82 FR 33534 - Self-Regulatory Organizations; New York Stock Exchange LLC; NYSE MKT LLC; Order Disapproving Proposed Rule Changes Amending Exchange Rule 104 To Delete Subsection (g)(i)(A)(III), Which Prohibits Designated Market Makers From Engaging in Transactions, During the Last Ten Minutes of Trading Before the Close, That Establish a New High (Low) Price for the Day on the Exchange in an Assigned Security in Which the DMM Has a Long (Short) Position
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 138 (July 20, 2017)
Federal Register Volume 82, Issue 138 (July 20, 2017)
| Page Range | 33534-33537 | |
| FR Document | 2017-15195 |
[Federal Register Volume 82, Number 138 (Thursday, July 20, 2017)] [Notices] [Pages 33534-33537] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-15195] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-81150; File Nos. SR-NYSE-2016-71 and SR-NYSEMKT 2016- 99] Self-Regulatory Organizations; New York Stock Exchange LLC; NYSE MKT LLC; Order Disapproving Proposed Rule Changes Amending Exchange Rule 104 To Delete Subsection (g)(i)(A)(III), Which Prohibits Designated Market Makers From Engaging in Transactions, During the Last Ten Minutes of Trading Before the Close, That Establish a New High (Low) Price for the Day on the Exchange in an Assigned Security in Which the DMM Has a Long (Short) Position July 1, 2017. I. Introduction On October 27, 2016, New York Stock Exchange LLC (``NYSE'') and NYSE MKT LLC (``NYSE MKT'') (each an ``Exchange,'' and collectively the ``Exchanges'') each filed with the Securities and Exchange Commission (``Commission'') pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change amending its respective Rule 104 to delete subsection (g)(i)(A)(III)--``Prohibited Transactions.'' \3\ Exchange Rule 104(g)(i)(A)(III) prohibits Designated Market Makers (``DMMs'') from engaging in a transaction that establishes, during the last ten minutes of trading before the close, a new high (low) price for the day on the Exchange in an assigned security in which the DMM has a long (short) position (``Prohibited Transactions Rule''). The proposed rule changes were published for comment in the Federal Register on November 17, 2016.\4\ --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ This order refers to both NYSE Rule 104 and NYSE MKT Rule 104--Equities as ``Exchange Rule 104.'' NYSE MKT Rule 104--Equities is based on and, in relevant part, substantively identical to NYSE Rule 104. See Securities Exchange Act Release Nos. 58705 (Oct. 1, 2008), 73 FR 58995 (Oct. 8. 2008) (SR-Amex-2008-63) and 59022 (Nov. 26, 2008), 73 FR 73683 (Dec. 3, 2008) (amending NYSE MKT equity rules to conform to NYSE New Market Model Pilot rules). \4\ See Securities Exchange Act Release Nos. 79284 (Nov. 10, 2016), 81 FR 81222 (Nov. 17, 2016) (``NYSE Notice'') and 79283 (Nov. 10, 2016), 81 FR 81210 (Nov. 17, 2016) (``NYSE MKT Notice''). --------------------------------------------------------------------------- On December 20, 2016, the Commission extended to February 15, 2017, the time period in which to approve or disapprove the proposed rule changes or to institute proceedings to determine whether to approve or disapprove the proposals.\5\ On February 15, 2017, the Commission instituted proceedings to determine whether to approve or disapprove the proposed rule changes.\6\ The Commission then received a comment letter, as well as a combined response letter from NYSE and NYSE MKT.\7\ On April 28, 2017, the Commission designated a longer period for Commission action on proceedings to determine whether to approve or disapprove the proposed rule changes.\8\ This order disapproves the proposed rule changes. --------------------------------------------------------------------------- \5\ See Securities Exchange Act Release Nos. 79612 (Dec. 20, 2016), 81 FR 95205 (Dec. 27, 2016) and 79611 (Dec. 20, 2016), 81 FR 95205 (Dec. 27, 2016). \6\ See Securities Exchange Act Release Nos. 80044 (Feb. 15, 2017), 82 FR 11388 (Feb. 22, 2017) (``NYSE Order Instituting Proceedings'') and 80043 (Feb. 15, 2017), 82 FR 11379 (Feb. 22, 2017) (``NYSE MKT Order Instituting Proceedings'') (collectively, the ``Orders Instituting Proceedings''). \7\ See Letter from Stephen John Berger, Managing Director, Government and Regulatory Policy, Citadel Securities, to Brent J. Fields, Secretary, Commission (Mar. 15, 2017) (``Citadel Letter''); Letter from Elizabeth K. King, General Counsel and Corporate Secretary, NYSE, to Brent J. Fields, Secretary, Commission (Mar. 16, 2017) (``NYSE Letter''). The