81 FR 31981 - Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Definition of Professional Customer in Rule 6.1A(a)(4A)

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 98 (May 20, 2016)

[Federal Register Volume 81, Number 98 (Friday, May 20, 2016)]
[Notices]
[Pages 31981-31983]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-11878]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77837; File No. SR-NYSEARCA-2016-65]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend the 
Definition of Professional Customer in Rule 6.1A(a)(4A)

May 16, 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 May 3, 2016, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend the definition of Professional 
Customer in Rule 6.1A(a)(4A) to specify the manner in which the 
Exchange calculates average daily order submissions for purposes of 
counting Professional Customer orders. The proposed rule change is 
available on the Exchange's Web site at www.nyse.com, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to amend the definition of Professional 
Customer in Rule 6.1A(a)(4A) to adopt a methodology for counting 
average daily order submissions in listed options to determine whether 
a person or entity meets the definition of a Professional Customer 
(``Professional Customer order counting''). The proposed rule change is 
designed to harmonize Professional Customer order counting with the 
recently adopted rules of competing options exchanges--specifically the 
Chicago Board of Options Exchange, Inc. (``CBOE'') and NASDAQ OMX PHLX 
LLC (``PHLX'').\4\
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    \4\ See Securities Exchange Act Release Nos. 77450 (March 25, 
2016), 81 FR 18668, (March 31, 2016) (SR-CBOE-2016-005); 77449 
(March 25, 2016), 81 FR 18665, (March 31, 2016) (SR-Phlx-2016-10) 
(approval orders). The Exchange notes that it recently issued 
guidance regarding Professional Customer order counting. See e.g., 
NYSE Arca, Inc.'s and NYSE MKT LLC's Joint Regulatory Bulletin (RBO-
15-03 and RBO-15-06, respectively) dated September 9, 2015. This 
proposal codifies that guidance in a manner that is consistent with 
CBOE and PHLX's approved rules.
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    Rule 6.1A(a)(4A) defines Professional Customer ``as an individual 
or organization that (i) is not a Broker/Dealer in securities, and (ii) 
places more than 390 orders in listed options per day on average during 
a calendar month for its own beneficial account(s).'' In adopting the 
Rule 6.1A(a)(4A), the Exchange noted that identifying Professional 
Customer accounts based upon the average number of orders entered in 
qualified accounts is an appropriate, objective approach that will 
reasonably distinguish such persons and entities from non-professional, 
retail investors or market participants. In order to properly represent 
orders entered on the Exchange, OTP Holders and OTP Firms are required 
to indicate whether Customer orders are ``Professional Customer'' 
orders.\5\ To comply with this requirement, member organizations are 
required to review their Customers' activity on at least a quarterly 
basis to determine whether orders that are not for the account of a 
broker-dealer should be represented as Customer orders or Professional 
Customer orders.\6\
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    \5\ See e.g., Rule 6.69 (Reporting Duties), Commentary .03 
(requiring that manual orders submitted be marked with an origin 
code ``PC.'').
    \6\ Orders for any customer that had an average of more than 390 
orders per day during any month of a calendar quarter must be 
represented as Professional Customer orders for the next calendar 
quarter. OTP Holders and OTP Firms would be required to conduct a 
quarterly review and make any appropriate changes to the way in 
which they are representing orders within five business days after 
the end of each calendar quarter. While members only would be 
required to review their accounts on a quarterly basis, if during a 
quarter the Exchange identifies a customer for which orders are 
being represented as Customer orders but that has averaged more than 
390 orders per day during a month, the Exchange would notify the OTP 
Holder and the OTP Holder would be required to change the manner in 
which it is representing the customer's orders within five business 
days.
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    The advent of new multi-leg spread products and the proliferation 
of the use of complex orders and algorithmic execution strategies by 
both institutional and retail market participants has raised questions 
as to what should be counted as an ``order'' for Professional Customer 
order counting purposes. The proposed changes would specifically 
address the

