81 FR 89171 - Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending Rule 6.40 To Expand the Risk Limitation Mechanism to All Orders, Including Complex Orders

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 237 (December 9, 2016)

Page Range		89171-89176
FR Document		2016-29467
Federal Register, Volume 81 Issue 237 (Friday, December 9, 2016)
[Federal Register Volume 81, Number 237 (Friday, December 9, 2016)]
[Notices]
[Pages 89171-89176]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-29467]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79469; File No. SR-NYSEArca-2016-155]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Amending Rule 6.40 
To Expand the Risk Limitation Mechanism to All Orders, Including 
Complex Orders

December 5, 2016.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that on November 25, 2016, NYSE Arca, Inc. (``NYSE Arca'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The 
Commission is

[[Page 89172]]

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 Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 6.40 (Risk Limitation 
Mechanism) to expand the risk limitation mechanism to all orders, 
including Complex Orders. The proposed rule change is available on the 
Exchange's Web site at www.nyse.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to amend Rule 6.40 (Risk Limitation 
Mechanism) to expand the risk limitation mechanism to all orders, 
including Complex Orders.\4\
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    \4\ Rule 6.62(e) defines a Complex Order as any order involving 
the simultaneous purchase and/or sale of two or more different 
option series in the same underlying security, for the same account, 
in a ratio that is equal to or greater than one-to-three (.333) and 
less than or equal to three-to-one (3.00) and for the purpose of 
executing a particular investment strategy.
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Existing Risk Limitation Mechanism
    Rule 6.40 sets forth the risk-limitation system, which is designed 
to help Market Makers, as well as OTP Firms and OTP Holders 
(collectively, ``OTPs''), better manage risk related to quoting and 
submitting orders, respectively, during periods of increased and 
significant trading activity.\5\ The Exchange requires Market Makers to 
utilize its risk limitation mechanism, which automatically removes a 
Market Maker's quotes in all series of an options class when certain 
parameter settings are breached.\6\ The Exchange permits, but does not 
require, OTPs to utilize its risk limitation mechanism for certain 
orders, which automatically cancels such orders when certain parameter 
settings are breached.\7\
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    \5\ Market Makers are included in the definition of OTPs and 
therefore, unless the Exchange is discussing the quoting activity of 
Market Makers, the Exchange does not distinguish Market Markers from 
OTPs when discussing the risk limitation mechanisms. See Rule 1.1(q) 
(defining OTP Holder as ``a natural person, in good standing, who 
has been issued an OTP, or has been named as a Nominee'' that is ``a 
registered broker or dealer pursuant to Section 15 of the Securities 
Exchange Act of 1934, or a nominee or an associated person of a 
registered broker or dealer that has been approved by the Exchange 
to conduct business on the Exchange's Trading Facilities''). See 
also Rule 6.32(a) (defining a Market Maker as an individual 
``registered with the Exchange for the purpose of making 
transactions as a dealer-specialist on the Floor of the Exchange or 
for the purpose of submitting quotes electronically and making 
transactions as a dealer-specialist through the NYSE Arca OX 
electronic trading system'').
    \6\ See Rule 6.40(b)(3), (c)(3), (d)(3) and (e)(3). See also 
Commentary .04 to Rule 6.40 (providing that Market Makers are 
required to utilize one of the three risk settings for their 
quotes).
    \7\ See Rule 6.40(b)(1), (2); (c)(1), (c)(2), (d)(1), (d)(2) and 
Commentary .01 to Rule 6.40 (regarding the cancellation of orders 
once the risk settings have been breached). See also Commentary .04 
to Rule 6.40 (providing that OTPs may avail themselves of one of the 
three risk limitation mechanisms for certain of their orders).
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    Pursuant to Rule 6.40, the Exchange establishes a time period 
during which the NYSE Arca System (``System'') \8\ calculates for 
quotes and orders, respectively: (1) The number of trades executed by 
the Market Maker or OTP in a particular options class; (2) the volume 
of contracts traded by the Market Maker or OTP in a particular options 
class; or (3) the aggregate percentage of the Market Maker's quoted 
size or OTP's order size(s) executed in a particular options class 
(collectively, the ``risk settings'').\9\ When a Market Maker or OTP 
has breached its risk settings (i.e., has traded more than the contract 
or volume limit or cumulative percentage limit of a class during the 
specified measurement interval), the System will cancel all of the 
Market Maker's quotes or the OTP's open orders in that class until the 
Market Maker or OTP notifies the Exchange it will resume submitting 
quotes or orders.\10\ The temporary suspension of quotes or orders from 
the market that results when the risk settings are triggered is meant 
to operate as a safety valve that enables Market Makers and/or OTPs to 
re-evaluate their positions before requesting to re-enter the market.
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    \8\ The Exchange proposes to define ``System'' as a shorthand 
reference to the term ``NYSE Arca System'' and replace uses of the 
term ``NYSE Arca System'' with the term ``System'' throughout the 
rule text. See proposed Rule 6.40(a),(e), (f), and Commentaries .01, 
.02, .05 and .06 to the Rule.
    \9\ See Rule 6.40(a)-(e) (settings forth the three risk 
limitation mechanisms available: Transaction-Based, Volume-Based and 
Percentage-Based). A Market Maker may activate one Risk Limitation 
Mechanism for its quotes (which is required) and a different Risk 
Limitation Mechanism for its orders (which is optional), even if 
both are activated for the same class. See also Commentary .04 to 
Rule 6.40.
    \10\ See Commentaries .01 and .02 to Rule 6.40 (requiring that a 
Market Maker or OTP request that it be re-enabled after a breach of 
its risk settings). In the event that a Market Maker or OTP 
experiences multiple, successive triggers of its risk settings, the 
Exchange would cancel all of the quotes or Applicable Orders--as 
opposed to cancelling only those in the option class (underlying 
symbol) in which the risk settings were triggered. See Rule 6.40(f) 
and Commentary .02 to Rule 6.40.
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Proposed Expansion of Risk Limitation Mechanism to All Orders
    Currently, OTPs may voluntarily utilize risk settings for PNP 
Orders, PNP-Blind Orders, PNP-Light Orders and Liquidity Adding Orders 
(``ALO'') submitted via ArcaDirect, which are defined as ``Applicable 
Orders''.\11\ Given the importance of risk settings in today's trading 
environment, the Exchange proposes to expand the availability of the 
risk settings to all orders traded on the Exchange.
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    \11\ See Commentary .07 to Rule 6.40. For purposes of risk 
settings relating to orders, the Exchange does not distinguish 
Market Maker from OTPs.
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    The Exchange believes that expanding the availability of the risk 
settings to all orders would reduce the likelihood of unintended trades 
and would enable OTPs to re-evaluate their positions before requesting 
to re-enter the market if a risk setting is triggered. The proposed 
expansion would, for example, prevent the execution of a large set of 
orders that are improperly priced for any number of reasons (i.e., 
because of a malfunctioning algorithm, the orders are left over from 
the prior day, etc.). By preventing the execution of such trades, the 
Exchange may help parties (including clearing members) avoid large 
trading losses. Thus, the Exchange believes the proposed expansion of 
the risk settings to all orders would allow OTPs to better manage the 
potential risks of multiple executions against an OTP's trading 
interest that, in today's highly automated and electronic trading 
environment, can occur simultaneously across multiple series and 
multiple option classes. Consistent with the ability to better manage 
risk, the Exchange anticipates that the proposed changes would enhance 
the Exchange's overall market quality as a result of narrowed quote 
widths and increased liquidity for series traded on the Exchange. This 
proposed expansion is also being made, in part, to be responsive to 
requests from OTPs that engage in high-volume trading in a

