Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt Rules To Implement the Quoting and Trading Provisions of the Plan To Implement a Tick Size Pilot Program, 46979-46984 [2016-16973]
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Federal Register / Vol. 81, No. 138 / Tuesday, July 19, 2016 / Notices
Please direct your written comments
to: Pamela Dyson, Director/Chief
Information Officer, Securities and
Exchange Commission, c/o Remi PavlikSimon, 100 F Street NE., Washington,
DC 20549, or send an email to:
PRA_Mailbox@sec.gov.
Dated: July 13, 2016.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–17000 Filed 7–18–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78317; File No. SR–Phlx–
2016–73]
Self-Regulatory Organizations;
NASDAQ PHLX LLC; Notice of Filing
and Immediate Effectiveness of
Proposed Rule Change To Adopt Rules
To Implement the Quoting and Trading
Provisions of the Plan To Implement a
Tick Size Pilot Program
July 13, 2016.
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 29,
2016, NASDAQ PHLX LLC (‘‘Phlx’’ or
‘‘Exchange’’) 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 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 adopt rules
under Rule 3317 to implement the
quoting and trading provisions of the
Plan to Implement a Tick Size Pilot
Program submitted to the Commission
pursuant to Rule 608 of Regulation
NMS 3 under the Act (the ‘‘Plan’’).4 The
proposed rule change is substantially
similar to proposed rule changes
recently approved or published by the
Commission by New York Stock
Exchange LLC to adopt NYSE Rules
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1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 17 CFR 242.608.
4 See Securities and Exchange Act Release No.
74892 (May 6, 2015), 80 FR 27513 (File No. 4–657)
(‘‘Tick Plan Approval Order’’). See also Securities
and Exchange Act Release No. 76382 (November 6,
2015) (File No. 4–657), 80 FR 70284 (File No. 4–
657) (November 13, 2015), which extended the pilot
period commencement date from May 6, 2015 to
October 3, 2016.
2 17
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67(a) and 67(c)-(e), which also
implemented the quoting and trading
provisions of the Plan.5
The text of the proposed rule change
is available on the Exchange’s Web site
at https://
nasdaqomxphlx.cchwallstreet.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
Exchange 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. The
Exchange 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 the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to establish
rules to require its member
organizations to comply with the
requirements of the Plan, which is
designed to study and assess the impact
of increment conventions on the
liquidity and trading of the common
stocks of small capitalization
companies. The Exchange proposes
changes to its rules for a two-year pilot
period that coincides with the pilot
period for the Plan, which is currently
scheduled as a two year pilot to begin
on October 3, 2016.
Background
On August 25, 2014, NYSE Group,
Inc., on behalf of Bats BZX Exchange,
Inc. (f/k/a BATS Exchange, Inc.), Bats
BYX Exchange, Inc. (f/k/a BATS YExchange, Inc.), Chicago Stock
Exchange, Inc., EDGA Exchange, Inc.,
EDGX Exchange, Inc., the Exchange
[sic], Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’), NASDAQ
OMX BX, Inc., NASDAQ OMX PHLX
LLC, New York Stock Exchange LLC,
the Exchange [sic] and NYSE Arca, Inc.,
and the NYSE MKT LLC, (collectively,
5 See Securities Exchange Act Release No. 76229
(October 22, 2015), 80 FR 66065 (October 28, 2015)
(SR–NYSE–2015–46), as amended by Partial
Amendments No. 1 and No. 2 to the Quoting &
Trading Rules Proposal. See Securities Exchange
Act Release No. 77703 (April 25, 2016), 81 FR
25725 (April 29, 2016) (SR–NYSE–2015–46).
PO 00000
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46979
‘‘Participants’’), filed with the
Commission, pursuant to Section 11A of
the Act 6 and Rule 608 of Regulation
NMS thereunder, the Plan to Implement
a Tick Size Pilot Program.7 The
Participants filed the Plan to comply
with an order issued by the Commission
on June 24, 2014 (the ‘‘June 2014
Order’’).8 The Plan 9 was published for
comment in the Federal Register on
November 7, 2014,10 and approved by
the Commission, as modified, on May 6,
2015.11
The Plan is designed to allow the
Commission, market participants, and
the public to study and assess the
impact of increment conventions on the
liquidity and trading of the common
stocks of small capitalization
companies. The Commission plans to
use the Tick Size Pilot Program to assess
whether wider tick sizes enhance the
market quality of Pilot Securities for the
benefit of issuers and investors. Each
Participant is required to comply with,
and to enforce compliance by its
member organizations, as applicable,
with the provisions of the Plan.
On October 9, 2015, the Operating
Committee approved the Exchange’s
[sic] proposed rules as model
Participant rules that would require
compliance by a Participant’s member
organizations with the provisions of the
Plan, as applicable, and would establish
written policies and procedures
reasonably designed to comply with
applicable quoting and trading
requirements specified in the Plan.12 As
described more fully below, the
proposed rules would require member
organizations to comply with the Plan
and provide for the widening of quoting
6 15
U.S.C. 78k–1.
Letter from Brendon J. Weiss, Vice
President, Intercontinental Exchange, Inc., to
Secretary, Commission, dated August 25, 2014.
8 See Securities Exchange Act Release No. 72460
(June 24, 2014), 79 FR 36840 (June 30, 2014).
9 Unless otherwise specified, capitalized terms
used in this rule filing are based on the defined
terms of the Plan.
10 See Securities and Exchange Act Release No.
73511 (November 3, 2014), 79 FR 66423 (File No.
4–657) (Tick Plan Filing).
11 See Tick Plan Approval Order, supra note 4.
See also Securities Exchange Act Release No. 77277
(March 3, 2016), 81 FR 12162 (March 8, 2016) (File
No. 4–657), which amended the Plan to add
National Stock Exchange, Inc. as a Participant.
12 The Operating Committee is required under
Section III(C)(2) of the Plan to ‘‘monitor the
procedures established pursuant to the Plan and
advise Participants with respect to any deficiencies,
problems, or recommendations as the Operating
Committee may deem appropriate.’’ The Operating
Committee is also required to ‘‘establish
specifications and procedures for the
implementation and operation of the Plan that are
consistent with the provisions of the Plan.’’
7 See
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and trading increments for Pilot
Securities, consistent with the Plan.
The Plan will include stocks of
companies with $3 billion or less in
market capitalization, an average daily
trading volume of one million shares or
less, and a volume weighted average
price of at least $2.00 for every trading
day. The Plan will consist of a control
group of approximately 1,400 Pilot
Securities and three test groups with
400 Pilot Securities in each selected by
a stratified sampling.13 During the pilot,
Pilot Securities in the control group will
be quoted at the current tick size
increment of $0.01 per share and will
trade at the currently permitted
increments. Pilot Securities in the first
test group (‘‘Test Group One’’) will be
quoted in $0.05 minimum increments
but will continue to trade at any price
increment that is currently permitted.14
Pilot Securities in the second test group
(‘‘Test Group Two’’) will be quoted in
$0.05 minimum increments and will
trade at $0.05 minimum increments
subject to a midpoint exception, a retail
investor exception, and a negotiated
trade exception.15 Pilot Securities in the
third test group (‘‘Test Group Three’’)
will be subject to the same terms as Test
Group Two and also will be subject to
the ‘‘Trade-at’’ requirement to prevent
price matching by a person not
displaying at a price of a Trading
Center’s ‘‘Best Protected Bid’’ or ‘‘Best
Protected Offer,’’ unless an enumerated
exception applies.16 In addition to the
exceptions provided under Test Group
Two, an exception for Block Size orders
and exceptions that closely resemble
those under Rule 611 of Regulation
NMS 17 will apply to the Trade-at
requirement.
The Plan also contains requirements
for the collection and transmission of
data to the Commission and the public.
A variety of data generated during the
Plan will be released publicly on an
aggregated basis to assist in analyzing
the impact of wider tick sizes on smaller
capitalization stocks.18
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Proposed Rules 3317(a) and (c)
The Plan requires the Exchange to
establish, maintain, and enforce written
policies and procedures that are
reasonably designed to comply with
applicable quoting and trading
13 See Section V of the Plan for identification of
Pilot Securities, including criteria for selection and
grouping.
14 See Section VI(B) of the Plan. Pilot Securities
in Test Group One will be subject to a midpoint
exception and a retail investor exception.
15 See Section VI(C) of the Plan.
16 See Section VI(D) of the Plan.
17 17 CFR 242.611.
18 See Section VII of the Plan.
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requirements specified in the Plan.19
Accordingly, the Exchange is proposing
new Rule 3317(a) to require its member
organizations to comply with the
quoting and trading provisions of the
Plan. The proposed Rules are also
designed to ensure the Exchange’s
compliance with the Plan.
Proposed paragraph (a)(1) of new Rule
3317 would establish the following
defined terms:
• ‘‘Plan’’ means the Tick Size Pilot
Plan submitted to the Commission
pursuant to Rule 608(a)(3) of Regulation
NMS under the Act.
• ‘‘Pilot Test Groups’’ means the three
test groups established under the Plan,
consisting of 400 Pilot Securities each,
which satisfy the respective criteria
established by the Plan for each such
test group.
• ‘‘Trade-at Intermarket Sweep
Order’’ 20 would mean a limit order for
a Pilot Security that meets the following
requirements:
(i) When routed to a Trading Center,
the limit order is identified as a Tradeat Intermarket Sweep Order; and
(ii) Simultaneously with the routing
of the limit order identified as a Tradeat Intermarket Sweep Order, one or
19 The Exchange was also required by the Plan to
develop appropriate policies and procedures that
provide for data collection and reporting to the
Commission of data described in Appendixes B and
C of the Plan. See Securities Exchange Act Release
No. 77458 (March 28, 2016), 81 FR 18919 (April 1,
2016) (SR–Phlx–2016–39).
