80 FR 34717 - Self-Regulatory Organizations; New York Stock Exchange, LLC; Notice of Filing of Proposed Rule Change Making Permanent the Rules of the New Market Model Pilot and the Supplemental Liquidity Providers Pilot
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 80, Issue 116 (June 17, 2015)
Federal Register Volume 80, Issue 116 (June 17, 2015)
| Page Range | 34717-34727 | |
| FR Document | 2015-14827 |
[Federal Register Volume 80, Number 116 (Wednesday, June 17, 2015)] [Notices] [Pages 34717-34727] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2015-14827] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-75153; File No. SR-NYSE-2015-26] Self-Regulatory Organizations; New York Stock Exchange, LLC; Notice of Filing of Proposed Rule Change Making Permanent the Rules of the New Market Model Pilot and the Supplemental Liquidity Providers Pilot June 11, 2015. Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 1934 (``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby given that on June 4, 2015, New York Stock Exchange LLC (``NYSE'' or the ``Exchange'') filed with the Securities and Exchange Commission (``SEC'' or ``Commission'') the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C.78s(b)(1). \2\ 15 U.S.C. 78a. \3\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to make permanent the rules of the New Market Model Pilot and the Supplemental Liquidity Providers Pilot. The text of the proposed rule change is available on the Exchange's Web site at www.nyse.com, at the principal office of the Exchange, and at the Commission's Public Reference Room. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to make permanent the rules of New Market Model Pilot (``NMM Pilot'') and the Supplemental Liquidity Providers Pilot (``SLP Pilot,'' collectively ``Pilots''). The Pilots are currently scheduled to expire upon the earlier of July 31, 2015 or Securities and Exchange Commission (``SEC'' or ``Commission'') approval to make the Pilots permanent.\4\ --------------------------------------------------------------------------- \4\ See Securities Exchange Act Nos. 73919 (December 23, 2014), 79 FR 78930 (December 31, 2014) (SR-NYSE-2014-71) (``NMM Pilot extension filing''); 73945 (December 24, 2014), 80 FR 58 (January 2, 2015) (SR-NYSE-2014-72) (``SLP Pilot extension filing''). --------------------------------------------------------------------------- Background In October 2008, the NYSE implemented significant changes to its market rules, execution technology, and the rights and obligations of its market participants, all of which were designed to improve execution quality on the Exchange. Certain of the enhanced market model changes were implemented through the NMM Pilot.\5\ Specifically, and as described in greater detail below, Rules 72, 104 and the provisions of Rule 1000 relating to the Capital Commitment Schedule are the pilot rules associated with the NMM Pilot. --------------------------------------------------------------------------- \5\ See Securities Exchange Act No. 58845 (October 24, 2008), 73 FR 64379 (October 29, 2008) (SR-NYSE-2008-46) (``NMM Pilot Approval Order''). --------------------------------------------------------------------------- As part of the NMM Pilot, NYSE eliminated the function of specialists on the Exchange and created a new category of market participant, the Designated Market Maker (``DMM'').\6\ DMMs, like specialists, have affirmative obligations to make an orderly market, including continuous quoting requirements and obligations to re-enter the market when reaching across to execute against trading interest. Unlike specialists, DMMs have a minimum quoting requirement \7\ in their assigned securities and no longer have negative obligations. DMMs are also no longer agents for public customer orders.\8\ DMM obligations under the NMM Pilot are set forth in Rule 104. --------------------------------------------------------------------------- \6\ See Rule 103. \7\ See Rule 104. \8\ See Rule 60; see also Rules 104 and 1000. --------------------------------------------------------------------------- In addition, the Exchange implemented a system change that allowed a DMM to create a schedule of additional non-displayed liquidity at various price points where the DMM is willing to interact with interest and provide price improvement to orders in the Exchange's system. This schedule is known as the DMM Capital Commitment Schedule (``CCS'') and is set forth in Rule 1000. CCS provides the Exchange systems, formerly referred to as the ``Display Book[reg]'' \9\ with the amount of shares that the DMM is willing to trade at price points outside, [[Page 34718]] at, and inside the Exchange Best Bid or Best Offer (``BBO''). CCS interest is separate and distinct from other DMM interest in that it is generally interest of last resort. --------------------------------------------------------------------------- \9\ The Exchange's Display Book system is an order management and execution facility. The Display Book system receives and displays orders to the DMMs, contains the order information, and provides a mechanism to execute and report transactions and publish the results to the Consolidated Tape. The Display Book system is connected to a number of other Exchange systems for the purposes of comparison, surveillance, and reporting information to customers and other market data and national market systems. Because the Exchange has retired the actual system referred to as the ``Display Book,'' but not the functionality associated with the Display Book, the Exchange proposes to replace all references to the term ``Display Book'' in Rules 104 and 1000 with references either to the term (i) ``Exchange systems'' when use of the term refers to the Exchange systems that receive and execute orders, or (ii) ``Exchange book'' when use of the term refers to the interest that has been entered and ranked in Exchange systems. --------------------------------------------------------------------------- The NMM Pilot further modified the priority of trading interest, set forth in Rule 72, which rewards displayed orders that establish the BBO by giving such orders priority in execution against incoming orders. During the operation of the NMM Pilot, an order or portion thereof that establishes priority, retains that priority until such order or portion of such order is exhausted. Where no one order has established priority, shares are distributed among all market participants on parity. In addition, the NMM Pilot modified how orders are allocated among market participants. Before the NMM Pilot, the Exchange operated on a parity allocation model whereby executed orders were allocated on parity among market participants, which included each Floor broker and the orders collectively represented in Exchange systems. Because specialists on the Exchange had both agency obligations to public customer orders and negative obligations, their executions yielded to public customer orders. Under the NMM Pilot, because DMMs do not have either agency obligations or negative obligations, DMMs are an individual market participant eligible for allocation under the Exchange's parity allocation. Accordingly, for purposes of share allocation in an execution, Rule 72(c)(ii) provides that each Floor broker, the DMM, and orders collectively represented in Exchange systems (i.e., ``Book Participant'') \10\ constitute individual participants for purposes of parity allocation of executed orders. --------------------------------------------------------------------------- \10\ The orders represented in the Book Participant in aggregate constitute a single participant. --------------------------------------------------------------------------- In connection with the DMM Pilot, the NYSE established the SLP Pilot, which established SLPs as a new class of market participants to supplement the liquidity provided by DMMs.\11\ Rule 107B governs the SLP Pilot. --------------------------------------------------------------------------- \11\ See Securities Exchange Act No. 58877 (October 29, 2008), 73 FR 65904 (November 5, 2008) (SR-NYSE-2008-108) (Notice of Filing'' [sic]). --------------------------------------------------------------------------- The Pilots were originally scheduled to end on October 1, 2009, or such earlier time as the Commission determined to make the Pilots' rules permanent. The Exchange filed to extend the operation of the Pilots on several occasions in order to prepare this rule filing.\12\ --------------------------------------------------------------------------- \12\ See NMM pilot extension filing and SLP pilot extension filing, supra n. 3 [sic]. --------------------------------------------------------------------------- Description of Pilot Rules That Would Become Permanent Rule 104 Current Rule 104, as amended since 2008, sets forth DMM obligations. Under Rule 104(a), DMMs registered in one or more securities traded on the Exchange are required to engage in a course of dealings for their own account to assist in the maintenance of a fair and orderly market insofar as reasonably practicable. The responsibilities and duties of a DMM include:Assisting the Exchange by providing liquidity as needed to provide a reasonable quotation and by maintaining continuous two-sided quotes with a displayed size of at least one round lot that meets certain metrics as set forth in the rule; Facilitating openings and re-openings in assigned securities, which may include supplying liquidity as needed; and Facilitating the close of trading for assigned securities, which may include supplying liquidity as needed.\13\ --------------------------------------------------------------------------- \13\ In 2015, the Exchange eliminated liquidity replenishment points (``LRP'') and the ``gap'' quote procedures and amended Rule 104(a) to eliminate the former DMM obligations to facilitate trading when an LRP was reached or the gap quote procedure was being used. See Securities Exchange Act Release No. 74063 (Jan. 15, 2015), 80 FR 3269 (Jan. 22, 2015) (Notice of Filing). --------------------------------------------------------------------------- The Rule 104(a)(1) quoting requirements applicable to DMMs are two- fold. First, with respect to maintaining a continuous two-sided quote with reasonable size, DMM units must maintain a bid or an offer at the National Best Bid (``NBB'') and National Best Offer (``NBO'') (collectively, ``inside'') at least 15% of the trading day for securities in which the DMM unit is registered with a consolidated average daily volume (``CADV'') of less than one million shares (``Less Active Securities''), and at least 10% for securities in which the DMM is registered with a CADV equal to or greater than one million shares (``More Active Securities'').\14\ These DMM quoting obligations set forth in Rule 104(a)(1)(A) are unique to the Exchange. Second, DMM units are subject to the two-sided quoting obligations set forth in Rule 104(a)(1)(B), which are the pricing obligations applicable to all equity market makers market-wide to maintain a bid and offer a designated percentage away from the NBB and NBO at all times.\15\ --------------------------------------------------------------------------- \14\ In 2009, the Exchange amended Rule 104(a)(1) to increase the amount of time that a DMM unit must maintain a bid and offer at the inside from 10% to 15% for Less Active Securities and from 5% to 10% for More Active Securities. See Securities Exchange Act Release No. 60595 (August 31, 2009), 74 FR 46261 (September 8, 2009) (SR- NYSE-2009-91) (Notice of Filing) (``DMM quoting requirement filing''). In 2011, the Exchange amended Rule 104(a)(1) to specify that the quoting percentage would be based on the consolidated average daily volume of a security, rather than the average daily volume of the security on the Exchange. See Securities Exchange Act Release No. 65865 (December 2, 2011), 76 FR 76799 (December 8, 2011) (SR-NYSE-2011-58) (Notice of Filing). \15\ See Securities Exchange Act Release No. 63255 (November 5, 2010), 75 FR 69484 (November 12, 2010) (SR-NYSE-2010-69) (Notice of Filing). --------------------------------------------------------------------------- Under Rule 104(b), DMM units are permitted to use algorithms for quoting and trading consistent with NYSE and SEC rules. Exchange systems enforce the proper sequencing of incoming orders and algorithmically-generated messages. Except as provided for in the rule, the DMM unit's system employing algorithms has access to information with respect to orders entered on the Exchange, Floor Broker agency interest files or reserve interest, to the extent such information is publicly available. DMM unit algorithms receive the same information with respect to orders entered on the Exchange, Floor Broker agency interest files or reserve interest as is disseminated to the public by the Exchange and receive such information no sooner than it is available to other market participants.\16\ A DMM unit's algorithm may submit trading interest via CCS interest in accordance with Rule 1000. --------------------------------------------------------------------------- \16\ In 2013, the Exchange amended Rules 104 and 123C to specify that closings may be effectuated manually or electronically. See Securities Exchange Act Release No. 71086 (December 16, 2013), 78 FR 77186 (December 20, 2013) (SR-NYSE-2013-79) (Notice of Filing). As part of that filing, the Exchange amended Rules 104(a)(3) and 104(b) to provide that the DMM algorithm would have access to aggregate order information relating to Reserve Interest eligible to participate in a manual execution. --------------------------------------------------------------------------- Under Rule 104(c), a DMM unit may maintain reserve interest consistent with Exchange rules governing Reserve Orders. Such reserve interest is eligible for execution in manual transactions. Under Rule 104(d), a DMM unit may provide algorithmically generated price improvement to all or part of an incoming order that can be executed at or within the BBO through the use of CCS interest. Any orders eligible for execution in the Exchange's book at the price of the DMM unit's interest trade on parity with such interest, as does any displayed interest representing a d-Quote enabling such interest to trade at the same price as the DMM unit's interest. Under Rule 104(e), DMM units must provide contra-side liquidity as needed for the execution of odd-lot quantities that are eligible to be executed as part of the opening, re-opening, and closing transactions but remain unpaired after [[Page 34719]] the DMM has paired all other eligible round lot sized interest. Rule 104(f) sets forth the functions of DMMs. First, any member who expects to act as a DMM in any listed stock must be registered as a DMM in accordance with Rule 103. Second, a DMM must maintain, insofar as reasonably practicable, a fair and orderly market on the Exchange in the stocks in which he or she is so acting. Third, the Exchange supplies DMMs with suggested Depth Guidelines for each security in which a DMM is registered, and DMMs are expected to quote and trade with reference to the Depth Guidelines. Finally, DMMs are designated as market makers on the Exchange for all purposes under the Act and the rules and regulations thereunder. Rule 104(g) governs transactions by DMMs. Transactions on the Exchange by a DMM for the DMM's account must be effected in a reasonable and orderly manner in relation to the condition of the general market and the market in the particular stock. Rule 104(g) describes certain permitted transactions, including neutral transactions and non-conditional transactions, but prohibits certain other transactions. Specifically, except as otherwise permitted by Rule 104, during the last ten minutes prior to the close of trading, a DMM with a long (short) position in a security is prohibited from making a purchase (sale) in such security that results in a new high (low) price on the Exchange for the day at the time of the DMM's transaction. Rule 104(h) addresses DMM transactions in securities that establish or increase the DMM's position. A ``Conditional Transaction'' is a DMM's