[[Page 89173]]

multitude of series and classes. The Exchange believes that the 
proposal to make the risk settings available for all orders would 
assist OTPs in providing a means to calibrate and monitor their risk 
exposure on all orders. As is the case today, the proposed availability 
of risk settings for all of an OTP's orders would not be mandated, but 
risk settings would continue to be mandated for all Market Maker 
quotes.\12\
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    \12\ See proposed Commentary .04 (a) and (b) to Rule 6.40.
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    To effect this change, the Exchange proposes to amend Rule 
6.40(a)(1) to provide that the Exchange would maintain separate ``trade 
counters'' for each of the following scenarios: (i) When any order, 
including a single-leg order or any leg of a Complex Order submitted by 
an OTP is executed in any series in a specified class; and (ii) when a 
Market Maker quote is executed in any series in an appointed class.\13\ 
The Exchange proposes this rule text to replace the current rule text 
that covers the Applicable Orders of non-Market Makers and Market 
Makers, respectively.\14\ Because Market Makers are also OTPs, and 
because the operation of the risk settings for orders are identical for 
all OTPs, the Exchange proposes to streamline the rule text--in Rule 
6.40(a)(1) and throughout the Rule--by removing reference to ``non-
Market Makers'' as superfluous and potentially confusing.\15\ Instead 
of separately addressing risk settings for orders that are available to 
Market Makers and non-Market Makers, the proposed rule would simply 
address the option as being available to all OTPs. Proposed Rule 
6.40(a)(1) would further provide that for each of these scenarios, the 
trade counters would be incremented every time a trade is executed, in 
accordance with Commentary .07 to Rule 6.40.
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    \13\ See proposed Rule 6.40(a)(1)(i)-(ii).
    \14\ The Exchange also proposes the non-substantive modification 
to replace uses of the term ``shall'' with the term ``will'' 
throughout the rule text. See generally proposed Rule 6.40.
    \15\ See supra note 5. See also proposed Rule 6.40(a)(1), 
(b)(1), (c)(1), (d)(1), (e)(1), (f)(1) (collapsing into one 
paragraph the separate paragraphs in the current Rule relating to 
risk settings for orders sent by Market Maker and non-Market Makers 
and updating cross-references to condensed rule text).
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    The Exchange proposes to amend paragraphs (b), (c), (d), (e), and 
(f) to make similar changes so that each of these paragraphs would have 
two sub-paragraphs that would be parallel to the proposed changes to 
Rule 6.40(a)(1):
     The first sub-paragraph of each paragraph would address 
how the specific risk setting would be applied to an OTP's orders, 
which would be the substantive change, as further described below. 
These proposed sub-paragraphs would replace current rule text in each 
paragraph governing how the specific risk setting would apply to a non-
Market Maker's or Market Maker's Applicable Orders. Accordingly, 
current sub-paragraph (2) to each of paragraphs (b), (c), (d), (e), and 
(f) would be deleted.
    The proposed second sub-paragraph of each paragraph would address 
how the specific risk setting would be applied to a Market Marker's 
quotes, as further described below. Accordingly, current sub-paragraph 
(3) to each of paragraphs (b), (c), (d), (e), and (f) would be re-
numbered as sub-paragraph (2).
    In addition to the substantive change to expand risk settings to 
all orders, the Exchange further proposes to make non-substantive 
amendments to each of the proposed sub-paragraphs to paragraphs (b), 
(c), and (d). The Exchange believes that the proposed rule text would 
simplify and streamline the rule by describing a risk setting being 
triggered when an OTP's orders or Market Marker's quotes ``have 
traded'' rather than using the more cumbersome text that an order or 
quote has been traded ``against.'' When addressing an OTP's orders, the 
proposed rules would provide that the risk setting would be applicable 
to all orders in a specific class. When addressing a Market Maker's 
quotes, the proposed rules would provide that the risk setting would be 
applicable to all of the Market Maker's quotes in an appointed class. 
For each risk setting, the proposed new text would provide as follows.
     The Transaction-Based Risk Limitation Mechanism, described 
in Rule 6.40(b), would be triggered under the following conditions:
    [cir] When a trade counter indicates that within a time period 
specified by the Exchange, ``n'' executions of an OTP's open orders 
have traded in a specific class (proposed Rule 6.40(b)(1)); or
    [cir] when a trade counter indicates that within a time period 
specified by the Exchange, ``n'' executions of a Market Marker's quotes 
have traded in an appointed class (proposed Rule 6.40(b)(2)).
     The Volume-Based Risk Limitation Mechanism, described in 
Rule 6.40(c), would be triggered under the following conditions:
    [cir] When a trade counter indicates that within a time period 
specified by the Exchange, ``k'' contracts of an OTP's open orders have 
traded in a specific class (proposed Rule 6.40(c)(1)); or
    [cir] when a trade counter indicates that within a time period 
specified by the Exchange, ``k'' contracts of a Market Maker's quotes 
have traded in an appointed class (proposed Rule 6.40(c)(2)).
     The Percentage-Based Risk Limitation Mechanism, described 
in Rule 6.40(d), would be triggered under the following conditions:
    [cir] When a trade counter has calculated that within a time period 
specified by the Exchange, ``p'' percentage of an OTP's open orders 
have traded in a specific class (proposed Rule 6.40(d)(1)); or
    [cir] when a trade counter has calculated that within a time period 
specified by the Exchange, ``p'' percentage of a Market Maker's quotes 
have traded in an appointed class (proposed Rule 6.40(d)(2)).
    The Exchange also proposes clarifying changes to how the 
Percentage-Based Risk Limitation Mechanism operates. The Exchange 
proposes to modify Rule 6.40(d)(2)(i)-(ii) to make clear that the trade 
counter would first calculate, for each series of an option class, 
``the percentage(s) of an OTP's order size(s) or a Market Maker's quote 
size that is executed on each side of the market, including both 
displayed and non-displayed size,'' and would then ``sum the overall 
percentages of the size(s) for the entire option class to calculate the 
`p' percentage.'' The proposed changes are designed to account for the 
fact that OTPs may submit multiple orders on each side of the market 
that may be counted by the risk settings (whereas Market Makers have 
only one quote on each side of the market) and to reduce excess 
verbiage to streamline and condense the rule text, which the Exchange 
believes adds clarity and transparency to the Rule.
Proposed Changes Regarding Routable Orders
    Because the proposed expansion of risk settings for orders would 
include routable orders, the Exchange proposes to amend Rule 6.40 to 
address the counting and cancellation of such orders (or unexecuted 
portions thereof). First, the Exchange proposes to add rule text to 
Commentary .07 to Rule 6.40 to provide that executions of routable 
orders on away markets would be considered by a trade counter once the 
execution report is received by the Exchange.\16\ The Exchange also

[[Page 89174]]

