Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending Rule To Expand the Risk Limitation Mechanism to All Orders, Including Complex Orders, 89160-89165 [2016-29466]
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SUMMARY:
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Self-Regulatory Organizations; NYSE
MKT LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Amending Rule To
Expand the Risk Limitation Mechanism
to All Orders, Including Complex
Orders
December 5, 2016.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934
(‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that on December
1 15
U.S.C. 78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
2 15
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1, 2016, NYSE MKT LLC (‘‘NYSE MKT’’
or the ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the 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 amend
Rule 928NY (Risk Limitation
Mechanism) to expand the risk
limitation mechanism to all orders,
including Complex Orders. The
proposed rule change is available on the
Exchange’s Web site at www.nyse.com,
at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
Rule 928NY (Risk Limitation
Mechanism) to expand the risk
limitation mechanism to all orders,
including Complex Orders.4
Existing Risk Limitation Mechanism
Rule 928NY sets forth the risklimitation system, which is designed to
help Market Makers, as well as ATP
Holders, better manage risk related to
quoting and submitting orders,
respectively, during periods of
increased and significant trading
4 Rule 900.3NY(e) defines a Complex Order as
any order involving the simultaneous purchase
and/or sale of two or more different option series
in the same underlying security, for the same
account, in a ratio that is equal to or greater than
one-to-three (.333) and less than or equal to threeto-one (3.00) and for the purpose of executing
particular investment strategy.
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activity.5 The Exchange requires Market
Makers to utilize its risk limitation
mechanism, which automatically
removes a Market Maker’s quotes in all
series of an options class when certain
parameter settings are breached.6 The
Exchange permits, but does not require,
ATP Holders to utilize its risk limitation
mechanism for certain orders, which
automatically cancels such orders when
certain parameter settings are breached.7
Pursuant to Rule 928NY, the
Exchange establishes a time period
during which the System calculates for
quotes and orders, respectively: (1) The
number of trades executed by the
Market Maker or ATP Holder in a
particular options class; (2) the volume
of contracts traded by the Market Maker
or ATP Holder in a particular options
class; or (3) the aggregate percentage of
the Market Maker’s quoted size or ATP
Holder’s order size(s) executed in a
particular options class (collectively, the
‘‘risk settings’’).8 When a Market Maker
or ATP Holder has breached its risk
settings (i.e., has traded more than the
contract or volume limit or cumulative
percentage limit of a class during the
specified measurement interval), the
System will cancel all of the Market
Maker’s quotes or the ATP Holder’s
open orders in that class until the
Market Maker or ATP Holder notifies
the Exchange it will resume submitting
quotes or orders.9 The temporary
5 Market Makers are included in the definition of
ATP Holders and therefore, unless the Exchange is
discussing the quoting activity of Market Makers,
the Exchange does not distinguish Market Markers
from ATP Holders when discussing the risk
limitation mechanisms. See Rule 900.2NY(5)
(defining ATP Holder as ‘‘a natural person, sole
proprietorship, partnership, corporation, limited
liability company or other organization, in good
standing, that has been issued an ATP,’’ and
requires that ‘‘[a]n ATP Holder must be a registered
broker or dealer pursuant to Section 15 of the
Securities Exchange Act of 1934.’’ See also Rule
900.2NY(38) (providing that a Market Maker is ‘‘an
ATP Holder that acts as a Market Maker pursuant
to Rule 920NY’’).
6 See Rule 928NY(b)(3), (c)(3), (d)(3) and (e)(3).
See also Commentary .04 to Rule 928NY (providing
that Market Makers are required to utilize one of the
three risk settings for their quotes).
7 See Rule 928NY(b)(1), (2), (c)(1), (c)(2), (d)(1),
(d)(2) and Commentary .01 to Rule 928NY
(regarding the cancellation of orders once the risk
settings have been breached). See also Commentary
.04 to Rule 928NY (providing that ATP Holders may
avail themselves of one of the three risk limitation
mechanisms for certain of their orders).
8 See Rule 928NY(a)–(e) (settings forth the three
risk limitation mechanisms available: TransactionBased, Volume-Based and Percentage-Based). A
Market Maker may activate one Risk Limitation
Mechanism for its quotes (which is required) and
a different Risk Limitation Mechanism for its orders
(which is optional), even if both are activated for
the same class. See also Commentary .04 to Rule
928NY.
9 See Commentaries .01 and .02 to Rule 928NY
(requiring that a Market Maker or ATP Holder
request that it be re-enabled after a breach of its risk
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suspension of quotes or orders from the
market that results when the risk
settings are triggered is meant to operate
as a safety valve that enables Market
Makers and/or ATP Holders to reevaluate their positions before
requesting to re-enter the market.
Proposed Expansion of Risk Limitation
Mechanism to All Orders
Currently, ATP Holders may
voluntarily utilize risk settings for PNP
Orders and PNP-Blind Orders submitted
via ArcaDirect, which are defined as
‘‘Applicable Orders’’.10 Given the
importance of risk settings in today’s
trading environment, the Exchange
proposes to expand the availability of
the risk settings to all orders traded on
the Exc [sic]
The Exchange believes that expanding
the availability of the risk settings to all
orders would reduce the likelihood of
unintended trades and would enable
ATP Holders to re-evaluate their
positions before requesting to re-enter
the market if a risk setting is triggered.
The proposed expansion would, for
example, prevent the execution of a
large set of orders that are improperly
priced for any number of reasons (i.e.,
because of a malfunctioning algorithm,
the orders are left over from the prior
day, etc.). By preventing the execution
of such trades, the Exchange may help
parties (including clearing members)
avoid large trading losses. Thus, the
Exchange believes the proposed
expansion of the risk settings to all
orders would allow ATP Holders to
better manage the potential risks of
multiple executions against an ATP
Holder’s trading interest that, in today’s
highly automated and electronic trading
environment, can occur simultaneously
across multiple series and multiple
option classes. Consistent with the
ability to better manage risk, the
Exchange anticipates that the proposed
changes would enhance the Exchange’s
overall market quality as a result of
narrowed quote widths and increased
liquidity for series traded on the
Exchange. This proposed expansion is
also being made, in part, to be
responsive to requests from ATP
Holders that engage in high-volume
trading in a multitude of series and
settings). In the event that a Market Maker or ATP
Holder experiences multiple, successive triggers of
its risk settings, the Exchange would cancel all of
the quotes or Applicable Orders—as opposed to
cancelling only those in the option class
(underlying symbol) in which the risk settings were
triggered. See Rule 928NY(f) and Commentary .02
to Rule 928NY.
10 See Commentary .07 to Rule 928NY. For
purposes of risk settings relating to orders, the
Exchange does not distinguish Market Maker from
ATP Holders.
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89161
classes. The Exchange believes that the
proposal to make the risk settings
available for all orders would assist ATP
Holders in providing a means to
calibrate and monitor their risk
exposure on all orders. As is the case
today, the proposed availability of risk
settings for all of an ATP Holder’s
orders would not be mandated, but risk
settings would continue to be mandated
for all Market Maker quotes.11
To effect this change, the Exchange
proposes to amend Rule 928NY(a)(1) to
provide that the Exchange would
maintain separate ‘‘trade counters’’ for
each of the following scenarios: (i)
When any order, including a single-leg
order or any leg of a Complex Order
submitted by an ATP Holder is executed
in any series in a specified class; and (ii)
when a Market Maker quote is executed
in any series in an appointed class.12
The Exchange proposes this rule text to
replace the current rule text that covers
the Applicable Orders of non-Market
Makers and Market Makers,
respectively.13 Because Market Makers
are also ATP Holders, and because the
operation of the risk settings for orders
are identical for all ATP Holders, the
Exchange proposes to streamline the
rule text—in Rule 928NY(a)(1) and
throughout the Rule—by removing
reference to ‘‘non-Market Makers’’ as
superfluous and potentially confusing.14
Instead of separately addressing risk
settings for orders that are available to
Market Makers and non-Market Makers,
the proposed rule would simply address
the option as being available to all ATP
Holders. Proposed Rule 928NY(a)(1)
would further provide that for each of
these scenarios, the trade counters
would be incremented every time a
trade is executed, in accordance with
Commentary .07 to Rule 928NY.
