatory concerns.
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\49\ In its comment letter, this commenter references its
``Patent-Pending `DYNAMIC PEG ORDERS IN AN ELECTRONIC TRADING
SYSTEM' in the U.S. patent application number 14/799,975, priority
to August 22, 2014.'' However, this commenter states that its
comment letter ``speaks to deficiencies in NYSE's application in
light of current market structure and is not intended to address,
comment on or waive our property rights in the D-peg invention or
related subject matter.'' See IEX Letter at note 2. In issuing this
order, the Commission expresses no view with respect to these
matters.
\50\ See, e.g., Exchange Rule 7.31P(h)(2) (describing the
Exchange's ``Primary Pegged Order'') and IEX Rules 11.190(a)(3) and
(b)(8) (describing IEX's ``primary peg order'').
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Finally, the Commission notes that existing exchanges offer both
discretion and pegging functionalities, including the combination of
both of those functionalities in a single order type.\51\ As with IEX's
D-Peg Order, the proposed discretion functionality would be turned
``on'' or ``off'' depending on the Exchange's quote stability
determination. Because the Exchange has encoded in its rule the
totality of the discretionary feature of the proposed Discretionary
Pegged Order, the Commission believes the proposed order type is a
close variant of the discretion and pegging functionality that
currently exist on other exchanges.
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\51\ See, e.g., Nasdaq Rule 4703(g).
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Based on the foregoing and the Exchange's representations, the
Commission believes that the proposed rule change, as modified by
Amendment No. 1, is consistent with the Act.
V. Solicitation of Comments on Amendment No. 1
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 1
to the proposed rule change is consistent with the Act. Comments may be
[[Page 43301]]
submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NYSEArca-2016-44 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-NYSEArca-2016-44. 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 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-NYSEArca-2016-44 and should
be submitted on or before July 22, 2016.
VI. Accelerated Approval of the Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the 30th day after the
date of publication of notice of Amendment No. 1 in the Federal
Register. In Amendment No. 1, the Exchange added subsection (E) to
proposed Rule 7.31P(h)(3), which would provide that if the PBBO is
locked or crossed, both an arriving and resting Discretionary Pegged
Order would wait for a PBBO that is not locked or crossed before the
working price is adjusted and the order becomes eligible to trade. As
noted above, this aspect of the proposed Discretionary Pegged Order is
consistent with Exchange Rule 7.31P(h)(1)(B), which governs the
treatment of other non-displayed pegged orders on the Exchange (i.e.,
Market Pegged Orders) when the market is locked or crossed. In
Amendment No. 1, the Exchange also provided additional responses to the
comment letters and provided more information regarding the
implementation date for the proposed rule change. These two changes do
not alter the substance of the proposed rule change. Accordingly, the
Commission finds good cause, pursuant to Section 19(b)(2) of the
Act,\52\ to approve the proposed rule change, as modified by Amendment
No. 1, on an accelerated basis.
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\52\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\53\ that the proposed rule change (SR-NYSEArca-2016-44), as
modified by Amendment No. 1, be, and it hereby is, approved on an
accelerated basis.
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\53\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\54\
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\54\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-15718 Filed 6-30-16; 8:45 am]
BILLING CODE 8011-01-P