[[Page 31982]]

counting of multi-leg spread products, algorithm generated orders, and 
complex orders for purposes of determining Professional Customer 
status. In addition, the proposal is intended to provide guidance 
regarding the methodology used by the Exchange when calculating average 
daily orders for Professional order counting purposes.\7\
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    \7\ This proposal is consistent with CBOE and PHLX's approved 
rules. See supra n. 4.
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    As proposed, the rule would provide that an order would count as 
one order for Professional Customer counting purposes, unless one of 
the exceptions enumerated in the proposed rule stipulates otherwise 
(each an ``Exception''). The first Exception relates to the treatment 
of complex orders for purposes of computing orders for Professional 
order counting purposes. Specifically, the proposed rule provides that 
a complex order of eight legs or less would count as one order, whereas 
a complex order comprised of nine (9) option legs or more counts as 
multiple orders with each option leg counting as its own separate 
order.\8\ The Exchange believes the distinction between complex orders 
with up to eight legs from those with nine or more legs is appropriate 
in light of the purposes for which Rule 6.1A(a)(4A) was adopted. In 
particular, the Exchange notes that multi-leg complex order strategies 
with nine or more legs are more complex in nature and thus, more likely 
to be used by professional traders than traditional two, three, and 
four leg complex order strategies such as the strangle, straddle, 
butterfly, collar, and condor strategies, and combinations thereof with 
eight legs or fewer, which are generally not algorithmically generated 
and are frequently used by non-professional, retail investors. Thus, 
the types of complex orders traditionally placed by retail investors 
would continue to count as only one order while the more complex 
strategy orders that are typically used by professional traders would 
count as multiple orders for Professional Customer order counting 
purposes.\9\
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    \8\ See proposed Rule 6.1A(a)(4A)(A)(1)(i)-(ii).
    \9\ See also supra n. 4.
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    The second Exception relates to calculations for parent/child 
orders. As proposed, if a parent order submitted for the beneficial 
account(s) of a person or entity other than a broker or dealer is 
subsequently broken up into multiple child orders on the same side 
(buy/sell) and series by a broker or dealer, or by an algorithm housed 
at the broker or dealer, or by an algorithm licensed from the broker or 
dealer but housed with the customer, then the order would count as one 
order even if the child orders are routed across several exchanges.\10\ 
The Exchange believes this proposed change would allow the orders of 
public customers to be ``worked'' by a broker (or a broker's algorithm) 
in order to achieve best execution without counting the multiple child 
orders as separate orders for Professional Customer order counting 
purposes. Conversely, if a parent order, including a strategy 
order,\11\ is broken into multiple child orders on both sides (buy/
sell) of a series and/or multiple series, then each child order would 
count as a separate new order per side and series.\12\ This proposed 
change would allow the Exchange, for Professional Customer order 
counting purposes, to count as multiple orders those ``child'' orders 
of ``parent'' orders generated by algorithms that are typically used by 
sophisticated traders to continuously update their orders in concert 
with market updates in order to keep their overall trading strategies 
in balance.
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    \10\ See proposed Rule 6.1A(a)(4A)(A)(2)(i).
    \11\ The term ``strategy order'' refers to an execution 
strategy, trading instruction, or algorithm whereby multiple 
``child'' orders on both sides of a series and/or multiple series 
are generated prior to being sent to an options exchange(s).
    \12\ See proposed Rule 6.1A(a)(4A)(A)(2)(ii).
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    The third Exception would govern the counting methodology for 
cancel/replace orders. As proposed, any order that cancels and replaces 
an existing order would count as a separate order (or multiple orders 
in the case of complex orders of nine legs or more) for Professional 
Customer order counting purposes.\13\ However, the Exchange proposes 
that an order to cancel and replace a child order would not count as a 
new order if the parent order that was placed for the beneficial 
account(s) of a non-broker or dealer had been subsequently broken into 
multiple child orders on the same side and series as the parent order 
by a broker or dealer, algorithm at a broker or dealer, or algorithm 
licensed from a broker or dealer but housed at the customer.\14\ By 
contrast, the Exchange proposes that an order that cancels and replaces 
a child order resulting from a parent order, including a strategy 
order, that generated child orders on both sides (buy/sell) of a series 
and/or in multiple series would count as a new order per side and 
series (``Both Sides/Multiple Series'').\15\ Finally, the Exchange 
proposes that, notwithstanding the treatment of a cancel/replace 
relating to Both Sides/Multiple Series orders, an order that cancels 
and replaces any child order resulting from a parent order being pegged 
to the Exchange's best bid or offer (``BBO'') or the national best bid 
or offer (``NBBO'') or that cancels and replaces any child order 
pursuant to an algorithm that uses the BBO or NBBO in the calculation 
of child orders and attempts to move with or follow the BBO or NBBO of 
a particular options series would count as a new order each time the 
order cancels and replaces in order to attempt to move with or follow 
the BBO or NBBO.\16\
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    \13\ See proposed Rule 6.1A(a)(4A)(A)(3)(i).
    \14\ See proposed Rule 6.1A(a)(4A)(A)(3)(ii).
    \15\ See proposed Rule 6.1A(a)(4A)(A)(3)(iii).
    \16\ See proposed Rule 6.1A(a)(4A)(A)(3)(iv).
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Implementation
    The Exchange proposes to implement the rule on July 1, 2016, which 
would be announced via Trader Update.
2. Statutory Basis
    The Exchange believes that the proposed change is consistent with 
Section 6(b) of the Act,\17\ in general, and furthers the objectives of 
Section 6(b)(5),\18\ in particular, in that it is designed 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 facilitation transactions 
in securities, to remove impediments to, and perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Exchange believes that the proposal is designed 
to adopt a reasonable and objective approach to determine Professional 
Customer status that is consistent with the approach being utilized on 
other options exchanges, which benefits market participants by 
providing consistency across exchanges regarding the Professional 
Customer order counting.\19\ In this regard, the Exchange believes that 
codifying the manner in which the Exchange would conduct Professional 
Customer order counting would provide OTP Holders and OTP Firms with 
certainty and provide them with insight as they conduct their own 
quarterly reviews for purposes of designating orders.
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    \19\ See supra n. 4.
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    The Exchange notes that it is not amending the threshold of 390 
orders in listed options per day but, consisting with other exchanges 
is revising the method for counting Professional Customer orders in the 
context of multi-part orders and cancel/replace activity. In short, the 
proposal addresses how to account for complex orders, parent/

