78 FR 184 pgs. 58356-58359 - Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending Rule 6.91 To Specify That LMMs Receive Execution Allocations of Incoming Electronic Complex Orders and Complex Order Auction Eligible Orders in Accordance With the Guaranteed Participation Provision of Rule 6.76A(a)(1)(A), Without Any Exceptions
Type: NOTICEVolume: 78Number: 184Pages: 58356 - 58359
Pages: 58356, 58357, 58358, 58359Docket number: [Release No. 34-70425; File No. SR-NYSEArca-2013-90]
FR document: [FR Doc. 2013-23006 Filed 9-20-13; 8:45 am]
Agency: Securities and Exchange Commission
Official PDF Version: PDF Version
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70425; File No. SR-NYSEArca-2013-90]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending Rule 6.91 To Specify That LMMs Receive Execution Allocations of Incoming Electronic Complex Orders and Complex Order Auction Eligible Orders in Accordance With the Guaranteed Participation Provision of Rule 6.76A(a)(1)(A), Without Any Exceptions
September 17, 2013.
Pursuant to Section 19(b)(1)1of the Securities Exchange Act of 1934 (the "Act")2and Rule 19b-4 thereunder,3notice is hereby given that, on September 12, 2013, NYSE Arca, Inc. (the "Exchange" or "NYSE Arca") filed with the Securities and Exchange Commission (the "Commission") the proposed rule change as described in Items I and II below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
Footnotes:
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 6.91 to specify that LMMs receive execution allocations of incoming Electronic Complex Orders and Complex Order Auction ("COA") eligible orders in accordance with the guaranteed participation provision of Rule 6.76A(a)(1)(A), without any exceptions. The text of the proposed rule change is available on the Exchange's Web site at www.nyse.com, at the principal office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
1. Purpose
[top] The Exchange is proposing to amend Rules 6.91(a)(2)(i), (a)(2)(ii), (c)(6)(A), and (c)(6)(D) to specify that LMMs receive execution allocations of the individual components of a legged out incoming Electronic Complex Order or COA-eligible order in accordance with the guaranteed participation provision of Rule 6.76A(a)(1)(A), without any exceptions, which is how the Exchange currently operates.
Rule 6.91 governs trading of "Electronic Complex Orders," as that term is defined in NYSE Arca Options Rule 6.62(e).4Rule 6.91(a)(2)(i) currently provides that Electronic Complex Orders accepted in the Exchange's Complex Matching Engine ("CME")5are executed automatically against other Electronic Complex Orders in the Consolidated Book,6unless individual orders or quotes in the Consolidated Book can execute against incoming Electronic Complex Orders, subject to specified conditions, in which case such individual orders and quotes have priority. Rule 6.91(a)(2)(ii) currently provides that Electronic Complex Orders in the CME that are not marketable against other Electronic Complex Orders automatically execute against individual quotes or orders in the Consolidated Book, provided that the Electronic Complex Orders can be executed in full or in a permissible ratio by the individual quotes or orders.
Footnotes:
4 NYSE Arca Options Rule 6.62(e) defines an Electronic 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 a particular investment strategy."
5 NYSE Arca Options Rule 6.91(a) defines the CME as "the mechanism in which Electronic Complex Orders are executed against each other or against individual quotes and orders in the Consolidated Book."
6 NYSE Arca Options Rule 6.1(b)(37) defines the Consolidated Book as "the Exchange's electronic book of limit orders for the accounts of Public Customers and broker-dealers, and Quotes with Size. All orders and Quotes with Size that are entered into the Book will be ranked and maintained in accordance with the rules of priority as provided in Rule 6.76. There is no limit to the size of orders or quotes that may be entered into the Consolidated Book."
Rule 6.91(c) governs the electronic COA process, and specifically, Rule 6.91(c)(6) governs the execution of COA-eligible orders.7Upon receiving a COA-eligible order and a request by the OTP Holder representing the order that an auction be initiated, the Exchange sends an automated request for responses ("RFR") message to OTP Holders with an interface connection to the Exchange that have elected to receive such RFR messages. Market Makers with an appointment in the relevant options class, and OTP Holders acting as agent for orders resting at the top of the Consolidated Book in the relevant options series, may electronically submit responses ("RFR Responses"), and modify, but not withdraw, the RFR response at anytime during the request response time interval (the "Response Time Interval"). When the Response Time Interval expires, the COA-eligible order is executed and allocated to the extent it is marketable, or routed to the Consolidated Book to the extent it is not marketable.