proposes to amend Commentary .07 to Rule 6.40 to provide that 
executions of each leg of a Complex Order would be considered by a 
trade counter as an individual transaction.
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    \16\ The Exchange also proposes to delete as inapplicable the 
rule text in Commentary .07 to Rule 6.40 providing that ``[o]nly 
executions against order types specified by the Exchange via Trader 
Update and against quotes of Market Makers shall be considered by a 
trade counter.'' The Exchange likewise proposes to delete the rule 
text from Commentary .07 to Rule 6.40 that defines ``Applicable 
Orders,'' given that this limitation no longer applies. In this 
regard, the Exchange proposes to delete reference to ``Applicable 
Orders'' throughout the rule text and, where pertinent, and [sic] to 
replace uses of the term ``Applicable Orders'' with ``orders.''
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    Regarding cancellations, the Exchange proposes to amend Commentary 
.01 to Rule 6.40 to provide that once the risk settings have been 
triggered, pursuant to paragraphs (e) and (f) of the Rule, the System 
would automatically generate a ``bulk cancel'' message to cancel Market 
Maker quotes and electronic orders, or portions thereof, that have not 
been routed to away markets, excluding intraday and prior day Good-
Till-Cancel (``GTC''), All-or-None (``AON''), and orders entered in 
response to an electronic auction that are valid only for the duration 
of the auction (``GTX'').\17\ The Exchange has determined that it would 
not cancel GTC, AON, or GTX orders because these order types are 
typically retail orders which, if automatically cancelled by the 
Exchange, could cause an operational issue for any firm that entered 
the order(s) (i.e., exposing a firm to the risk of a missed execution 
on an order that has come due).\18\ Given these potential operational 
issues, and for the protection of investors and the investing public, 
the Exchange has determined to exempt these order types from automatic 
cancellation when the risk settings are triggered.\19\ The Exchange 
also proposes to amend Commentary .01 to Rule 6.40 to provide that 
``[o]rders and quotes residing in the Consolidated Book received prior 
to processing of the bulk cancel message may trade. Any unexecuted 
portion of an order subject to a `bulk cancel' message that had routed 
away, but returned unexecuted, will be immediately cancelled.'' \20\
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    \17\ In light of this change, the Exchange proposes to delete 
the following rule text in Commentary .01 to Rule 6.40 as no longer 
applicable: ``The bulk cancel message shall be processed by the NYSE 
Arca System in time priority with any other quote or order message 
received by the NYSE Arca System. Any Applicable Orders or quotes 
that matched with a Market Maker's quote or a Market Maker's or non-
Market Maker's Applicable Order and were received by the NYSE Arca 
System prior to the receipt of the bulk cancel message shall be 
automatically executed.'' See id.
    \18\ See, e.g., Rule 6.62(n) (defining GTC as buy or sell orders 
that remain in force until the order is filled, cancelled or the 
option contract expires); (d)(4) (defining AON orders as a Market or 
Limit Order that is to be executed in its entirety or not at all).
    \19\ The Exchange notes that the trade counters would be 
incremented every time a GTC, AON or GTX order is executed, subject 
to proposed Commentary .07. See proposed Rule 6.40(a)(1).
    \20\ Relatedly, the Exchange proposes to delete the following 
rule text in Commentary .01 to Rule 6.40: ``Applicable Orders or 
quotes received by the NYSE Arca System after receipt of the bulk 
cancel message shall not be executed.''
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    In addition to the foregoing changes to paragraphs (e) and (f) of 
Rule 6.40, the Exchange also proposes to amend these paragraphs to 
address the action (i.e., cancellations) that the System would effect 
upon the triggering of the risk settings to account for the proposed 
amendments to Commentary .01 to the Rule. Specifically, the Exchange 
proposes to modify sub-paragraph (1) to both paragraphs (e) and (f) to 
provide that if a risk setting is triggered, the System would 
automatically cancel an OTP's orders, ``except as provided in 
Commentary .01 to this Rule.'' Finally, the Exchange proposes to make 
additional conforming changes to Commentary .02 to Rule 6.40 to specify 
that once the risk settings have been breached, any new orders (or 