The Exchange proposes to amend
paragraphs (b), (c), (d), (e), and (f) to
make similar changes so that each of
these paragraphs would have two subparagraphs that would be parallel to the
proposed changes to Rule 928NY(a)(1):
• The first sub-paragraph of each
paragraph would address how the
specific risk setting would be applied to
an ATP Holder’s orders, which would
11 See proposed Commentary .04(a) and (b) to
Rule 928NY.
12 See proposed Rule 928NY(a)(1)(i)–(ii).
13 The Exchange also proposes the nonsubstantive modification to replace uses of the term
‘‘shall’’ with the term ‘‘will’’ throughout the rule
text. See generally proposed Rule 928NY.
14 See supra note 5. See also proposed Rule
928NY(a)(1), (b)(1), (c)(1), (d)(1), (e)(1), (f)(1)
(collapsing into one paragraph the separate
paragraphs in the current Rule relating to risk
settings for orders sent by Market Maker and nonMarket Makers and updating cross-references to
condensed rule text).
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be the substantive change, as further
described below. These proposed subparagraphs would replace current rule
text in each paragraph governing how
the specific risk setting would apply to
a non-Market Maker’s or Market Maker’s
Applicable Orders. Accordingly, current
sub-paragraph (2) to each of paragraphs
(b), (c), (d), (e), and (f) would be deleted.
• The proposed second sub-paragraph
of each paragraph would address how
the specific risk setting would be
applied to a Market Marker’s quotes, as
further described below. Accordingly,
current sub-paragraph (3) to each of
paragraphs (b), (c), (d), (e), and (f) would
be re-numbered as sub-paragraph (2).
In addition to the substantive change
to expand risk settings to all orders, the
Exchange further proposes to make nonsubstantive amendments to each of the
proposed sub-paragraphs to paragraphs
(b), (c), and (d). The Exchange believes
that the proposed rule text would
simplify and streamline the rule by
describing a risk setting being triggered
when an ATP Holder’s orders or Market
Marker’s quotes ‘‘have traded’’ rather
than using the more cumbersome text
that an order or quote has been traded
‘‘against.’’ When addressing an ATP
Holder’s orders, the proposed rules
would provide that the risk setting
would be applicable to all orders in a
specific class. When addressing a
Market Maker’s quotes, the proposed
rules would provide that the risk setting
would be applicable to all of the Market
Maker’s quotes in an appointed class.
For each risk setting, the proposed new
text would provide as follows.
• The Transaction-Based Risk
Limitation Mechanism, described in
Rule 928NY(b), would be triggered
under the following conditions:
Æ When a trade counter indicates that
within a time period specified by the
Exchange, ‘‘n’’ executions of an ATP
Holder’s open orders have traded in a
specific class (proposed Rule
928NY(b)(1)); or
Æ when a trade counter indicates that
within a time period specified by the
Exchange, ‘‘n’’ executions of a Market
Marker’s quotes have traded in an
appointed class (proposed Rule
928NY(b)(2)).
• The Volume-Based Risk Limitation
Mechanism, described in Rule
928NY(c), would be triggered under the
following conditions:
Æ When a trade counter indicates that
within a time period specified by the
Exchange, ‘‘k’’ contracts of an ATP
Holder’s open orders have traded in a
specific class (proposed Rule
928NY(c)(1)); or
Æ when a trade counter indicates that
within a time period specified by the
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Exchange, ‘‘k’’ contracts of a Market
Maker’s quotes have traded in an
appointed class (proposed Rule
928NY(c)(2)).
• The Percentage-Based Risk
Limitation Mechanism, described in
Rule 928NY(d), would be triggered
under the following conditions:
Æ When a trade counter has
calculated that within a time period
specified by the Exchange, ‘‘p’’
percentage of an ATP Holder’s open
orders have traded in a specific class
(proposed Rule 928NY(d)(1)); or
Æ when a trade counter has calculated
that within a time period specified by
the Exchange, ‘‘p’’ percentage of a
Market Maker’s quotes have traded in an
appointed class (proposed Rule
928NY(d)(2)).
The Exchange also proposes clarifying
changes to how the Percentage-Based
Risk Limitation Mechanism operates.
The Exchange proposes to modify Rule
928NY(d)(2)(i)–(ii) to make clear that
the trade counter would first calculate,
for each series of an option class, ‘‘the
percentage(s) of an ATP Holder’s order
size(s) or a Market Maker’s quote size
that is executed on each side of the
market, including both displayed and
non-displayed size,’’ and would then
‘‘sum the overall percentages of the
size(s) for the entire option class to
calculate the ‘p’ percentage.’’ The
proposed changes are designed to
account for the fact that ATP Holders
may submit multiple orders on each
side of the market that may be counted
by the risk settings (whereas Market
Makers have only one quote on each
side of the market) and to reduce excess
verbiage to streamline and condense the
rule text, which the Exchange believes
adds clarity and transparency to the
Rule.
Proposed Changes Regarding Routable
Orders
Because the proposed expansion of
risk settings for orders would include
routable orders, the Exchange proposes
to amend Rule 928NY to address the
counting and cancellation of such
orders (or unexecuted portions thereof).
First, the Exchange proposes to add rule
text to Commentary .07 to Rule 928NY
to provide that executions of routable
orders on away markets would be
considered by a trade counter once the
execution report is received by the
Exchange.15 The Exchange also
15 The Exchange also proposes to delete as
inapplicable the rule text in Commentary .07 to
Rule 928NY providing that ‘‘[o]nly executions
against order types specified by the Exchange via
Trader Update and against quotes of Market Makers
shall be considered by a trade counter.’’ The
Exchange likewise proposes to delete the rule text
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proposes to amend Commentary .07 to
Rule 928NY to provide that executions
of each leg of a Complex Order would
be considered by a trade counter as an
individual transaction.
Regarding cancellations, the Exchange
proposes to amend Commentary .01 to
Rule 928NY to provide that once the
risk settings have been triggered,
pursuant to paragraphs (e) and (f) of the
Rule, the System would automatically
generate a ‘‘bulk cancel’’ message to
cancel Market Maker quotes and
electronic orders, or portions thereof,
that have not been routed to away
markets, excluding intraday and prior
day Good-Till-Cancel (‘‘GTC’’), All-orNone (‘‘AON’’), Customer Best
Execution (‘‘CUBE’’) orders, and orders
entered in response to an electronic
auction that are valid only for the
duration of the auction (‘‘GTX’’).16 The
Exchange has determined that it would
not cancel GTC, AON, CUBE, or GTX
orders because these order types are
typically retail orders which, if
automatically cancelled by the
Exchange, could cause an operational
issue for any firm that entered the
order(s) (i.e., exposing a firm to the risk
of a missed execution on an order that
has come due).17 Given these potential
operational issues, and for the
protection of investors and the investing
public, the Exchange has determined to
exempt these order types from
automatic cancellation when the risk
settings are triggered.18 The Exchange
also proposes to amend Commentary .01
to Rule 928NY to provide that ‘‘[o]rders
and quotes residing in the Consolidated
Book received prior to processing of the
from Commentary .07 to Rule 928NY that defines
‘‘Applicable Orders,’’ given that this limitation no
longer applies. In this regard, the Exchange
proposes to delete reference to ‘‘Applicable Orders’’
throughout the rule text and, where pertinent, and
[sic] to replace uses of the term ‘‘Applicable
Orders’’ with ‘‘orders.’’