Citadel Letter addressed only the NYSE proposal, which is substantively identical to the NYSE MKT proposal. The NYSE Letter was submitted on behalf of both NYSE and NYSE MKT. \8\ See Securities Exchange Act Release Nos. 80552 (Apr. 28, 2017), 82 FR 20927 (May 4, 2017) and 80550 (Apr. 28, 2017), 82 FR 20926 (May 4, 2017). --------------------------------------------------------------------------- II. Description of the Proposals Currently, under Exchange Rule 104(g)(i)(A)(III), a DMM with a long (short) position in an assigned security cannot, during the last ten minutes before the close of trading, make a purchase (sale) in that security that results in a new high (low) price on the Exchange for the day.\9\ The Prohibited Transactions Rule provides two exceptions that permit a DMM to: (1) Match another market's better bid or offer price; or (2) bring the price of a security into parity with an underlying or related security or asset.\10\ The Exchanges propose to remove the Prohibited Transactions Rule from their rulebooks. --------------------------------------------------------------------------- \9\ See Exchange Rule 104(g)(i)(A)(III). \10\ See id.; see also Exchange Rule 104(g)(i)(A)(II)(2)(i). --------------------------------------------------------------------------- [[Page 33535]] The Exchanges assert that, in light of developments in the equity markets and in their trading model, the Prohibited Transactions Rule has lost its original purpose and utility.\11\ Specifically, the Exchanges assert that in today's electronic marketplace--where DMMs have replaced specialists and control of pricing decisions has moved away from market participants on the Exchange trading floor--the Prohibited Transactions Rule is no longer necessary.\12\ According to the Exchanges, eliminating the Prohibited Transactions Rule would not eliminate other existing safeguards that prevent DMMs from inappropriately influencing or manipulating the close.\13\ --------------------------------------------------------------------------- \11\ See NYSE Notice, supra note 4, 81 FR at 81223; NYSE MKT Notice, supra note 4, 81 FR at 81211. \12\ See NYSE Notice, supra note 4, 81 FR at 81222; NYSE MKT Notice, supra note 4, 81 FR at 81212. \13\ See NYSE Notice, supra note 4, 81 FR at 81222-23; NYSE MKT Notice, supra note 4, 81 FR at 81212. --------------------------------------------------------------------------- The Exchanges assert that the rationale behind the Prohibited Transactions Rule--preventing specialists from setting the price of a security on the Exchange in the final ten minutes of trading--was to prevent a specialist from inappropriately influencing the price of a security at the close to advantage the specialist's proprietary position.\14\ According to the Exchanges, in today's fragmented marketplace, a new high (low) price for a security on one of the Exchanges in the last ten minutes of trading does not have a significant effect on the market price for that security, because a new high (low) price on one of the Exchanges may not be the new high (low) market-wide price for a security--prices may be higher (lower) in away markets, where the majority of intra-day trading in Exchange-listed securities takes place--and because any advantage to a DMM from establishing a new high or low on the Exchange during the last ten minutes can rapidly evaporate following trades in away markets.\15\ The Exchanges assert that, because DMMs do not have the ability to direct or influence trading or to control intra-day prices that specialists had before the implementation of Regulation NMS, the Prohibited Transactions Rule is anachronistic.\16\ --------------------------------------------------------------------------- \14\ See NYSE Notice, supra note 4, 81 FR at 81223; NYSE MKT Notice, supra note 4, 81 FR at 81211. \15\ See id. \16\ See id. --------------------------------------------------------------------------- III. Summary of Comment Letter and the Exchanges' Response The Commission received one comment letter in support of the NYSE proposal and a combined response letter from NYSE and NYSE MKT.\17\ The commenter asserts that the Prohibited Transactions Rule is no longer necessary. First, the commenter states that, when the Prohibited Transactions Rule was originally adopted, structural advantages enjoyed by NYSE specialists--including a dominant position in NYSE-listed securities and an advance look at incoming orders--warranted imposing prescriptive limitations on their trading activities, particularly at certain critical pricing points during the day, such as the pre-closing period.