20 The Plan defines a Trade-at Intermarket Sweep
Order (‘‘ISO’’) as a limit order for a Pilot Security
that, when routed to a Trading Center, is identified
as an ISO, and simultaneous with the routing of the
limit order identified as an ISO, one or more
additional limit orders, as necessary, are routed to
execute against the full displayed size of any
protected bid (in the case of a limit order to sell)
or the full displayed size of any protected offer (in
the case of a limit order to buy) for the Pilot
Security with a price that is equal to the limit price
of the limit order identified as an ISO. These
additional routed orders also must be marked as
ISOs. See Plan, Section I(MM). Since the Plan
allows (i) an order that is identified as an ISO to
be executed at the price of a Protected Quotation
(see Plan, Section VI(D)(8) and proposed Rule
3317(c)(3)(D)(iii)i.) and (ii) an order to execute at
the price of a Protected Quotation that ‘‘is executed
by a trading center that simultaneously routed
Trade-at ISO to execute against the full displayed
size of the Protected Quotation that was trade at’’
(see Plan, Section VI(D)(9) and proposed Rule
3317(c)(3)(D)(iii)j.)), the Exchange proposes to
clarify the use of an ISO in connection with the
Trade-at requirement by adopting, as part of
proposed Rule 3317(a)(1), a comprehensive
definition of ‘‘Trade-at ISO.’’ As set forth in the
Plan and as noted above, the definition of a Tradeat ISO used in the Plan does not distinguish ISOs
that are compliant with Rule 611 or Regulation
NMS from ISOs that are compliant with Trade-at.
The Exchange therefore proposes the separate
definition of Trade-at ISO contained in proposed
Rule 3317(a). The Exchange believes that this
proposed definition will further clarify to recipients
of ISOs in Test Group Three securities whether the
ISO satisfies the requirements of Rule 611 of
Regulation NMS or Trade-at.
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more additional limit orders, as
necessary, are routed to execute against
the full size of any protected bid, in the
case of a limit order to sell, or the full
displayed size of any protected offer, in
the case of a limit order to buy, for the
Pilot Security with a price that is better
than or equal to the limit price of the
limit order identified as a Trade-at
Intermarket Sweep Order. These
additional routed orders also must be
marked as Trade-at Intermarket Sweep
Orders.
• Paragraph (a)(1)(E) would provide
that all capitalized terms not otherwise
defined in this rule shall have the
meanings set forth in the Plan,
Regulation NMS under the Act, or
Exchange rules, as applicable.
Proposed Paragraph (a)(2) would state
that the Exchange is a Participant in,
and subject to the applicable
requirements of, the Plan; proposed
Paragraph (a)(3) would require member
organizations to establish, maintain and
enforce written policies and procedures
that are reasonably designed to comply
with the applicable requirements of the
Plan, which would allow the Exchange
to enforce compliance by its member
organizations with the provisions of the
Plan, as required pursuant to Section
II(B) of the Plan.
In addition, Paragraph (a)(4) would
provide that Exchange systems would
not display, quote or trade in violation
of the applicable quoting and trading
requirements for a Pilot Security
specified in the Plan and this proposed
rule, unless such quotation or
transaction is specifically exempted
under the Plan.21
The Exchange also proposes to add
Rule 3317(a)(5) to provide for the
treatment of Pilot Securities that drop
below a $1.00 value during the Pilot
Period.22 The Exchange proposes that if
21 The Exchange is still evaluating its internal
policies and procedures to ensure compliance with
the Plan, and plans to separately propose rules that
would address violations of the Plan.
22 New York Stock Exchange LLC, on behalf of the
Participants, submitted a letter to Commission
requesting exemption from certain provisions of the
Plan related to quoting and trading. See letter from
Elizabeth K. King, NYSE, to Brent J. Fields,
Secretary, Commission, dated October 14, 2015 (the
‘‘October Exemption Request’’). FINRA, also on
behalf of the Plan Participants, submitted a separate
letter to Commission requesting additional
exemptions from certain provisions of the Plan
related to quoting and trading. See letter from
Marcia E. Asquith, Senior Vice President and
Corporate Secretary, FINRA, to Robert W. Errett,
Deputy Secretary, Commission, dated February 23,
2016 (the ‘‘February Exemption Request,’’ and
together with the October Exemption Request, the
‘‘Exemption Request Letters’’). The Commission,
pursuant to its authority under Rule 608(e) of
Regulation NMS, granted New York Stock Exchange
LLC a limited exemption from the requirement to
comply with certain provisions of the Plan as
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the price of a Pilot Security drops below
$1.00 during regular trading on any
given business day, such Pilot Security
would continue to be subject to the Plan
and the requirements described below
that necessitate member organizations to
comply with the specific quoting and
trading obligations for each respective
Pilot Test Group under the Plan, and
would continue to trade in accordance
with the proposed rules below as if the
price of the Pilot Security had not
dropped below $1.00. However, if the
Closing Price of a Pilot Security on any
given business day is below $1.00, such
Pilot Security would be moved out of its
respective Pilot Test Group into the
control group (which consists of Pilot
Securities not placed into a Pilot Test
Group), and may then be quoted and
traded at any price increment that is
currently permitted by Exchange rules
for the remainder of the Pilot Period.
Notwithstanding anything contained
herein to the contrary, the Exchange
proposes that, at all times during the
Pilot Period, Pilot Securities (whether in
the control group or any Pilot Test
Group) would continue to be subject to
the data collection rules, which are
enumerated in Rule 3317(b).
The Exchange proposes Rules
3317(c)(1)–(3), which would require
member organizations to comply with
the specific quoting and trading
obligations for each Pilot Test Group
under the Plan. With regard to Pilot
Securities in Test Group One, proposed
Rule 3317(c)(1) would provide that no
member organization may display, rank,
or accept from any person any
displayable or non-displayable bids or
offers, orders, or indications of interest
in increments other than $0.05.
However, orders priced to trade at the
midpoint of the National Best Bid and
National Best Offer (‘‘NBBO’’) or Best
Protected Bid and Best Protected Offer
(‘‘PBBO’’) and orders entered in a
Participant-operated retail liquidity
program 23 may be ranked and accepted
in increments of less than $0.05. Pilot
Securities in Test Group One may
continue to trade at any price increment
specified in the Exemption Request Letters and
noted herein. See letter from David Shillman,
Associate Director, Division of Trading and
Markets, Commission to Sherry Sandler, Associate
General Counsel, New York Stock Exchange LLC,
dated April 25, 2016 (the ‘‘Exemption Letter’’). The
Exchange is seeking the same exemptions as
requested in the Exemption Request Letters,
including without limitation, an exemption relating
to proposed Rule 3317(a)(5).
23 The Exchange notes that it does not currently
operate a retail liquidity program, but has elected
to include rule text taken from the plan concerning
such programs and Retail Investor Orders under
Rule 3317(c) to keep the rule text consistent with
the Plan.
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that is currently permitted by Rule
3301(k).24
With regard to Pilot Securities in Test
Group Two, proposed Rule
3317(c)(2)(A) would provide that such
Pilot Securities would be subject to all
of the same quoting requirements as
described above for Pilot Securities in
Test Group One, along with the
applicable quoting exceptions. In
addition, proposed Rule 3317(c)(2)(B)
would provide that, absent one of the
listed exceptions in proposed
3317(c)(2)(C) enumerated below, no
member organization may execute
orders in any Pilot Security in Test
Group Two in price increments other
than $0.05. The $0.05 trading increment
would apply to all trades, including
Brokered Cross Trades.
Paragraph (2)(C) would set forth
further requirements for Pilot Securities
in Test Group Two. Specifically,
member organizations trading Pilot
Securities in Test Group Two would be
allowed to trade in increments less than
$0.05 under the following
circumstances: 25
(i) Trading may occur at the midpoint
between the NBBO or PBBO;
(ii) Retail Investor Orders may be
provided with price improvement that
is at least $0.005 better than the PBBO;
and
(iii) Negotiated Trades may trade in
increments less than $0.05.
24 Rule 3301(k) describes the minimum price
variation for quoting and entry of orders in equity
securities listed on the Exchange or a national
securities exchange other than the Exchange.
25 Under the Plan [sic], there is a fourth
circumstance under which a security may trade in
increments less than $0.05, which applies to trading
Pilot Securities in Test Groups Two and Three. The
fourth circumstance allows the execution of a
customer order to comply with the member’s
Manning obligation, such as required by FINRA
Rule 5320, following the execution of a proprietary
trade by the member at an increment other than
$0.05, where such proprietary trade was
permissible pursuant to an exception under the
Plan. FINRA Rule 5320 states:
(a) Except as provided herein, a member that
accepts and holds an order in an equity security
from its own customer or a customer of another
broker-dealer without immediately executing the
order is prohibited from trading that security on the
same side of the market for its own account at a
price that would satisfy the customer order, unless
it immediately thereafter executes the customer
order up to the size and at the same or better price
at which it traded for its own account.
(b) A member must have a written methodology
in place governing the execution and priority of all
pending orders that is consistent with the
requirements of this Rule and Rule 5310. A member
also must ensure that this methodology is
consistently applied.
The Exchange does not currently have a Manning
rule analogous to FINRA Rule 5320, but will adopt
such a rule in the near future. Once approved, the
Exchange will amend Rules 3317(c)(2)(C)(iv) and
(c)(3)(C)(iv), which are currently held in reserve, to
reflect the availability of this additional
circumstance by which a trade in increments less
than $0.05.