transaction in a security that establishes or increases a position and reaches across the market to trade as the contra-side to the Exchange-published bid or offer. Certain Conditional Transactions may be made by a DMM without restriction as to price if they are followed by appropriate re-entry on the opposite side of the market commensurate with the size of the DMM's transaction. The Exchange issues guidelines, called price participation points (``PPP''), that identify the price at or before which a DMM is expected to re-enter the market after effecting a Conditional Transaction. Immediate re-entry is required after certain Conditional Transactions. However, certain other Conditional Transactions may be made without restriction as to price and Rule 104(i) provides that the re-entry obligations following such Conditional Transactions would be the same as the re-entry obligations for non-conditional transactions,'' as set forth in Rule 104(g). Rule 104(j), which was added in 2013,\17\ permits a DMM to perform the following Trading Floor functions: --------------------------------------------------------------------------- \17\ See Securities Exchange Act Release No. 71175 (December 23, 2013), 78 FR 79534 (December 30, 2013) (SR-NYSE-2013-21) (Order approving adoption of Rule 104(j)). --------------------------------------------------------------------------- Maintain order among Floor brokers manually trading at the DMM's assigned panel; Bring Floor brokers together to facilitate trading, which may include the DMM as a buyer or seller; Assist a Floor broker with respect to an order by providing information regarding the status of a Floor broker's orders, helping to resolve errors or questioned trades, adjusting errors, and cancelling or inputting Floor broker agency interest on behalf of a Floor broker; and Research the status of orders or questioned trades on his or her own initiative or at the request of the Exchange or a Floor broker when a Floor broker's handheld device is not operational, when there is activity indicating that a potentially erroneous order was entered or a potentially erroneous trade was executed, or when there otherwise is an indication that improper activity may be occurring. The rule also permits the Exchange to make systems available to a DMM at the post that display the following information about securities in which the DMM is registered: (A) Aggregated buying and selling interest; (B) the price and size of any individual order or Floor broker agency interest file and the entering and clearing firm information for such order, except that the display excludes any order or portion thereof that a market participant has elected not to display to a DMM; and (C) post-trade information. A DMM may not use any such information in a manner that would violate Exchange rules or federal securities laws or regulations. The DMM may provide market information that is available to the DMM at the post to (i) respond to an inquiry from a Floor broker in the normal course of business or (ii) visitors to the Trading Floor for the purpose of demonstrating methods of trading. However, a Floor broker may not submit an inquiry pursuant to this provision by electronic means and the DMM may not use electronic means to transmit market information to a Floor broker in response to a Floor broker's inquiry pursuant to this provision. Rule 104(k) provides that in the event of an emergency, such as the absence of the DMM, or when the volume of business in the particular stock or stocks is so great that it cannot be handled by the DMMs without assistance, a Floor Governor may authorize a member of the Exchange who is not registered as a DMM in such stock to act as temporary DMM for that day only. Rule 1000 The provisions of current Rule 1000 relating to CCS, as amended since 2008, and which are operating as part of the NMM Pilot, are set forth sections (d)-(g) of Rule 1000. Rule 1000(d) provides that for each security in which it is registered, a DMM unit may place within Exchange systems a pool of liquidity to be available to fill or partially fill \18\ incoming orders in automatic executions, which is CCS. CCS is designed to be a DMM unit's commitment to trade a specified number of shares at specified price points in reaction to incoming contra-side interest. As noted above, CCS interest is used to trade at the BBO, at prices better than the BBO, and at prices outside the BBO. CCS interest supplements displayed and non-displayed interest of the DMM in Exchange systems. CCS interest must be for a minimum of one round lot of a security and entered at price points that are at, inside, or away from the BBO. --------------------------------------------------------------------------- \18\ The original NMM Pilot permitted CCS to participate only if it would fill an incoming order. In 2009, the Exchange amended Rule 1000 to provide that Exchange systems would access CCS interest to participate in executions when the incoming order would only be partially executed. See Securities Exchange Act Release No. 60671 (September 15, 2009), 74 FR 48327 (September 22, 2009) (SR-NYSE- 2009-71) (``CCS Partial Fill Approval Order''). --------------------------------------------------------------------------- Rule 1000(e) governs executions at and outside the BBO, and specifies how CCS interest would interact with such executions. For executions at the BBO, CCS interest would yield to all other interest at that price point. For executions outside the BBO, i.e., sweeps, Rule 1000(e)(iii) specifies how CCS interest could participate to provide price improvement to the residual of an order that sweeps. As provided for in the rule, if an order is not executed at full at the Exchange BBO, Exchange systems will calculate the unfilled volume of the contra- side order and review the additional displayed and non-displayed interest, including CCS interest and protected quotes on away markets, to determine the price at which the remaining volume of the contra-side order can be executed in full (the ``completion price''). Exchange systems will evaluate the price at which the maximum volume of CCS interest exists to trade, and execute the incoming order one [[Page 34720]] minimum price variation (as the term is defined in Rule 62) better than that price, which is how CCS provides price improvement. If an order cannot be executed in full because of the order's limit price, or because of an immediate-or-cancel time-in-force, CCS interest is available to partially fill the incoming order. Rule 1000(f) specifies how CCS interest may provide price improvement inside the BBO with interest arriving in the Exchange market that: Will be eligible to trade at or through the BBO; Will be eligible to trade at the price of interest in Exchange systems representing non-displayable reserve interest of Reserve Orders and Floor broker agency interest files reserve interest (``hidden interest'') or MPL Orders; or Will be eligible to route to away market interest for execution if [sic] the total volume of CCS interest, plus d-Quote interest in Floor broker agency interest files, plus any interest represented by hidden interest, would be sufficient to fully complete the arriving interest at a price inside the BBO. In such an instance, the Exchange systems determine the price point inside the BBO at which the maximum volume of CCS interest trades, taking into account the volume, if any, available from d-Quotes and hidden interest. The arriving interest is executed at that price, with all interest (CCS, d- Quote, hidden interest) trading on parity. Under Rule 1000(g), CCS interest may trade with non-marketable \19\ interest where such non-marketable interest betters the BBO (or cancels in the case of an arriving IOC order) if the incoming interest may be executed in full by all interest available in the Exchange's book, including CCS interest and d-quotes. Such trade takes place at the limit price of the arriving non-marketable interest. All interest trading with the incoming interest trades on parity. --------------------------------------------------------------------------- \19\ ``Non-marketable'' means trading interest (i.e., displayable and non-displayable) that is at a price higher than the current Exchange bid (but below the current Exchange offer) or lower than the current Exchange offer (but above the current Exchange bid), including better bids and offers on other market centers. See Rule 1000(g)(1). --------------------------------------------------------------------------- Rule 72 The priority of bids and offers and allocation of executions is governed by Rule 72, as amended since 2008. Under Rule 72(a), when a bid or offer, including pegging interest,\20\ is established as the only displayable \21\ bid or offer made at a particular price and such bid or offer is the only displayable interest when such price is or becomes the BBO (the ``setting interest''), such setting interest is entitled to priority for allocation of executions at that price as described in the rule, subject to the provisions below: --------------------------------------------------------------------------- \20\ In 2012, the Exchange amended Rule 72(a) to specify that pegging interest may be considered setting interest. See Securities Exchange Act Release No. 68302 (November 27, 2012), 77 FR 71658 (December 3, 2012) (SR-NYSE-2012-65) (Notice of Filing) (``Pegging filing''). \21\ As used in this rule, the term ``displayable'' means that portion of interest that could be published as, or as part of, the BBO, including pegging interest. Displayable odd-lot orders are published as part of the BBO if, when aggregated with other interest available for execution at that price point, the sum of the odd-lot order and other interest available at that price point would be equal to or greater than a round lot. The term ``displayed interest'' includes that part of an order that is published as, or as part of, the BBO, which may include one or more odd-lot orders. --------------------------------------------------------------------------- (A) Odd-lot orders, including aggregated odd-lot orders that are displayable, are not eligible to be setting interest.\22\ --------------------------------------------------------------------------- \22\ In 2010, the Exchange amended its rules, including Rule 72, to incorporate the receipt and execution of odd-lot interest in the round-lot market and decommission the former Odd Lot System. See Securities Exchange Act Release No. 62578 (July 27, 2010), 75 FR 45185 (August 2, 2010) (SR-NYSE-2010-43 and SR-NYSEAmex-2010-53) (``Odd-lot Approval Order''). --------------------------------------------------------------------------- (B) If at the time displayable interest of a round lot or greater becomes the BBO, there is other displayable interest of a round lot or greater, including aggregated odd-lot orders that are equal to or greater than a round lot, at the price that becomes the BBO, no interest is considered to be a setting interest, and, therefore, there is no priority established. (C) If at the time displayable interest of a round lot or greater becomes the BBO, there is other displayable interest, the sum of which is less than a round lot, at the price that becomes the BBO, the displayable interest of a round lot or greater is considered the only displayable bid or offer at that price point and is therefore established as the setting interest. (D) If executions decrement the setting interest to an odd-lot size, a round lot or partial round lot order that joins such remaining odd-lot size order is not eligible to be the setting interest. (E) If as a result of cancellation, interest is or becomes the single displayable interest of a round lot or greater at the BBO, it becomes the setting interest. (F) Only the portion of setting interest that is or has been published in the BBO is entitled to priority allocation of an execution. That portion of setting interest that is designated as reserve interest and therefore not displayed at the BBO (or not displayable if it becomes the BBO) is not eligible for priority allocation of an execution irrespective of the price of such reserve interest or the time it is accepted into Exchange systems. However, if, following an execution of part or all of setting interest, such setting interest is replenished from any reserve interest, the replenished volume of such setting interest is entitled to priority if the setting interest is still the only interest at the BBO. (G) If non-pegging interest becomes the BBO, it is considered the setting interest even if pegging interest is pegging to such non- pegging interest, and it retains its priority even if subsequently joined at that price by a pegging interest. Under Rule 72(b), once priority is established by the setting interest, such setting interest retains that priority for any execution at that price when that price is at the BBO. If executions decrement the setting interest to an odd-lot size, such remaining portion of the setting interest retains its priority for any execution at that price when that price is the BBO. For any execution of setting interest that occurs when the price of the setting interest is not the BBO, the setting interest does not have priority and is executed on parity. Priority of setting interest is not retained after the close of trading on the Exchange or following the resumption of trading in a security after a trading halt in such security has been invoked pursuant to Rule 123D or following the resumption of trading after a trading halt invoked pursuant to the provisions of Rule 80B. Priority of the setting interest is not retained on any portion of the priority interest that is routed to an away market and is returned unexecuted unless such priority interest is greater than a round lot and the only other interest at the price point is odd-lot orders, the sum of which is less than a round lot. Under Rule 72(c), executions are allocated as follows. An automatically executing order trades first with the displayed bid (offer) and, if there is insufficient displayed volume to fill the order, trades next with reserve interest. All reserve interest trades on parity. For the purpose of share allocation in an execution, each single Floor broker, the DMM and orders collectively represented in Exchange systems (referred to as ``Book Participant'') constitute individual participants. The orders represented in the Book Participant in aggregate constitute a single participant and are allocated [[Page 34721]] shares among such orders by means of time priority with respect to entry. In any execution at the BBO, a participant who is the setting interest receives 15% of the volume of such executed amount or a minimum of one round lot, whichever is greater, until such setting interest has received a complete execution of its eligible priority interest. Setting interest that is decremented to an odd-lot size receives 15% of the volume of such incoming interest rounded up to the size of the setting interest, or the size of the incoming interest, whichever is less. Following the allocation of an execution to setting interest as provided above, the remainder of the executed volume is allocated to each participant on parity. The participant with the priority interest (the setting interest) is included in such parity allocation. If there is no setting interest for an execution at the BBO, allocation of the executed volume is on parity by participant except as otherwise set forth in the rule. When an execution occurs at the BBO, interest that is displayed in the BBO is allocated before any interest that is not displayed. In allocating an execution that involves setting interest, whether such execution takes place at the BBO or otherwise, the volume allocated to the setting interest is allocated to the interest in the setting interest that is entitled to priority first. Shares are allocated in round lots or the size of the order if less than a round lot. If the number of shares to be executed at a price point is insufficient to allocate round lots to all the participants eligible to receive an execution at that price point, or the size of the order if less than a round lot, Exchange systems create an allocation wheel of the eligible participants at that price point and the available round lot shares are distributed to the participants in turn. If an odd-lot sized portion of the incoming order remains after allocating all eligible round lots, the remaining shares are allocated to the next eligible participant in less than a round lot. On each trading day, the allocation wheel for each security is set to begin with the participant whose interest is entered or retained first on a time basis. Thereafter, participants are added to the wheel as their interest joins existing interest at a particular price point. If a participant cancels interest and then rejoins, that participant joins as the last position on the wheel at that time. If an odd-lot allocation completely fills the interest of a participant, the wheel moves to the next participant. The allocation wheel also moves to the next participant where Exchange systems execute remaining displayable odd-lot interest prior to replenishing the displayable quantity of a participant. When an execution occurs outside the BBO, the interest that is displayable is allocated before any interest that is non-displayable (i.e., reserve interest). All interest that is displayable is on parity among individual participants' displayable interest. All interest that is non-displayable is on parity among individual participants' non- displayable interest. Incoming orders eligible for execution at price points between the BBO trade with all available interest at the price. All NYSE interest available to participate in the execution (e.g., d- quotes, s-quotes, Reserve Orders, and CCS interest) trade on parity. DMM interest added intra-day to participate in a verbal transaction with a Floor broker or during a slow quote is allocated shares only after all other interest eligible for execution at the price point is executed in full. DMM interest added at the time of the slow quote or when verbally trading with a Floor broker not executed during the transaction is cancelled.