\18\ The commenter states that, because DMMs no longer have these same structural advantages, and because DMMs do not have the dominant position that NYSE specialists once had in the trading of NYSE-listed securities, DMMs should be able to engage in the sorts of transactions barred under the Prohibited Transactions Rule.\19\ --------------------------------------------------------------------------- \17\ See supra note 7. While Citadel submitted its letter solely to the NYSE proposal, the Commission will consider the comment letter to be applicable to the NYSE MKT proposal, as both proposals are substantively identical. \18\ See Citadel Letter, supra note 7, at 1-3. \19\ See id. The commenter states that, for example, in February 2017, NYSE market share for NYSE-listed stocks was approximately 24% including auctions and 19% excluding auctions. See id. at 2. The commenter further states that, during the same month, a stock in which NYSE is the primary exchange and the DMM is the commenter, NYSE market share during the last ten minutes was approximately 27% on a share-weighted basis. See id. --------------------------------------------------------------------------- Second, the commenter states that the Prohibited Transactions Rule is unnecessary because existing NYSE and Commission rules ``prohibit all market participants, including DMMs, from engaging in market manipulation, including around the close.'' \20\ Finally, the commenter states that the Prohibited Transactions Rule is ``artificial'' and creates an ``uneven playing field'' in the current market structure because it only prohibits trading activity on a single exchange.\21\ According to the commenter, this restriction affects a DMM's ability to provide competitive quotations during the last ten minutes of trading, thereby hindering price discovery, reducing liquidity at NYSE, and causing trading activity to migrate to venues where participants are not subject to the same artificial restriction.\22\ --------------------------------------------------------------------------- \20\ Id. at 3. \21\ See id. at 3-4. \22\ See id. --------------------------------------------------------------------------- According to NYSE and NYSE MKT, in today's electronic marketplace, where increased automation of trading has decentralized control of pricing decisions away from the DMM and from other market participants on the Exchanges' trading floor, retaining the Prohibited Transactions Rule is no longer necessary.\23\ NYSE and NYSE MKT believe that the Prohibited Transactions Rule is anachronistic because DMMs do not have the same ability to direct or influence trading or control intra-day prices that specialists had before Regulation NMS.\24\ Further, NYSE and NYSE MKT assert that the proposal does not alter the existing balance of DMM benefits and obligations because, despite the elimination of the Prohibited Transactions Rule, remaining DMM obligations would be sufficient to safeguard against the possibility that DMMs may act to inappropriately influence prices or manipulate the close.\25\ Finally, NYSE and NYSE MKT state that the Exchanges would use their existing suite of trading surveillances to assess whether a particular transaction was effectuated to manipulate a security's price going into the close to benefit the DMM's position.\26\ --------------------------------------------------------------------------- \23\ See NYSE Letter, supra note 7, at 3. \24\ See id. \25\ See id. at 3-6. The Exchanges state that these obligations include the obligations: (1) Not to destabilize the market when buying or selling to increase a position or reaching across the market; (2) to facilitate the close; (3) to effect transactions in a reasonable and orderly manner; and (4) to refrain from causing or exacerbating excessive price movements. See id. \26\ See id. at 5. --------------------------------------------------------------------------- IV. Discussion and Commission Findings Under Section 19(b)(2)(C) of the Exchange Act,\27\ the Commission shall approve a proposed rule change by a self-regulatory organization if the Commission finds that the proposed rule change is consistent with the requirements of the Exchange Act and the applicable rules and regulations thereunder.\28\ The Commission shall disapprove a proposed rule change if it does not make such a finding.