Footnotes:
7 Rule 6.91(c)(1) defines a COA-eligible order as "an Electronic Complex Order that, as determined by the Exchange on a class-by-class basis, is eligible for a COA considering the order's marketability (defined as a number of ticks away from the current market), size, number of series, and complex order origin types (i.e., Customers, broker-dealers that are not Market-Makers or specialists on an options exchange, and/or Market-Makers or specialists on an options exchange)."
Rule 6.91(c)(6) provides that COA-eligible orders are executed against the best priced contra-side interest, and provides an allocation process for orders at the same net price. Rule 6.91(c)(6)(A) currently provides that individual orders and quotes in the leg markets resting in the Consolidated Book prior to the initiation of a COA will have first priority to trade against a COA-eligible order, provided that the COA-eligible order can be executed in full (or in a permissible ratio) by the orders and quotes in the Consolidated Book. Rule 6.91(c)(6)(D) currently provides that individual orders and quotes in the leg markets that cause the derived Complex Best Bid/Offer to be improved during the COA and match the best RFR Response and/or Electronic Complex Orders received during the Response Time Interval will be filled after Electronic Complex Orders and RFR Responses at the same net price. Allocations to individual orders or quotes in the leg markets that cause the derived BBO to be improved occur on a Customer/order/size pro rata basis.
Under Rules 6.91(a)(2)(i) and (a)(2)(ii), incoming orders or quotes, or those residing in the Consolidated Book, that execute against Electronic Complex Orders are allocated pursuant to Rule 6.76A. Additionally, under Rules 6.91(c)(6)(A) and (c)(6)(D), individual orders or quotes residing in the Consolidated Book that execute against a COA-eligible order are allocated pursuant to Rule 6.76A. Rule 6.76A(a)(1)(A) grants LMMs guaranteed participation, which means that if an LMM is quoting at a price equal to the National Best Bid or Offer ("NBBO") in an option series that the LMM is assigned, incoming bids and offers in that series will, depending on order ranking provisions of Rule 6.76A, be matched against the LMM's quote, up to specified thresholds.8Currently, Rules 6.91(a)(2)(i), (a)(2)(ii), (c)(6)(A), and (c)(6)(D) provide that the LMM guaranteed participation afforded in Rule 6.76A(a)(1)(A) will not apply to executions against an Electronic Complex Order or a COA-eligible order. However, Exchange systems do apply the LMM guaranteed participation afforded in Rule 6.76A(a)(1)(A) to Electronic Complex Orders and COA-eligible orders that execute against individual quotes and orders in the Consolidated Book.
Footnotes:
8 Rule 6.76(a)(1)(A) also provides for guaranteed participation for Directed Order Market Makers; however, there are not currently any Directed Order Market Markers on NYSE Arca.
The Exchange is proposing to amend Rules 6.91(a)(2)(i), (a)(2)(ii), (c)(6)(A), and (c)(6)(D) to specify that LMMs receive execution allocations of incoming Electronic Complex Orders and COA-eligible orders in accordance with the guaranteed participation provision of Rule 6.76A(a)(1)(A), without any exceptions.9The proposed change would codify existing processing of Electronic Complex Orders that leg out to the individual markets and how they may interact with the LMM in the individual markets.
Footnotes:
9 The Exchange will announce, via Trader Update, the allocation process when an Electronic Complex Order legs out to the individual markets.
The Exchange notes that under the proposed amendment to Rule 6.91 the execution of an Electronic Complex Order against another Electronic Complex Order in the Consolidated Book would not result in a guaranteed participation for an LMM. Rather, the guaranteed participation provision of that rule is only applicable if an Electronic Complex Order legs out individual components to trade with the quotes of an LMM.
[top] The Exchange believes that it is appropriate to provide LMMs with guaranteed participation in relation to execution allocations of the individual components of an Electronic Complex Order. The guaranteed participation strikes a reasonable balance between rewarding certain participants for making markets, and providing other market participants an incentive to quote aggressively.10Although Exchange rules did not originally afford LMMs any guaranteed participation when a Complex Order executes against the individual leg markets, the Exchange believes that permitting such guaranteed participation will further incentivize the provision of liquidity
Footnotes:
10 See Exchange Act Release No. 59472 (Feb. 27, 2009), 74 FR 9843, 9847 (Mar. 6, 2009) (SR-NYSEALTR-2008-14) ("The Commission has also previously approved Specialist Pool participations of up to 40% of the size of incoming orders (after any Customer Orders have been satisfied and only when the Directed Order guarantee has not been applied), provided that the Specialist Pool is quoting at the NBBO when the order is received by the Exchange. The Commission believes that these guarantees strike a reasonable balance between rewarding certain participants for making markets . . . , with providing other market participants an incentive to quote aggressively.")