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Paragraph (3)(A)–(3)(C) would set
forth the requirements for Pilot
Securities in Test Group Three. Member
organizations quoting or trading such
Pilot Securities would be subject to all
of the same quoting and trading
requirements as described above for
Pilot Securities in Test Group Two,
including the quoting and trading
exceptions applicable to Pilot Securities
in Test Group Two. In addition,
proposed Paragraph (3)(D) would
provide for an additional prohibition on
Pilot Securities in Test Group Three
referred to as the ‘‘Trade-at
Prohibition.’’ 26 Paragraph (3)(D)(ii)
would provide that, absent one of the
listed exceptions in proposed Rule
3317(c)(3)(D)(iii) enumerated below, no
member organization may execute a sell
order for a Pilot Security in Test Group
Three at the price of a Protected Bid or
execute a buy order for a Pilot Security
in Test Group Three at the price of a
Protected Offer.
Proposed Rule 3317(c)(3)(D)(iii)
would allow member organizations to
execute a sell order for a Pilot Security
in Test Group Three at the price of a
Protected Bid or execute a buy order for
a Pilot Security in Test Group Three at
the price of a Protected Offer if any of
the following circumstances exist:
a. The order is executed as agent or
riskless principal by an independent
trading unit, as defined under Rule
200(f) of Regulation SHO,27 of a Trading
Center within a member organization
that has a displayed quotation as agent
or riskless principal, via either a
processor or an SRO Quotation Feed, at
a price equal to the traded-at Protected
Quotation, that was displayed before the
order was received,28 but only up to the
26 Proposed 3317(c)(3)(D)(i) would define the
‘‘Trade-at Prohibition’’ to mean the prohibition
against executions by a Trading Center of a sell
order for a Pilot Security at the price of a Protected
Bid or the execution of a buy order for a Pilot
Security at the price of a Protected Offer during
regular trading hours.
27 The Exchange is proposing that, for proposed
Rules 3317(c)(3)(D)(iii)a. and c.[sic], a Trading
Center operated by a broker-dealer would mean an
independent trading unit, as defined under Rule
200(f) of Regulation SHO, within such brokerdealer. See 17 CFR 242.200.
Independent trading unit aggregation is available
if traders in an aggregation unit pursue only the
particular trading objective(s) or strategy(s) of that
aggregation unit and do not coordinate that strategy
with any other aggregation unit. Therefore, a
Trading Center cannot rely on quotations displayed
by that broker dealer from a different independent
trading unit. As an example, an agency desk of a
broker-dealer cannot rely on the quotation of a
proprietary desk in a separate independent trading
unit at that same broker-dealer.
28 The Exchange is proposing to adopt this
limitation to ensure that a Trading Center does not
display a quotation after the time of order receipt
solely for the purpose of trading at the price of a
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full displayed size of that independent
trading unit’s previously displayed
quote; 29
b. The order is executed by an
independent trading unit, as defined
under Rule 200(f) of Regulation SHO, of
a Trading Center within a member
organization that has a displayed
quotation for the account of that Trading
Center on a principal (excluding riskless
principal 30) basis, via either a processor
or an SRO Quotation Feed, at a price
equal to the traded-at Protected
Quotation, that was displayed before the
order was received, but only up to the
full displayed size of that independent
unit’s previously displayed quote; 31
c. The order is of Block Size 32 at the
time of origin and may not be:
A. An aggregation of non-block
orders;
B. broken into orders smaller than
Block Size prior to submitting the order
to a Trading Center for execution; or
C. executed on multiple Trading
Centers; 33
protected quotation without routing to that
protected quotation.
29 This proposed exception to Trade-at would
allow a Trading Center to execute an order at the
Protected Quotation in the same capacity in which
it has displayed a quotation at a price equal to the
Protected Quotation and up to the displayed size of
such displayed quotation.
30 As described above, proposed Rule
3317(c)(3)(D)(iii)a. would establish the
circumstances in which a Trading Center displaying
an order as riskless principal would be permitted
to Trade-at the Protected Quotation. Accordingly,
the Exchange proposes that proposed Rule
3317(c)(3)(D)(iii)b. would exclude such
circumstances.
31 The display exceptions to Trade-at set forth in
proposed Rules 3317(c)(3)(D)(iii)a. and b. would not
permit a broker-dealer to trade on the basis of
interest it is not responsible for displaying. In
particular, a broker-dealer that matches orders in
the over-the-counter market shall be deemed to
have ‘‘executed’’ such orders as a Trading Center for
purposes of proposed Rule 3317. Accordingly, if a
broker-dealer is not displaying a quotation at a price
equal to the Protected Quotation, it could not
submit matched trades to an alternative trading
center (‘‘ATS’’) that was displaying on an agency
basis the quotation of another ATS subscriber.
However, a broker-dealer that is displaying, as
principal, via either a processor or an SRO
Quotation Feed, a buy order at the protected bid,
could internalize a customer sell order up to its
displayed size. The display exceptions would not
permit a non-displayed Trading Center to submit
matched trades to an ATS that was displaying on
an agency basis the quotation of another ATS
subscriber and confirmed that a broker-dealer
would not be permitted to trade on the basis of
interest that it is not responsible for displaying.
32 ‘‘Block Size’’ is defined in the Plan as an order
(1) of at least 5,000 shares or (2) for a quantity of
stock having a market value of at least $100,000.
33 Once a Block Size order or portion of such
Block Size order is routed from one Trading Center
to another Trading Center in compliance with Rule
611 of Regulation NMS, the Block Size order would
not lose the Trade-at exemption provided under
proposed Rule 3317(c)(3)(D)(iii)c. For example, if an
exchange has a Protected Bid of 3,000 shares, with
2,000 shares in reserve, and receives a 5,000 share
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d. The order is a Retail Investor Order
executed with at least $0.005 price
improvement;
e. The order is executed when the
Trading Center displaying the Protected
Quotation that was traded at was
experiencing a failure, material delay, or
malfunction of its systems or
equipment;
f. The order is executed as part of a
transaction that was not a ‘‘regular way’’
contract;
g. The order is executed as part of a
single-priced opening, reopening, or
closing transaction on the Exchange;
h. The order is executed when a
Protected Bid was priced higher than a
Protected Offer in the Pilot Security in
Test Group Three;
i. The order is identified as a Tradeat Intermarket Sweep Order; 34
j. The order is executed by a Trading
Center that simultaneously routed
Trade-at Intermarket Sweep Orders to
execute against the full displayed size of
the Protected Quotation that was traded
at; 35
k. The order is executed as part of a
Negotiated Trade;
l. The order is executed when the
Trading Center displaying the Protected
order to sell, the exchange would be able to execute
the entire 5,000 share order without having to route
to an away market at any other Protected Bid at the
same price. If, however, that exchange only has
1,000 shares in reserve, the entire order would not
be able to be executed on that exchange, and the
exchange would only be able to execute 3,000
shares and route the rest to away markets at other
Protected Bids at the same price, before executing
the 1,000 shares in reserve.
34 In connection with the definition of a Tradeat ISO proposed in Rule 3317(a)(1)(D), this
exception refers to the ISO that is received by a
Trading Center.
The Exchange proposed an exemption to the
Trade-at Prohibition for Trade-at ISOs to clarify that
an ISO that is received by a Trading Center (and
which could form the basis of an execution at the
price of a Protected Quotation pursuant to Section
VI(D)(8) of the Plan), is identified as a Trade-at ISO.
Depending on whether Rule 611 of Regulation NMS
or the Trade-at requirement applies, an ISO may
mean that the sender of the ISO has swept betterpriced Protected Quotations, so that the recipient of
that ISO may trade through the price of the
Protected Quotation (Rule 611 of Regulation NMS),
or it could mean that the sender of the ISO has
swept Protected Quotations at the same price that
it wishes to execute at (in addition to any betterpriced quotations), so the recipient of that ISO may
trade at the price of the Protected Quotation (Tradeat). Given that the meaning of an ISO may differ
under Rule 611 of Regulation NMS and Trade-at,
the Exchange proposed an exemption to the Tradeat Prohibition for Trade-at ISOs so that the recipient
of an ISO in a Test Group Three security would
know, upon receipt of that ISO, that the Trading
Center that sent the ISO had already executed
against the full size of displayed quotations at that
price, e.g., the recipient of that ISO could
permissibly trade at the price of the Protected
Quotation.
35 In connection with the definition of a Tradeat ISO proposed in Rule 3317(a)(1)(D), this
exception refers to the Trading Center that routed
the ISO.
PO 00000
Frm 00097
Fmt 4703
Sfmt 4703
Quotation that was traded at had
displayed, within one second prior to
execution of the transaction that
constituted the Trade-at, a Best
Protected Bid or Best Protected Offer, as
applicable, for the Pilot Security in Test
Group Three with a price that was
inferior to the price of the Trade-at
transaction;
m. The order is executed by a Trading
Center which, at the time of order
receipt, the Trading Center had
guaranteed an execution at no worse
than a specified price (a ‘‘stopped
order’’), where:
A. The stopped order was for the
account of a customer;
B. The customer agreed to the
specified price on an order-by-order
basis; and
C. The price of the Trade-at
transaction was, for a stopped buy
order, equal to or less than the National
Best Bid in the Pilot Security in Test
Group Three at the time of execution or,
for a stopped sell order, equal to or
greater than the National Best Offer in
the Pilot Security in Test Group Three
at the time of execution, as long as such
order is priced at an acceptable
increment; 36
36 The stopped order exemption in Rule 611 of
Regulation NMS applies where ‘‘[t]he price of the
trade-through transaction was, for a stopped buy
order, lower than the national best bid in the NMS
stock at the time of execution or, for a stopped sell
order, higher than the national best offer in the
NMS stock at the time of execution’’ (see 17 CFR
242.611(b)(9)). The Trade-at stopped order
exception applies where ‘‘the price of the Trade-at
transaction was, for a stopped buy order, equal to
the national best bid in the Pilot Security at the
time of execution or, for a stopped sell order, equal
to the national best offer in the Pilot Security at the
time of execution’’ (see Plan, Section VI(D)(12)).