quotes) would not be accepted until the OTP or Market Maker contacts 
the Exchange and requests to be re-enabled.
Proposed Changes to Persistence of Risk Settings for Orders
    The Exchange also proposes to amend Commentary .04 to Rule 6.40 to 
specify the persistence of the risk settings, once activated, by an OTP 
for orders to conform this Commentary to the changes described above to 
delineate risk settings between an OTP's orders and a Market Maker's 
quotes. Specifically, the Exchange proposes to divide Commentary .04 
into two paragraphs to make it easier to navigate--paragraph (a) would 
address the persistence of risk settings for quotes, and paragraph (b) 
would address the persistence of risk settings for orders.
    Current Commentary .04 to Rule 6.40 provides that an OTP must 
activate its risk settings for orders on a daily basis. The Exchange 
proposes to amend this Commentary .04 to specify that ``[o]nce an OTP 
activates a Risk Limitation Mechanism for its orders in a specified 
class, the mechanism and the settings established will remain active 
unless, and until, the OTP deactivates the Risk Limitation Mechanism or 
changes the settings.'' \21\ While the risk settings for orders remain 
an optional feature, the Exchange believes this change would enable 
each OTP to calibrate its settings as needed, as opposed to re-
establishing the settings on a daily basis.
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    \21\ See proposed Commentary .04(b) to Rule 6.40 (specifying 
that, ``[t]o be effective, an OTP must activate a Risk Limitation 
Mechanism, and corresponding settings, for orders in a specified 
class''). Regarding the risk settings for quotes, the Exchange 
proposes to delete as inapplicable rule text that indicates that a 
Market Maker may deactivate its risk settings for quotes, as this 
functionality is mandated by the Exchange. See proposed Commentary 
.04(a) to Rule 6.40. The Exchange believes removing this language 
would add clarity and consistency to the Rule.
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Proposed Modifications to Parameters for Each Risk Limitation Mechanism
    The Exchange proposes to adjust the minimum and maximum parameters 
for the Risk Limitation Mechanism as set forth in Commentary .03 to the 
Rule. The current Rule provides that the Exchange would not exceed the 
following minimum and maximum parameters, applicable to quotes and 
orders:
     Minimum of 1 and maximum of 100 for transaction-based risk 
setting;
     Minimum of 20 and a maximum of 5,000 for volume-based risk 
setting; and
     Minimum of 100 and a maximum of 2,000 for percentage-based 
risk setting.\22\
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    \22\ See Commentary .03 to Rule 6.40.
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    The existing parameters have been in place since 2012 and the 
Exchange has not modified or increased these parameters in the past 
four years.\23\ Since 2012, the markets have experienced more 
volatility and fragmentation. To account for these changes, as well as 
the ever-increasing automation, speed and volume transacted in today's 
electronic trading environment, the Exchange proposes to modify the 
minimum and maximum parameters, applicable to quotes and orders, as 
follows:
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    \23\ See Securities Exchange Act Release No. 67714 (August 22, 
2012), 77 FR 52098 (August 28, 2012) (SR-NYSEArca-2012-87).
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     Minimum of 3 and maximum of 2,000 for the transaction-
based setting;
     Minimum of 20 and a maximum of 500,000 for volume-based 
setting: And
     Minimum of 100 and a maximum of 200,000 for percentage-
based setting.\24\
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    \24\ See proposed Commentary .03 to Rule 6.40.
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    Although this proposal establishes the outside parameters of 
allowable settings, Rule 6.40 would still obligate the Exchange to 
announce via Trader Update ``any applicable minimum, maximum and/or 
default settings for the Risk Limitation Mechanisms,'' which would 
afford Market Makers and OTPs the opportunity to adjust their own risk 
settings within the announced parameters.\25\ The Exchange further 
believes the proposed adjustments to the minimum/maximum parameters 
would enable the Exchange to strike the appropriate balance to ensure 
that risk settings may be established at a level that is consistent 
with existing market conditions, which would enable the risk settings 
to operate in the manner