11 See CBOE Rules 6.53C(c)(ii)(2), 6.53C(d)(v)(1), 6.45A(a)(i)(C), and 6.45B(a)(ii)(C) and Commentaries .08(e)(vi)(A)(1) and .08(f)(iii) to PHLX Rule 1080 and PHLX Rule 1014(g)(vii).
The Exchange notes, moreover, that to receive a guaranteed participation, the LMM is subject to heightened quoting obligations. An LMM must provide continuous two-sided quotations throughout the trading day in its appointed issues for 90% of the time the Exchange is open for trading in each issue.12
Footnotes:
12 See Rule 6.37B(b).
Finally, the Exchange also believes that eliminating the inconsistency between Rule 6.76A and Rule 6.91 with respect to the guarantee will eliminate potential confusion as to whether an LMM is receiving its guaranteed participation when it quotes at a price equal to the NBBO. The Exchange is also proposing a non-substantive, technical amendment to Rule 6.91(a)(2)(ii) to fix a typographical error.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section 6(b) of the Act,13in general, and furthers the objectives of Section 6(b)(5),14in particular, in that it is designed to promote just and equitable principles of trade, to remove impediments to, and perfect the mechanism of a free and open market and, in general, to protect investors and the public interest. The Exchange believes that providing the guaranteed participation allocation for LMMs for the execution of incoming Electronic Complex Orders and COA-eligible orders removes impediments to, and perfects the mechanism of a free and open market by (1) promoting liquidity on the Exchange because LMM quotes interact with incoming Electronic Complex Orders and COA-eligible orders, (2) providing consistency among Exchange rules by applying the same allocation logic to the execution of incoming Electronic Complex Orders/COA-eligible orders and single-leg orders, and (3) eliminating potential confusion with respect to guaranteed participation for LMMs trading in Electronic Complex Orders. Additionally, the Exchange believes that the proposal is designed to protect investors and the public interest because the proposed rule change is consistent with the allocation process for executing Complex Orders against individual orders and quotes on CBOE and PHLX. The Exchange further believes that the proposal will promote liquidity on the Exchange because the LMM guaranteed participation strikes a reasonable balance between rewarding certain participants for making markets, and providing other market participants an incentive to quote aggressively.
Footnotes:
13 15 U.S.C. § 78f(b).
14 15 U.S.C. § 78f(b)(5).
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes the proposed rule change will not impose a significant burden on competition; instead, the Exchange believes the proposed rule change will enhance competition by increasing liquidity in the options market. By permitting the guaranteed participation allocation with respect to Electronic Complex Orders and COA-eligible orders, LMMs are encouraged to quote at the NBBO in their assigned options series, which increases the level of liquidity in the options market. While allocations due to guaranteed participations may direct order flow to particular participants, the Commission has previously approved such allocations as a reasonable balance between rewarding such participants for making markets, and providing other market participants an incentive to quote aggressively.15By allocating 40 percent of the order to LMMs, the Exchange believes that it properly incentivizes the provision of liquidity from LMMs, while still ensuring that other market participants are able to participate and receive allocations.
Footnotes:
15 See 74 FR at 9847.
In addition, eliminating the current exception from the guaranteed participation allocation will also provide consistency and eliminate potential confusion concerning guaranteed participation allocation for LMMs with respect to Electronic Complex Orders and COA-eligible orders. Further, the Exchange does not believe the proposal will impose a significant burden on competition since the proposal is consistent with the allocation process on CBOE and PHLX.
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
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 after the date of the filing, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the Act16and Rule 19b-4(f)(6)17thereunder.
Footnotes:
16 15 U.S.C. 78s(b)(3)(A).
17 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.
At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings under Section 19(b)(2)(B)18of the Act to determine whether the proposed rule change should be approved or disapproved.
Footnotes:
18 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 ( http://www.sec.gov/rules/sro.shtml ); or
• Use the Commission's Internet comment form ( http://www.sec.gov/rules/sro.shtml ); or
• Send an email to rule-comments@sec.gov. Please include File Number SR-NYSEArca-2013-90 on the subject line.
Paper Comments
[top] • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission,
All submissions should refer to File Number SR-NYSEArca-2013-90. 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 ( http://www.sec.gov/rules/sro.shtml ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NYSEArca-2013-90 and should be submitted on or before October 15, 2013.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.19
Footnotes:
19 17 CFR 200.30-3(a)(12).
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-23006 Filed 9-20-13; 8:45 am]
BILLING CODE 8011-01-P