To illustrate the application of the stopped order
exemption as it currently operates under Rule 611
of Regulation NMS and as it is currently proposed
for Trade-at, assume the National Best Bid is $10.00
and another protected quote is at $9.95. Under Rule
611 of Regulation NMS, a stopped order to buy can
be filled at $9.95 and the firm does not have to send
an ISO to access the protected quote at $10.00 since
the price of the stopped order must be lower than
the National Best Bid. For the stopped order to also
be executed at $9.95 and satisfy the Trade-at
requirements, the Trade-at exception would have to
be revised to allow an order to execute at the price
of a protected quote which, in this case, could be
$9.95.
Based on the fact that a stopped order would be
treated differently under the Rule 611 of Regulation
NMS exception than under the Trade-at exception
in the Plan, the Exchange believes that it is
appropriate to amend the Trade-at stopped order
exception in the Plan to ensure that the application
of this exception would produce a consistent result
under both Regulation NMS and the Plan.
Therefore, the Exchange proposes in this proposed
Rule 3317(c)(3)(D)(iii)m. to allow a transaction to
satisfy the Trade-at requirement if the stopped order
price, for a stopped buy order, is equal to or less
than the National Best Bid, and for a stopped sell
order, is equal to or greater than the National Best
Offer, as long as such order is priced at an
acceptable increment. The Commission granted
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n. The order is for a fractional share
of a Pilot Security in Test Group Three,
provided that such fractional share
order was not the result of breaking an
order for one or more whole shares of
a Pilot Security in Test Group Three
into orders for fractional shares or was
not otherwise effected to evade the
requirements of the Trade-at Prohibition
or any other provisions of the Plan; or
o. The order is to correct a bona fide
error, which is recorded by the Trading
Center in its error account.37 A bona
fide error is defined as:
A. The inaccurate conveyance or
execution of any term of an order
including, but not limited to, price,
number of shares or other unit of
trading; identification of the security;
identification of the account for which
securities are purchased or sold; lost or
New York Stock Exchange LLC an exemption from
Rule 608(c) related to this provision. See Exemption
Letter, supra note 22. The Exchange is seeking the
same exemptions as requested in the Exemption
Request Letters.
37 The exceptions to the Trade-at requirement set
forth in the Plan and in the Exchange’s proposed
Rule 3317(c)(3)(D)(iii) are, in part, based on the
exceptions to the trade-through requirement set
forth in Rule 611 of Regulation NMS, including
exceptions for an order that is executed as part of
a transaction that was not a ‘‘regular way’’ contract,
and an order that is executed as part of a singlepriced opening, reopening, or closing transaction by
the Trading Center (see 17 CFR 242.611(b)(2) and
(b)(3)). Following the adoption of Rule 611 of
Regulation NMS and its exceptions, the
Commission issued exemptive relief that created
exceptions from Rule 611 of Regulation NMS for
certain error correction transactions. See Securities
Exchange Act Release No. 55884 (June 8, 2007), 72
FR 32926 (June 14, 2007); Securities Exchange Act
Release No. 55883 (June 8, 2007), 72 FR 32927 (June
14, 2007). The Exchange has determined that it is
appropriate to incorporate this additional exception
to the Trade-at Prohibition, as this exception is
equally applicable in the Trade-at context.
Accordingly, the Exchange is proposing to
exempt certain transactions to correct bona fide
errors in the execution of customer orders from the
Trade-at Prohibition, subject to the conditions set
forth by the SEC’s order exempting these
transactions from Rule 611 of Regulation NMS. The
Commission granted New York Stock Exchange LLC
an exemption from Rule 608(c) related to this
provision. See Exemption Letter, supra note 22. The
Exchange is seeking the same exemptions as
requested in the Exemption Request Letters.
As with the corresponding exception under Rule
611 of Regulation NMS, the bona fide error would
have to be evidenced by objective facts and
circumstances, the Trading Center would have to
maintain documentation of such facts and
circumstances and record the transaction in its error
account. To avail itself of the exemption, the
Trading Center would have to establish, maintain,
and enforce written policies and procedures
reasonably designed to address the occurrence of
errors and, in the event of an error, the use and
terms of a transaction to correct the error in
compliance with this exemption. Finally, the
Trading Center would have to regularly surveil to
ascertain the effectiveness of its policies and
procedures to address errors and transactions to
correct errors and take prompt action to remedy
deficiencies in such policies and procedures. See
Securities Exchange Act Release No. 55884 (June 8,
2007), 72 FR 32926 (June 14, 2007).
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19:39 Jul 18, 2016
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otherwise misplaced order tickets; short
sales that were instead sold long or vice
versa; or the execution of an order on
the wrong side of a market;
B. The unauthorized or unintended
purchase, sale, or allocation of
securities, or the failure to follow
specific client instructions;
C. The incorrect entry of data into
relevant systems, including reliance on
incorrect cash positions, withdrawals,
or securities positions reflected in an
account; or
D. A delay, outage, or failure of a
communication system used to transmit
market data prices or to facilitate the
delivery or execution of an order.
Finally, proposed Rule
3317(c)(3)(D)(iv) would prevent member
organizations from breaking an order
into smaller orders or otherwise
effecting or executing an order to evade
the requirements of the Trade-at
Prohibition or any other provisions of
the Plan.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,38 in general, and furthers the
objectives of Section 6(b)(5) of the Act,39
in particular, in that it is designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest. The Exchange believes
that the proposed rule change is
consistent with the Act because it
ensures that the Exchange and its
member organizations would be in
compliance with a Plan approved by the
Commission pursuant to an order issued
by the Commission in reliance on
Section 11A of the Act.40 Such
approved Plan gives the Exchange
authority to establish, maintain, and
enforce written policies and procedures
that are reasonably designed to comply
with applicable quoting and trading
requirements specified in the Plan. The
Exchange believes that the proposed
rule change is consistent with the
authority granted to it by the Plan to
establish specifications and procedures
for the implementation and operation of
the Plan that are consistent with the
provisions of the Plan. Likewise, the
Exchange believes that the proposed
rule change provides interpretations of
the Plan that are consistent with the
PO 00000
38 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
40 15 U.S.C. 78k–1.
Fmt 4703
Act, in general, and furthers the
objectives of the Act, in particular.
Furthermore, the Exchange is a
Participant under the Plan and subject,
itself, to the provisions of the Plan. The
proposed rule change ensures that the
Exchange’s systems would not display
or execute trading interests outside the
requirements specified in such Plan.
The proposal would also help allow
market participants to continue to trade
NMS Stocks within quoting and trading
requirements that are in compliance
with the Plan, with certainty on how
certain orders and trading interests
would be treated. This, in turn, will
help encourage market participants to
continue to provide liquidity in the
marketplace.
Because the Plan supports further
examination and analysis on the impact
of tick sizes on the trading and liquidity
of the securities of small capitalization
companies, and the Commission
believes that altering tick sizes could
result in significant market-wide
benefits and improvements to liquidity
and capital formation, adopting rules
that enforce compliance by its member
organizations with the provisions of the
Plan would help promote liquidity in
the marketplace and perfect the
mechanism of a free and open market
and national market system.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
proposed changes are being made to
establish, maintain, and enforce written
policies and procedures that are
reasonably designed to comply with the
trading and quoting requirements
specified in the Plan, of which other
equities exchanges are also Participants.
Other competing national securities
exchanges are subject to the same
trading and quoting requirements
specified in the Plan. Therefore, the
proposed changes would not impose
any burden on competition, while
providing certainty of treatment and
execution of trading interests on the
Exchange to market participants in NMS
Stocks that are acting in compliance
with the requirements specified in the
Plan.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
39 15
Frm 00098
46983
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Federal Register / Vol. 81, No. 138 / Tuesday, July 19, 2016 / Notices
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) 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)(iii) of the Act 41 and
subparagraph (f)(6) of Rule 19b–4
thereunder.42
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: (i) Necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) 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.
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–
Phlx–2016–73 on the subject line.
mstockstill on DSK3G9T082PROD with NOTICES
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–Phlx–2016–73. 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/
41 15
U.S.C. 78s(b)(3)(a)(iii).
42 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
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. The Exchange has satisfied this
requirement.
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19:39 Jul 18, 2016
Jkt 238001
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–Phlx–
2016–73, and should be submitted on or
before August 9, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.43
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2016–16973 Filed 7–18–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78314; File No. SR–
BatsEDGA–2016–16]
Self-Regulatory Organizations; Bats
EDGA Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change to EDGA Rule
13.4(a), Stating It Will Utilize IEX Market
Data From the CQS/UQDF for
Purposes of Order Handling, Routing,
and Related Compliance Processes
July 13, 2016.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on July 5,
2016, Bats EDGA Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGA’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
PO 00000
43 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
Frm 00099
Fmt 4703
Sfmt 4703
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 filed a proposal to
update Rule 13.4(a) regarding the public
disclosure of the sources of data that the
Exchange utilizes when performing: (i)
Order handling; (ii) order routing; and
(iii) related compliance processes to
reflect the operation of the Investors
Exchange LLC (‘‘IEX’’) as a registered
national securities exchange 3 beginning
on August 19, 2016.4
The text of the proposed rule change
is available at the Exchange’s Web site
at www.batstrading.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
Exchange 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. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
On June 17, 2016, the Commission
approved IEX’s application to register as
a national securities exchange.5 As part
of its transition to exchange status, IEX
announced that it will commence a
symbol-by-symbol roll-out on August
19, 2016, concluding on September 2,
2016.6 The Exchange, therefore,
proposes to update Rule 13.4(a)
regarding the public disclosure of the
sources of data that the Exchange
utilizes when performing: (i) Order
handling; (ii) order routing; and (iii)
3 See Securities Exchange Act Release No. 78101
(June 17, 2016), 81 FR 41141 (June 23, 2016) (‘‘IEX
Approval Order’’).