\23\ However, s-Quotes, if any, representing DMM interest present at the price point prior to the verbal transaction with a Floor broker or during a slow quote receive an allocation on parity as described above. An order that is modified to reduce the size of the order retains the time stamp of original order entry. An order modified in any other way, such as increasing the size or changing the price of the order, receives a new time stamp.\24\ --------------------------------------------------------------------------- \23\ When the Exchange adopted the NMM Pilot in 2008, all DMM interest was on parity. In 2009, the Exchange amended Rule 72 to add new subsection (c)(xi) to the rule to remove parity for DMM interest that verbal transactions with a Floor broker or during a slow quote. See Securities Exchange Act Release No. 60287 (July 10, 2009), 74 FR 34817 (July 17, 2009) (SR-NYSE-2009-69) (Notice of Filing). \24\ See Pegging Filing, supra n. 18 [sic] (amending Rule 72(c) to specify how order modifications impact the time stamp of an order). --------------------------------------------------------------------------- Under Rule 72(d), when a member has an order to buy and an order to sell an equivalent amount of the same security, and both orders are ``block'' orders (i.e., at least 10,000 shares or a quantity of stock having a market value of $200,000 or more, whichever is less) and are not for the account of such member or member organization, an account of an associated person, or an account with respect to which the member, member organization, or associated person thereof exercises investment discretion, then the member may ``cross'' those orders at a price at or within the BBO.\25\ The member's bid or offer is entitled to priority at such cross price, irrespective of pre-existing displayed bids or offers on the Exchange at that price. The member must follow the crossing procedures of Rule 76, and another member may trade with either the bid or offer side of the cross transaction only to provide a price which is better than the cross price as to all or part of such bid or offer. A member who is providing a better price to one side of the cross transaction must trade with all other displayed market interest on the Exchange at that price before trading with any part of the cross transaction. Following a transaction at the improved price, the member with the agency cross transaction must follow the crossing procedures of Rule 76 and complete the balance of the cross. No member may break up the proposed cross transaction, in whole or in part, at the cross price. No DMM may effect a proprietary transaction to provide price improvement to one side or the other of a cross transaction effected pursuant Rule 72(d). A transaction effected at the cross price in reliance on this provision is printed as ``stopped stock.'' When a member effects a transaction under this provision, the member must, as soon as practicable after the trade is completed, complete documentation of the trade as the Exchange requires. --------------------------------------------------------------------------- \25\ In 2011, the Exchange amended Rule 72(d) regarding agency cross transactions to (i) change the minimum size of a block order under the rule from 25,000 to 10,000 shares or a quantity of stock having a market value of $200,000 or more, whichever is less, and (ii) conform Rule 72(d) to Rule 90 to permit a Floor broker to represent a Rule 72(d) crossing transaction on behalf of an unaffiliated member or member organization. See Securities Exchange Act Release No. 64334 (April 25, 2011), 76 FR 24078 (April 29, 2011) (SR-NYSE-2011-18) (Notice of Filing). --------------------------------------------------------------------------- Rule 107B Rule 107B, as amended, governs the SLP Pilot. Under current Rule 107B(a), an SLP is defined as a member organization that electronically enters proprietary orders or quotes from off the Floor of the Exchange into the systems and facilities of the Exchange and is obligated to maintain a bid or an offer at the National Best Bid (``NBB'') or the National Best Offer (``NBO'') in each assigned security in round lots averaging at least 10% of the trading day and for all assigned SLP securities \26\ and to add liquidity of an ADV of more than a specified percentage of [[Page 34722]] consolidated average daily volume (``CADV'') in all NYSE-listed securities, as set forth in the Exchange's Price List, on a monthly basis.\27\ An SLP can be either a proprietary trading unit of a member organization (``SLP-Prop'') or a registered market maker at the Exchange (``SLMM'').\28\ --------------------------------------------------------------------------- \26\ The SLP Pilot originally required an SLP to maintain a bid and/or offer at the NBB or NBO averaging at least 5% of the trading day. Effective September 25, 2010, the Exchange increased this quoting requirement to require SLPs to maintain a bid and/or offer at the NBB or NBO at least 10% of the trading day. See Securities Exchange Act Release No. 62791 (August 30, 2010) 75 FR 54411 (September 7, 2010) (SR-NYSE-2010-60) (Notice of Filing) (``SLP 2010 Filing''). \27\ In the SLP 2010 Filing, the Exchange introduced a monthly volume requirement for SLPs of an average daily volume (``ADV'') of more than 10 million shares. See SLP 2010 Filing, supra n. 26. Effective September 1, 2012, the Exchange amended the monthly volume requirement to require instead that SLPs meet an ADV that is a specified percentage of the NYSE CADV and amended the Exchange's Price List to specify the applicable percentage of NYSE CADV for the monthly volume requirement. See Securities Exchange Act Release No. 67759 (August 30, 2012), 77 FR 54939 (September 6, 2012) (SR-NYSE- 2012-38) (Notice of Filing). \28\ The SLP Pilot was originally available only for a proprietary trading unit of a member organization. In 2012, the Exchange amended Rule 107B to add a class of SLPs that are registered as market makers on the Exchange and subject to the market-wide equity market maker quoting obligations. See Securities Exchange Act Release No. 67154 (June 7, 2012), 77 FR 35455 (June 13, 2012) (SR-NYSE-2012-10) (Approval Order). --------------------------------------------------------------------------- Under Rule 107B(b), when an SLP posts liquidity on the Exchange and such liquidity is executed against an inbound order, the SLP receives a financial rebate for that executed transaction as set forth in the Exchange's Price List, subject to the non-regulatory penalty provision described in Rule 107B(k).\29\ The SLP receives credit toward the financial rebate for executions of displayed and non-displayed liquidity (e.g., reserve and dark orders) posted in round lots in its assigned securities only. --------------------------------------------------------------------------- \29\ In the SLP 2010 Filing, the Exchange modified the non- regulatory penalties to align them to the changes in the quoting and volume requirements for SLPs. See SLP 2010 Filing, supra no. 26. The Exchange proposes a non-substantive amendment to Rule 107B(b) to correct the cross-reference in the Rule from subparagraph (j) to subparagraph (k). --------------------------------------------------------------------------- Under Rule 107B(c), to qualify as an SLP-Prop, a member organization must have: (1) Adequate technology to support electronic trading through the systems and facilities of the Exchange; (2) mnemonics that identify to the Exchange SLP-Prop trading activity in assigned SLP securities; (3) adequate trading infrastructure and staff to support SLP trading activity; (4) quoting and volume performance that demonstrates an ability to meet the 10% average quoting requirement in each assigned security and the ADV requirement of more than a specified percentage of CADV in all NYSE-listed securities for all assigned SLP securities on a monthly basis; (5) a disciplinary history that is consistent with just and equitable business practices; and (6) the business unit of the member organization acting as an SLP- Prop must have in place adequate information barriers between the SLP- Prop unit and the member organization's customer, research, and investment banking business. A member organization may register as an SLMM in one or more securities traded on the Exchange in order to assist in the maintenance of a fair and orderly market insofar as reasonably practicable. To qualify as an SLMM, a member organization must meet the all of the requirements for an SLP-Prop set forth above, except item (2) relating to mnemonics. If approved as an SLMM, the member organization must (i) maintain continuous, two-sided trading interest in assigned securities (``Two-Sided Obligation'') and meet certain pricing obligations as set forth in the rule; (ii) maintain minimum net capital in accordance with SEC Rule 15c3-1; and (iii) maintain unique mnemonics specifically dedicated to SLMM activity, which may not be used for trading in securities other than SLP securities assigned to the SLMM. Rule 107B(e) sets forth the application process for SLPs. If an applicant is disapproved or disqualified, such applicant may request an appeal of such disapproval or disqualification by the SLP Panel as provided in the rule and/or reapply for SLP status three months after the month in which the applicant received the disapproval or disqualification notice. Rule 107B(f) describes how an SLP may voluntarily withdraw from such status. Rule 107B(g) and (h) set forth the calculations for determining whether an SLP is meeting its 10% quoting requirement and monthly volume requirement. An SLP may post non-displayed liquidity; however, such liquidity is not counted as credit toward the 10% quoting requirement. In addition, tick sensitive orders (i.e., ``Sell Plus'', ``Buy Minus'' and ``Buy Minus Zero Plus'') do not count as credit toward the 10% quoting requirement. Rule 107B(i) governs the assignment of securities to SLPs. Rule 107B(j) provides that SLPs may only enter orders electronically from off the Floor of the Exchange and may only enter such orders directly into Exchange systems and facilities designated for this purpose. SLMM quotes and orders may be for the account of the SLMM in either a proprietary or principal capacity on behalf of affiliated or unaffiliated persons and SLP-Prop orders must only be for the proprietary account of the SLP-Prop member organization. Rule 107B(k) sets forth non-regulatory penalties that apply if an SLP fails to meet its quoting requirements and sets forth procedures for reapplication. Rule 107B(l) sets forth provisions for appealing non-regulatory penalties. Rationale for Making Pilots Permanent The Exchange adopted the NMM Pilot in part to adapt the Exchange's model to the equities market environment in place in 2008. At that time, the more electronic market had fundamentally altered the Exchange's traditional trading environment, in which price discovery had taken place largely, and almost exclusively, on the Floor of the Exchange. As the trading information that was previously only available on the Floor of the Exchange shifted to become widely available via electronic means, together with increased fragmentation in the market, the Exchange believed that the NMM Pilot would provide a more robust trading model on the Floor where market participants could compete on more equal footing relative to their responsibilities to the market.\30\ With the NMM Pilot, the Exchange would continue to provide a quality market that maintains both a competitive market maker responsible for providing liquidity to the market and the element of human judgment that is particularly valuable in less liquid securities, re-openings, and closings. The Exchange sought, and believes it has attained, the appropriate balance among market participants that retains a role for liquidity providers responsible for maintaining fair and orderly markets, i.e., DMMs, together with agents on the Floor and off-Floor participants. The Exchange adopted the SLP Pilot to encourage an additional pool of liquidity at the Exchange. --------------------------------------------------------------------------- \30\ See Securities Exchange Act Release No. 58184 (July 17, 2009 [sic]), 73 FR 42853 (July 23, 2008) (NMM Pilot Filing). --------------------------------------------------------------------------- As noted in the NMM Pilot approval order, the Commission had concerns regarding certain aspects of the Exchange's proposal and approved it on a pilot basis. The Commission further stated that before it would decide to make the NMM Pilot permanent, the Exchange must provide data and analysis on the impact of the NMM Pilot. The metrics requested by the Commission include: (i) DMM time at the NBBO by security; (ii) the effective spread by security; (iii) the DMM volume broken out by DMM interest type (e.g., CCS, s-Quote); (iv) the average depth at the NBBO by market participant (DMMs, Floor brokers, and orders represented in the Exchange's book); (v) the ratio of (i) shares not executed in Exchange systems due to [[Page 34723]] DMM execution due to (ii) the shares executed by the DMM; and (vi) effective spread for (a) orders that involve DMM liquidity provisions and (b) orders that are executed without DMM liquidity (for similar order size categories).\31\ In compliance with this requirement, the Exchange has been providing the above-described metrics to the Commission's Division of Trading and Markets and Office of Economic and Risk Analysis on a monthly basis. --------------------------------------------------------------------------- \31\ See NMM Pilot Approval Order, supra n. 5 at 64387. --------------------------------------------------------------------------- Since adopting the NMM Pilot, the Exchange believes that the equities market has continued to undergo significant changes that require a fresh look at the basis for whether the NMM Pilot should be approved on a permanent basis. Rather than looking at the specific metrics identified above, the Exchange believes that looking more holistically at the Exchange's performance relative to the equities market in general demonstrates the continued value of the NMM and SLP Pilots and basis for permanent approval of the pilots. In particular, the continued impact of Regulation NMS, which had been in effect for only one year when the Exchange filed for the NMM Pilot, together with additional technological advancements and competitive forces since 2008 have fundamentally altered the way the market functions and how market participants interact. Some of the major developments include the significant rise in off-exchange trading from 22% in 2009 to 34% in 2014; the proliferation of over 50 trading venues, including four additional registered equities exchanges since October 2008; and the increasing segmentation of client order flow onto private dark markets.