16 In light of this change, the Exchange proposes
to delete the following rule text in Commentary .01
to Rule 928NY as no longer applicable: ‘‘The bulk
cancel message shall be processed by the System in
time priority with any other quote or order message
received by the System. Any Applicable Orders or
quotes that matched with a Market Maker’s quote
or a Market Maker’s or non-Market Maker’s
Applicable Order and were received by the System
prior to the receipt of the bulk cancel message shall
be automatically executed.’’ See id.
17 See, e.g., Rule 900.3NY(n) (defining GTC as buy
or sell orders that remain in force until the order
is filled, cancelled or the option contract expires);
(d)(4) (defining AON orders as a Market or Limit
Order that is to be executed in its entirety or not
at all); 971.1NY (defining initiating CUBE orders as
limit orders guaranteed by an ATP Holder, as agent,
submitted to the CUBE for possible price
improvement, which may not be cancelled or
modified).
18 The Exchange notes that the trade counters
would be incremented every time a GTC, AON,
CUBE or GTX order is executed, subject to proposed
Commentary .07. See proposed Rule 928NY(a)(1).
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bulk cancel message may trade. Any
unexecuted portion of an order subject
to a ‘bulk cancel’ message that had
routed away, but returned unexecuted,
will be immediately cancelled.’’ 19
In addition to the foregoing changes to
paragraphs (e) and (f) of Rule 928NY,
the Exchange also proposes to amend
these paragraphs to address the action
(i.e., cancellations) that the System
would effect upon the triggering of the
risk settings to account for the proposed
amendments to Commentary .01 to the
Rule. Specifically, the Exchange
proposes to modify sub-paragraph (1) to
both paragraphs (e) and (f) to provide
that if a risk setting is triggered, the
System would automatically cancel an
ATP Holder’s orders, ‘‘except as
provided in Commentary .01 to this
Rule.’’ Finally, the Exchange proposes
to make additional conforming changes
to Commentary .02 to Rule 928NY to
specify that once the risk settings have
been breached, any new orders (or
quotes) would not be accepted until the
ATP Holder or Market Maker contacts
the Exchange and requests to be reenabled.
Proposed Changes to Persistence of Risk
Settings for Orders
The Exchange also proposes to amend
Commentary .04 to Rule 928NY to
specify the persistence of the risk
settings, once activated, by an ATP
Holder for orders to conform this
Commentary to the changes described
above to delineate risk settings between
an ATP Holder’s orders and a Market
Maker’s quotes. Specifically, the
Exchange proposes to divide
Commentary .04 into two paragraphs to
make it easier to navigate—paragraph (a)
would address the persistence of risk
settings for quotes, and paragraph (b)
would address the persistence of risk
settings for orders.
Current Commentary .04 to Rule
928NY provides that an ATP Holder
must activate its risk settings for orders
on a daily basis. The Exchange proposes
to amend this Commentary .04 to
specify that ‘‘[o]nce an ATP Holder
activates a Risk Limitation Mechanism
for its orders in a specified class, the
mechanism and the settings established
will remain active unless, and until, the
ATP Holder deactivates the Risk
Limitation Mechanism or changes the
settings.’’ 20 While the risk settings for
orders remain an optional feature, the
Exchange believes this change would
enable each ATP Holder to calibrate its
settings as needed, as opposed to reestablishing the settings on a daily basis.
Proposed Modifications to Parameters
for Each Risk Limitation Mechanism
The Exchange proposes to adjust the
minimum and maximum parameters for
the Risk Limitation Mechanism as set
forth in Commentary .03 to the Rule.
The current Rule provides that the
Exchange would not exceed the
following minimum and maximum
parameters, applicable to quotes and
orders:
• Minimum of 1 and maximum of 100
for transaction-based risk setting;
• Minimum of 20 and a maximum of
5,000 for volume-based risk setting; and
• Minimum of 100 and a maximum of
2,000 for percentage-based risk
setting.21
The existing parameters have been in
place since 2012 and the Exchange has
not modified or increased these
parameters in the past four years.22
Since 2012, the markets have
experienced more volatility and
fragmentation. To account for these
changes, as well as the ever-increasing
automation, speed and volume
transacted in today’s electronic trading
environment, the Exchange proposes to
modify the minimum and maximum
parameters, applicable to quotes and
orders, as follows:
• Minimum of 3 and maximum of
2,000 for the transaction-based setting;
• Minimum of 20 and a maximum of
500,000 for volume-based setting; and
• Minimum of 100 and a maximum of
200,000 for percentage-based setting.23
Although this proposal establishes the
outside parameters of allowable settings,
Rule 928NY would still obligate the
Exchange to announce via Trader
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20 See
19 Relatedly, the Exchange proposes to delete the
following rule text in Commentary .01 to Rule
928NY: ‘‘Applicable Orders or quotes received by
the System after receipt of the bulk cancel message
shall not be executed.’’ The Exchange also proposes
to delete as obsolete the following rule text in
Commentary .01 to Rule 928NY, as the Exchange no
longer charges a Cancellation Fee: ‘‘Public
Customer orders cancelled pursuant to a Risk
Limitation Mechanism bulk cancel message shall
not be counted for purposes of calculating the
Exchange’s Cancellation Fee’’). See Securities
Exchange Act Release No. 70799 (November 1,
2013), 78 FR 66980 (November 7, 2013) (SR–
NYSEMKT–2013–87) (eliminating the Cancellation
Fee from the Exchange’s fee schedule).
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proposed Commentary .04(b) to Rule
928NY (specifying that, ‘‘[t]o be effective, an ATP
Holder must activate a Risk Limitation Mechanism,
and corresponding settings, for orders in a specified
class’’). Regarding the risk settings for quotes, the
Exchange proposes to delete as inapplicable rule
text that indicates that a Market Maker may
deactivate its risk settings for quotes, as this
functionality is mandated by the Exchange. See
proposed Commentary .04(a) to Rule 928NY. The
Exchange believes removing this language would
add clarity and consistency to the Rule.
21 See Commentary .03 to Rule 928NY.
22 See Securities Exchange Act Release No. 67713
(August 22, 2012), 77 FR 52090 (August 28, 2012)
(SR–NYSEMKT–2012–39).
23 See proposed Commentary .03 to Rule 928NY.
PO 00000
Frm 00122
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89163
Update ‘‘any applicable minimum,
maximum and/or default settings for the
Risk Limitation Mechanisms,’’ which
would afford Market Makers and ATP
Holders the opportunity to adjust their
own risk settings within the announced
parameters.24 The Exchange further
believes the proposed adjustments to
the minimum/maximum parameters
would enable the Exchange to strike the
appropriate balance to ensure that risk
settings may be established at a level
that is consistent with existing market
conditions, which would enable the risk
settings to operate in the manner
intended. The Exchange believes that
setting the parameters within this broad
range would provide ATP Holders with
ample flexibility in setting their
tolerance for risk. For example, ATP
Holders with a lower risk tolerance may
opt to select a lower threshold within
the range established by the Exchange,
thereby optimizing the protection
afforded by this proposed rule change,
whereas ATP Holders with a higher risk
tolerance may select the maximum
allowable parameter afforded by the
proposed rule change. Moreover, while
the Exchange retains discretion with
respect to the levels at which it could
adjust these settings, the Exchange
would not be permitted to adjust the
settings below the minimum or above
the maximum proposed, which, the
Exchange believes would ensure that
the settings are at all times within a
reasonable range. Finally, given that the
risk settings would now be available for
all order types, the Exchange believes it
would be prudent to provide ample
flexibility for setting the maximum
thresholds.