4 See Letter from Brad Katsuyama, CEO, IEX, to
IEX’s Sell-Side and Buy-Side Partners, dated June
17, 2016 (https://www.iextrading.com/) (stating that
IEX will commence a symbol-by-symbol roll-out on
August 19, 2016, concluding on September 2, 2016).
5 See supra note 3.
6 See supra note 4.
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]]>Agencies
[Federal Register Volume 81, Number 138 (Tuesday, July 19, 2016)]
[Notices]
[Pages 46979-46984]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-16973]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78317; File No. SR-Phlx-2016-73]
Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Adopt Rules To
Implement the Quoting and Trading Provisions of the Plan To Implement a
Tick Size Pilot Program
July 13, 2016.
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 29, 2016, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') 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 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\ 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 adopt rules under Rule 3317 to implement
the quoting and trading provisions of the Plan to Implement a Tick Size
Pilot Program submitted to the Commission pursuant to Rule 608 of
Regulation NMS \3\ under the Act (the ``Plan'').\4\ The proposed rule
change is substantially similar to proposed rule changes recently
approved or published by the Commission by New York Stock Exchange LLC
to adopt NYSE Rules 67(a) and 67(c)-(e), which also implemented the
quoting and trading provisions of the Plan.\5\
---------------------------------------------------------------------------
\3\ 17 CFR 242.608.
\4\ See Securities and Exchange Act Release No. 74892 (May 6,
2015), 80 FR 27513 (File No. 4-657) (``Tick Plan Approval Order'').
See also Securities and Exchange Act Release No. 76382 (November 6,
2015) (File No. 4-657), 80 FR 70284 (File No. 4-657) (November 13,
2015), which extended the pilot period commencement date from May 6,
2015 to October 3, 2016.
\5\ See Securities Exchange Act Release No. 76229 (October 22,
2015), 80 FR 66065 (October 28, 2015) (SR-NYSE-2015-46), as amended
by Partial Amendments No. 1 and No. 2 to the Quoting & Trading Rules
Proposal. See Securities Exchange Act Release No. 77703 (April 25,
2016), 81 FR 25725 (April 29, 2016) (SR-NYSE-2015-46).
---------------------------------------------------------------------------
The text of the proposed rule change is available on the Exchange's
Web site at https://nasdaqomxphlx.cchwallstreet.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 Exchange 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. The Exchange 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to establish rules to require its member
organizations to comply with the requirements of the Plan, which is
designed to study and assess the impact of increment conventions on the
liquidity and trading of the common stocks of small capitalization
companies. The Exchange proposes changes to its rules for a two-year
pilot period that coincides with the pilot period for the Plan, which
is currently scheduled as a two year pilot to begin on October 3, 2016.
Background
On August 25, 2014, NYSE Group, Inc., on behalf of Bats BZX
Exchange, Inc. (f/k/a BATS Exchange, Inc.), Bats BYX Exchange, Inc. (f/
k/a BATS Y-Exchange, Inc.), Chicago Stock Exchange, Inc., EDGA
Exchange, Inc., EDGX Exchange, Inc., the Exchange [sic], Financial
Industry Regulatory Authority, Inc. (``FINRA''), NASDAQ OMX BX, Inc.,
NASDAQ OMX PHLX LLC, New York Stock Exchange LLC, the Exchange [sic]
and NYSE Arca, Inc., and the NYSE MKT LLC, (collectively,
``Participants''), filed with the Commission, pursuant to Section 11A
of the Act \6\ and Rule 608 of Regulation NMS thereunder, the Plan to
Implement a Tick Size Pilot Program.\7\ The Participants filed the Plan
to comply with an order issued by the Commission on June 24, 2014 (the
``June 2014 Order'').\8\ The Plan \9\ was published for comment in the
Federal Register on November 7, 2014,\10\ and approved by the
Commission, as modified, on May 6, 2015.\11\
---------------------------------------------------------------------------
\6\ 15 U.S.C. 78k-1.
\7\ See Letter from Brendon J. Weiss, Vice President,
Intercontinental Exchange, Inc., to Secretary, Commission, dated
August 25, 2014.
\8\ See Securities Exchange Act Release No. 72460 (June 24,
2014), 79 FR 36840 (June 30, 2014).
\9\ Unless otherwise specified, capitalized terms used in this
rule filing are based on the defined terms of the Plan.
\10\ See Securities and Exchange Act Release No. 73511 (November
3, 2014), 79 FR 66423 (File No. 4-657) (Tick Plan Filing).
\11\ See Tick Plan Approval Order, supra note 4. See also
Securities Exchange Act Release No. 77277 (March 3, 2016), 81 FR
12162 (March 8, 2016) (File No. 4-657), which amended the Plan to
add National Stock Exchange, Inc. as a Participant.
---------------------------------------------------------------------------
The Plan is designed to allow the Commission, market participants,
and the public to study and assess the impact of increment conventions
on the liquidity and trading of the common stocks of small
capitalization companies. The Commission plans to use the Tick Size
Pilot Program to assess whether wider tick sizes enhance the market
quality of Pilot Securities for the benefit of issuers and investors.
Each Participant is required to comply with, and to enforce compliance
by its member organizations, as applicable, with the provisions of the
Plan.
On October 9, 2015, the Operating Committee approved the Exchange's
[sic] proposed rules as model Participant rules that would require
compliance by a Participant's member organizations with the provisions
of the Plan, as applicable, and would establish written policies and
procedures reasonably designed to comply with applicable quoting and
trading requirements specified in the Plan.\12\ As described more fully
below, the proposed rules would require member organizations to comply
with the Plan and provide for the widening of quoting
[[Page 46980]]
and trading increments for Pilot Securities, consistent with the Plan.
---------------------------------------------------------------------------
\12\ The Operating Committee is required under Section III(C)(2)
of the Plan to ``monitor the procedures established pursuant to the
Plan and advise Participants with respect to any deficiencies,
problems, or recommendations as the Operating Committee may deem
appropriate.'' The Operating Committee is also required to
``establish specifications and procedures for the implementation and
operation of the Plan that are consistent with the provisions of the
Plan.''
---------------------------------------------------------------------------
The Plan will include stocks of companies with $3 billion or less
in market capitalization, an average daily trading volume of one
million shares or less, and a volume weighted average price of at least
$2.00 for every trading day. The Plan will consist of a control group
of approximately 1,400 Pilot Securities and three test groups with 400
Pilot Securities in each selected by a stratified sampling.\13\ During
the pilot, Pilot Securities in the control group will be quoted at the
current tick size increment of $0.01 per share and will trade at the
currently permitted increments. Pilot Securities in the first test
group (``Test Group One'') will be quoted in $0.05 minimum increments
but will continue to trade at any price increment that is currently
permitted.\14\ Pilot Securities in the second test group (``Test Group
Two'') will be quoted in $0.05 minimum increments and will trade at
$0.05 minimum increments subject to a midpoint exception, a retail
investor exception, and a negotiated trade exception.\15\ Pilot
Securities in the third test group (``Test Group Three'') will be
subject to the same terms as Test Group Two and also will be subject to
the ``Trade-at'' requirement to prevent price matching by a person not
displaying at a price of a Trading Center's ``Best Protected Bid'' or
``Best Protected Offer,'' unless an enumerated exception applies.\16\
In addition to the exceptions provided under Test Group Two, an
exception for Block Size orders and exceptions that closely resemble
those under Rule 611 of Regulation NMS \17\ will apply to the Trade-at
requirement.
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\13\ See Section V of the Plan for identification of Pilot
Securities, including criteria for selection and grouping.
\14\ See Section VI(B) of the Plan. Pilot Securities in Test
Group One will be subject to a midpoint exception and a retail
investor exception.
\15\ See Section VI(C) of the Plan.
\16\ See Section VI(D) of the Plan.
\17\ 17 CFR 242.611.
---------------------------------------------------------------------------
The Plan also contains requirements for the collection and
transmission of data to the Commission and the public. A variety of
data generated during the Plan will be released publicly on an
aggregated basis to assist in analyzing the impact of wider tick sizes
on smaller capitalization stocks.\18\
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\18\ See Section VII of the Plan.
---------------------------------------------------------------------------
Proposed Rules 3317(a) and (c)
The Plan requires the Exchange to establish, maintain, and enforce
written policies and procedures that are reasonably designed to comply
with applicable quoting and trading requirements specified in the
Plan.\19\ Accordingly, the Exchange is proposing new Rule 3317(a) to
require its member organizations to comply with the quoting and trading
provisions of the Plan. The proposed Rules are also designed to ensure
the Exchange's compliance with the Plan.
---------------------------------------------------------------------------
\19\ The Exchange was also required by the Plan to develop
appropriate policies and procedures that provide for data collection
and reporting to the Commission of data described in Appendixes B
and C of the Plan. See Securities Exchange Act Release No. 77458
(March 28, 2016), 81 FR 18919 (April 1, 2016) (SR-Phlx-2016-39).