[[Page 89175]]

intended. The Exchange believes that setting the parameters within this 
broad range would provide OTPs with ample flexibility in setting their 
tolerance for risk. For example, OTPs with a lower risk tolerance may 
opt to select a lower threshold within the range established by the 
Exchange, thereby optimizing the protection afforded by this proposed 
rule change, whereas OTPs with a higher risk tolerance may select the 
maximum allowable parameter afforded by the proposed rule change. 
Moreover, while the Exchange retains discretion with respect to the 
levels at which it could adjust these settings, the Exchange would not 
be permitted to adjust the settings below the minimum or above the 
maximum proposed, which, the Exchange believes would ensure that the 
settings are at all times within a reasonable range. Finally, given 
that the risk settings would now be available for all order types, the 
Exchange believes it would be prudent to provide ample flexibility for 
setting the maximum thresholds.
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    \25\ See supra notes 22 and 24 (rule text remains unchanged in 
current and proposed Commentary .03 to Rule 6.40).
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Implementation
    The Exchange will announce by Trader Update the implementation date 
of the proposed rule change to expand the availability of the Risk 
Limitation Mechanism to all orders, which implementation will be no 
later than 90 days after the effectiveness of this rule change.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Securities Exchange Act of 1934 (the ``Act''),\26\ in 
general, and furthers the objectives of Section 6(b)(5) of the Act,\27\ 
in particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest.
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    \26\ 15 U.S.C. 78f(b).
    \27\ 15 U.S.C. 78f(b)(5).
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    OTPs are vulnerable to the risk from a system or other error or a 
market event that may cause them to send a large number of orders or 
receive multiple, automatic executions before they can adjust their 
order exposure in the market. Without adequate risk management tools, 
such as the proposed expanded risk settings for orders, OTPs may opt to 
reduce the amount of order flow and liquidity that they provide to the 
market, which could undermine the quality of the markets available to 
market participants. Thus, the Exchange believes that the proposed rule 
change to expand the availability of the risk settings to all orders 
removes impediments to and perfects the mechanism of a free and open 
market by providing OTPs with greater control and flexibility over 
setting their risk tolerance and more protection over risk exposure, if 
the market moves in an unexpected direction. The proposed expansion of 
the risk settings to all orders would promote just and equitable 
principles of trade because it would help OTPs not only avoid 
transacting against their interests but would also reduce the potential 
for executions at erroneous prices, which should encourage OTPs to 
submit additional order flow and liquidity to the Exchange.
    This proposed expansion, which was specifically requested by some 
OTPs, would foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, and processing information with respect 
to, and facilitating transactions in, securities as it will be 
available to all OTPs for all orders entered on the Exchange. In 
addition, the expanded risk settings may prevent the execution of 
erroneously priced trades, which would help parties (including clearing 
members) avoid large trading losses, thereby fostering cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
and processing information with respect to, and facilitating 
transactions in, securities.
    The Exchange believes the proposed adjustments to the minimum/
maximum parameters for each risk limitation mechanism, which have not 
been increased since 2012, are consistent with the Act because they 
would allow the Exchange to strike the appropriate balance to ensure 
that risk settings could be established at a level that is consistent 
with existing market conditions, which would enable the risk settings 
to operate in the manner intended. The Exchange believes that setting 
the parameters within the broad range, as proposed, would provide OTPs 
with ample flexibility in setting their tolerance for risk. For 
example, OTPs with a lower risk tolerance may opt to select a lower 
threshold within the range established by the Exchange, thereby 
optimizing the protection afforded by this proposed rule change, 
whereas OTPs with a higher risk tolerance may select the maximum 
allowable parameter afforded by the proposed rule change. Moreover, 
because the Exchange would not be permitted to adjust the settings 
below the minimum or above the maximum proposed, the settings should 
remain at all times within a reasonable range. Finally, given that the 
risk settings would now be available for all order types, the Exchange 
believes it would be prudent to provide ample flexibility for setting 
the maximum thresholds.
    Consistent with the ability to better manage risk, the Exchange 
anticipates that the proposed enhancement to the existing Risk 
Limitation Mechanism would likewise enhance the Exchange's overall 
market quality as a result of narrowed quote widths and increased 
liquidity for series traded on the Exchange, which would benefit 
investors and the public interest because they receive better prices 
and because it lowers volatility in the options market. Moreover, the 
Exchange believes that the proposal is consistent with the protection 
of investors and the public interests because it would permit OTPs to 
better manage the potential risks of multiple executions against an 
OTP's proprietary interest that, in today's highly automated and 
electronic trading environment, can occur simultaneously across 
multiple series and multiple option classes.
    Finally, the Exchange believes that the proposed changes to 
streamline and clarify the rule text, including updated cross 
references that conform rule text to proposed changes, promotes just 
and equitable principles of trade, fosters cooperation and coordination 
among persons engaged in facilitating securities transactions, and 
removes impediments to and perfects the mechanism of a free and open 
market by ensuring that members, regulators and the public can more 
easily navigate the Exchange's rulebook and better understand the 
defined terms used by the Exchange.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange is proposing a 
market enhancement that would provide OTPs with greater control and 
flexibility over setting their risk tolerance and more protection over 
risk exposure, if the market moves in an unexpected direction. The 
Exchange believes the proposal would provide market participants with 
additional protection from unintended executions. The proposal is 
structured to offer the same