\29\ The Commission's Rules of Practice, under Rule 700(b)(3), state that the ``burden to demonstrate that a proposed rule change is consistent with the Exchange Act and the rules and regulations issued thereunder . . . is on the self-regulatory organization that proposed the rule change'' and that a ``mere assertion that the proposed rule change is consistent with those requirements . . . is not sufficient.'' \30\ --------------------------------------------------------------------------- \27\ 15 U.S.C. 78s(b)(2)(C). \28\ See 15 U.S.C. 78s(b)(2)(C)(i). \29\ See 15 U.S.C. 78s(b)(2)(C)(ii). \30\ 17 CFR 201.700(b)(3). The description of a proposed rule change, its purpose and operation, its effect, and a legal analysis of its consistency with applicable requirements must all be sufficiently detailed and specific to support an affirmative Commission finding. See id. Any failure of a self-regulatory organization to provide the information elicited by Form 19b-4 may result in the Commission not having a sufficient basis to make an affirmative finding that a proposed rule change is consistent with the Exchange Act and the rules and regulations issued thereunder that are applicable to the self-regulatory organization. See id. --------------------------------------------------------------------------- [[Page 33536]] After careful consideration of the proposals, and for the reasons discussed below, the Commission does not believe that the proposed rule changes are consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to a national securities exchange.\31\ Specifically, the Commission does not find that the proposals are consistent with Section 6(b)(5) of the Exchange Act, which, among other things, requires that the rules of a national securities exchange not be designed to permit unfair discrimination and that those rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, 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.\32\ --------------------------------------------------------------------------- \31\ In disapproving the proposed rule changes, the Commission has considered the proposed rules' impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). \32\ See 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- The Exchanges propose to eliminate the Prohibited Transactions Rule--a negative obligation imposed on DMMs to restrict aggressive trading immediately before the close--and the Commission analyzes the proposed rule changes in the context of the unique role played by DMMs on the Exchanges. Because the Exchanges' proposal would alter the balance of the benefits and obligations of DMMs, and in light of the special responsibilities that DMMs have for the closing auction on the Exchanges, the Commission sought comment in the Orders Instituting Proceedings on these topics. Specifically, the Commission asked for public comment on whether each Exchange's proposal ``would maintain an appropriate balance between the benefits and obligations of being a DMM on the Exchange and whether the obligations of DMMs under remaining Exchange rules are reasonably designed to prevent DMMs from inappropriately influencing or manipulating the close in light of DMMs' special responsibility for closing auctions under Exchange rules.'' \33\ --------------------------------------------------------------------------- \33\ NYSE Order Instituting Proceedings, supra note 6, 82 FR at 11389; NYSE MKT Order Instituting Proceedings, supra note 6, 82 FR at 11380. --------------------------------------------------------------------------- The Prohibited Transactions Rule was originally adopted by NYSE in 2006 as NYSE moved to its ``hybrid market'' model,\34\ and NYSE retained Prohibited Transactions Rule in 2008, when it adopted its New Market Model, which replaced the specialists on its floor with DMMs.\35\ NYSE MKT subsequently adopted the NYSE's New Market Model, including the Prohibited Transactions Rule, pursuant to its merger with the NYSE.\36\ --------------------------------------------------------------------------- \34\ See Securities Exchange Act Release No. 54860 (Dec. 1, 2006), 71 FR 71221 (Dec. 8, 2006) (SR-NYSE-2006-76) (order approving amendments to Rule 104 that included Prohibited Transactions in Supplementary Material .10 of Rule 104). \35\ See Securities Exchange Act Release No. 58845 (Oct. 24, 2008), 73 FR 64379 (Oct. 29, 2008) (SR-NYSE-2008-46) (order approving New Market Model pilot program). \36\ See Securities Exchange Act Release No. 75952 (Sept. 18, 2015), 80 FR 57645, 57646 & n.6 (Sept. 24, 2015) (describing filings by which NYSE MKT adopted NYSE equity trading rules). --------------------------------------------------------------------------- Exchange Rule 104 sets forth the obligations of DMMs on each Exchange, which include the affirmative obligation to engage in a course of dealings for their own account to assist in the maintenance of a fair and orderly market in securities for which they have been assigned responsibility as the DMM, to maintain quotes in their assigned securities at the inside market a specified percentage of time, and to facilitate certain transactions in their assigned securities, most notably the opening and closing auctions.