Implementation
The Exchange will announce by
Trader Update the implementation date
of the proposed rule change to expand
the availability of the Risk Limitation
Mechanism to all orders, which
implementation will be no later than 90
days after the effectiveness of this rule
change.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Securities Exchange Act of 1934
(the ‘‘Act’’),25 in general, and furthers
the objectives of Section 6(b)(5) of the
Act,26 in particular, in that it is designed
to prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to foster
24 See supra notes 21 and 23 (rule text remains
unchanged in current and proposed Commentary
.03 to Rule 928NY).
25 15 U.S.C. 78f(b).
26 15 U.S.C. 78f(b)(5).
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89164
Federal Register / Vol. 81, No. 237 / Friday, December 9, 2016 / Notices
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system and, in general, to protect
investors and the public interest.
ATP Holders are vulnerable to the risk
from a system or other error or a market
event that may cause them to send a
large number of orders or receive
multiple, automatic executions before
they can adjust their order exposure in
the market. Without adequate risk
management tools, such as the proposed
expanded risk settings for orders, ATP
Holders may opt to reduce the amount
of order flow and liquidity that they
provide to the market, which could
undermine the quality of the markets
available to market participants. Thus,
the Exchange believes that the proposed
rule change to expand the availability of
the risk settings to all orders removes
impediments to and perfects the
mechanism of a free and open market by
providing ATP Holders with greater
control and flexibility over setting their
risk tolerance and more protection over
risk exposure, if the market moves in an
unexpected direction. The proposed
expansion of the risk settings to all
orders would promote just and equitable
principles of trade because it would
help ATP Holders not only avoid
transacting against their interests but
would also reduce the potential for
executions at erroneous prices, which
should encourage OTPs [sic] to submit
additional order flow and liquidity to
the Exchange.
This proposed expansion, which was
specifically requested by some ATP
Holders, would foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, and
processing information with respect to,
and facilitating transactions in,
securities as it will be available to all
ATP Holders for all orders entered on
the Exchange. In addition, the expanded
risk settings may prevent the execution
of erroneously priced trades, which
would help parties (including clearing
members) avoid large trading losses,
thereby fostering cooperation and
coordination with persons engaged in
regulating, clearing, settling, and
processing information with respect to,
and facilitating transactions in,
securities.
The Exchange believes the proposed
adjustments to the minimum/maximum
parameters for each risk limitation
mechanism, which have not been
increased since 2012, are consistent
with the Act because they would allow
VerDate Sep<11>2014
18:13 Dec 08, 2016
Jkt 241001
the Exchange to strike the appropriate
balance to ensure that risk settings
could be established at a level that is
consistent with existing market
conditions, which would enable the risk
settings to operate in the manner
intended. The Exchange believes that
setting the parameters within the broad
range, as proposed, would provide OTPs
[sic] with ample flexibility in setting
their tolerance for risk. For example,
OTPs [sic] with a lower risk tolerance
may opt to select a lower threshold
within the range established by the
Exchange, thereby optimizing the
protection afforded by this proposed
rule change, whereas OTPs [sic] with a
higher risk tolerance may select the
maximum allowable parameter afforded
by the proposed rule change. Moreover,
because the Exchange would not be
permitted to adjust the settings below
the minimum or above the maximum
proposed, the settings should remain at
all times within a reasonable range.
Finally, given that the risk settings
would now be available for all order
types, the Exchange believes it would be
prudent to provide ample flexibility for
setting the maximum thresholds.
Consistent with the ability to better
manage risk, the Exchange anticipates
that the proposed enhancement to the
existing Risk Limitation Mechanism
would likewise enhance the Exchange’s
overall market quality as a result of
narrowed quote widths and increased
liquidity for series traded on the
Exchange, which would benefit
investors and the public interest
because they receive better prices and
because it lowers volatility in the
options market. Moreover, the Exchange
believes that the proposal is consistent
with the protection of investors and the
public interests because it would permit
ATP Holders to better manage the
potential risks of multiple executions
against an ATP Holder’s proprietary
interest that, in today’s highly
automated and electronic trading
environment, can occur simultaneously
across multiple series and multiple
option classes.
Finally, the Exchange believes that
the proposed changes to streamline and
clarify the rule text, including updated
cross references that conform rule text
to proposed changes, promotes just and
equitable principles of trade, fosters
cooperation and coordination among
persons engaged in facilitating securities
transactions, and removes impediments
to and perfects the mechanism of a free
and open market by ensuring that
members, regulators and the public can
more easily navigate the Exchange’s
rulebook and better understand the
defined terms used by the Exchange.
PO 00000
Frm 00123
Fmt 4703
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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
Exchange is proposing a market
enhancement that would provide ATP
Holders with greater control and
flexibility over setting their risk
tolerance and more protection over risk
exposure, if the market moves in an
unexpected direction. The Exchange
believes the proposal would provide
market participants with additional
protection from unintended executions.
The proposal is structured to offer the
same enhancement to all ATP Holders,
regardless of size, and would not
impose a competitive burden on any
participant. The Exchange does not
believe that the proposed enhancement
to the existing risk limitation
mechanism would impose a burden on
competing options exchanges. Rather,
the availability of this mechanism may
foster more competition. Specifically,
the Exchange notes that it operates in a
highly competitive market in which
market participants can readily favor
competing venues. When an exchange
offers enhanced functionality that
distinguishes it from the competition
and participants find it useful, it has
been the Exchange’s experience that
competing exchanges will move to
adopt similar functionality. Thus, the
Exchange believes that this type of
competition amongst exchanges is
beneficial to the market place as a whole
as it can result in enhanced processes,
functionality, and technologies.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed
rule change pursuant to Section
19(b)(3)(A)(iii) of the Act 27 and Rule
19b–4(f)(6) thereunder.28 Because the
27 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
has satisfied this requirement.
28 17
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Federal Register / Vol. 81, No. 237 / Friday, December 9, 2016 / Notices
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
prior to 30 days from the date on which
it was filed, or such shorter time as the
Commission may designate, if
consistent with the protection of
investors and the public interest, the
proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act and Rule 19b–4(f)(6)(iii)
thereunder.
At any time within 60 days of the
filing of such proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 29 of the Act to
determine whether the proposed rule
change 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:
mstockstill on DSK3G9T082PROD with NOTICES
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–
NYSEMKT–2016–110 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSEMKT–2016–110. 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
29 15
U.S.C. 78s(b)(2)(B).
VerDate Sep<11>2014
18:13 Dec 08, 2016
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of 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–
NYSEMKT–2016–110, and should be
submitted on or before December 30,
2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.30
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016–29466 Filed 12–8–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Proposed Collection; Comment
Request
Upon Written Request Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE., Washington, DC
20549–2736.
Extension:
Regulation 14N and Schedule 14N, SEC
File No. 270–598, OMB Control No.
3235–0655
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
and Exchange Commission
(‘‘Commission’’) is soliciting comments
on the collection of information
summarized below. The Commission
plans to submit this existing collection
of information to the Office of
Management and Budget for extension
and approval.