---------------------------------------------------------------------------
Proposed paragraph (a)(1) of new Rule 3317 would establish the
following defined terms:
``Plan'' means the Tick Size Pilot Plan submitted to the
Commission pursuant to Rule 608(a)(3) of Regulation NMS under the Act.
``Pilot Test Groups'' means the three test groups
established under the Plan, consisting of 400 Pilot Securities each,
which satisfy the respective criteria established by the Plan for each
such test group.
``Trade-at Intermarket Sweep Order'' \20\ would mean a
limit order for a Pilot Security that meets the following requirements:
---------------------------------------------------------------------------
\20\ The Plan defines a Trade-at Intermarket Sweep Order
(``ISO'') as a limit order for a Pilot Security that, when routed to
a Trading Center, is identified as an ISO, and simultaneous with the
routing of the limit order identified as an ISO, one or more
additional limit orders, as necessary, are routed to execute against
the full displayed size of any protected bid (in the case of a limit
order to sell) or the full displayed size of any protected offer (in
the case of a limit order to buy) for the Pilot Security with a
price that is equal to the limit price of the limit order identified
as an ISO. These additional routed orders also must be marked as
ISOs. See Plan, Section I(MM). Since the Plan allows (i) an order
that is identified as an ISO to be executed at the price of a
Protected Quotation (see Plan, Section VI(D)(8) and proposed Rule
3317(c)(3)(D)(iii)i.) and (ii) an order to execute at the price of a
Protected Quotation that ``is executed by a trading center that
simultaneously routed Trade-at ISO to execute against the full
displayed size of the Protected Quotation that was trade at'' (see
Plan, Section VI(D)(9) and proposed Rule 3317(c)(3)(D)(iii)j.)), the
Exchange proposes to clarify the use of an ISO in connection with
the Trade-at requirement by adopting, as part of proposed Rule
3317(a)(1), a comprehensive definition of ``Trade-at ISO.'' As set
forth in the Plan and as noted above, the definition of a Trade-at
ISO used in the Plan does not distinguish ISOs that are compliant
with Rule 611 or Regulation NMS from ISOs that are compliant with
Trade-at. The Exchange therefore proposes the separate definition of
Trade-at ISO contained in proposed Rule 3317(a). The Exchange
believes that this proposed definition will further clarify to
recipients of ISOs in Test Group Three securities whether the ISO
satisfies the requirements of Rule 611 of Regulation NMS or Trade-
at.
---------------------------------------------------------------------------
(i) When routed to a Trading Center, the limit order is identified
as a Trade-at Intermarket Sweep Order; and
(ii) Simultaneously with the routing of the limit order identified
as a Trade-at Intermarket Sweep Order, one or more additional limit
orders, as necessary, are routed to execute against the full size of
any protected bid, in the case of a limit order to sell, or the full
displayed size of any protected offer, in the case of a limit order to
buy, for the Pilot Security with a price that is better than or equal
to the limit price of the limit order identified as a Trade-at
Intermarket Sweep Order. These additional routed orders also must be
marked as Trade-at Intermarket Sweep Orders.
Paragraph (a)(1)(E) would provide that all capitalized
terms not otherwise defined in this rule shall have the meanings set
forth in the Plan, Regulation NMS under the Act, or Exchange rules, as
applicable.
Proposed Paragraph (a)(2) would state that the Exchange is a
Participant in, and subject to the applicable requirements of, the
Plan; proposed Paragraph (a)(3) would require member organizations to
establish, maintain and enforce written policies and procedures that
are reasonably designed to comply with the applicable requirements of
the Plan, which would allow the Exchange to enforce compliance by its
member organizations with the provisions of the Plan, as required
pursuant to Section II(B) of the Plan.
In addition, Paragraph (a)(4) would provide that Exchange systems
would not display, quote or trade in violation of the applicable
quoting and trading requirements for a Pilot Security specified in the
Plan and this proposed rule, unless such quotation or transaction is
specifically exempted under the Plan.\21\
---------------------------------------------------------------------------
\21\ The Exchange is still evaluating its internal policies and
procedures to ensure compliance with the Plan, and plans to
separately propose rules that would address violations of the Plan.
---------------------------------------------------------------------------
The Exchange also proposes to add Rule 3317(a)(5) to provide for
the treatment of Pilot Securities that drop below a $1.00 value during
the Pilot Period.\22\ The Exchange proposes that if
[[Page 46981]]
the price of a Pilot Security drops below $1.00 during regular trading
on any given business day, such Pilot Security would continue to be
subject to the Plan and the requirements described below that
necessitate member organizations to comply with the specific quoting
and trading obligations for each respective Pilot Test Group under the
Plan, and would continue to trade in accordance with the proposed rules
below as if the price of the Pilot Security had not dropped below
$1.00. However, if the Closing Price of a Pilot Security on any given
business day is below $1.00, such Pilot Security would be moved out of
its respective Pilot Test Group into the control group (which consists
of Pilot Securities not placed into a Pilot Test Group), and may then
be quoted and traded at any price increment that is currently permitted
by Exchange rules for the remainder of the Pilot Period.
Notwithstanding anything contained herein to the contrary, the Exchange
proposes that, at all times during the Pilot Period, Pilot Securities
(whether in the control group or any Pilot Test Group) would continue
to be subject to the data collection rules, which are enumerated in
Rule 3317(b).
---------------------------------------------------------------------------
\22\ New York Stock Exchange LLC, on behalf of the Participants,
submitted a letter to Commission requesting exemption from certain
provisions of the Plan related to quoting and trading. See letter
from Elizabeth K. King, NYSE, to Brent J. Fields, Secretary,
Commission, dated October 14, 2015 (the ``October Exemption
Request''). FINRA, also on behalf of the Plan Participants,
submitted a separate letter to Commission requesting additional
exemptions from certain provisions of the Plan related to quoting
and trading. See letter from Marcia E. Asquith, Senior Vice
President and Corporate Secretary, FINRA, to Robert W. Errett,
Deputy Secretary, Commission, dated February 23, 2016 (the
``February Exemption Request,'' and together with the October
Exemption Request, the ``Exemption Request Letters''). The
Commission, pursuant to its authority under Rule 608(e) of
Regulation NMS, granted New York Stock Exchange LLC a limited
exemption from the requirement to comply with certain provisions of
the Plan as specified in the Exemption Request Letters and noted
herein. See letter from David Shillman, Associate Director, Division
of Trading and Markets, Commission to Sherry Sandler, Associate
General Counsel, New York Stock Exchange LLC, dated April 25, 2016
(the ``Exemption Letter''). The Exchange is seeking the same
exemptions as requested in the Exemption Request Letters, including
without limitation, an exemption relating to proposed Rule
3317(a)(5).
---------------------------------------------------------------------------
The Exchange proposes Rules 3317(c)(1)-(3), which would require
member organizations to comply with the specific quoting and trading
obligations for each Pilot Test Group under the Plan. With regard to
Pilot Securities in Test Group One, proposed Rule 3317(c)(1) would
provide that no member organization may display, rank, or accept from
any person any displayable or non-displayable bids or offers, orders,
or indications of interest in increments other than $0.05. However,
orders priced to trade at the midpoint of the National Best Bid and
National Best Offer (``NBBO'') or Best Protected Bid and Best Protected
Offer (``PBBO'') and orders entered in a Participant-operated retail
liquidity program \23\ may be ranked and accepted in increments of less
than $0.05. Pilot Securities in Test Group One may continue to trade at
any price increment that is currently permitted by Rule 3301(k).\24\
---------------------------------------------------------------------------
\23\ The Exchange notes that it does not currently operate a
retail liquidity program, but has elected to include rule text taken
from the plan concerning such programs and Retail Investor Orders
under Rule 3317(c) to keep the rule text consistent with the Plan.
\24\ Rule 3301(k) describes the minimum price variation for
quoting and entry of orders in equity securities listed on the
Exchange or a national securities exchange other than the Exchange.
---------------------------------------------------------------------------
With regard to Pilot Securities in Test Group Two, proposed Rule
3317(c)(2)(A) would provide that such Pilot Securities would be subject
to all of the same quoting requirements as described above for Pilot
Securities in Test Group One, along with the applicable quoting
exceptions. In addition, proposed Rule 3317(c)(2)(B) would provide
that, absent one of the listed exceptions in proposed 3317(c)(2)(C)
enumerated below, no member organization may execute orders in any
Pilot Security in Test Group Two in price increments other than $0.05.
The $0.05 trading increment would apply to all trades, including
Brokered Cross Trades.
Paragraph (2)(C) would set forth further requirements for Pilot
Securities in Test Group Two. Specifically, member organizations
trading Pilot Securities in Test Group Two would be allowed to trade in
increments less than $0.05 under the following circumstances: \25\
---------------------------------------------------------------------------
\25\ Under the Plan [sic], there is a fourth circumstance under
which a security may trade in increments less than $0.05, which
applies to trading Pilot Securities in Test Groups Two and Three.
The fourth circumstance allows the execution of a customer order to
comply with the member's Manning obligation, such as required by
FINRA Rule 5320, following the execution of a proprietary trade by
the member at an increment other than $0.05, where such proprietary
trade was permissible pursuant to an exception under the Plan. FINRA
Rule 5320 states:
(a) Except as provided herein, a member that accepts and holds
an order in an equity security from its own customer or a customer
of another broker-dealer without immediately executing the order is
prohibited from trading that security on the same side of the market
for its own account at a price that would satisfy the customer
order, unless it immediately thereafter executes the customer order
up to the size and at the same or better price at which it traded
for its own account.