\37\ Under Exchange rules, DMMs have significant responsibilities to ``facilitate the close of trading'' in their assigned securities.\38\ The closing price for a security on its listing exchange is widely used as a reference price (e.g., by mutual funds calculating their net asset value), and the listing exchange tends to have a dominant market share at the close.\39\ --------------------------------------------------------------------------- \37\ See Exchange Rule 104. \38\ See Exchange Rule 104; NYSE Rule 123C; NYSE MKT Rule 123C-- Equities. \39\ See, e.g., NYSE Opening and Closing Auctions Fact Sheet (stating that NYSE has a 100% market share in the closing auction for Tape A securities), https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Opening_and_Closing_Auctions_Fact_Sheet.pdf. --------------------------------------------------------------------------- Supporting these general obligations, Exchange Rules 104(g) and 104(h) regulate specific types of DMM transactions: Neutral Transactions, Non-Conditional Transactions, Conditional Transactions, and Prohibited Transactions.\40\ DMMs may engage in Conditional Transactions throughout the trading day--generally, crossing the market to take liquidity by buying (selling) at an increasing (decreasing) price--if those transactions are followed by ``appropriate'' re-entry on the opposite side of the market ``commensurate with the size of the DMM's transaction.'' \41\ During the last ten minutes of the day, however, DMMs are subject to the Prohibited Transactions Rule at issue here--a bright-line rule against aggressively taking liquidity and moving prices on the exchange immediately before the closing auction.\42\ --------------------------------------------------------------------------- \40\ See Exchange Rule 104(g)(i)(A)(I)-(III) (defining Neutral Transactions, Non-Conditional Transactions, and Prohibited Transactions); Exchange Rule 104(h)(i) (defining Conditional Transaction). A Neutral Transaction is a purchase or sale by which a DMM liquidates or decreases a position and may be made without regard to price, but the DMM's ``obligation to maintain a fair and orderly market may require re-entry on the opposite side of the market trend . . . in accordance with the immediate and anticipated needs of the market.'' See Exchange Rule 104(g)(i)(A)(I). A Non- Conditional Transaction is a DMM's bid or purchase and offer or sale that establishes or increases a position, other than a transaction that reaches across the market to trade with the Exchange best bid or offer, and may be made without regard to price in order to match another market's better bid or offer price; to bring the price of a security into parity with an underlying or related security or asset; to add size to an independently established bid or offer on the Exchange; to purchase at the published bid price on the Exchange; to sell at the published offer price on the Exchange; to purchase or sell at a price between the Exchange BBO; or to purchase below the published bid or sell above the published offer on the Exchange. See Exchange Rule 104(g)(i)(A)(II). Following a Non- Conditional Transaction, a DMM's obligation to maintain a fair and orderly market ``may require re-entry on the opposite side of the market trend . . . commensurate with the size of the Non-Conditional Transactions and the immediate and anticipated needs of the market.'' Id. \41\ See Exchange Rule 104(h)(i)-(iv). According to their rules, the Exchanges periodically issue guidelines, called ``price participation points'' that ``identify the price at or before which a DMM is expended to re-enter the market after effecting a Conditional Transaction.'' See Exchange Rule 104(h)(iii)(A). \42\ See Exchange Rule 104(g)(i)(A)(III). --------------------------------------------------------------------------- In return for their obligations and responsibilities, DMMs have significant priority and informational advantages in trading on the Exchanges, both during continuous trading and during the closing auction. During continuous trading, DMMs trade on parity with the entire order book and with floor brokers, which ``provides DMMs with a substantial advantage over off-Floor orders'' sent to the NYSE order book.