[[Page 89176]]

enhancement to all OTPs, regardless of size, and would not impose a 
competitive burden on any participant. The Exchange does not believe 
that the proposed enhancement to the existing risk limitation mechanism 
would impose a burden on competing options exchanges. Rather, the 
availability of this mechanism may foster more competition. 
Specifically, the Exchange notes that it operates in a highly 
competitive market in which market participants can readily favor 
competing venues. When an exchange offers enhanced functionality that 
distinguishes it from the competition and participants find it useful, 
it has been the Exchange's experience that competing exchanges will 
move to adopt similar functionality. Thus, the Exchange believes that 
this type of competition amongst exchanges is beneficial to the market 
place as a whole as it can result in enhanced processes, functionality, 
and technologies.

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

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

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \28\ and Rule 19b-4(f)(6) thereunder.\29\ 
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.
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \29\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \30\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NYSEArca-2016-155 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-NYSEArca-2016-155. 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 Number SR-NYSEArca-2016-155, and 
should be submitted on or before December 30, 2016.
---------------------------------------------------------------------------

    \31\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-29467 Filed 12-8-16; 8:45 am]
 BILLING CODE 8011-01-P
89174 Federal Register / Vol. 81, No. 237 / Friday, December 9, 2016 / Notices

proposes to amend Commentary .07 to In addition to the foregoing changes to enable each OTP to calibrate its settings
Rule 6.40 to provide that executions of paragraphs (e) and (f) of Rule 6.40, the as needed, as opposed to re-establishing
each leg of a Complex Order would be Exchange also proposes to amend these the settings on a daily basis.
considered by a trade counter as an paragraphs to address the action (i.e.,
Proposed Modifications to Parameters
individual transaction. cancellations) that the System would
Regarding cancellations, the Exchange effect upon the triggering of the risk for Each Risk Limitation Mechanism
proposes to amend Commentary .01 to settings to account for the proposed The Exchange proposes to adjust the
Rule 6.40 to provide that once the risk amendments to Commentary .01 to the minimum and maximum parameters for
settings have been triggered, pursuant to Rule. Specifically, the Exchange the Risk Limitation Mechanism as set
paragraphs (e) and (f) of the Rule, the proposes to modify sub-paragraph (1) to forth in Commentary .03 to the Rule.
System would automatically generate a both paragraphs (e) and (f) to provide The current Rule provides that the
‘‘bulk cancel’’ message to cancel Market that if a risk setting is triggered, the Exchange would not exceed the
Maker quotes and electronic orders, or System would automatically cancel an following minimum and maximum
portions thereof, that have not been OTP’s orders, ‘‘except as provided in parameters, applicable to quotes and
routed to away markets, excluding Commentary .01 to this Rule.’’ Finally, orders:
intraday and prior day Good-Till-Cancel the Exchange proposes to make • Minimum of 1 and maximum of 100
(‘‘GTC’’), All-or-None (‘‘AON’’), and additional conforming changes to for transaction-based risk setting;
orders entered in response to an Commentary .02 to Rule 6.40 to specify • Minimum of 20 and a maximum of
electronic auction that are valid only for that once the risk settings have been 5,000 for volume-based risk setting; and
the duration of the auction (‘‘GTX’’).17 breached, any new orders (or quotes) • Minimum of 100 and a maximum of
The Exchange has determined that it would not be accepted until the OTP or 2,000 for percentage-based risk
would not cancel GTC, AON, or GTX Market Maker contacts the Exchange setting.22
orders because these order types are and requests to be re-enabled. The existing parameters have been in
typically retail orders which, if place since 2012 and the Exchange has
automatically cancelled by the Proposed Changes to Persistence of Risk not modified or increased these
Exchange, could cause an operational Settings for Orders parameters in the past four years.23
issue for any firm that entered the The Exchange also proposes to amend Since 2012, the markets have
order(s) (i.e., exposing a firm to the risk Commentary .04 to Rule 6.40 to specify experienced more volatility and
of a missed execution on an order that the persistence of the risk settings, once fragmentation. To account for these
has come due).18 Given these potential activated, by an OTP for orders to changes, as well as the ever-increasing
operational issues, and for the conform this Commentary to the automation, speed and volume
protection of investors and the investing changes described above to delineate transacted in today’s electronic trading
public, the Exchange has determined to risk settings between an OTP’s orders environment, the Exchange proposes to
exempt these order types from and a Market Maker’s quotes. modify the minimum and maximum
automatic cancellation when the risk Specifically, the Exchange proposes to parameters, applicable to quotes and
settings are triggered.19 The Exchange divide Commentary .04 into two orders, as follows:
also proposes to amend Commentary .01 paragraphs to make it easier to • Minimum of 3 and maximum of
to Rule 6.40 to provide that ‘‘[o]rders navigate—paragraph (a) would address 2,000 for the transaction-based setting;
and quotes residing in the Consolidated the persistence of risk settings for • Minimum of 20 and a maximum of
Book received prior to processing of the quotes, and paragraph (b) would address 500,000 for volume-based setting: And
bulk cancel message may trade. Any the persistence of risk settings for • Minimum of 100 and a maximum of
unexecuted portion of an order subject orders. 200,000 for percentage-based setting.24
to a ‘bulk cancel’ message that had Current Commentary .04 to Rule 6.40 Although this proposal establishes the
routed away, but returned unexecuted, provides that an OTP must activate its outside parameters of allowable settings,
will be immediately cancelled.’’ 20 risk settings for orders on a daily basis. Rule 6.40 would still obligate the
The Exchange proposes to amend this Exchange to announce via Trader
proposes to delete reference to ‘‘Applicable Orders’’ Commentary .04 to specify that ‘‘[o]nce Update ‘‘any applicable minimum,
throughout the rule text and, where pertinent, and an OTP activates a Risk Limitation maximum and/or default settings for the
[sic] to replace uses of the term ‘‘Applicable Mechanism for its orders in a specified Risk Limitation Mechanisms,’’ which
Orders’’ with ‘‘orders.’’
17 In light of this change, the Exchange proposes
class, the mechanism and the settings would afford Market Makers and OTPs
to delete the following rule text in Commentary .01 established will remain active unless, the opportunity to adjust their own risk
to Rule 6.40 as no longer applicable: ‘‘The bulk and until, the OTP deactivates the Risk settings within the announced
cancel message shall be processed by the NYSE Limitation Mechanism or changes the parameters.25 The Exchange further
Arca System in time priority with any other quote
or order message received by the NYSE Arca
settings.’’ 21 While the risk settings for believes the proposed adjustments to
System. Any Applicable Orders or quotes that orders remain an optional feature, the the minimum/maximum parameters
matched with a Market Maker’s quote or a Market Exchange believes this change would would enable the Exchange to strike the
Maker’s or non-Market Maker’s Applicable Order appropriate balance to ensure that risk
and were received by the NYSE Arca System prior ‘‘Applicable Orders or quotes received by the NYSE
to the receipt of the bulk cancel message shall be settings may be established at a level
Arca System after receipt of the bulk cancel
automatically executed.’’ See id. message shall not be executed.’’
that is consistent with existing market
18 See, e.g., Rule 6.62(n) (defining GTC as buy or
21 See proposed Commentary .04(b) to Rule 6.40 conditions, which would enable the risk
sell orders that remain in force until the order is (specifying that, ‘‘[t]o be effective, an OTP must settings to operate in the manner
filled, cancelled or the option contract expires);
mstockstill on DSK3G9T082PROD with NOTICES