(b) A member must have a written methodology in place governing
the execution and priority of all pending orders that is consistent
with the requirements of this Rule and Rule 5310. A member also must
ensure that this methodology is consistently applied.
The Exchange does not currently have a Manning rule analogous
to FINRA Rule 5320, but will adopt such a rule in the near future.
Once approved, the Exchange will amend Rules 3317(c)(2)(C)(iv) and
(c)(3)(C)(iv), which are currently held in reserve, to reflect the
availability of this additional circumstance by which a trade in
increments less than $0.05.
---------------------------------------------------------------------------
(i) Trading may occur at the midpoint between the NBBO or PBBO;
(ii) Retail Investor Orders may be provided with price improvement
that is at least $0.005 better than the PBBO; and
(iii) Negotiated Trades may trade in increments less than $0.05.
Paragraph (3)(A)-(3)(C) would set forth the requirements for Pilot
Securities in Test Group Three. Member organizations quoting or trading
such Pilot Securities would be subject to all of the same quoting and
trading requirements as described above for Pilot Securities in Test
Group Two, including the quoting and trading exceptions applicable to
Pilot Securities in Test Group Two. In addition, proposed Paragraph
(3)(D) would provide for an additional prohibition on Pilot Securities
in Test Group Three referred to as the ``Trade-at Prohibition.'' \26\
Paragraph (3)(D)(ii) would provide that, absent one of the listed
exceptions in proposed Rule 3317(c)(3)(D)(iii) enumerated below, no
member organization may execute a sell order for a Pilot Security in
Test Group Three at the price of a Protected Bid or execute a buy order
for a Pilot Security in Test Group Three at the price of a Protected
Offer.
---------------------------------------------------------------------------
\26\ Proposed 3317(c)(3)(D)(i) would define the ``Trade-at
Prohibition'' to mean the prohibition against executions by a
Trading Center of a sell order for a Pilot Security at the price of
a Protected Bid or the execution of a buy order for a Pilot Security
at the price of a Protected Offer during regular trading hours.
---------------------------------------------------------------------------
Proposed Rule 3317(c)(3)(D)(iii) would allow member organizations
to execute a sell order for a Pilot Security in Test Group Three at the
price of a Protected Bid or execute a buy order for a Pilot Security in
Test Group Three at the price of a Protected Offer if any of the
following circumstances exist:
a. The order is executed as agent or riskless principal by an
independent trading unit, as defined under Rule 200(f) of Regulation
SHO,\27\ of a Trading Center within a member organization that has a
displayed quotation as agent or riskless principal, via either a
processor or an SRO Quotation Feed, at a price equal to the traded-at
Protected Quotation, that was displayed before the order was
received,\28\ but only up to the
[[Page 46982]]
full displayed size of that independent trading unit's previously
displayed quote; \29\
---------------------------------------------------------------------------
\27\ The Exchange is proposing that, for proposed Rules
3317(c)(3)(D)(iii)a. and c.[sic], a Trading Center operated by a
broker-dealer would mean an independent trading unit, as defined
under Rule 200(f) of Regulation SHO, within such broker-dealer. See
17 CFR 242.200.
Independent trading unit aggregation is available if traders in
an aggregation unit pursue only the particular trading objective(s)
or strategy(s) of that aggregation unit and do not coordinate that
strategy with any other aggregation unit. Therefore, a Trading
Center cannot rely on quotations displayed by that broker dealer
from a different independent trading unit. As an example, an agency
desk of a broker-dealer cannot rely on the quotation of a
proprietary desk in a separate independent trading unit at that same
broker-dealer.
\28\ The Exchange is proposing to adopt this limitation to
ensure that a Trading Center does not display a quotation after the
time of order receipt solely for the purpose of trading at the price
of a protected quotation without routing to that protected
quotation.
\29\ This proposed exception to Trade-at would allow a Trading
Center to execute an order at the Protected Quotation in the same
capacity in which it has displayed a quotation at a price equal to
the Protected Quotation and up to the displayed size of such
displayed quotation.
---------------------------------------------------------------------------
b. The order is executed by an independent trading unit, as defined
under Rule 200(f) of Regulation SHO, of a Trading Center within a
member organization that has a displayed quotation for the account of
that Trading Center on a principal (excluding riskless principal \30\)
basis, via either a processor or an SRO Quotation Feed, at a price
equal to the traded-at Protected Quotation, that was displayed before
the order was received, but only up to the full displayed size of that
independent unit's previously displayed quote; \31\
---------------------------------------------------------------------------
\30\ As described above, proposed Rule 3317(c)(3)(D)(iii)a.
would establish the circumstances in which a Trading Center
displaying an order as riskless principal would be permitted to
Trade-at the Protected Quotation. Accordingly, the Exchange proposes
that proposed Rule 3317(c)(3)(D)(iii)b. would exclude such
circumstances.
\31\ The display exceptions to Trade-at set forth in proposed
Rules 3317(c)(3)(D)(iii)a. and b. would not permit a broker-dealer
to trade on the basis of interest it is not responsible for
displaying. In particular, a broker-dealer that matches orders in
the over-the-counter market shall be deemed to have ``executed''
such orders as a Trading Center for purposes of proposed Rule 3317.
Accordingly, if a broker-dealer is not displaying a quotation at a
price equal to the Protected Quotation, it could not submit matched
trades to an alternative trading center (``ATS'') that was
displaying on an agency basis the quotation of another ATS
subscriber. However, a broker-dealer that is displaying, as
principal, via either a processor or an SRO Quotation Feed, a buy
order at the protected bid, could internalize a customer sell order
up to its displayed size. The display exceptions would not permit a
non-displayed Trading Center to submit matched trades to an ATS that
was displaying on an agency basis the quotation of another ATS
subscriber and confirmed that a broker-dealer would not be permitted
to trade on the basis of interest that it is not responsible for
displaying.
---------------------------------------------------------------------------
c. The order is of Block Size \32\ at the time of origin and may
not be:
---------------------------------------------------------------------------
\32\ ``Block Size'' is defined in the Plan as an order (1) of at
least 5,000 shares or (2) for a quantity of stock having a market
value of at least $100,000.
---------------------------------------------------------------------------
A. An aggregation of non-block orders;
B. broken into orders smaller than Block Size prior to submitting
the order to a Trading Center for execution; or
C. executed on multiple Trading Centers; \33\
---------------------------------------------------------------------------
\33\ Once a Block Size order or portion of such Block Size order
is routed from one Trading Center to another Trading Center in
compliance with Rule 611 of Regulation NMS, the Block Size order
would not lose the Trade-at exemption provided under proposed Rule
3317(c)(3)(D)(iii)c. For example, if an exchange has a Protected Bid
of 3,000 shares, with 2,000 shares in reserve, and receives a 5,000
share order to sell, the exchange would be able to execute the
entire 5,000 share order without having to route to an away market
at any other Protected Bid at the same price. If, however, that
exchange only has 1,000 shares in reserve, the entire order would
not be able to be executed on that exchange, and the exchange would
only be able to execute 3,000 shares and route the rest to away
markets at other Protected Bids at the same price, before executing
the 1,000 shares in reserve.
---------------------------------------------------------------------------
d. The order is a Retail Investor Order executed with at least
$0.005 price improvement;
e. The order is executed when the Trading Center displaying the
Protected Quotation that was traded at was experiencing a failure,
material delay, or malfunction of its systems or equipment;
f. The order is executed as part of a transaction that was not a
``regular way'' contract;
g. The order is executed as part of a single-priced opening,
reopening, or closing transaction on the Exchange;
h. The order is executed when a Protected Bid was priced higher
than a Protected Offer in the Pilot Security in Test Group Three;
i. The order is identified as a Trade-at Intermarket Sweep Order;
\34\
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\34\ In connection with the definition of a Trade-at ISO
proposed in Rule 3317(a)(1)(D), this exception refers to the ISO
that is received by a Trading Center.
The Exchange proposed an exemption to the Trade-at Prohibition
for Trade-at ISOs to clarify that an ISO that is received by a
Trading Center (and which could form the basis of an execution at
the price of a Protected Quotation pursuant to Section VI(D)(8) of
the Plan), is identified as a Trade-at ISO. Depending on whether
Rule 611 of Regulation NMS or the Trade-at requirement applies, an
ISO may mean that the sender of the ISO has swept better-priced
Protected Quotations, so that the recipient of that ISO may trade
through the price of the Protected Quotation (Rule 611 of Regulation
NMS), or it could mean that the sender of the ISO has swept
Protected Quotations at the same price that it wishes to execute at
(in addition to any better-priced quotations), so the recipient of
that ISO may trade at the price of the Protected Quotation (Trade-
at). Given that the meaning of an ISO may differ under Rule 611 of
Regulation NMS and Trade-at, the Exchange proposed an exemption to
the Trade-at Prohibition for Trade-at ISOs so that the recipient of
an ISO in a Test Group Three security would know, upon receipt of
that ISO, that the Trading Center that sent the ISO had already
executed against the full size of displayed quotations at that
price, e.g., the recipient of that ISO could permissibly trade at
the price of the Protected Quotation.
---------------------------------------------------------------------------
j. The order is executed by a Trading Center that simultaneously
routed Trade-at Intermarket Sweep Orders to execute against the full
displayed size of the Protected Quotation that was traded at; \35\
---------------------------------------------------------------------------
\35\ In connection with the definition of a Trade-at ISO
proposed in Rule 3317(a)(1)(D), this exception refers to the Trading
Center that routed the ISO.