\43\ Moreover, during the trading day, including the ten minutes before the close, DMMs have unique access to aggregated information about closing auction interest at each price level, and, during the auction itself, DMMs are [[Page 33537]] aware of interest represented by floor brokers, which is not publicly disseminated.\44\ When offsetting an imbalance during the closing auction, DMM interest trades at parity with limit orders on the Exchange order book, and DMM interest takes priority over limit-on- close orders with a price equal to the closing price and over closing- offset orders.\45\ In approving the entire set of advantages given to DMMs in 2008 through the New Market Model, the Commission specifically assessed ``whether the rewards granted to DMMs . . . are commensurate with their obligations'' and found that the proposed New Market Model pilot reflected ``an appropriate balance of DMM obligations against the benefits provided to DMMs.'' \46\ --------------------------------------------------------------------------- \43\ See Securities Exchange Act Release No. 58845 (Oct. 24, 2008), 73 FR 64379, 64389 (Oct. 29, 2008) (Order approving SR-NYSE- 2008-46). See also NYSE Rule 72(c)(ii) and NYSE MKT Rule 72(c)(ii)-- Equities (stating that, for the purpose of share allocation in an execution, each single floor broker, the DMM, and orders on the Exchange book shall constitute individual participants and that the orders on the Exchange book shall constitute a single participant). \44\ See Exchange Rule 104(j); see also NYSE Rule 123C and NYSE MKT Rule 123C--Equities. \45\ See NYSE Rule 123C(7)(b); NYSE MKT Rule 123C(7)(b)-- Equities. \46\ Securities Exchange Act Release No. 58845 (Oct. 24, 2008), 73 FR 64379, 64388-89 (Oct. 29, 2008) (SR-NYSE-2008-46). --------------------------------------------------------------------------- In proposing to remove the Prohibited Transactions Rule, however, NYSE and NYSE MKT have failed to adequately explain or justify how the proposed alteration to the balance of benefits and obligations of a DMM previously approved by the Commission is consistent with Section 6(b)(5) of the Exchange Act, or how allowing DMMs to aggressively take liquidity in the last ten minutes of trading is both consistent with a DMM's obligation to maintain a fair and orderly market in its assigned securities and designed to prevent fraudulent or manipulative acts and practices regarding the closing auction, for which a DMM has crucial responsibilities. The Exchanges and Citadel in their comment letters argue that changes in market structure such as the inability of DMMs, compared to specialists, to ``set prices'' in their assigned securities, and the movement of trading volume in NYSE-listed securities away from the NYSE, support the elimination of the Prohibited Transactions Rule. But, as noted above, the Prohibited Transactions Rule was included in the New Market Model rule filing that established the role of DMMs, and the market-share statistics offered by Citadel--which purportedly establish the relatively weak pricing power of a DMM \47\--fail to acknowledge that the Exchanges have a dominant market share in the closing auction,\48\ and that a DMM has discretion and informational advantages that place the DMM in a unique position to choose its own level of participation in the auction and to influence the closing price.\49\ Additionally, the argument by Citadel that the current prohibition creates an uneven playing field, and that it limits DMMs' ``ability to provide competitive quotations,'' \50\ fails to address that DMMs have unique privileges on NYSE and NYSE MKT and that the proposed rule change is not limited to circumstances in which DMMs would be allowed to quote competitively and provide liquidity, but would also allow them to aggressively take liquidity. --------------------------------------------------------------------------- \47\ See Citadel Letter, supra note 7, at 2. \48\ See supra note 39 and accompanying text. \49\ See supra notes 42-44 and accompanying text. \50\ Citadel Letter, supra note 7, at 2-3. --------------------------------------------------------------------------- Additionally, while NYSE and NYSE MKT have argued that the proposal is consistent with the Exchange Act because remaining exchange