\32\ --------------------------------------------------------------------------- \32\ In a speech on October 2, 2013, Chair Mary Jo White noted that ``[a] steadily increasing percentage of trading occurs in `dark' venues, which now appear to execute more than half of the orders of long-term investors,'' Mary Jo White, Chair, Securities and Exchange Commission, Speech at Securities Traders Association 80th Annual Market Structure Conference (Oct. 2, 2013) (available at http://www.sec.gov/News/Speech/Detail/Speech/1370539857459#.VNoXc_nF_AQ). The Commission also noted the fragmentation of the equities markets in its 2010 Concept Release on Equity Market Structure. See Securities Exchange Act Release No. 61358, 75 FR 3594 (Jan. 21, 2010). See also, Staff of the Division of Trading and Markets, Commission, Equity Market Structure Literature Review, Part I: Market Fragmentation, Oct. 7, 2013, (available at: http://www.sec.gov/marketstructure/research/fragmentation-lit-review-100713.pdf) and Tuttle, Laura, Alternative Trading Systems: Description of ATS Trading in National Market System Stocks (available at http://www.sec.gov/marketstructure/research/alternative-trading-systems-march-2014.pdf.) --------------------------------------------------------------------------- The Exchange believes that the shifts in market share of traded volume among venues demonstrate the robust competition among markets. In particular, the following chart shows a snapshot of how market share of traded volume on registered exchanges has declined since 2009 and shifted to the TRF, which reports transactions that occur off of registered exchanges.\33\ --------------------------------------------------------------------------- \33\ The market share percentages set forth in Table 1 are based on trades reported to the Consolidated Tape Association and via Crossing Session II on the Exchange pursuant to Rule 902(a)(iii). Table 1--Tape A Market Share Developments ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ NYSE FINRA F NYSE Arca TRI * Nasdaq Nasdaq Nasdaq BATS Z BATS Y EDGA * EDGX ** ISE (%) NSX (%) CHX (%) CBSX (%) (%) (%) (%) BX (%) PSX (%) (%) (%) (%) (%) (%) ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ 2009................................................ 25.0 13.4 22.5 15.5 1.9 0.0 8.5 0.0 0.0 10.4 1.9 0.6 0.3 0.1 2010................................................ 24.4 11.9 27.3 13.6 3.6 0.1 7.5 0.2 2.0 7.6 0.8 0.5 0.3 0.1 2011................................................ 24.3 10.5 29.8 13.3 2.3 0.7 6.9 2.3 3.6 5.5 0.0 0.5 0.2 0.1 2012................................................ 21.4 10.0 32.3 12.8 2.6 0.7 7.5 3.1 2.4 6.3 0.0 0.3 0.3 0.4 2013................................................ 22.1 8.4 35.3 11.6 2.3 0.5 7.1 1.9 2.8 6.9 0.0 0.4 0.4 0.4 2014................................................ 22.4 8.3 34.7 13.1 2.4 0.4 6.8 3.0 2.5 5.9 0.0 0.1 0.4 0.1 ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ * Includes ADF and adjusted for EDGA/EDGX launch. * EDGA and EDGX are combined into EDGX for Jan. 2009 through July 2010, as Direct Edge didn't break them out prior to receiving exchange status. While these statistics demonstrate that all exchanges, including the Exchange, have faced challenges in the last six years, the Exchange believes that the NMM and SLP Pilots have enabled the Exchange to remain competitive during this period. As demonstrated in the chart above, notwithstanding the competing market forces, the Exchange's market share has remained relatively stable. The Exchange further notes that it adopted the NMM and SLP Pilots during a period of high trading volumes. Since the global financial crisis of 2008-2009, there has been a significant drop in volume and volatility in cash equities markets. A case in point, Tape A CADV fell 41% from 5.64 billion in 2009 to 3.33 billion shares in 2014. Additionally, the VIX volatility index, which is an industry-standard measure of market volatility, fell from a daily average of 31.5% in 2009 to 14.2 in 2014. Table 2--Tape A Volume and VIX[supreg] ------------------------------------------------------------------------ CADV VIX[supreg] ------------------------------------------------------------------------ 2009.............................................. 5.68 31.5 2010.............................................. 4.87 22.6 2011.............................................. 4.37 24.3 2012.............................................. 3.66 17.8 2013.............................................. 3.40 14.2 2014.............................................. 3.39 14.2 ------------------------------------------------------------------------ As overall trading volume and volatility falls, the demand for the liquidity continuously provided by market makers' [sic] falls, which leads to thinner profit margins for market makers. This impact can be demonstrated, in part, by the significant changes in the firms operating as DMMs since the Exchange adopted the NMM Pilot. In October 2008, the Exchange had six firms operating as specialists: Bank of America Corp. (``BAC''), Barclays Capital, Inc. (``Barclays''), Bear Wagner Specialists, LLC (``Bear Wagner''), Goldman, Sachs and Co (``Goldman Sachs,'' operating Spear, Leads & Kellogg, LLC), Kellogg Specialist Group (``Kellogg), and LaBranche & Company (``Labranche''). Six years later, only one of those firms still operates as a DMM, Barclays. Below are key changes within the NYSE DMM universe: In March 2009, Barclays acquired Bear Wagner's DMM business, with Bear Wagner exiting the business. In January 2010, Barclays acquired LaBranche's DMM business, with LaBranche exiting the business. In February 2010, Getco Securities, LLC (``Getco'') became an NYSE DMM. In December 2010, Knight Capital Group, Inc. (``Knight'') acquired Kellogg's NYSE and NYSE MKT DMM business, with Kellogg exiting the business. In November 2011, Getco acquired BAC's DMM business, with BAC exiting the business. In December 2011, J. Streicher & Co, an NYSE MKT DMM, became an NYSE DMM. In April 2012, Virtu Financial (``Virtu'') became a NYSE DMM (in [[Page 34724]] 2011, Virtu entered the DMM business by acquiring Cohen Capital Group, an NYSE MKT DMM). In November 2012, Brendan Cryan & Co, an NYSE MKT DMM, became an NYSE DMM. In July 2013, Knight and Getco merged to become KCG Americas. In August 2014, IMC Financial Markets acquired Goldman's DMM business, with Goldman exiting the business. In this challenging environment, the Exchange believes that the operation of the NMM Pilot has helped the Exchange better serve the needs of investors by maintaining high market-quality standards. Specifically, the NMM Pilot allowed the Exchange's former specialists to compete in today's fully electronic trading environment, continuing to provide contribute to market quality. Moreover, while there has been turnover in who comprises the DMM community, the Exchange believes that the operation of the NMM Pilot has been instrumental in attracting new entrants to the business as the former specialists have exited.\34\ --------------------------------------------------------------------------- \34\ The Exchange notes that in 2008, it also amended its rules governing the operation of DMMs, in particular, Rule 98, to enable specialists, and now DMMs, to better integrate their NYSE market- making operations with market-making activities on other markets. See Securities Exchange Act Release No. 58328 (Aug. 7, 2008), 73 FR 48260 (Aug. 18, 2008) (SR-NYSE-2008-45) (Approval Order); see also Securities Exchange Act Release No. 72534 (July 3, 2014), 79 FR 39019 (July 9, 2014) (SR-NYSE-2014-12) (Order approving amendments to Rule 98 to adopt a principles-based approach to prohibit the misuse of material non-public information). --------------------------------------------------------------------------- With respect to how DMMs operate, the Exchange believes that the NMM Pilot strikes the appropriate balance between DMM benefits and obligations. Importantly, while DMMs do not need to yield to orders on the Book, under the NMM Pilot, DMMs continue to be subject to Exchange- specific affirmative obligations to maintain a fair and orderly market that are not imposed on any other cash equity market participant. These obligations include maintaining a quote at the inside a specified percentage of the day,\35\ supplying liquidity as needed to facilitate openings and closings,\36\ maintaining price continuity with reasonable depth in all of their registered securities,\37\ and re-entering the market if taking liquidity to increase a trading position.\38\ Similarly, the SLP Pilot has created a separate class of liquidity providers at the Exchange, with differing incentives, to supplement the liquidity provided by the DMMs, which further supports the Exchange's market quality. --------------------------------------------------------------------------- \35\ See NYSE Rule 104(a)(1)(A). \36\ See NYSE Rule 104(a)(2)-(3). \37\ See NYSE Rule 104(f)(ii). \38\ See NYSE Rule 104(h). --------------------------------------------------------------------------- The Exchange believes that by operating under its NMM and SLP Pilots, it offers a diverse and unique population of market participants, including DMMs, SLPs, Floor brokers, and other off-Floor market participants, that allow it to more effectively compete for order flow, with superior market quality. The Exchange believes that an important market quality measure is how much liquidity an exchange provides. In today's fragmented equity model, the market quality of displayed venues varies widely. The Exchange believes, however, that it continues to be a leader in liquidity providing among registered exchanges, which is due to the ongoing operation of the NMM and SLP Pilots. The chart below highlights six key market-quality metrics that measure best price and liquidity in Exchange-listed securities. Best prices are measured by assessing Exchange bid/ask spreads, percentage of time at best prices, and percentage time alone at the best prices. Liquidity is measured by looking at market share, most displayed shares at the best prices, and percentage of time at the best prices with the greatest displayed size. As set forth in the table below, the Exchange ranks first in each of these metrics. NYSE-Listed Securities (Tape A)--December 2014 ---------------------------------------------------------------------------------------------------------------- All securities (equal weighted) ----------------------------------------------------------------------------------------------------------------- Average Market quoted Displayed % Time best % Time share spread shares at % Time at price & alone at (volume (time NBBO NBBO largest NBBO weighted) weighted) size ---------------------------------------------------------------------------------------------------------------- NYSE.............................. 23.4 48.5 1071.9 74.0 45.8 19.6 Nasdaq............................ 13.6 311.6 451.6 47.3 17.5 4.2 NYSE Arca......................... 8.0 710.4 409.6 42.9 12.0 3.0 BZX............................... 7.7 463.8 294.3 31.2 6.7 1.5 EDGX.............................. 5.0 382.1 326.6 29.5 9.4 3.1 BYX............................... 3.6 551.1 107.7 21.2 2.5 0.6 Nasdaq BX......................... 1.8 68.7 59.2 15.7 2.0 0.2 EDGA.............................. 2.8 850.6 94.9 19.2 2.0 0.3 ---------------------------------------------------------------------------------------------------------------- The Exchange notes that DMMs and SLPs have been important contributors to the Exchange's performance, particularly at setting the NBBO. For example, during September 2014, DMMs and SLPs (including SLMMs) accounted for over 38% of the liquidity-providing volume on the Exchange. In addition, during 2014, DMMs have averaged quoting at the inside almost 30% of the time and DMMs provided an average of 14.6% of the Exchange's size. In 2014, 8.3% of DMM volume executed was from quotes that improved the NBBO at the time the quote was entered. This represents an improvement since 2009, when only 2.7% of DMM volume improved the NBBO. The Exchange believes that key changes to the NMM Pilot support the continued operation of the pilot in the ever-changing equities environment. For example, as noted above, in 2009, the Exchange amended Rule 104(a)(1) to increase the amount of time that a DMM unit must maintain a bid and offer at the inside from 10% to 15% for Less Active Securities and from 5% to 10% for More Active Securities.\39\ During the same period, the Exchange also amended Rule 1000 to permit CCS to provide a partial fill to an incoming order.\40\ --------------------------------------------------------------------------- \39\ See DMM quoting requirement filing, supra n. 14. \40\ See CCS Partial Fill Approval Order, supra n. 18. --------------------------------------------------------------------------- After the DMM's quoting requirement was increased, DMM share of intraday provide activity increased, from 18.82% in July 2009, before the quoting change, [[Page 34725]] to 20.03% in September 2009. The Exchange noted a concurrent decline in DMM CCS volume during this same time from 9.32% to 6.94% of DMM activity. The Exchange believes that the decrease in CCS activity was related to a corresponding increase in the DMM displayed quoting activity. During the same period, the Exchange experienced a drop in NYSE shares routed to away markets from 7.8% in July 2009 to 7.1% in September 2009, to 6.6 in October 2009. The Exchange believes that the decline in shares routed away is attributable in part to both to the increased quoting requirement, because DMMs represented the best quote in the market more frequently, and the ability for CCS to partially fill incoming orders, thereby obviating the need to route such orders to away markets. Accordingly, the Exchange believes that these changes to the NMM Pilot contributed to the ongoing market quality at the Exchange. SLPs likewise represent a substantial share of the Exchange's intraday liquidity-providing volume. Participation in the SLP Pilot has grown steadily since inception. When first launched, only 497 symbols were covered by an SLP. By the end of September 2014, nearly every Exchange symbol, including operating companies, preferred stocks, warrants, rights and all other issue types, had at least one SLP quoting in it. In December 2014, approximately 45% of these symbols had at least one SLP quoting at the inside at least 10% of the time. Through December 2014, SLPs represented 25.2% of liquidity- providing execution. The Exchange notes that SLPs have been a solid contributor to liquidity in less-active issues, and now account for 13.3% of the liquidity-providing volume in issues outside of the Exchange's 1,000 most active issues. The following chart shows both the increase in number of symbols assigned to SLPs during the course of the pilot, and the number of SLP symbols in which at least one SLP is at the NBB or NBO at least 10% of the time. The first two columns represent a count of all SLP/symbol pairs where the average time at the NBB or NBO (referred to in the chart as NBBO) was 10%. For example, if symbol XYZ were assigned to three SLPs, of which two met the 10% NBBO quoting requirement, the count for ``Total'' column would be three, and the count for the ``NBBO >10%'' column would be two. The right two columns show the number of distinct symbols that are covered by and reached 10% NBBO by at least one SLP. SLP Symbols and Quoting ---------------------------------------------------------------------------------------------------------------- Distinct Distinct NBBO Total NBBO>10% symbols >10% ---------------------------------------------------------------------------------------------------------------- Dec-08.......................................... 