Schedule 14N (17 CFR 240.14n–101)
requires the filing of certain information
with the Commission by shareholders
who submit a nominee or nominees for
director pursuant to applicable state
law, or a company’s governing
30 17
Jkt 241001
PO 00000
documents. Schedule 14N provides
notice to the company of the
shareholder’s intent to have the
company include the shareholder’s or
shareholder groups’ nominee or
nominees for director in the company’s
proxy materials. This information is
intended to assist shareholders in
making an informed voting decision
with regards to any nominee or
nominees put forth by a nominating
shareholder or group, by allowing
shareholders to gauge the nominating
shareholder’s interest in the company,
longevity of ownership, and intent with
regard to continued ownership in the
company. We estimate that Schedule
14N takes approximately 40 hours per
response and will be filed by
approximately 42 issuers annually. In
addition, we estimate that 75% of the 40
hours per response (30 hours per
response) is prepared by the issuer for
an annual reporting burden of 1,260
hours (30 hours per response × 42
responses).
Written comments are invited on: (a)
Whether this collection of information
is necessary for the proper performance
of the functions of the agency, including
whether the information will have
practical utility; (b) the accuracy of the
agency’s estimate of the burden imposed
by the collection of information; (c)
ways to enhance the quality, utility, and
clarity of the information collected; and
(d) ways to minimize the burden of the
collection of information on
respondents, including through the use
of automated collection techniques or
other forms of information technology.
Consideration will be given to
comments and suggestions submitted in
writing within 60 days of this
publication.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a currently valid
control number.
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 and an email to: PRA_
Mailbox@sec.gov.
Dated: December 1, 2016.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–29493 Filed 12–8–16; 8:45 am]
BILLING CODE 8011–01–P
CFR 200.30–3(a)(12).
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]]>Agencies
[Federal Register Volume 81, Number 237 (Friday, December 9, 2016)]
[Notices]
[Pages 89160-89165]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-29466]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-79468; File No. SR-NYSEMKT-2016-110]
Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and
Immediate Effectiveness of Proposed Rule Change Amending Rule To Expand
the Risk Limitation Mechanism to All Orders, Including Complex Orders
December 5, 2016.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that on December 1, 2016, NYSE MKT LLC (``NYSE MKT'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 928NY (Risk Limitation
Mechanism) to expand the risk limitation mechanism to all orders,
including Complex Orders. The proposed rule change is available on the
Exchange's Web site at www.nyse.com, at the principal office of the
Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 928NY (Risk Limitation
Mechanism) to expand the risk limitation mechanism to all orders,
including Complex Orders.\4\
---------------------------------------------------------------------------
\4\ Rule 900.3NY(e) defines a Complex Order as any order
involving the simultaneous purchase and/or sale of two or more
different option series in the same underlying security, for the
same account, in a ratio that is equal to or greater than one-to-
three (.333) and less than or equal to three-to-one (3.00) and for
the purpose of executing particular investment strategy.
---------------------------------------------------------------------------
Existing Risk Limitation Mechanism
Rule 928NY sets forth the risk-limitation system, which is designed
to help Market Makers, as well as ATP Holders, better manage risk
related to quoting and submitting orders, respectively, during periods
of increased and significant trading
[[Page 89161]]
activity.\5\ The Exchange requires Market Makers to utilize its risk
limitation mechanism, which automatically removes a Market Maker's
quotes in all series of an options class when certain parameter
settings are breached.\6\ The Exchange permits, but does not require,
ATP Holders to utilize its risk limitation mechanism for certain
orders, which automatically cancels such orders when certain parameter
settings are breached.\7\
---------------------------------------------------------------------------
\5\ Market Makers are included in the definition of ATP Holders
and therefore, unless the Exchange is discussing the quoting
activity of Market Makers, the Exchange does not distinguish Market
Markers from ATP Holders when discussing the risk limitation
mechanisms. See Rule 900.2NY(5) (defining ATP Holder as ``a natural
person, sole proprietorship, partnership, corporation, limited
liability company or other organization, in good standing, that has
been issued an ATP,'' and requires that ``[a]n ATP Holder must be a
registered broker or dealer pursuant to Section 15 of the Securities
Exchange Act of 1934.'' See also Rule 900.2NY(38) (providing that a
Market Maker is ``an ATP Holder that acts as a Market Maker pursuant
to Rule 920NY'').
\6\ See Rule 928NY(b)(3), (c)(3), (d)(3) and (e)(3). See also
Commentary .04 to Rule 928NY (providing that Market Makers are
required to utilize one of the three risk settings for their
quotes).
\7\ See Rule 928NY(b)(1), (2), (c)(1), (c)(2), (d)(1), (d)(2)
and Commentary .01 to Rule 928NY (regarding the cancellation of
orders once the risk settings have been breached). See also
Commentary .04 to Rule 928NY (providing that ATP Holders may avail
themselves of one of the three risk limitation mechanisms for
certain of their orders).
---------------------------------------------------------------------------
Pursuant to Rule 928NY, the Exchange establishes a time period
during which the System calculates for quotes and orders, respectively:
(1) The number of trades executed by the Market Maker or ATP Holder in
a particular options class; (2) the volume of contracts traded by the
Market Maker or ATP Holder in a particular options class; or (3) the
aggregate percentage of the Market Maker's quoted size or ATP Holder's
order size(s) executed in a particular options class (collectively, the
``risk settings'').\8\ When a Market Maker or ATP Holder has breached
its risk settings (i.e., has traded more than the contract or volume
limit or cumulative percentage limit of a class during the specified
measurement interval), the System will cancel all of the Market Maker's
quotes or the ATP Holder's open orders in that class until the Market
Maker or ATP Holder notifies the Exchange it will resume submitting
quotes or orders.\9\ The temporary suspension of quotes or orders from
the market that results when the risk settings are triggered is meant
to operate as a safety valve that enables Market Makers and/or ATP
Holders to re-evaluate their positions before requesting to re-enter
the market.
---------------------------------------------------------------------------
\8\ See Rule 928NY(a)-(e) (settings forth the three risk
limitation mechanisms available: Transaction-Based, Volume-Based and
Percentage-Based). A Market Maker may activate one Risk Limitation
Mechanism for its quotes (which is required) and a different Risk
Limitation Mechanism for its orders (which is optional), even if
both are activated for the same class. See also Commentary .04 to
Rule 928NY.
\9\ See Commentaries .01 and .02 to Rule 928NY (requiring that a
Market Maker or ATP Holder request that it be re-enabled after a
breach of its risk settings). In the event that a Market Maker or
ATP Holder experiences multiple, successive triggers of its risk
settings, the Exchange would cancel all of the quotes or Applicable
Orders--as opposed to cancelling only those in the option class
(underlying symbol) in which the risk settings were triggered. See
Rule 928NY(f) and Commentary .02 to Rule 928NY.
---------------------------------------------------------------------------
Proposed Expansion of Risk Limitation Mechanism to All Orders
Currently, ATP Holders may voluntarily utilize risk settings for
PNP Orders and PNP-Blind Orders submitted via ArcaDirect, which are
defined as ``Applicable Orders''.\10\ Given the importance of risk
settings in today's trading environment, the Exchange proposes to
expand the availability of the risk settings to all orders traded on
the Exc [sic]
---------------------------------------------------------------------------
\10\ See Commentary .07 to Rule 928NY. For purposes of risk
settings relating to orders, the Exchange does not distinguish
Market Maker from ATP Holders.
