81 FR 26598 - Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of Proposed Rule Change Amending the Definition of “Block” for Purposes of Rule 72(d)-Equities and the Size of a Proposed Cross Transaction Eligible for the Cross Function in Rule 76-Equities

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 85 (May 3, 2016)

[Federal Register Volume 81, Number 85 (Tuesday, May 3, 2016)]
[Notices]
[Pages 26598-26600]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-10274]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77734; File No. SR-NYSEMKT-2016-49]


Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of 
Proposed Rule Change Amending the Definition of ``Block'' for Purposes 
of Rule 72(d)--Equities and the Size of a Proposed Cross Transaction 
Eligible for the Cross Function in Rule 76--Equities

April 27, 2016.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on April 22, 2016, NYSE MKT LLC (the ``Exchange'' or ``NYSE 
MKT'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and 
II, below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the definition of ``block'' for 
purposes of Rule 72(d)--Equities and the size of a proposed cross 
transaction eligible for the Cross Function in Rule 76--Equities. The 
proposed rule change is available on the Exchange's Web site at 
www.nyse.com, at the principal office of the Exchange, and at the 
Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend the definition of ``block'' for 
purposes of Rule 72(d)--Equities and the size of a proposed cross 
transaction eligible for the Cross Function in Rule 76--Equities. Under 
Rule 72(d)--Equities, when a member \4\ has an order to buy and an 
order to sell an equivalent amount of the same security, and both 
orders are ``block'' orders, the member may cross those orders at a 
price at or within the Exchange best bid or offer and does not have to 
break up the cross transaction to trade with any bids or offers 
previously displayed at the Exchange best bid or offer, including any 
interest with priority. For purposes of Rule 72(d)--Equities, a 
``block'' is at least 10,000 shares or a quantity of stock having a 
market value of $200,000 or more, whichever is less.
---------------------------------------------------------------------------

    \4\ The reference to ``member'' in Rule 72(d)--Equities and this 
rule proposal means only Floor Broker members. Designated Market 
Makers (``DMMs''), while members of the Exchange, do not have any 
agency relationships, and are therefore not able to effect this type 
of transaction.
---------------------------------------------------------------------------

    Further, Rule 76--Equities governs the execution of ``cross'' or 
``crossing'' orders by Floor Brokers. Rule 76--Equities applies only to 
manual transactions executed at the point of sale on the trading floor 
and provides that when a member has an order to buy and an order to 
sell the same security that can be crossed at the same price, the 
member is required to announce to the trading crowd the proposed cross 
by offering the security at a price that is higher than his or her bid 
by a minimum variation permitted in the security before crossing the 
orders. Any other member, including the DMM, can break up the announced 
bid and offer by trading with either side of the proposed cross 
transaction. Supplementary [sic] .10 to Rule 76--Equities provides for 
a ``Cross Function'' that Floor brokers may use to monitor compliance 
with Rule 611 of Regulation NMS. To be eligible for this Cross 
Function, the proposed cross transaction must be for at least 10,000 
shares or a quantity of stock having a market value of $200,000 or 
more.
    The Exchange proposes to amend the permissible size of a crossing 
transaction permitted under Rule 72(d)--Equities and Supplementary 
Material .10 to Rule 76--Equities to be

[[Page 26599]]

at least 5,000 shares or a quantity of stock having a market value of 
$100,000 or more, whichever is less. The Exchange's proposed definition 
of block size would more closely align with how a block-sized 
transaction is defined in other SEC rules and other exchanges' 
rules.\5\ For example, SEC Rule 10b-18 (Purchases of certain equity 
securities by the issuer and others) includes in the definition of a 
block a quantity of stock that is at least 5,000 shares and has a 
purchase price of at least $50,000.\6\ Additionally, Financial Industry 
Regulatory Authority, Inc. (``FINRA'') defines a block-sized order as 
being 10,000 shares or more, unless such orders are less than $100,000 
in value.\7\ The CBOE Stock Exchange (``CBSX'') Rule 52.11 also permits 
a cross of two orders so long as the crossing transaction is of at 
least 5,000 shares and is for a principal amount of at least 
$100,000.\8\ More recently, in approving the National Market System 
Plan to Implement a Tick Size Pilot Program (``Tick Size Pilot''),\9\ 
the SEC approved a modified definition of ``block size'' such that an 
order of at least 5,000 shares or with a market value of at least 
$100,000 would be considered a block size for purposes the Tick Size 
Pilot. In approving the Tick Size Pilot, the Commission noted that 
among all NMS securities, trades with at least 10,000 shares or with a 
market value of at least $200,000 constitute just 0.24 percent of all 
trades, 13.04 percent of traded share volume and 16.27 percent of 
traded dollar volume.\10\ The Exchange believes modifying the 
definition of a block order in its rules would likely result in a 
greater number of large size orders being executed on the Exchange.
---------------------------------------------------------------------------