501 332 497 335 Dec-09.......................................... 4,328 2,864 1,242 1,199 Dec-10.......................................... 6,509 4,079 1,404 1,302 Dec-11.......................................... 6,599 3,293 1,478 1,019 Dec-12.......................................... 7,971 3,340 1,909 1,377 Dec-13.......................................... 10,352 2,845 3,218 1,125 Dec-14.......................................... 8,572 3,458 3,262 1,481 ---------------------------------------------------------------------------------------------------------------- The Exchange notes that notwithstanding the significant changes the U.S. equities market has undergone since 2008, the statistics the Exchange committed to track in connection with the NMM Pilot demonstrate that the pilot rules have been effective at improving the Exchange's effective spread on marketable orders, the percentage of time that the DMMs quote at the NBBO and the percentage of DMM participation in total trading volume. Specifically, Effective spreads on all marketable orders, which ranged from 10 to 18.5 basis points from August to December 2008, have remained below 10 basis points since September 2009 and ranged from 6.7 to 8.2 basis points from November 2013 to November 2014. Effective spreads have declined for all order size categories from 100-9999 shares. The percentage of time that DMMs were quoting at the NBBO, which ranged from 9.9% to 19% from August to December 2008, have exceeded 20% since that time and ranged from 31.3% to 39.2% in the period from November 2013 to November 2014. For these reasons, the Exchange believes that the Pilots' rules, as amended, should be made permanent. The Exchange also proposes to delete Rule 104T, which is the pre-NMM Pilot version of Rule 104. Rule 104T remains in the Exchange's rule book, but is not operational. With permanent approval of current Rule 104, the need to retain Rule 104T is mooted. The Exchange also proposes to delete Supplementary Material to Rule 104, and related reference to that Supplementary Material in Rule 104(a)(2), because that rule text was intended to be in effect only through October 30, 2009.\41\ Finally, the Exchange proposes to replace the reference to ``NYSE Regulation's Division of Market Surveillance'' in Rule 104(k) with a reference to the Exchange. Pursuant to Rule 0, references to the Exchange may mean references to NYSE Regulation or FINRA, which performs certain regulatory services to the Exchange pursuant to a Regulatory Services Agreement. --------------------------------------------------------------------------- \41\ See Securities Exchange Act Release No. 60573 (Aug. 26, 2009), 74 FR 45500 (Sept. 2, 2009) (SR-NYSE-2009-86) (Notice of Filing). --------------------------------------------------------------------------- The Exchange notes that the proposed change is not otherwise intended to address any other issues and the Exchange is not aware of any problems that member organizations would have in complying with the proposed rule change. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act,\42\ in general, and furthers the objectives of Section 6(b)(5) of the Act,\43\ in particular, because it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to, and perfect the mechanisms of, a free and open market and a national market system and, in general, to protect investors and the public interest and because it is not designed to permit unfair [[Page 34726]] discrimination between customers, issuers, brokers, or dealers. --------------------------------------------------------------------------- \42\ 15 U.S.C. 78f(b). \43\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- The Exchange believes the proposed rule change is consistent with these principles because it seeks to make permanent Pilots and associated rule changes that were previously approved by the Commission as pilots, that the Exchange has subsequently provided data and analysis to the Commission, and that this data and analysis, as well as the further analysis in this filing, clearly shows that the Pilots have operated as intended and are consistent with the Act. The Exchange also believes the proposed rule change is designed to facilitate transactions in securities and to remove impediments to, and perfect the mechanisms of, a free and open market and a national market system because making the Pilots permanent would provide market participants with a trading venue that encourages the addition of liquidity, facilitates the trading of larger orders more efficiently, and operates to reward aggressive liquidity providers. The monthly statistics provided by the Exchange to the Commission staff over more than five years demonstrate that the NMM Pilot has improved market quality by numerous measures. Similarly, the Exchange believes the data show that the SLP program has appropriately rewarded aggressive liquidity providers in the market. The Exchange believes that making both of these Pilots permanent would encourage the additional utilization of, and interaction with, the NYSE and provide customers with the premier venue for price discovery, liquidity, competitive quotes, and price improvement. In addition, the Exchange believes that making the NMM and SLP Pilots permanent would promote just and equitable principles of trade and remove impediments to and perfect the mechanism of a free and open market because the rules strike the appropriate balance between the obligations and benefits of the Exchange's market participants. For example, while DMMs no longer have agency responsibilities to the Book, they retain a number of affirmative obligations that are unique to the Exchange, including meeting Exchange-only quoting requirements, supplying liquidity as needed when facilitating openings and closings, and maintaining depth and continuity in their listed securities. Given these obligations, the Exchange believes it is appropriate to classify DMMs as a separate participant in the parity allocation wheel. The Exchange notes that it has been operating under this model since 2009, and the above-cited market statistics demonstrate that within the highly competitive cash equities market, the Exchange's model, including DMM parity, has enabled the Exchange to maintain execution quality for all investors on the Exchange. Finally, the Exchange believes that it is subject to significant competitive forces, as described below in the Exchange's statement regarding the burden on competition. For these reasons, the Exchange believes that the proposal is consistent with the Act. B. Self-Regulatory Organization's Statement on Burden on Competition In accordance with Section 6(b)(8) of the Act,\44\ the Exchange believes that the proposed rule change would not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange believes that making the Pilots permanent would continue to foster competition among liquidity providers and maintain execution quality on the Exchange. The Exchange believes that the data supplied to the Commission and experience gained over more than six years have demonstrated the efficacy of the Pilots, and as such, they should be made permanent. Finally, the Exchange notes that it operates in a highly competitive market in which market participants can easily direct their orders to competing venues, including off-exchange venues. In such an environment, the Exchange must continually review, and consider adjusting the services it offers and the requirements it imposes to remain competitive with other U.S. equity exchanges. For the reasons described above, the Exchange believes that the proposed rule change reflects this competitive environment. --------------------------------------------------------------------------- \44\ 15 U.S.C. 78f(b)(8). --------------------------------------------------------------------------- C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register, or such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to [email protected]. Please include File Number SR-NYSE-2015-26 on the subject line. Paper Comments Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-NYSE-2015-26. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (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 offices of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NYSE-2015-26, and should be submitted on or before July 8, 2015. [[Page 34727]] For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\45\ --------------------------------------------------------------------------- \45\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Robert W. Errett, Deputy Secretary. [FR Doc. 2015-14827 Filed 6-16-15; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices 34717
All submissions should refer to File notice is hereby given that on June 4, the rights and obligations of its market
Number SR–EDGX–2015–26. This file 2015, New York Stock Exchange LLC participants, all of which were designed
number should be included on the (‘‘NYSE’’ or the ‘‘Exchange’’) filed with to improve execution quality on the
subject line if email is used. To help the the Securities and Exchange Exchange. Certain of the enhanced
Commission process and review your Commission (‘‘SEC’’ or ‘‘Commission’’) market model changes were
comments more efficiently, please use the proposed rule change as described implemented through the NMM Pilot.5
only one method. The Commission will in Items I and II below, which Items Specifically, and as described in greater
post all comments on the Commission’s have been prepared by the Exchange. detail below, Rules 72, 104 and the
Internet Web site (http://www.sec.gov/ The Commission is publishing this provisions of Rule 1000 relating to the
rules/sro.shtml). Copies of the notice to solicit comments on the Capital Commitment Schedule are the
submission, all subsequent proposed rule change from interested pilot rules associated with the NMM
amendments, all written statements persons. Pilot.
with respect to the proposed rule As part of the NMM Pilot, NYSE
I. Self-Regulatory Organization’s eliminated the function of specialists on
change that are filed with the
Statement of the Terms of Substance of the Exchange and created a new
Commission, and all written
the Proposed Rule Change category of market participant, the
communications relating to the
proposed rule change between the The Exchange proposes to make Designated Market Maker (‘‘DMM’’).6
Commission and any person, other than permanent the rules of the New Market DMMs, like specialists, have affirmative
those that may be withheld from the Model Pilot and the Supplemental obligations to make an orderly market,
public in accordance with the Liquidity Providers Pilot. The text of the including continuous quoting
provisions of 5 U.S.C. 552, will be proposed rule change is available on the requirements and obligations to re-enter
available for Web site viewing and Exchange’s Web site at www.nyse.com, the market when reaching across to
printing in the Commission’s Public at the principal office of the Exchange, execute against trading interest. Unlike
Reference Room, 100 F Street NE., and at the Commission’s Public specialists, DMMs have a minimum
Washington, DC 20549, on official Reference Room. quoting requirement 7 in their assigned
business days between the hours of II. Self-Regulatory Organization’s securities and no longer have negative
10:00 a.m. and 3:00 p.m. Copies of the Statement of the Purpose of, and obligations. DMMs are also no longer
filing will also be available for Statutory Basis for, the Proposed Rule agents for public customer orders.8
inspection and copying at the principal Change DMM obligations under the NMM Pilot
office of the Exchange. All comments are set forth in Rule 104.
received will be posted without change; In its filing with the Commission, the In addition, the Exchange
the Commission does not edit personal self-regulatory organization included implemented a system change that
identifying information from statements concerning the purpose of, allowed a DMM to create a schedule of
submissions. You should submit only and basis for, the proposed rule change additional non-displayed liquidity at
information that you wish to make and discussed any comments it received various price points where the DMM is
available publicly. All submissions on the proposed rule change. The text willing to interact with interest and
should refer to File Number SR–EDGX– of those statements may be examined at provide price improvement to orders in
2015–26 and should be submitted on or the places specified in Item IV below. the Exchange’s system. This schedule is
before July 8, 2015. The Exchange has prepared summaries, known as the DMM Capital
set forth in sections A, B, and C below, Commitment Schedule (‘‘CCS’’) and is
For the Commission, by the Division of of the most significant parts of such
Trading and Markets, pursuant to delegated set forth in Rule 1000. CCS provides the
statements. Exchange systems, formerly referred to
authority.15
Robert W. Errett, A. Self-Regulatory Organization’s as the ‘‘Display Book®’’ 9 with the
Deputy Secretary. Statement of the Purpose of, and the amount of shares that the DMM is
Statutory Basis for, the Proposed Rule willing to trade at price points outside,
[FR Doc. 2015–14823 Filed 6–16–15; 8:45 am]
BILLING CODE 8011–01–P
Change
5 See Securities Exchange Act No. 58845 (October
1. Purpose 24, 2008), 73 FR 64379 (October 29, 2008) (SR–
NYSE–2008–46) (‘‘NMM Pilot Approval Order’’).
SECURITIES AND EXCHANGE The Exchange proposes to make 6 See Rule 103.
COMMISSION permanent the rules of New Market 7 See Rule 104.
Model Pilot (‘‘NMM Pilot’’) and the 8 See Rule 60; see also Rules 104 and 1000.
[Release No. 34–75153; File No. SR–NYSE– Supplemental Liquidity Providers Pilot 9 The Exchange’s Display Book system is an order
2015–26] (‘‘SLP Pilot,’’ collectively ‘‘Pilots’’). The management and execution facility. The Display
Book system receives and displays orders to the
Pilots are currently scheduled to expire
Self-Regulatory Organizations; New DMMs, contains the order information, and
upon the earlier of July 31, 2015 or provides a mechanism to execute and report
York Stock Exchange, LLC; Notice of
Securities and Exchange Commission transactions and publish the results to the
Filing of Proposed Rule Change Consolidated Tape. The Display Book system is
(‘‘SEC’’ or ‘‘Commission’’) approval to
Making Permanent the Rules of the connected to a number of other Exchange systems
make the Pilots permanent.4 for the purposes of comparison, surveillance, and
New Market Model Pilot and the
Supplemental Liquidity Providers Pilot Background reporting information to customers and other
market data and national market systems. Because
In October 2008, the NYSE
asabaliauskas on DSK5VPTVN1PROD with NOTICES
June 11, 2015. the Exchange has retired the actual system referred
implemented significant changes to its to as the ‘‘Display Book,’’ but not the functionality
Pursuant to Section 19(b)(1) 1 of the associated with the Display Book, the Exchange
Securities Exchange Act of 1934 market rules, execution technology, and proposes to replace all references to the term
(‘‘Act’’),2 and Rule 19b–4 thereunder,3 ‘‘Display Book’’ in Rules 104 and 1000 with
4 See Securities Exchange Act Nos. 73919 references either to the term (i) ‘‘Exchange systems’’
15 17
(December 23, 2014), 79 FR 78930 (December 31, when use of the term refers to the Exchange systems
CFR 200.30–3(a)(12). 2014) (SR–NYSE–2014–71) (‘‘NMM Pilot extension that receive and execute orders, or (ii) ‘‘Exchange
1 15 U.S.C.78s(b)(1).
filing’’); 73945 (December 24, 2014), 80 FR 58 book’’ when use of the term refers to the interest
2 15 U.S.C. 78a.
(January 2, 2015) (SR–NYSE–2014–72) (‘‘SLP Pilot that has been entered and ranked in Exchange
3 17 CFR 240.19b–4. extension filing’’). systems.