[[Page 31983]]

child orders, and cancel/replace orders. The Exchange believes that 
distinguishing between complex orders with 9 or more options legs and 
those orders with 8 or fewer options legs is a reasonable and objective 
approach. In addition, the Exchange believes the proposal appropriately 
distinguishes between parent/child orders that are generated by a 
broker's efforts to obtain an execution on a larger size order while 
minimizing market impact and multi-part orders that used by more 
sophisticated market participants. Similarly, the Exchange believes 
that the proposal that cancel/replace orders would count as separate 
orders with limited exceptions is a reasonable and objective approach 
to distinguish the orders of retail customers that are ``worked'' by a 
broker from orders generated by algorithms used by more sophisticated 
market participants.
    Thus, the Exchange believes the proposal, which establishes an 
objective methodology for counting average daily order submissions for 
Professional Customer order counting purposes, is consistent with the 
Act.

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

    The Exchange does not believe that this proposed rule change would 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. To the contrary, the proposed 
rule change is a competitive change that is substantially similar to 
recent rule changes filed by the CBOE and PHLX.\20\
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    \20\ See id.
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    The Exchange notes that one of the purposes of the Professional 
Customer designation is to help ensure fairness in the marketplace and 
promote competition among all market participants. The Exchange 
believes that this proposal would help establish more competition among 
market participants and promote the purposes for which the Exchange's 
Professional Customer rule was originally adopted. Moreover, the 
proposal would stem ensure consistency and stem potential confusion as 
to the manner in which options exchanges compute the Professional 
Customer order volume.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \21\ and Rule 19b-4(f)(6) thereunder.\22\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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    \21\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \22\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \23\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \23\ 15 U.S.C. 78s(b)(2)(B).
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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 No. SR-NYSEARCA-2016-65 on the subject line.

Paper Comments

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

All submissions should refer to File No. SR-NYSEARCA-2016-65. 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 such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File No. SR-NYSEARCA-2016-65, and should be 
submitted on or before June 10, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-11878 Filed 5-19-16; 8:45 am]
 BILLING CODE 8011-01-P