    \5\ For purposes of Regulation NMS, a ``block size'' with 
respect to an order means it is: (i) Of at least 10,000 shares or 
(ii) for a quantity of stock having a market value of at least 
$200,000. See 17 CFR 242.600(a)(9). The term ``block size'' is used 
in Regulation NMS in the definition of an OTC Market Marker, 17 CFR 
242.600(a)(52), and in an exception to specialists' and OTC Market 
Makers' obligation to display customer limit orders, 17 CFR 
242.604(b)(4). The definition of ``block size'' in Regulation NMS is 
the same as the Exchange's current definition of ``block'' for 
purposes of Rule 72(d)--Equities and the size of a proposed cross 
transaction eligible for the Cross Function in Rule 76--Equities. 
The Exchange's proposal to change its rules does not change the 
definition of ``block size'' as used in Regulation NMS.
    \6\ See 17 CFR 240.10b-18(a)(5)(ii).
    \7\ See FINRA Rule 5320, Supplementary Material .01.
    \8\ See CBSX Rule 52.11 Facilitation of Orders and Crossing 
Trades, Chapter LII--Trading Rules and Processing of Orders. In 
September 2006, the Commission approved rules governing the trading 
of non-option securities traded on the Chicago Board Options 
Exchange, Inc. (``CBOE''), including CBSX Rule 52.11. See Securities 
Exchange Act Release No. 54422 (September 11, 2006), 71 FR 54537 
(September 15, 2006) (Approving SR-CBOE-2004-21). The Commission 
also approved modifications to CBOE's non-option trading rules to 
conform those rules to aspects of Regulation NMS. See Securities 
Exchange Act Release No. 54526 (September 27, 2006), 71 FR 58646 
(October 4, 2006) (Approving SR-CBOE-2006-70). Although CBSX has 
ceased trading operations, the CBSX rules are incorporated into the 
rules of the CBOE.
    \9\ See Securities Exchange Act Release No. 34-74892 (May 6, 
2015), 80 FR 27514 (May 13, 2015) File No. 4-657 (Order Approving 
the National Market System Plan To Implement a Tick Size Pilot 
Program by BATS Exchange, Inc. BATS-Y Exchange, Inc., Chicago Stock 
Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial 
Industry Regulatory Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX 
PHLX LLC, The NASDAQ Stock Market LLC, New York Stock Exchange LLC, 
NYSE MKT LLC, and NYSE Arca, Inc., as Modified by the Commission, 
for a Two-Year Period) (``Tick Size Approval Order).
    \10\ See Tick Size Approval Order at 27541.
---------------------------------------------------------------------------

    The Exchange believes the proposed rule change would promote 
increased trading by institutions as they are most frequent 
participants of block-sized trading on the Exchange. If an institution 
is able to execute in larger sizes, the contra party to the execution 
is less likely to be a participant that reacts to short term changes in 
the stock price and as such the price impact to the stock could be less 
acute when larger individual executions are obtained by the 
institution.\11\ As a consequence of this concern, large size orders 
are often executed away from the Exchange in dark pools or via broker-
dealer internalization.
---------------------------------------------------------------------------

    \11\ The Commission has long recognized this concern: ``Another 
type of implicit transaction cost reflected in the price of a 
security is short-term price volatility caused by temporary 
imbalances in trading interest. For example, a significant implicit 
cost for large investors [sic] is the price impact that their large 
trades can have on the market. Indeed, disclosure of these large 
orders can reduce the likelihood of their being filled.'' See 
Securities Exchange Act Release No. 42450 (February 23, 2000), 65 FR 
10577 (February 28, 2000) (SR-NYSE-99-48).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\12\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\13\ in particular, because it 
is designed to prevent fraudulent and manipulative acts and practices, 
promote just and equitable principles of trade, remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and protect investors and the public interest.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change would remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system because it would attract more order flow to 
the Exchange that is currently trading on less transparent venues that 
contribute less to price discovery and price competition than 
executions and quotes that occur on lit markets. Such new order flow 
will further enhance the depth and liquidity on the Exchange, which 
supports just and equitable principles of trade. Specifically, as 
required under Rule 76--Equities, any proposed crossing transaction, 
including a transaction using the Cross Function or a cross that meets 
the requirements of Rule 72(d)--Equities, must be announced in the 
Crowd before trading, thus providing an opportunity for other market 
participants, including other Floor brokers or the designated market 
maker, to participate in the proposed crossing transaction. By reducing 
the size of a block transaction, the Exchange believes that additional 
order flow may be routed to Floor brokers and thus be subject to such 
exposure requirements on the Trading Floor.
    The Exchange believes that modifying the definition of block orders 
to lower the thresholds would be consistent with the public interest 
and the protection of investors because the Exchange is proposing to 
align the definition of block orders to current SEC and other exchange 
rules which the Exchange expects will result in increased participation 
of large-sized orders on the Exchange.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. Specifically, the proposed 
change will align the definition of a ``block'' with current SEC and 
other exchange rules, thereby promoting its competitiveness with dark 
pools where such large-sized orders currently trade in more frequency 
than on lit markets. As a consequence, the proposed change will promote 
competition among the many trading venues, which, in turn, will 
decrease the burden on competition.

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.

[[Page 26600]]

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-NYSEMKT-2016-49 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEMKT-2016-49. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEMKT-2016-49 and should 
be submitted on or before May 24, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-10274 Filed 5-2-16; 8:45 am]
 BILLING CODE 8011-01-P