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![34718 Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices
at, and inside the Exchange Best Bid or Description of Pilot Rules That Would Second, DMM units are subject to the
Best Offer (‘‘BBO’’). CCS interest is Become Permanent two-sided quoting obligations set forth
separate and distinct from other DMM Rule 104 in Rule 104(a)(1)(B), which are the
interest in that it is generally interest of pricing obligations applicable to all
last resort. Current Rule 104, as amended since equity market makers market-wide to
2008, sets forth DMM obligations. Under maintain a bid and offer a designated
The NMM Pilot further modified the Rule 104(a), DMMs registered in one or
priority of trading interest, set forth in percentage away from the NBB and NBO
more securities traded on the Exchange at all times.15
Rule 72, which rewards displayed are required to engage in a course of Under Rule 104(b), DMM units are
orders that establish the BBO by giving dealings for their own account to assist permitted to use algorithms for quoting
such orders priority in execution against in the maintenance of a fair and orderly and trading consistent with NYSE and
incoming orders. During the operation market insofar as reasonably practicable. SEC rules. Exchange systems enforce the
of the NMM Pilot, an order or portion The responsibilities and duties of a proper sequencing of incoming orders
thereof that establishes priority, retains DMM include: and algorithmically-generated messages.
that priority until such order or portion • Assisting the Exchange by Except as provided for in the rule, the
of such order is exhausted. Where no providing liquidity as needed to provide DMM unit’s system employing
one order has established priority, a reasonable quotation and by algorithms has access to information
shares are distributed among all market maintaining continuous two-sided with respect to orders entered on the
participants on parity. quotes with a displayed size of at least Exchange, Floor Broker agency interest
In addition, the NMM Pilot modified one round lot that meets certain metrics files or reserve interest, to the extent
how orders are allocated among market as set forth in the rule; such information is publicly available.
participants. Before the NMM Pilot, the • Facilitating openings and re- DMM unit algorithms receive the same
Exchange operated on a parity openings in assigned securities, which information with respect to orders
allocation model whereby executed may include supplying liquidity as entered on the Exchange, Floor Broker
orders were allocated on parity among needed; and agency interest files or reserve interest
market participants, which included • Facilitating the close of trading for as is disseminated to the public by the
each Floor broker and the orders assigned securities, which may include Exchange and receive such information
collectively represented in Exchange supplying liquidity as needed.13 no sooner than it is available to other
systems. Because specialists on the The Rule 104(a)(1) quoting market participants.16 A DMM unit’s
Exchange had both agency obligations to requirements applicable to DMMs are algorithm may submit trading interest
public customer orders and negative two-fold. First, with respect to via CCS interest in accordance with
obligations, their executions yielded to maintaining a continuous two-sided Rule 1000.
public customer orders. Under the quote with reasonable size, DMM units Under Rule 104(c), a DMM unit may
NMM Pilot, because DMMs do not have must maintain a bid or an offer at the maintain reserve interest consistent
either agency obligations or negative National Best Bid (‘‘NBB’’) and National with Exchange rules governing Reserve
obligations, DMMs are an individual Best Offer (‘‘NBO’’) (collectively, Orders. Such reserve interest is eligible
market participant eligible for allocation ‘‘inside’’) at least 15% of the trading day for execution in manual transactions.
for securities in which the DMM unit is Under Rule 104(d), a DMM unit may
under the Exchange’s parity allocation.
registered with a consolidated average provide algorithmically generated price
Accordingly, for purposes of share
daily volume (‘‘CADV’’) of less than one improvement to all or part of an
allocation in an execution, Rule 72(c)(ii)
million shares (‘‘Less Active incoming order that can be executed at
provides that each Floor broker, the
Securities’’), and at least 10% for or within the BBO through the use of
DMM, and orders collectively
securities in which the DMM is CCS interest. Any orders eligible for
represented in Exchange systems (i.e.,
registered with a CADV equal to or execution in the Exchange’s book at the
‘‘Book Participant’’) 10 constitute
greater than one million shares (‘‘More price of the DMM unit’s interest trade
individual participants for purposes of
Active Securities’’).14 These DMM on parity with such interest, as does any
parity allocation of executed orders.
quoting obligations set forth in Rule displayed interest representing a d-
In connection with the DMM Pilot, 104(a)(1)(A) are unique to the Exchange. Quote enabling such interest to trade at
the NYSE established the SLP Pilot, the same price as the DMM unit’s
which established SLPs as a new class 13 In 2015, the Exchange eliminated liquidity
interest.
of market participants to supplement replenishment points (‘‘LRP’’) and the ‘‘gap’’ quote Under Rule 104(e), DMM units must
procedures and amended Rule 104(a) to eliminate
the liquidity provided by DMMs.11 Rule the former DMM obligations to facilitate trading provide contra-side liquidity as needed
107B governs the SLP Pilot. when an LRP was reached or the gap quote for the execution of odd-lot quantities
The Pilots were originally scheduled procedure was being used. See Securities Exchange that are eligible to be executed as part
Act Release No. 74063 (Jan. 15, 2015), 80 FR 3269 of the opening, re-opening, and closing
to end on October 1, 2009, or such (Jan. 22, 2015) (Notice of Filing).
earlier time as the Commission 14 In 2009, the Exchange amended Rule 104(a)(1)
transactions but remain unpaired after
determined to make the Pilots’ rules to increase the amount of time that a DMM unit
15 See Securities Exchange Act Release No. 63255
permanent. The Exchange filed to must maintain a bid and offer at the inside from
10% to 15% for Less Active Securities and from 5% (November 5, 2010), 75 FR 69484 (November 12,
extend the operation of the Pilots on to 10% for More Active Securities. See Securities 2010) (SR–NYSE–2010–69) (Notice of Filing).
several occasions in order to prepare
asabaliauskas on DSK5VPTVN1PROD with NOTICES
Exchange Act Release No. 60595 (August 31, 2009), 16 In 2013, the Exchange amended Rules 104 and
this rule filing.12 74 FR 46261 (September 8, 2009) (SR–NYSE–2009– 123C to specify that closings may be effectuated
91) (Notice of Filing) (‘‘DMM quoting requirement manually or electronically. See Securities Exchange
filing’’). In 2011, the Exchange amended Rule Act Release No. 71086 (December 16, 2013), 78 FR
10 The orders represented in the Book Participant
104(a)(1) to specify that the quoting percentage 77186 (December 20, 2013) (SR–NYSE–2013–79)
in aggregate constitute a single participant. would be based on the consolidated average daily (Notice of Filing). As part of that filing, the
11 See Securities Exchange Act No. 58877
volume of a security, rather than the average daily Exchange amended Rules 104(a)(3) and 104(b) to
(October 29, 2008), 73 FR 65904 (November 5, 2008) volume of the security on the Exchange. See provide that the DMM algorithm would have access
(SR–NYSE–2008–108) (Notice of Filing’’ [sic]). Securities Exchange Act Release No. 65865 to aggregate order information relating to Reserve
12 See NMM pilot extension filing and SLP pilot (December 2, 2011), 76 FR 76799 (December 8, Interest eligible to participate in a manual
extension filing, supra n. 3 [sic]. 2011) (SR–NYSE–2011–58) (Notice of Filing). execution.
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![34720 Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices
minimum price variation (as the term is established as the only displayable 21 interest and therefore not displayed at
defined in Rule 62) better than that bid or offer made at a particular price the BBO (or not displayable if it
price, which is how CCS provides price and such bid or offer is the only becomes the BBO) is not eligible for
improvement. If an order cannot be displayable interest when such price is priority allocation of an execution
executed in full because of the order’s or becomes the BBO (the ‘‘setting irrespective of the price of such reserve
limit price, or because of an immediate- interest’’), such setting interest is interest or the time it is accepted into
or-cancel time-in-force, CCS interest is entitled to priority for allocation of Exchange systems. However, if,
available to partially fill the incoming executions at that price as described in following an execution of part or all of
order. the rule, subject to the provisions below: setting interest, such setting interest is
Rule 1000(f) specifies how CCS (A) Odd-lot orders, including replenished from any reserve interest,
interest may provide price improvement aggregated odd-lot orders that are the replenished volume of such setting
inside the BBO with interest arriving in displayable, are not eligible to be setting interest is entitled to priority if the
the Exchange market that: interest.22 setting interest is still the only interest
• Will be eligible to trade at or (B) If at the time displayable interest at the BBO.
through the BBO; of a round lot or greater becomes the (G) If non-pegging interest becomes
• Will be eligible to trade at the price BBO, there is other displayable interest the BBO, it is considered the setting
of interest in Exchange systems of a round lot or greater, including interest even if pegging interest is
representing non-displayable reserve aggregated odd-lot orders that are equal pegging to such non-pegging interest,
interest of Reserve Orders and Floor to or greater than a round lot, at the and it retains its priority even if
broker agency interest files reserve price that becomes the BBO, no interest subsequently joined at that price by a
interest (‘‘hidden interest’’) or MPL is considered to be a setting interest, pegging interest.
Orders; or and, therefore, there is no priority Under Rule 72(b), once priority is
• Will be eligible to route to away established. established by the setting interest, such
market interest for execution if [sic] the (C) If at the time displayable interest setting interest retains that priority for
total volume of CCS interest, plus d- of a round lot or greater becomes the any execution at that price when that
Quote interest in Floor broker agency BBO, there is other displayable interest, price is at the BBO. If executions
interest files, plus any interest the sum of which is less than a round decrement the setting interest to an odd-
represented by hidden interest, would lot, at the price that becomes the BBO, lot size, such remaining portion of the
be sufficient to fully complete the the displayable interest of a round lot or setting interest retains its priority for
arriving interest at a price inside the greater is considered the only any execution at that price when that
BBO. In such an instance, the Exchange displayable bid or offer at that price price is the BBO. For any execution of
systems determine the price point point and is therefore established as the setting interest that occurs when the
inside the BBO at which the maximum setting interest. price of the setting interest is not the
volume of CCS interest trades, taking (D) If executions decrement the BBO, the setting interest does not have
into account the volume, if any, setting interest to an odd-lot size, a priority and is executed on parity.
available from d-Quotes and hidden round lot or partial round lot order that Priority of setting interest is not
interest. The arriving interest is joins such remaining odd-lot size order retained after the close of trading on the
executed at that price, with all interest is not eligible to be the setting interest. Exchange or following the resumption
(CCS, d-Quote, hidden interest) trading (E) If as a result of cancellation, of trading in a security after a trading
on parity. interest is or becomes the single halt in such security has been invoked
Under Rule 1000(g), CCS interest may displayable interest of a round lot or pursuant to Rule 123D or following the
trade with non-marketable 19 interest greater at the BBO, it becomes the resumption of trading after a trading
where such non-marketable interest setting interest. halt invoked pursuant to the provisions
betters the BBO (or cancels in the case (F) Only the portion of setting interest
of Rule 80B. Priority of the setting
of an arriving IOC order) if the incoming that is or has been published in the BBO
interest is not retained on any portion
interest may be executed in full by all is entitled to priority allocation of an
of the priority interest that is routed to
interest available in the Exchange’s execution. That portion of setting
an away market and is returned
book, including CCS interest and d- interest that is designated as reserve
unexecuted unless such priority interest
quotes. Such trade takes place at the is greater than a round lot and the only
limit price of the arriving non- setting interest. See Securities Exchange Act
Release No. 68302 (November 27, 2012), 77 FR other interest at the price point is odd-
marketable interest. All interest trading 71658 (December 3, 2012) (SR–NYSE–2012–65) lot orders, the sum of which is less than
with the incoming interest trades on (Notice of Filing) (‘‘Pegging filing’’). a round lot.
parity. 21 As used in this rule, the term ‘‘displayable’’
Under Rule 72(c), executions are
means that portion of interest that could be
Rule 72 published as, or as part of, the BBO, including allocated as follows. An automatically
pegging interest. Displayable odd-lot orders are executing order trades first with the
The priority of bids and offers and published as part of the BBO if, when aggregated displayed bid (offer) and, if there is
allocation of executions is governed by with other interest available for execution at that insufficient displayed volume to fill the
Rule 72, as amended since 2008. Under price point, the sum of the odd-lot order and other
order, trades next with reserve interest.
Rule 72(a), when a bid or offer, interest available at that price point would be equal
to or greater than a round lot. The term ‘‘displayed All reserve interest trades on parity. For
including pegging interest,20 is interest’’ includes that part of an order that is the purpose of share allocation in an
asabaliauskas on DSK5VPTVN1PROD with NOTICES
published as, or as part of, the BBO, which may execution, each single Floor broker, the
19 ‘‘Non-marketable’’ means trading interest (i.e., include one or more odd-lot orders.
displayable and non-displayable) that is at a price 22 In 2010, the Exchange amended its rules, DMM and orders collectively
higher than the current Exchange bid (but below the including Rule 72, to incorporate the receipt and represented in Exchange systems
current Exchange offer) or lower than the current execution of odd-lot interest in the round-lot market (referred to as ‘‘Book Participant’’)
Exchange offer (but above the current Exchange and decommission the former Odd Lot System. See constitute individual participants. The
bid), including better bids and offers on other Securities Exchange Act Release No. 62578 (July 27,
market centers. See Rule 1000(g)(1). 2010), 75 FR 45185 (August 2, 2010) (SR–NYSE–
orders represented in the Book
20 In 2012, the Exchange amended Rule 72(a) to 2010–43 and SR–NYSEAmex–2010–53) (‘‘Odd-lot Participant in aggregate constitute a
specify that pegging interest may be considered Approval Order’’). single participant and are allocated
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![Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices 34721
shares among such orders by means of replenishing the displayable quantity of The member’s bid or offer is entitled to
time priority with respect to entry. a participant. priority at such cross price, irrespective
In any execution at the BBO, a When an execution occurs outside the of pre-existing displayed bids or offers
participant who is the setting interest BBO, the interest that is displayable is on the Exchange at that price. The
receives 15% of the volume of such allocated before any interest that is non- member must follow the crossing
executed amount or a minimum of one displayable (i.e., reserve interest). All procedures of Rule 76, and another
round lot, whichever is greater, until interest that is displayable is on parity member may trade with either the bid
such setting interest has received a among individual participants’ or offer side of the cross transaction
complete execution of its eligible displayable interest. All interest that is only to provide a price which is better
priority interest. Setting interest that is non-displayable is on parity among than the cross price as to all or part of
decremented to an odd-lot size receives individual participants’ non-displayable such bid or offer. A member who is
15% of the volume of such incoming interest. Incoming orders eligible for providing a better price to one side of
interest rounded up to the size of the execution at price points between the the cross transaction must trade with all
setting interest, or the size of the BBO trade with all available interest at other displayed market interest on the
incoming interest, whichever is less. the price. All NYSE interest available to Exchange at that price before trading
Following the allocation of an execution participate in the execution (e.g., d- with any part of the cross transaction.
to setting interest as provided above, the quotes, s-quotes, Reserve Orders, and Following a transaction at the improved
remainder of the executed volume is CCS interest) trade on parity. price, the member with the agency cross
allocated to each participant on parity. DMM interest added intra-day to transaction must follow the crossing
The participant with the priority participate in a verbal transaction with procedures of Rule 76 and complete the
interest (the setting interest) is included a Floor broker or during a slow quote is balance of the cross. No member may
in such parity allocation. If there is no allocated shares only after all other break up the proposed cross transaction,
setting interest for an execution at the interest eligible for execution at the in whole or in part, at the cross price.