activate a Risk Limitation Mechanism, and
(d)(4) (defining AON orders as a Market or Limit corresponding settings, for orders in a specified 22 See Commentary .03 to Rule 6.40.
Order that is to be executed in its entirety or not class’’). Regarding the risk settings for quotes, the
at all). 23 See Securities Exchange Act Release No. 67714
Exchange proposes to delete as inapplicable rule
19 The Exchange notes that the trade counters
text that indicates that a Market Maker may (August 22, 2012), 77 FR 52098 (August 28, 2012)
would be incremented every time a GTC, AON or deactivate its risk settings for quotes, as this (SR–NYSEArca–2012–87).
GTX order is executed, subject to proposed functionality is mandated by the Exchange. See 24 See proposed Commentary .03 to Rule 6.40.

Commentary .07. See proposed Rule 6.40(a)(1). proposed Commentary .04(a) to Rule 6.40. The 25 See supra notes 22 and 24 (rule text remains
20 Relatedly, the Exchange proposes to delete the Exchange believes removing this language would unchanged in current and proposed Commentary
following rule text in Commentary .01 to Rule 6.40: add clarity and consistency to the Rule. .03 to Rule 6.40).

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89176 Federal Register / Vol. 81, No. 237 / Friday, December 9, 2016 / Notices