rules address the possibility of disruptive or improper DMM trading during the last ten minutes of the day, the Commission does not believe that NYSE and NYSE MKT have met their burden to demonstrate that these other rules--which require the exercise of judgment as to what is ``reasonable,'' ``excessive,'' ``appropriate,'' or ``commensurate'' \51\--are adequate substitutes for a clear, meaningful, and enforceable bright-line rule that limits aggressive DMM trading at a particularly sensitive and important time of the trading day and that addresses the risk of destabilizing or even manipulative activity. Additionally, the Commission believes that NYSE and NYSE MKT have merely asserted that, but not explained how, existing surveillances can act as an adequate substitute for this bright-line rule. --------------------------------------------------------------------------- \51\ See supra notes 25 & 40 and accompanying text. --------------------------------------------------------------------------- Thus, because the Exchanges' arguments in favor of the proposed rule changes do not adequately address significant issues raised by the proposals, the Commission does not find that the proposed rule changes are consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to a national securities exchange and, in particular, with Section 6(b)(5) of the Exchange Act. V. Conclusion It is therefore ordered that, pursuant to Section 19(b)(2) of the Exchange Act,\52\ the proposed rule changes (SR-NYSE-2016-71 and SR- NYSEMKT-2016-99) be, and hereby are, disapproved. --------------------------------------------------------------------------- \52\ 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\53\ --------------------------------------------------------------------------- \53\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Jill M. Peterson, Assistant Secretary. [FR Doc. 2017-15195 Filed 7-19-17; 8:45 am] BILLING CODE 8011-01-P
![33534 Federal Register / Vol. 82, No. 138 / Thursday, July 20, 2017 / Notices
comments were submitted to File No. SR–NYSEArca–2017–57; SR– proposed rule changes were published
SR–FINRA–2017–013.9 On June 22, NYSEArca–2017–59; SR–NYSEMKT– for comment in the Federal Register on
2017, each of NASDAQ, BX, ISE, and 2017–29; SR–NYSEMKT–2017–30). November 17, 2016.4
Phlx filed a technical amendment to its For the Commission, by the Division of On December 20, 2016, the
proposed rule change.10 Trading and Markets, pursuant to delegated Commission extended to February 15,
Section 19(b)(2) of the Act 11 provides authority.13 2017, the time period in which to
that, within 45 days of the publication Jill M. Peterson, approve or disapprove the proposed
of notice of the filing of a proposed rule Assistant Secretary. rule changes or to institute proceedings
change, or within such longer period up [FR Doc. 2017–15190 Filed 7–19–17; 8:45 am] to determine whether to approve or
to 90 days as the Commission may disapprove the proposals.5 On February
BILLING CODE 8011–01–P
designate if it finds such longer period 15, 2017, the Commission instituted
to be appropriate and publishes its proceedings to determine whether to
reasons for so finding or as to which the SECURITIES AND EXCHANGE approve or disapprove the proposed
self-regulatory organization consents, COMMISSION rule changes.6 The Commission then
the Commission shall either approve the received a comment letter, as well as a
proposed rule change, disapprove the [Release No. 34–81150; File Nos. SR–NYSE–
2016–71 and SR–NYSEMKT 2016–99] combined response letter from NYSE
proposed rule change, or institute and NYSE MKT.7 On April 28, 2017, the
proceedings to determine whether the Commission designated a longer period
Self-Regulatory Organizations; New
proposed rule change should be for Commission action on proceedings
York Stock Exchange LLC; NYSE MKT
disapproved. The 45th day for the
LLC; Order Disapproving Proposed to determine whether to approve or
proposed rule changes published on
Rule Changes Amending Exchange disapprove the proposed rule changes.8
June 1, 2017, is July 16, 2017. The 45th
Rule 104 To Delete Subsection This order disapproves the proposed
day for the proposed rule changes
(g)(i)(A)(III), Which Prohibits rule changes.
published on June 2, 2017, is July 17,
Designated Market Makers From
2017. The 45th day for the proposed II. Description of the Proposals
Engaging in Transactions, During the
rule changes published on June 5, 2017,
Last Ten Minutes of Trading Before the Currently, under Exchange Rule
is July 20, 2017.