BBO, allocation of the executed volume price point is executed in full. DMM No DMM may effect a proprietary
is on parity by participant except as interest added at the time of the slow transaction to provide price
otherwise set forth in the rule. When an quote or when verbally trading with a improvement to one side or the other of
execution occurs at the BBO, interest Floor broker not executed during the a cross transaction effected pursuant
that is displayed in the BBO is allocated transaction is cancelled.23 However, s- Rule 72(d). A transaction effected at the
before any interest that is not displayed. Quotes, if any, representing DMM cross price in reliance on this provision
In allocating an execution that involves interest present at the price point prior is printed as ‘‘stopped stock.’’ When a
setting interest, whether such execution to the verbal transaction with a Floor member effects a transaction under this
takes place at the BBO or otherwise, the broker or during a slow quote receive an provision, the member must, as soon as
volume allocated to the setting interest allocation on parity as described above. practicable after the trade is completed,
is allocated to the interest in the setting An order that is modified to reduce the complete documentation of the trade as
interest that is entitled to priority first. size of the order retains the time stamp the Exchange requires.
Shares are allocated in round lots or of original order entry. An order
Rule 107B
the size of the order if less than a round modified in any other way, such as
lot. If the number of shares to be increasing the size or changing the price Rule 107B, as amended, governs the
executed at a price point is insufficient of the order, receives a new time SLP Pilot. Under current Rule 107B(a),
to allocate round lots to all the stamp.24 an SLP is defined as a member
participants eligible to receive an Under Rule 72(d), when a member has organization that electronically enters
execution at that price point, or the size an order to buy and an order to sell an proprietary orders or quotes from off the
of the order if less than a round lot, equivalent amount of the same security, Floor of the Exchange into the systems
Exchange systems create an allocation and both orders are ‘‘block’’ orders (i.e., and facilities of the Exchange and is
wheel of the eligible participants at that at least 10,000 shares or a quantity of obligated to maintain a bid or an offer
price point and the available round lot stock having a market value of $200,000 at the National Best Bid (‘‘NBB’’) or the
shares are distributed to the participants or more, whichever is less) and are not National Best Offer (‘‘NBO’’) in each
in turn. If an odd-lot sized portion of the for the account of such member or assigned security in round lots
incoming order remains after allocating member organization, an account of an averaging at least 10% of the trading day
all eligible round lots, the remaining associated person, or an account with and for all assigned SLP securities 26
shares are allocated to the next eligible respect to which the member, member and to add liquidity of an ADV of more
participant in less than a round lot. On organization, or associated person than a specified percentage of
each trading day, the allocation wheel thereof exercises investment discretion,
then the member may ‘‘cross’’ those 25,000 to 10,000 shares or a quantity of stock
for each security is set to begin with the having a market value of $200,000 or more,
participant whose interest is entered or orders at a price at or within the BBO.25 whichever is less, and (ii) conform Rule 72(d) to
retained first on a time basis. Thereafter, 23 When the Exchange adopted the NMM Pilot in
Rule 90 to permit a Floor broker to represent a Rule
participants are added to the wheel as 72(d) crossing transaction on behalf of an
2008, all DMM interest was on parity. In 2009, the unaffiliated member or member organization. See
their interest joins existing interest at a Exchange amended Rule 72 to add new subsection Securities Exchange Act Release No. 64334 (April
particular price point. If a participant (c)(xi) to the rule to remove parity for DMM interest 25, 2011), 76 FR 24078 (April 29, 2011) (SR–NYSE–
cancels interest and then rejoins, that that verbal transactions with a Floor broker or 2011–18) (Notice of Filing).
asabaliauskas on DSK5VPTVN1PROD with NOTICES
during a slow quote. See Securities Exchange Act 26 The SLP Pilot originally required an SLP to
participant joins as the last position on Release No. 60287 (July 10, 2009), 74 FR 34817 maintain a bid and/or offer at the NBB or NBO
the wheel at that time. If an odd-lot (July 17, 2009) (SR–NYSE–2009–69) (Notice of averaging at least 5% of the trading day. Effective
allocation completely fills the interest of Filing). September 25, 2010, the Exchange increased this
a participant, the wheel moves to the 24 See Pegging Filing, supra n. 18 [sic] (amending
quoting requirement to require SLPs to maintain a
next participant. The allocation wheel Rule 72(c) to specify how order modifications bid and/or offer at the NBB or NBO at least 10%
impact the time stamp of an order). of the trading day. See Securities Exchange Act
also moves to the next participant where 25 In 2011, the Exchange amended Rule 72(d) Release No. 62791 (August 30, 2010) 75 FR 54411
Exchange systems execute remaining regarding agency cross transactions to (i) change the (September 7, 2010) (SR–NYSE–2010–60) (Notice of
displayable odd-lot interest prior to minimum size of a block order under the rule from Filing) (‘‘SLP 2010 Filing’’).
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![34722 Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices
consolidated average daily volume (6) the business unit of the member meet its quoting requirements and sets
(‘‘CADV’’) in all NYSE-listed securities, organization acting as an SLP-Prop must forth procedures for reapplication. Rule
as set forth in the Exchange’s Price List, have in place adequate information 107B(l) sets forth provisions for
on a monthly basis.27 An SLP can be barriers between the SLP-Prop unit and appealing non-regulatory penalties.
either a proprietary trading unit of a the member organization’s customer,
Rationale for Making Pilots Permanent
member organization (‘‘SLP-Prop’’) or a research, and investment banking
registered market maker at the Exchange business. The Exchange adopted the NMM Pilot
(‘‘SLMM’’).28 A member organization may register in part to adapt the Exchange’s model to
Under Rule 107B(b), when an SLP as an SLMM in one or more securities the equities market environment in
posts liquidity on the Exchange and traded on the Exchange in order to assist place in 2008. At that time, the more
such liquidity is executed against an in the maintenance of a fair and orderly electronic market had fundamentally
inbound order, the SLP receives a market insofar as reasonably practicable. altered the Exchange’s traditional
financial rebate for that executed To qualify as an SLMM, a member trading environment, in which price
transaction as set forth in the organization must meet the all of the discovery had taken place largely, and
Exchange’s Price List, subject to the requirements for an SLP-Prop set forth almost exclusively, on the Floor of the
non-regulatory penalty provision above, except item (2) relating to Exchange. As the trading information
described in Rule 107B(k).29 The SLP mnemonics. If approved as an SLMM, that was previously only available on
receives credit toward the financial the member organization must (i) the Floor of the Exchange shifted to
rebate for executions of displayed and maintain continuous, two-sided trading become widely available via electronic
non-displayed liquidity (e.g., reserve interest in assigned securities (‘‘Two- means, together with increased
and dark orders) posted in round lots in Sided Obligation’’) and meet certain fragmentation in the market, the
its assigned securities only. pricing obligations as set forth in the Exchange believed that the NMM Pilot
Under Rule 107B(c), to qualify as an rule; (ii) maintain minimum net capital would provide a more robust trading
SLP-Prop, a member organization must in accordance with SEC Rule 15c3–1; model on the Floor where market
have: and (iii) maintain unique mnemonics participants could compete on more
(1) Adequate technology to support specifically dedicated to SLMM activity, equal footing relative to their
electronic trading through the systems which may not be used for trading in responsibilities to the market.30 With
and facilities of the Exchange; securities other than SLP securities the NMM Pilot, the Exchange would
(2) mnemonics that identify to the assigned to the SLMM. continue to provide a quality market
Exchange SLP-Prop trading activity in Rule 107B(e) sets forth the application that maintains both a competitive
assigned SLP securities; process for SLPs. If an applicant is market maker responsible for providing
(3) adequate trading infrastructure disapproved or disqualified, such liquidity to the market and the element
and staff to support SLP trading activity; applicant may request an appeal of such of human judgment that is particularly
(4) quoting and volume performance disapproval or disqualification by the valuable in less liquid securities, re-
that demonstrates an ability to meet the SLP Panel as provided in the rule and/ openings, and closings. The Exchange
10% average quoting requirement in or reapply for SLP status three months sought, and believes it has attained, the
each assigned security and the ADV after the month in which the applicant appropriate balance among market
requirement of more than a specified received the disapproval or participants that retains a role for
percentage of CADV in all NYSE-listed disqualification notice. Rule 107B(f) liquidity providers responsible for
securities for all assigned SLP securities describes how an SLP may voluntarily maintaining fair and orderly markets,
on a monthly basis; withdraw from such status.
(5) a disciplinary history that is i.e., DMMs, together with agents on the
Rule 107B(g) and (h) set forth the Floor and off-Floor participants. The
consistent with just and equitable calculations for determining whether an
business practices; and Exchange adopted the SLP Pilot to
SLP is meeting its 10% quoting encourage an additional pool of
requirement and monthly volume liquidity at the Exchange.
27 In the SLP 2010 Filing, the Exchange
requirement. An SLP may post non- As noted in the NMM Pilot approval
introduced a monthly volume requirement for SLPs
of an average daily volume (‘‘ADV’’) of more than displayed liquidity; however, such order, the Commission had concerns
10 million shares. See SLP 2010 Filing, supra n. 26. liquidity is not counted as credit toward regarding certain aspects of the
Effective September 1, 2012, the Exchange amended the 10% quoting requirement. In Exchange’s proposal and approved it on
the monthly volume requirement to require instead addition, tick sensitive orders (i.e., ‘‘Sell
that SLPs meet an ADV that is a specified a pilot basis. The Commission further
percentage of the NYSE CADV and amended the Plus’’, ‘‘Buy Minus’’ and ‘‘Buy Minus stated that before it would decide to
Exchange’s Price List to specify the applicable Zero Plus’’) do not count as credit make the NMM Pilot permanent, the
percentage of NYSE CADV for the monthly volume toward the 10% quoting requirement. Exchange must provide data and
requirement. See Securities Exchange Act Release Rule 107B(i) governs the assignment
No. 67759 (August 30, 2012), 77 FR 54939 analysis on the impact of the NMM
(September 6, 2012) (SR–NYSE–2012–38) (Notice of of securities to SLPs. Rule 107B(j) Pilot. The metrics requested by the
Filing). provides that SLPs may only enter Commission include: (i) DMM time at
28 The SLP Pilot was originally available only for orders electronically from off the Floor the NBBO by security; (ii) the effective
a proprietary trading unit of a member organization. of the Exchange and may only enter
In 2012, the Exchange amended Rule 107B to add spread by security; (iii) the DMM
a class of SLPs that are registered as market makers
such orders directly into Exchange volume broken out by DMM interest
on the Exchange and subject to the market-wide systems and facilities designated for this type (e.g., CCS, s-Quote); (iv) the average
equity market maker quoting obligations. See purpose. SLMM quotes and orders may
asabaliauskas on DSK5VPTVN1PROD with NOTICES
Securities Exchange Act Release No. 67154 (June 7, depth at the NBBO by market
be for the account of the SLMM in either participant (DMMs, Floor brokers, and
2012), 77 FR 35455 (June 13, 2012) (SR–NYSE–
2012–10) (Approval Order). a proprietary or principal capacity on orders represented in the Exchange’s
29 In the SLP 2010 Filing, the Exchange modified behalf of affiliated or unaffiliated book); (v) the ratio of (i) shares not
the non-regulatory penalties to align them to the persons and SLP-Prop orders must only executed in Exchange systems due to
changes in the quoting and volume requirements for be for the proprietary account of the
SLPs. See SLP 2010 Filing, supra no. 26. The
Exchange proposes a non-substantive amendment
SLP-Prop member organization. Rule 30 See Securities Exchange Act Release No. 58184
to Rule 107B(b) to correct the cross-reference in the 107B(k) sets forth non-regulatory (July 17, 2009 [sic]), 73 FR 42853 (July 23, 2008)
Rule from subparagraph (j) to subparagraph (k). penalties that apply if an SLP fails to (NMM Pilot Filing).