enhancement to all OTPs, regardless of action is necessary or appropriate in the submissions. You should submit only
size, and would not impose a public interest, for the protection of information that you wish to make
competitive burden on any participant. investors, or otherwise in furtherance of available publicly. All submissions
The Exchange does not believe that the the purposes of the Act. If the should refer to File Number SR–
proposed enhancement to the existing Commission takes such action, the NYSEArca–2016–155, and should be
risk limitation mechanism would Commission shall institute proceedings submitted on or before December 30,
impose a burden on competing options under Section 19(b)(2)(B) 30 of the Act to 2016.
exchanges. Rather, the availability of determine whether the proposed rule For the Commission, by the Division of
this mechanism may foster more change should be approved or Trading and Markets, pursuant to delegated
competition. Specifically, the Exchange disapproved. authority.31
notes that it operates in a highly Eduardo A. Aleman,
IV. Solicitation of Comments
competitive market in which market Assistant Secretary.
participants can readily favor competing Interested persons are invited to
[FR Doc. 2016–29467 Filed 12–8–16; 8:45 am]
venues. When an exchange offers submit written data, views, and
BILLING CODE 8011–01–P
enhanced functionality that arguments concerning the foregoing,
distinguishes it from the competition including whether the proposed rule
and participants find it useful, it has change is consistent with the Act.
SECURITIES AND EXCHANGE
been the Exchange’s experience that Comments may be submitted by any of
COMMISSION
competing exchanges will move to the following methods:
adopt similar functionality. Thus, the [Release No. 34–79467; File No. SR–
Electronic Comments BatsBZX–2016–81]
Exchange believes that this type of
competition amongst exchanges is • Use the Commission’s Internet
comment form (http://www.sec.gov/ Self-Regulatory Organizations; Bats
beneficial to the market place as a whole
rules/sro.shtml); or BZX Exchange, Inc.; Notice of Filing
as it can result in enhanced processes,
functionality, and technologies. • Send an email to rule-comments@ and Immediate Effectiveness of a
sec.gov. Please include File Number SR– Proposed Rule Change to BZX Rule
C. Self-Regulatory Organization’s NYSEArca–2016–155 on the subject 11.23, Auctions, To Amend How the
Statement on Comments on the line. Official Auction Prices Are Calculated
Proposed Rule Change Received From and Add Additional Specificity
Members, Participants, or Others Paper Comments Regarding the Handling of RHO Orders
No written comments were solicited • Send paper comments in triplicate During an Opening Auction for a BZX
or received with respect to the proposed to Brent J. Fields, Secretary, Securities Listed Security
rule change. and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090. December 5, 2016
III. Date of Effectiveness of the All submissions should refer to File Pursuant to Section 19(b)(1) of the
Proposed Rule Change and Timing for Number SR–NYSEArca–2016–155. This Securities Exchange Act of 1934 (the
Commission Action file number should be included on the ‘‘Act’’),1 and Rule 19b–4 thereunder,2
The Exchange has filed the proposed subject line if email is used. To help the notice is hereby given that on November
rule change pursuant to Section Commission process and review your 30, 2016, Bats BZX Exchange, Inc. (the
19(b)(3)(A)(iii) of the Act 28 and Rule comments more efficiently, please use ‘‘Exchange’’ or ‘‘BZX’’) filed with the
19b–4(f)(6) thereunder.29 Because the only one method. The Commission will Securities and Exchange Commission
proposed rule change does not: (i) post all comments on the Commission’s (‘‘Commission’’) the proposed rule
Significantly affect the protection of Internet Web site (http://www.sec.gov/ change as described in Items I and II
investors or the public interest; (ii) rules/sro.shtml). Copies of the below, which Items have been prepared
impose any significant burden on submission, all subsequent by the Exchange. The Exchange has
competition; and (iii) become operative amendments, all written statements designated this proposal as a ‘‘non-
prior to 30 days from the date on which with respect to the proposed rule controversial’’ proposed rule change
it was filed, or such shorter time as the change that are filed with the pursuant to Section 19(b)(3)(A) of the
Commission may designate, if Commission, and all written Act 3 and Rule 19b–4(f)(6) thereunder,4
consistent with the protection of communications relating to the which renders it effective upon filing
investors and the public interest, the proposed rule change between the with the Commission. The Commission
proposed rule change has become Commission and any person, other than is publishing this notice to solicit
effective pursuant to Section 19(b)(3)(A) those that may be withheld from the comments on the proposed rule change
of the Act and Rule 19b–4(f)(6)(iii) public in accordance with the from interested persons.
thereunder. provisions of 5 U.S.C. 552, will be I. Self-Regulatory Organization’s
At any time within 60 days of the available for Web site viewing and Statement of the Terms of Substance of
filing of such proposed rule change, the printing in the Commission’s Public the Proposed Rule Change
Commission summarily may Reference Room, 100 F Street NE.,
temporarily suspend such rule change if The Exchange filed a proposal to
Washington, DC 20549 on official amend Exchange Rule 11.23, Auctions,
it appears to the Commission that such business days between the hours of to: (i) Amend how the official auction
10:00 a.m. and 3:00 p.m. Copies of such prices are calculated and make related
28 15 U.S.C. 78s(b)(3)(A)(iii). filing also will be available for
mstockstill on DSK3G9T082PROD with NOTICES

29 17 CFR 240.19b–4(f)(6). In addition, Rule 19b– changes to the definitions of Indicative
4(f)(6)(iii) requires a self-regulatory organization to
inspection and copying at the principal Price and Auction Only Price; and (ii)
give the Commission written notice of its intent to office of the Exchange. All comments
file the proposed rule change, along with a brief received will be posted without change; 31 17 CFR 200.30–3(a)(12).
description and text of the proposed rule change, the Commission does not edit personal 15
at least five business days prior to the date of filing U.S.C. 78s(b)(1).
of the proposed rule change, or such shorter time identifying information from 2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
as designated by the Commission. The Exchange
has satisfied this requirement. 30 15 U.S.C. 78s(b)(2)(B). 4 17 CFR 240.19b–4(f)(6).

VerDate Sep<11>2014 18:13 Dec 08, 2016 Jkt 241001 PO 00000 Frm 00135 Fmt 4703 Sfmt 4703 E:\FR\FM\09DEN1.SGM 09DEN1
Document Created: 2018-02-14 09:04:01
Document Modified: 2018-02-14 09:04:01
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		81 FR 89171