---------------------------------------------------------------------------
The Exchange believes that expanding the availability of the risk
settings to all orders would reduce the likelihood of unintended trades
and would enable ATP Holders to re-evaluate their positions before
requesting to re-enter the market if a risk setting is triggered. The
proposed expansion would, for example, prevent the execution of a large
set of orders that are improperly priced for any number of reasons
(i.e., because of a malfunctioning algorithm, the orders are left over
from the prior day, etc.). By preventing the execution of such trades,
the Exchange may help parties (including clearing members) avoid large
trading losses. Thus, the Exchange believes the proposed expansion of
the risk settings to all orders would allow ATP Holders to better
manage the potential risks of multiple executions against an ATP
Holder's trading interest that, in today's highly automated and
electronic trading environment, can occur simultaneously across
multiple series and multiple option classes. Consistent with the
ability to better manage risk, the Exchange anticipates that the
proposed changes would enhance the Exchange's overall market quality as
a result of narrowed quote widths and increased liquidity for series
traded on the Exchange. This proposed expansion is also being made, in
part, to be responsive to requests from ATP Holders that engage in
high-volume trading in a multitude of series and classes. The Exchange
believes that the proposal to make the risk settings available for all
orders would assist ATP Holders in providing a means to calibrate and
monitor their risk exposure on all orders. As is the case today, the
proposed availability of risk settings for all of an ATP Holder's
orders would not be mandated, but risk settings would continue to be
mandated for all Market Maker quotes.\11\
---------------------------------------------------------------------------
\11\ See proposed Commentary .04(a) and (b) to Rule 928NY.
---------------------------------------------------------------------------
To effect this change, the Exchange proposes to amend Rule
928NY(a)(1) to provide that the Exchange would maintain separate
``trade counters'' for each of the following scenarios: (i) When any
order, including a single-leg order or any leg of a Complex Order
submitted by an ATP Holder is executed in any series in a specified
class; and (ii) when a Market Maker quote is executed in any series in
an appointed class.\12\ The Exchange proposes this rule text to replace
the current rule text that covers the Applicable Orders of non-Market
Makers and Market Makers, respectively.\13\ Because Market Makers are
also ATP Holders, and because the operation of the risk settings for
orders are identical for all ATP Holders, the Exchange proposes to
streamline the rule text--in Rule 928NY(a)(1) and throughout the Rule--
by removing reference to ``non-Market Makers'' as superfluous and
potentially confusing.\14\ Instead of separately addressing risk
settings for orders that are available to Market Makers and non-Market
Makers, the proposed rule would simply address the option as being
available to all ATP Holders. Proposed Rule 928NY(a)(1) would further
provide that for each of these scenarios, the trade counters would be
incremented every time a trade is executed, in accordance with
Commentary .07 to Rule 928NY.
---------------------------------------------------------------------------
\12\ See proposed Rule 928NY(a)(1)(i)-(ii).
\13\ The Exchange also proposes the non-substantive modification
to replace uses of the term ``shall'' with the term ``will''
throughout the rule text. See generally proposed Rule 928NY.
\14\ See supra note 5. See also proposed Rule 928NY(a)(1),
(b)(1), (c)(1), (d)(1), (e)(1), (f)(1) (collapsing into one
paragraph the separate paragraphs in the current Rule relating to
risk settings for orders sent by Market Maker and non-Market Makers
and updating cross-references to condensed rule text).
---------------------------------------------------------------------------
The Exchange proposes to amend paragraphs (b), (c), (d), (e), and
(f) to make similar changes so that each of these paragraphs would have
two sub-paragraphs that would be parallel to the proposed changes to
Rule 928NY(a)(1):
The first sub-paragraph of each paragraph would address
how the specific risk setting would be applied to an ATP Holder's
orders, which would
[[Page 89162]]
be the substantive change, as further described below. These proposed
sub-paragraphs would replace current rule text in each paragraph
governing how the specific risk setting would apply to a non-Market
Maker's or Market Maker's Applicable Orders. Accordingly, current sub-
paragraph (2) to each of paragraphs (b), (c), (d), (e), and (f) would
be deleted.
The proposed second sub-paragraph of each paragraph would
address how the specific risk setting would be applied to a Market
Marker's quotes, as further described below. Accordingly, current sub-
paragraph (3) to each of paragraphs (b), (c), (d), (e), and (f) would
be re-numbered as sub-paragraph (2).
In addition to the substantive change to expand risk settings to
all orders, the Exchange further proposes to make non-substantive
amendments to each of the proposed sub-paragraphs to paragraphs (b),
(c), and (d). The Exchange believes that the proposed rule text would
simplify and streamline the rule by describing a risk setting being
triggered when an ATP Holder's orders or Market Marker's quotes ``have
traded'' rather than using the more cumbersome text that an order or
quote has been traded ``against.'' When addressing an ATP Holder's
orders, the proposed rules would provide that the risk setting would be
applicable to all orders in a specific class. When addressing a Market
Maker's quotes, the proposed rules would provide that the risk setting
would be applicable to all of the Market Maker's quotes in an appointed
class. For each risk setting, the proposed new text would provide as
follows.
The Transaction-Based Risk Limitation Mechanism, described
in Rule 928NY(b), would be triggered under the following conditions:
[cir] When a trade counter indicates that within a time period
specified by the Exchange, ``n'' executions of an ATP Holder's open
orders have traded in a specific class (proposed Rule 928NY(b)(1)); or
[cir] when a trade counter indicates that within a time period
specified by the Exchange, ``n'' executions of a Market Marker's quotes
have traded in an appointed class (proposed Rule 928NY(b)(2)).
The Volume-Based Risk Limitation Mechanism, described in
Rule 928NY(c), would be triggered under the following conditions:
[cir] When a trade counter indicates that within a time period
specified by the Exchange, ``k'' contracts of an ATP Holder's open
orders have traded in a specific class (proposed Rule 928NY(c)(1)); or
[cir] when a trade counter indicates that within a time period
specified by the Exchange, ``k'' contracts of a Market Maker's quotes
have traded in an appointed class (proposed Rule 928NY(c)(2)).
The Percentage-Based Risk Limitation Mechanism, described
in Rule 928NY(d), would be triggered under the following conditions:
[cir] When a trade counter has calculated that within a time period
specified by the Exchange, ``p'' percentage of an ATP Holder's open
orders have traded in a specific class (proposed Rule 928NY(d)(1)); or
[cir] when a trade counter has calculated that within a time period
specified by the Exchange, ``p'' percentage of a Market Maker's quotes
have traded in an appointed class (proposed Rule 928NY(d)(2)).
The Exchange also proposes clarifying changes to how the
Percentage-Based Risk Limitation Mechanism operates. The Exchange
proposes to modify Rule 928NY(d)(2)(i)-(ii) to make clear that the
trade counter would first calculate, for each series of an option
class, ``the percentage(s) of an ATP Holder's order size(s) or a Market
Maker's quote size that is executed on each side of the market,
including both displayed and non-displayed size,'' and would then ``sum
the overall percentages of the size(s) for the entire option class to
calculate the `p' percentage.'' The proposed changes are designed to
account for the fact that ATP Holders may submit multiple orders on
each side of the market that may be counted by the risk settings
(whereas Market Makers have only one quote on each side of the market)
and to reduce excess verbiage to streamline and condense the rule text,
which the Exchange believes adds clarity and transparency to the Rule.
Proposed Changes Regarding Routable Orders
Because the proposed expansion of risk settings for orders would
include routable orders, the Exchange proposes to amend Rule 928NY to
address the counting and cancellation of such orders (or unexecuted
portions thereof). First, the Exchange proposes to add rule text to
Commentary .07 to Rule 928NY to provide that executions of routable
orders on away markets would be considered by a trade counter once the
execution report is received by the Exchange.\15\ The Exchange also
proposes to amend Commentary .07 to Rule 928NY to provide that
executions of each leg of a Complex Order would be considered by a
trade counter as an individual transaction.