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![Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices 34723
DMM execution due to (ii) the shares permanent basis. Rather than looking at developments include the significant
executed by the DMM; and (vi) effective the specific metrics identified above, the rise in off-exchange trading from 22% in
spread for (a) orders that involve DMM Exchange believes that looking more 2009 to 34% in 2014; the proliferation
liquidity provisions and (b) orders that holistically at the Exchange’s of over 50 trading venues, including
are executed without DMM liquidity performance relative to the equities four additional registered equities
(for similar order size categories).31 In market in general demonstrates the exchanges since October 2008; and the
compliance with this requirement, the continued value of the NMM and SLP increasing segmentation of client order
Exchange has been providing the above- Pilots and basis for permanent approval flow onto private dark markets.32
described metrics to the Commission’s of the pilots. In particular, the The Exchange believes that the shifts
Division of Trading and Markets and continued impact of Regulation NMS, in market share of traded volume among
Office of Economic and Risk Analysis which had been in effect for only one venues demonstrate the robust
on a monthly basis. year when the Exchange filed for the competition among markets. In
Since adopting the NMM Pilot, the NMM Pilot, together with additional particular, the following chart shows a
Exchange believes that the equities technological advancements and snapshot of how market share of traded
market has continued to undergo competitive forces since 2008 have volume on registered exchanges has
significant changes that require a fresh fundamentally altered the way the declined since 2009 and shifted to the
look at the basis for whether the NMM market functions and how market TRF, which reports transactions that
Pilot should be approved on a participants interact. Some of the major occur off of registered exchanges.33
TABLE 1—TAPE A MARKET SHARE DEVELOPMENTS
NYSE FINRA Nasdaq Nasdaq
NYSE Nasdaq BATS Z BATS Y EDGA * EDGX ** ISE NSX CHX CBSX
F Arca TRI * BX PSX
(%) (%) (%) (%) (%) (%) (%) (%) (%) (%)
(%) (%) (%) (%)
2009 ...... 25.0 13.4 22.5 15.5 1.9 0.0 8.5 0.0 0.0 10.4 1.9 0.6 0.3 0.1
2010 ...... 24.4 11.9 27.3 13.6 3.6 0.1 7.5 0.2 2.0 7.6 0.8 0.5 0.3 0.1
2011 ...... 24.3 10.5 29.8 13.3 2.3 0.7 6.9 2.3 3.6 5.5 0.0 0.5 0.2 0.1
2012 ...... 21.4 10.0 32.3 12.8 2.6 0.7 7.5 3.1 2.4 6.3 0.0 0.3 0.3 0.4
2013 ...... 22.1 8.4 35.3 11.6 2.3 0.5 7.1 1.9 2.8 6.9 0.0 0.4 0.4 0.4
2014 ...... 22.4 8.3 34.7 13.1 2.4 0.4 6.8 3.0 2.5 5.9 0.0 0.1 0.4 0.1
* Includes ADF and adjusted for EDGA/EDGX launch.
* EDGA and EDGX are combined into EDGX for Jan. 2009 through July 2010, as Direct Edge didn’t break them out prior to receiving exchange status.
While these statistics demonstrate TABLE 2—TAPE A VOLUME AND VIX® Specialist Group (‘‘Kellogg), and
that all exchanges, including the LaBranche & Company (‘‘Labranche’’).
Exchange, have faced challenges in the CADV VIX® Six years later, only one of those firms
last six years, the Exchange believes that still operates as a DMM, Barclays. Below
2009 .................................. 5.68 31.5 are key changes within the NYSE DMM
the NMM and SLP Pilots have enabled 2010 .................................. 4.87 22.6
the Exchange to remain competitive 2011 .................................. 4.37 24.3
universe:
during this period. As demonstrated in 2012 .................................. 3.66 17.8 • In March 2009, Barclays acquired
the chart above, notwithstanding the 2013 .................................. 3.40 14.2 Bear Wagner’s DMM business, with Bear
competing market forces, the Exchange’s 2014 .................................. 3.39 14.2 Wagner exiting the business.
market share has remained relatively • In January 2010, Barclays acquired
stable. As overall trading volume and LaBranche’s DMM business, with
volatility falls, the demand for the LaBranche exiting the business.
The Exchange further notes that it liquidity continuously provided by • In February 2010, Getco Securities,
adopted the NMM and SLP Pilots market makers’ [sic] falls, which leads LLC (‘‘Getco’’) became an NYSE DMM.
during a period of high trading volumes. to thinner profit margins for market • In December 2010, Knight Capital
Since the global financial crisis of 2008– makers. This impact can be Group, Inc. (‘‘Knight’’) acquired
2009, there has been a significant drop demonstrated, in part, by the significant Kellogg’s NYSE and NYSE MKT DMM
in volume and volatility in cash equities changes in the firms operating as DMMs business, with Kellogg exiting the
markets. A case in point, Tape A CADV since the Exchange adopted the NMM business.
fell 41% from 5.64 billion in 2009 to Pilot. In October 2008, the Exchange • In November 2011, Getco acquired
3.33 billion shares in 2014. had six firms operating as specialists: BAC’s DMM business, with BAC exiting
Additionally, the VIX volatility index, Bank of America Corp. (‘‘BAC’’), the business.
which is an industry-standard measure Barclays Capital, Inc. (‘‘Barclays’’), Bear • In December 2011, J. Streicher & Co,
of market volatility, fell from a daily Wagner Specialists, LLC (‘‘Bear an NYSE MKT DMM, became an NYSE
average of 31.5% in 2009 to 14.2 in Wagner’’), Goldman, Sachs and Co DMM.
2014. (‘‘Goldman Sachs,’’ operating Spear, • In April 2012, Virtu Financial
Leads & Kellogg, LLC), Kellogg (‘‘Virtu’’) became a NYSE DMM (in
asabaliauskas on DSK5VPTVN1PROD with NOTICES
31 See NMM Pilot Approval Order, supra n. 5 at http://www.sec.gov/News/Speech/Detail/Speech/ research/fragmentation-lit-review-100713.pdf) and
64387. 1370539857459#.VNoXc_nF_AQ). The Commission Tuttle, Laura, Alternative Trading Systems:
32 In a speech on October 2, 2013, Chair Mary Jo also noted the fragmentation of the equities markets Description of ATS Trading in National Market
White noted that ‘‘[a] steadily increasing percentage in its 2010 Concept Release on Equity Market System Stocks (available at http://www.sec.gov/
of trading occurs in ‘dark’ venues, which now Structure. See Securities Exchange Act Release No. marketstructure/research/alternative-trading-
appear to execute more than half of the orders of 61358, 75 FR 3594 (Jan. 21, 2010). See also, Staff systems-march-2014.pdf.)
long-term investors,’’ Mary Jo White, Chair, of the Division of Trading and Markets, 33 The market share percentages set forth in Table
Securities and Exchange Commission, Speech at Commission, Equity Market Structure Literature 1 are based on trades reported to the Consolidated
Securities Traders Association 80th Annual Market Review, Part I: Market Fragmentation, Oct. 7, 2013, Tape Association and via Crossing Session II on the
Structure Conference (Oct. 2, 2013) (available at (available at: http://www.sec.gov/marketstructure/ Exchange pursuant to Rule 902(a)(iii).
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![Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices 34727
For the Commission, by the Division of 7000. CLEARING, TRANSACTION AND requirements.5 Under Rule 7470, at a
Trading and Markets, pursuant to delegated ORDER DATA REQUIREMENTS, AND minimum, members must meet the
authority.45 FACILITY CHARGES following criteria to be eligible to
Robert W. Errett, * * * * * request an exemption from the OATS
Deputy Secretary. recording and reporting requirements
[FR Doc. 2015–14827 Filed 6–16–15; 8:45 am]
7400. ORDER AUDIT TRAIL SYSTEM for manual orders: (1) the member and
* * * * * current control affiliates and associated
BILLING CODE 8011–01–P
persons of the member have not been
7470. Exemption to the Order Recording subject within the last five years to any
and Data Transmission Requirements final disciplinary action, and within the
SECURITIES AND EXCHANGE
COMMISSION (a) through (b) No Change. last ten years to any disciplinary action
(c) This Rule shall be in effect until involving fraud; (2) the member has
July 10, 2019[2015]. annual revenues of less than $2 million;
[Release No. 34–75160; File No. SR–FINRA– (3) the member does not conduct any
2015–016] * * * * *
market making activities in any security
II. Self-Regulatory Organization’s subject to the OATS Rules; (4) the
Self-Regulatory Organizations; member does not execute principal
Statement of the Purpose of, and
Financial Industry Regulatory transactions with its customers (with
Statutory Basis for, the Proposed Rule
Authority, Inc.; Notice of Filing and limited exceptions for principal
Change
Immediate Effectiveness of a Proposed transactions executed pursuant to error
Rule Change Relating to Exemptions In its filing with the Commission,
corrections); and (5) the member does
From the Order Audit Trail System FINRA included statements concerning
not conduct clearing or carrying
Recording and Reporting the purpose of and basis for the
activities for other firms.6 An exemption
Requirements proposed rule change and discussed any
granted by FINRA pursuant to Rule
comments it received on the proposed
June 11, 2015. 7470 is for a maximum of two years;
rule change. The text of these statements
however, a member that continues to
Pursuant to Section 19(b)(1) of the may be examined at the places specified meet the criteria may request
Securities Exchange Act of 1934 in Item IV below. FINRA has prepared subsequent exemptions at or prior to the
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 summaries, set forth in sections A, B, expiration of a grant of exemptive
notice is hereby given that on June 10, and C below, of the most significant relief.7
2015, Financial Industry Regulatory aspects of such statements. Rule 7470 also includes a sunset
Authority, Inc. (‘‘FINRA’’) filed with the A. Self-Regulatory Organization’s provision. As initially adopted, the
Securities and Exchange Commission Statement of the Purpose of, and exemptive provision expired as of July
(‘‘SEC’’ or ‘‘Commission’’) the proposed Statutory Basis for, the Proposed Rule 10, 2011, which was five years from the
rule change as described in Items I, II, Change original effective date of the rule.8 In
and III below, which Items have been 2011, FINRA filed a proposed rule
prepared by FINRA. FINRA has 1. Purpose change to extend the sunset provision
designated the proposed rule change as The OATS Rules impose obligations until July 10, 2015, noting that FINRA
constituting a ‘‘non-controversial’’ rule on FINRA members to record in adopted this exemptive authority so that
change under paragraph (f)(6) of Rule electronic form and report to FINRA on it would have the ability to grant relief
19b–4 under the Act,3 which renders a daily basis certain information with to members that meet certain criteria in
the proposal effective upon receipt of respect to orders originated, received, situations where, for example, the
this filing by the Commission. The transmitted, modified, canceled, or reporting of order information would be
Commission is publishing this notice to executed by members relating to OTC unduly burdensome for the member or
solicit comments on the proposed rule equity securities and NMS stocks. OATS where temporary relief from the OATS
change from interested persons. captures this order information and Rules, in the form of additional time to
integrates it with quote and transaction achieve compliance, would permit the
I. Self-Regulatory Organization’s members to avoid unnecessary expense
Statement of the Terms of Substance of information to create a time-sequenced
record of orders, quotes, and or hardship.9 FINRA noted that these
the Proposed Rule Change concerns continued to be present for
transactions. This information is then
FINRA is proposing to amend Rule used by FINRA staff to conduct many firms and concluded it was
7470 to extend for four years FINRA’s surveillance and investigations of appropriate to allow firms that have
ability to exempt certain members from member firms for violations of FINRA received an exemption from OATS to
the recording and reporting rules and federal securities laws and continue to rely on their current
requirements of the Order Audit Trail regulations. exemption (or request an additional
System (‘‘OATS’’) Rules (‘‘OATS On September 28, 2005, the SEC two-year exemption) until the scope and
Rules’’) for manual orders received by approved amendments to the OATS
5 See Securities Exchange Act Release No. 53580
the member. Rules that, among other things, gave
(March 30, 2006), 71 FR 17529 (April 6, 2006). In
Below is the text of the proposed rule FINRA the authority to grant exemptive 2006, the exemptive provision was also relocated
change. Proposed new language is in relief from the OATS reporting from NASD Rule 6955(d) to NASD Rule 6958. As
asabaliauskas on DSK5VPTVN1PROD with NOTICES
italics; proposed deletions are in requirements for manual orders.4 In of December 15, 2008, NASD Rule 6958 was
2006, FINRA’s exemptive authority was renumbered as FINRA Rule 7470. See FINRA
brackets. Regulatory Notice 08–57 (October 2008).
expanded to include the authority to 6 See Rule 7470(a).
* * * * * exempt manual orders received by 7 See Rule 7470(b).
members from the OATS recording 8 See Securities Exchange Act Release No. 52521
45 17 CFR 200.30–3(a)(12). (September 28, 2005), 70 FR 57909 (October 4,
1 15 U.S.C. 78s(b)(1). 4 See Securities Exchange Act Release No. 52521 2005).
2 17 CFR 240.19b–4.
(September 28, 2005), 70 FR 57909 (October 4, 9 See Securities Exchange Act Release No. 64717
3 17 CFR 240.19b–4(f)(6). 2005). (June 21, 2011), 76 FR 37384 (June 27, 2011).
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Document Created: 2015-12-15 14:23:36
Document Modified: 2015-12-15 14:23:36
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