---------------------------------------------------------------------------
k. The order is executed as part of a Negotiated Trade;
l. The order is executed when the Trading Center displaying the
Protected Quotation that was traded at had displayed, within one second
prior to execution of the transaction that constituted the Trade-at, a
Best Protected Bid or Best Protected Offer, as applicable, for the
Pilot Security in Test Group Three with a price that was inferior to
the price of the Trade-at transaction;
m. The order is executed by a Trading Center which, at the time of
order receipt, the Trading Center had guaranteed an execution at no
worse than a specified price (a ``stopped order''), where:
A. The stopped order was for the account of a customer;
B. The customer agreed to the specified price on an order-by-order
basis; and
C. The price of the Trade-at transaction was, for a stopped buy
order, equal to or less than the National Best Bid in the Pilot
Security in Test Group Three at the time of execution or, for a stopped
sell order, equal to or greater than the National Best Offer in the
Pilot Security in Test Group Three at the time of execution, as long as
such order is priced at an acceptable increment; \36\
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\36\ The stopped order exemption in Rule 611 of Regulation NMS
applies where ``[t]he price of the trade-through transaction was,
for a stopped buy order, lower than the national best bid in the NMS
stock at the time of execution or, for a stopped sell order, higher
than the national best offer in the NMS stock at the time of
execution'' (see 17 CFR 242.611(b)(9)). The Trade-at stopped order
exception applies where ``the price of the Trade-at transaction was,
for a stopped buy order, equal to the national best bid in the Pilot
Security at the time of execution or, for a stopped sell order,
equal to the national best offer in the Pilot Security at the time
of execution'' (see Plan, Section VI(D)(12)).
To illustrate the application of the stopped order exemption as
it currently operates under Rule 611 of Regulation NMS and as it is
currently proposed for Trade-at, assume the National Best Bid is
$10.00 and another protected quote is at $9.95. Under Rule 611 of
Regulation NMS, a stopped order to buy can be filled at $9.95 and
the firm does not have to send an ISO to access the protected quote
at $10.00 since the price of the stopped order must be lower than
the National Best Bid. For the stopped order to also be executed at
$9.95 and satisfy the Trade-at requirements, the Trade-at exception
would have to be revised to allow an order to execute at the price
of a protected quote which, in this case, could be $9.95.
Based on the fact that a stopped order would be treated
differently under the Rule 611 of Regulation NMS exception than
under the Trade-at exception in the Plan, the Exchange believes that
it is appropriate to amend the Trade-at stopped order exception in
the Plan to ensure that the application of this exception would
produce a consistent result under both Regulation NMS and the Plan.
Therefore, the Exchange proposes in this proposed Rule
3317(c)(3)(D)(iii)m. to allow a transaction to satisfy the Trade-at
requirement if the stopped order price, for a stopped buy order, is
equal to or less than the National Best Bid, and for a stopped sell
order, is equal to or greater than the National Best Offer, as long
as such order is priced at an acceptable increment. The Commission
granted New York Stock Exchange LLC an exemption from Rule 608(c)
related to this provision. See Exemption Letter, supra note 22. The
Exchange is seeking the same exemptions as requested in the
Exemption Request Letters.
---------------------------------------------------------------------------
[[Page 46983]]
n. The order is for a fractional share of a Pilot Security in Test
Group Three, provided that such fractional share order was not the
result of breaking an order for one or more whole shares of a Pilot
Security in Test Group Three into orders for fractional shares or was
not otherwise effected to evade the requirements of the Trade-at
Prohibition or any other provisions of the Plan; or
o. The order is to correct a bona fide error, which is recorded by
the Trading Center in its error account.\37\ A bona fide error is
defined as:
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\37\ The exceptions to the Trade-at requirement set forth in the
Plan and in the Exchange's proposed Rule 3317(c)(3)(D)(iii) are, in
part, based on the exceptions to the trade-through requirement set
forth in Rule 611 of Regulation NMS, including exceptions for an
order that is executed as part of a transaction that was not a
``regular way'' contract, and an order that is executed as part of a
single-priced opening, reopening, or closing transaction by the
Trading Center (see 17 CFR 242.611(b)(2) and (b)(3)). Following the
adoption of Rule 611 of Regulation NMS and its exceptions, the
Commission issued exemptive relief that created exceptions from Rule
611 of Regulation NMS for certain error correction transactions. See
Securities Exchange Act Release No. 55884 (June 8, 2007), 72 FR
32926 (June 14, 2007); Securities Exchange Act Release No. 55883
(June 8, 2007), 72 FR 32927 (June 14, 2007). The Exchange has
determined that it is appropriate to incorporate this additional
exception to the Trade-at Prohibition, as this exception is equally
applicable in the Trade-at context.
Accordingly, the Exchange is proposing to exempt certain
transactions to correct bona fide errors in the execution of
customer orders from the Trade-at Prohibition, subject to the
conditions set forth by the SEC's order exempting these transactions
from Rule 611 of Regulation NMS. The Commission granted New York
Stock Exchange LLC an exemption from Rule 608(c) related to this
provision. See Exemption Letter, supra note 22. The Exchange is
seeking the same exemptions as requested in the Exemption Request
Letters.
As with the corresponding exception under Rule 611 of Regulation
NMS, the bona fide error would have to be evidenced by objective
facts and circumstances, the Trading Center would have to maintain
documentation of such facts and circumstances and record the
transaction in its error account. To avail itself of the exemption,
the Trading Center would have to establish, maintain, and enforce
written policies and procedures reasonably designed to address the
occurrence of errors and, in the event of an error, the use and
terms of a transaction to correct the error in compliance with this
exemption. Finally, the Trading Center would have to regularly
surveil to ascertain the effectiveness of its policies and
procedures to address errors and transactions to correct errors and
take prompt action to remedy deficiencies in such policies and
procedures. See Securities Exchange Act Release No. 55884 (June 8,
2007), 72 FR 32926 (June 14, 2007).
---------------------------------------------------------------------------
A. The inaccurate conveyance or execution of any term of an order
including, but not limited to, price, number of shares or other unit of
trading; identification of the security; identification of the account
for which securities are purchased or sold; lost or otherwise misplaced
order tickets; short sales that were instead sold long or vice versa;
or the execution of an order on the wrong side of a market;
B. The unauthorized or unintended purchase, sale, or allocation of
securities, or the failure to follow specific client instructions;
C. The incorrect entry of data into relevant systems, including
reliance on incorrect cash positions, withdrawals, or securities
positions reflected in an account; or
D. A delay, outage, or failure of a communication system used to
transmit market data prices or to facilitate the delivery or execution
of an order.
Finally, proposed Rule 3317(c)(3)(D)(iv) would prevent member
organizations from breaking an order into smaller orders or otherwise
effecting or executing an order to evade the requirements of the Trade-
at Prohibition or any other provisions of the Plan.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\38\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\39\ in particular, in that it is designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to remove impediments to and perfect
the mechanism of a free and open market and a national market system,
and, in general, to protect investors and the public interest. The
Exchange believes that the proposed rule change is consistent with the
Act because it ensures that the Exchange and its member organizations
would be in compliance with a Plan approved by the Commission pursuant
to an order issued by the Commission in reliance on Section 11A of the
Act.\40\ Such approved Plan gives the Exchange authority to establish,
maintain, and enforce written policies and procedures that are
reasonably designed to comply with applicable quoting and trading
requirements specified in the Plan. The Exchange believes that the
proposed rule change is consistent with the authority granted to it by
the Plan to establish specifications and procedures for the
implementation and operation of the Plan that are consistent with the
provisions of the Plan. Likewise, the Exchange believes that the
proposed rule change provides interpretations of the Plan that are
consistent with the Act, in general, and furthers the objectives of the
Act, in particular.
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\38\ 15 U.S.C. 78f(b).
\39\ 15 U.S.C. 78f(b)(5).
\40\ 15 U.S.C. 78k-1.
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Furthermore, the Exchange is a Participant under the Plan and
subject, itself, to the provisions of the Plan. The proposed rule
change ensures that the Exchange's systems would not display or execute
trading interests outside the requirements specified in such Plan. The
proposal would also help allow market participants to continue to trade
NMS Stocks within quoting and trading requirements that are in
compliance with the Plan, with certainty on how certain orders and
trading interests would be treated. This, in turn, will help encourage
market participants to continue to provide liquidity in the
marketplace.
Because the Plan supports further examination and analysis on the
impact of tick sizes on the trading and liquidity of the securities of
small capitalization companies, and the Commission believes that
altering tick sizes could result in significant market-wide benefits
and improvements to liquidity and capital formation, adopting rules
that enforce compliance by its member organizations with the provisions
of the Plan would help promote liquidity in the marketplace and perfect
the mechanism of a free and open market and national market system.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed changes are
being made to establish, maintain, and enforce written policies and
procedures that are reasonably designed to comply with the trading and
quoting requirements specified in the Plan, of which other equities
exchanges are also Participants. Other competing national securities
exchanges are subject to the same trading and quoting requirements
specified in the Plan. Therefore, the proposed changes would not impose
any burden on competition, while providing certainty of treatment and
execution of trading interests on the Exchange to market participants
in NMS Stocks that are acting in compliance with the requirements
specified in the Plan.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
[[Page 46984]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
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)(iii) of the Act \41\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\42\
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\41\ 15 U.S.C. 78s(b)(3)(a)(iii).
\42\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file 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.
The Exchange has satisfied this requirement.
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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: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) 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.
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-Phlx-2016-73 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-Phlx-2016-73. 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-Phlx-2016-73, and should be
submitted on or before August 9, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\43\
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\43\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2016-16973 Filed 7-18-16; 8:45 am]
BILLING CODE 8011-01-P