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\15\ The Exchange also proposes to delete as inapplicable the
rule text in Commentary .07 to Rule 928NY providing that ``[o]nly
executions against order types specified by the Exchange via Trader
Update and against quotes of Market Makers shall be considered by a
trade counter.'' The Exchange likewise proposes to delete the rule
text from Commentary .07 to Rule 928NY that defines ``Applicable
Orders,'' given that this limitation no longer applies. In this
regard, the Exchange proposes to delete reference to ``Applicable
Orders'' throughout the rule text and, where pertinent, and [sic] to
replace uses of the term ``Applicable Orders'' with ``orders.''
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Regarding cancellations, the Exchange proposes to amend Commentary
.01 to Rule 928NY to provide that once the risk settings have been
triggered, pursuant to paragraphs (e) and (f) of the Rule, the System
would automatically generate a ``bulk cancel'' message to cancel Market
Maker quotes and electronic orders, or portions thereof, that have not
been routed to away markets, excluding intraday and prior day Good-
Till-Cancel (``GTC''), All-or-None (``AON''), Customer Best Execution
(``CUBE'') orders, and orders entered in response to an electronic
auction that are valid only for the duration of the auction
(``GTX'').\16\ The Exchange has determined that it would not cancel
GTC, AON, CUBE, or GTX orders because these order types are typically
retail orders which, if automatically cancelled by the Exchange, could
cause an operational issue for any firm that entered the order(s)
(i.e., exposing a firm to the risk of a missed execution on an order
that has come due).\17\ Given these potential operational issues, and
for the protection of investors and the investing public, the Exchange
has determined to exempt these order types from automatic cancellation
when the risk settings are triggered.\18\ The Exchange also proposes to
amend Commentary .01 to Rule 928NY to provide that ``[o]rders and
quotes residing in the Consolidated Book received prior to processing
of the
[[Page 89163]]
bulk cancel message may trade. Any unexecuted portion of an order
subject to a `bulk cancel' message that had routed away, but returned
unexecuted, will be immediately cancelled.'' \19\
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\16\ In light of this change, the Exchange proposes to delete
the following rule text in Commentary .01 to Rule 928NY as no longer
applicable: ``The bulk cancel message shall be processed by the
System in time priority with any other quote or order message
received by the System. Any Applicable Orders or quotes that matched
with a Market Maker's quote or a Market Maker's or non-Market
Maker's Applicable Order and were received by the System prior to
the receipt of the bulk cancel message shall be automatically
executed.'' See id.
\17\ See, e.g., Rule 900.3NY(n) (defining GTC as buy or sell
orders that remain in force until the order is filled, cancelled or
the option contract expires); (d)(4) (defining AON orders as a
Market or Limit Order that is to be executed in its entirety or not
at all); 971.1NY (defining initiating CUBE orders as limit orders
guaranteed by an ATP Holder, as agent, submitted to the CUBE for
possible price improvement, which may not be cancelled or modified).
\18\ The Exchange notes that the trade counters would be
incremented every time a GTC, AON, CUBE or GTX order is executed,
subject to proposed Commentary .07. See proposed Rule 928NY(a)(1).
\19\ Relatedly, the Exchange proposes to delete the following
rule text in Commentary .01 to Rule 928NY: ``Applicable Orders or
quotes received by the System after receipt of the bulk cancel
message shall not be executed.'' The Exchange also proposes to
delete as obsolete the following rule text in Commentary .01 to Rule
928NY, as the Exchange no longer charges a Cancellation Fee:
``Public Customer orders cancelled pursuant to a Risk Limitation
Mechanism bulk cancel message shall not be counted for purposes of
calculating the Exchange's Cancellation Fee''). See Securities
Exchange Act Release No. 70799 (November 1, 2013), 78 FR 66980
(November 7, 2013) (SR-NYSEMKT-2013-87) (eliminating the
Cancellation Fee from the Exchange's fee schedule).
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In addition to the foregoing changes to paragraphs (e) and (f) of
Rule 928NY, the Exchange also proposes to amend these paragraphs to
address the action (i.e., cancellations) that the System would effect
upon the triggering of the risk settings to account for the proposed
amendments to Commentary .01 to the Rule. Specifically, the Exchange
proposes to modify sub-paragraph (1) to both paragraphs (e) and (f) to
provide that if a risk setting is triggered, the System would
automatically cancel an ATP Holder's orders, ``except as provided in
Commentary .01 to this Rule.'' Finally, the Exchange proposes to make
additional conforming changes to Commentary .02 to Rule 928NY to
specify that once the risk settings have been breached, any new orders
(or quotes) would not be accepted until the ATP Holder or Market Maker
contacts the Exchange and requests to be re-enabled.
Proposed Changes to Persistence of Risk Settings for Orders
The Exchange also proposes to amend Commentary .04 to Rule 928NY to
specify the persistence of the risk settings, once activated, by an ATP
Holder for orders to conform this Commentary to the changes described
above to delineate risk settings between an ATP Holder's orders and a
Market Maker's quotes. Specifically, the Exchange proposes to divide
Commentary .04 into two paragraphs to make it easier to navigate--
paragraph (a) would address the persistence of risk settings for
quotes, and paragraph (b) would address the persistence of risk
settings for orders.
Current Commentary .04 to Rule 928NY provides that an ATP Holder
must activate its risk settings for orders on a daily basis. The
Exchange proposes to amend this Commentary .04 to specify that ``[o]nce
an ATP Holder activates a Risk Limitation Mechanism for its orders in a
specified class, the mechanism and the settings established will remain
active unless, and until, the ATP Holder deactivates the Risk
Limitation Mechanism or changes the settings.'' \20\ While the risk
settings for orders remain an optional feature, the Exchange believes
this change would enable each ATP Holder to calibrate its settings as
needed, as opposed to re-establishing the settings on a daily basis.
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\20\ See proposed Commentary .04(b) to Rule 928NY (specifying
that, ``[t]o be effective, an ATP Holder must activate a Risk
Limitation Mechanism, and corresponding settings, for orders in a
specified class''). Regarding the risk settings for quotes, the
Exchange proposes to delete as inapplicable rule text that indicates
that a Market Maker may deactivate its risk settings for quotes, as
this functionality is mandated by the Exchange. See proposed
Commentary .04(a) to Rule 928NY. The Exchange believes removing this
language would add clarity and consistency to the Rule.
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Proposed Modifications to Parameters for Each Risk Limitation Mechanism
The Exchange proposes to adjust the minimum and maximum parameters
for the Risk Limitation Mechanism as set forth in Commentary .03 to the
Rule. The current Rule provides that the Exchange would not exceed the
following minimum and maximum parameters, applicable to quotes and
orders:
Minimum of 1 and maximum of 100 for transaction-based risk
setting;
Minimum of 20 and a maximum of 5,000 for volume-based risk
setting; and
Minimum of 100 and a maximum of 2,000 for percentage-based
risk setting.\21\
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\21\ See Commentary .03 to Rule 928NY.
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The existing parameters have been in place since 2012 and the
Exchange has not modified or increased these parameters in the past
four years.\22\ Since 2012, the markets have experienced more
volatility and fragmentation. To account for these changes, as well as
the ever-increasing automation, speed and volume transacted in today's
electronic trading environment, the Exchange proposes to modify the
minimum and maximum parameters, applicable to quotes and orders, as
follows:
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\22\ See Securities Exchange Act Release No. 67713 (August 22,
2012), 77 FR 52090 (August 28, 2012) (SR-NYSEMKT-2012-39).
---------------------------------------------------------------------------
Minimum of 3 and maximum of 2,000 for the transaction-
based setting;
Minimum of 20 and a maximum of 500,000 for volume-based
setting; and
Minimum of 100 and a maximum of 200,000 for percentage-
based setting.\23\
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\23\ See proposed Commentary .03 to Rule 928NY.
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Although this proposal establishes the outside parameters of
allowable settings, Rule 928NY would still obligate the Exchange to
announce via Trader Update ``any applicable minimum, maximum and/or
default settings for the Risk Limitation Mechanisms,'' which would
afford Market Makers and ATP Holders the opportunity to adjust their
own risk settings within the announced parameters.\24\ The Exchange
further believes the proposed adjustments to the minimum/maximum
parameters would enable the Exchange to strike the appropriate balance
to ensure that risk settings may be established at a level that is
consistent with existing market conditions, which would enable the risk
settings to operate in the manner intended. The Exchange believes that
setting the parameters within this broad range would provide ATP
Holders with ample flexibility in setting their tolerance for risk. For
example, ATP Holders with a lower risk tolerance may opt to select a
lower threshold within the range established by the Exchange, thereby
optimizing the protection afforded by this proposed rule change,
whereas ATP Holders with a higher risk tolerance may select the maximum
allowable parameter afforded by the proposed rule change. Moreover,
while the Exchange retains discretion with respect to the levels at
which it could adjust these settings, the Exchange would not be
permitted to adjust the settings below the minimum or above the maximum
proposed, which, the Exchange believes would ensure that the settings
are at all times within a reasonable range. Finally, given that the
risk settings would now be available for all order types, the Exchange
believes it would be prudent to provide ample flexibility for setting
the maximum thresholds.
---------------------------------------------------------------------------
\24\ See supra notes 21 and 23 (rule text remains unchanged in
current and proposed Commentary .03 to Rule 928NY).
---------------------------------------------------------------------------
Implementation
The Exchange will announce by Trader Update the implementation date
of the proposed rule change to expand the availability of the Risk
Limitation Mechanism to all orders, which implementation will be no
later than 90 days after the effectiveness of this rule change.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Securities Exchange Act of 1934 (the ``Act''),\25\ in
general, and furthers the objectives of Section 6(b)(5) of the Act,\26\
in particular, in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster
[[Page 89164]]
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------
\25\ 15 U.S.C. 78f(b).
\26\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
ATP Holders are vulnerable to the risk from a system or other error
or a market event that may cause them to send a large number of orders
or receive multiple, automatic executions before they can adjust their
order exposure in the market. Without adequate risk management tools,
such as the proposed expanded risk settings for orders, ATP Holders may
opt to reduce the amount of order flow and liquidity that they provide
to the market, which could undermine the quality of the markets
available to market participants. Thus, the Exchange believes that the
proposed rule change to expand the availability of the risk settings to
all orders removes impediments to and perfects the mechanism of a free
and open market by providing ATP Holders with greater control and
flexibility over setting their risk tolerance and more protection over
risk exposure, if the market moves in an unexpected direction. The
proposed expansion of the risk settings to all orders would promote
just and equitable principles of trade because it would help ATP
Holders not only avoid transacting against their interests but would
also reduce the potential for executions at erroneous prices, which
should encourage OTPs [sic] to submit additional order flow and
liquidity to the Exchange.
This proposed expansion, which was specifically requested by some
ATP Holders, would foster cooperation and coordination with persons
engaged in regulating, clearing, settling, and processing information
with respect to, and facilitating transactions in, securities as it
will be available to all ATP Holders for all orders entered on the
Exchange. In addition, the expanded risk settings may prevent the
execution of erroneously priced trades, which would help parties
(including clearing members) avoid large trading losses, thereby
fostering cooperation and coordination with persons engaged in
regulating, clearing, settling, and processing information with respect
to, and facilitating transactions in, securities.
The Exchange believes the proposed adjustments to the minimum/
maximum parameters for each risk limitation mechanism, which have not
been increased since 2012, are consistent with the Act because they
would allow the Exchange to strike the appropriate balance to ensure
that risk settings could be established at a level that is consistent
with existing market conditions, which would enable the risk settings
to operate in the manner intended. The Exchange believes that setting
the parameters within the broad range, as proposed, would provide OTPs
[sic] with ample flexibility in setting their tolerance for risk. For
example, OTPs [sic] with a lower risk tolerance may opt to select a
lower threshold within the range established by the Exchange, thereby
optimizing the protection afforded by this proposed rule change,
whereas OTPs [sic] with a higher risk tolerance may select the maximum
allowable parameter afforded by the proposed rule change. Moreover,
because the Exchange would not be permitted to adjust the settings
below the minimum or above the maximum proposed, the settings should
remain at all times within a reasonable range. Finally, given that the
risk settings would now be available for all order types, the Exchange
believes it would be prudent to provide ample flexibility for setting
the maximum thresholds.
Consistent with the ability to better manage risk, the Exchange
anticipates that the proposed enhancement to the existing Risk
Limitation Mechanism would likewise enhance the Exchange's overall
market quality as a result of narrowed quote widths and increased
liquidity for series traded on the Exchange, which would benefit
investors and the public interest because they receive better prices
and because it lowers volatility in the options market. Moreover, the
Exchange believes that the proposal is consistent with the protection
of investors and the public interests because it would permit ATP
Holders to better manage the potential risks of multiple executions
against an ATP Holder's proprietary interest that, in today's highly
automated and electronic trading environment, can occur simultaneously
across multiple series and multiple option classes.
Finally, the Exchange believes that the proposed changes to
streamline and clarify the rule text, including updated cross
references that conform rule text to proposed changes, promotes just
and equitable principles of trade, fosters cooperation and coordination
among persons engaged in facilitating securities transactions, and
removes impediments to and perfects the mechanism of a free and open
market by ensuring that members, regulators and the public can more
easily navigate the Exchange's rulebook and better understand the
defined terms used by the Exchange.
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 Exchange is proposing a
market enhancement that would provide ATP Holders with greater control
and flexibility over setting their risk tolerance and more protection
over risk exposure, if the market moves in an unexpected direction. The
Exchange believes the proposal would provide market participants with
additional protection from unintended executions. The proposal is
structured to offer the same enhancement to all ATP Holders, regardless
of size, and would not impose a competitive burden on any participant.
The Exchange does not believe that the proposed enhancement to the
existing risk limitation mechanism would impose a burden on competing
options exchanges. Rather, the availability of this mechanism may
foster more competition. Specifically, the Exchange notes that it
operates in a highly competitive market in which market participants
can readily favor competing venues. When an exchange offers enhanced
functionality that distinguishes it from the competition and
participants find it useful, it has been the Exchange's experience that
competing exchanges will move to adopt similar functionality. Thus, the
Exchange believes that this type of competition amongst exchanges is
beneficial to the market place as a whole as it can result in enhanced
processes, functionality, and technologies.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \27\ and Rule 19b-4(f)(6) thereunder.\28\
Because the
[[Page 89165]]
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 prior to 30 days from the
date on which it was filed, or such shorter time as the Commission may
designate, if consistent with the protection of investors and the
public interest, the proposed rule change has become effective pursuant
to Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6)(iii) thereunder.
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\27\ 15 U.S.C. 78s(b)(3)(A)(iii).
\28\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------
At any time within 60 days of the filing of such proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \29\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\29\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
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-NYSEMKT-2016-110 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEMKT-2016-110. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal office of 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-NYSEMKT-2016-110, and should
be submitted on or before December 30, 2016.
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\30\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\30\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-29466 Filed 12-8-16; 8:45 am]
BILLING CODE 8011-01-P