The Commission is extending the 45- Close, That Establish a New High 104(g)(i)(A)(III), a DMM with a long
day time period for Commission action (Low) Price for the Day on the (short) position in an assigned security
on each of the proposed rule changes. Exchange in an Assigned Security in cannot, during the last ten minutes
The Commission finds that it is Which the DMM Has a Long (Short) before the close of trading, make a
appropriate to designate a longer period Position purchase (sale) in that security that
within which to take action on the July 1, 2017.
results in a new high (low) price on the
proposed rule changes so that it has Exchange for the day.9 The Prohibited
sufficient time to consider the I. Introduction Transactions Rule provides two
comments received and any response to On October 27, 2016, New York Stock exceptions that permit a DMM to: (1)
the comments that the self-regulatory Exchange LLC (‘‘NYSE’’) and NYSE Match another market’s better bid or
organizations might provide. MKT LLC (‘‘NYSE MKT’’) (each an offer price; or (2) bring the price of a
Accordingly, pursuant to Section ‘‘Exchange,’’ and collectively the security into parity with an underlying
19(b)(2)(A)(ii)(I) of the Act 12 and for the ‘‘Exchanges’’) each filed with the or related security or asset.10 The
reasons stated above, the Commission Securities and Exchange Commission Exchanges propose to remove the
designates August 30, 2017, as the date (‘‘Commission’’) pursuant to Section Prohibited Transactions Rule from their
by which the Commission shall approve 19(b)(1) of the Securities Exchange Act rulebooks.
or disapprove, or institute proceedings of 1934 (‘‘Exchange Act’’) 1 and Rule
to determine whether to disapprove, the 19b–4 thereunder,2 a proposed rule 4 See Securities Exchange Act Release Nos. 79284
proposed rule changes (File Nos. SR– change amending its respective Rule (Nov. 10, 2016), 81 FR 81222 (Nov. 17, 2016)
BatsBZX–2017–37; SR–BatsEDGX– (‘‘NYSE Notice’’) and 79283 (Nov. 10, 2016), 81 FR
104 to delete subsection (g)(i)(A)(III)— 81210 (Nov. 17, 2016) (‘‘NYSE MKT Notice’’).
2017–23; SR–BOX–2017–17; SR–C2– ‘‘Prohibited Transactions.’’ 3 Exchange 5 See Securities Exchange Act Release Nos. 79612
2017–018; SR–CBOE–2017–041; SR– Rule 104(g)(i)(A)(III) prohibits (Dec. 20, 2016), 81 FR 95205 (Dec. 27, 2016) and
FINRA–2017–013; SR–ISE–2017–46; Designated Market Makers (‘‘DMMs’’) 79611 (Dec. 20, 2016), 81 FR 95205 (Dec. 27, 2016).
SR–IEX–2017–18; SR–MIAX–2017–20; from engaging in a transaction that 6 See Securities Exchange Act Release Nos. 80044
SR–PEARL–2017–23; SR–NASDAQ– (Feb. 15, 2017), 82 FR 11388 (Feb. 22, 2017) (‘‘NYSE
establishes, during the last ten minutes Order Instituting Proceedings’’) and 80043 (Feb. 15,
2017–055; SR–BX–2017–027; SR– of trading before the close, a new high 2017), 82 FR 11379 (Feb. 22, 2017) (‘‘NYSE MKT
PHLX–2017–43; SR–NYSE–2017–23; (low) price for the day on the Exchange Order Instituting Proceedings’’) (collectively, the
in an assigned security in which the ‘‘Orders Instituting Proceedings’’).
9 See letters from William H. Herbert, Managing 7 See Letter from Stephen John Berger, Managing
DMM has a long (short) position
Director, Financial Information Forum, dated June Director, Government and Regulatory Policy,
22, 2017; Manisha Kimmel, Chief Regulatory
(‘‘Prohibited Transactions Rule’’). The Citadel Securities, to Brent J. Fields, Secretary,
Officer, Wealth Management, Thomson Reuters, Commission (Mar. 15, 2017) (‘‘Citadel Letter’’);
13 17
CFR 200.30–3(a)(31). Letter from Elizabeth K. King, General Counsel and
dated June 22, 2017; Marc R. Bryant, Senior Vice
President, Deputy General Counsel, Fidelity 1 15
U.S.C. 78s(b)(1). Corporate Secretary, NYSE, to Brent J. Fields,
Investments, dated June 22, 2017; and Ellen Greene, Secretary, Commission (Mar. 16, 2017) (‘‘NYSE
asabaliauskas on DSKBBXCHB2PROD with NOTICES
2 17 CFR 240.19b–4.
Managing Director and Theodore R. Lazo, Managing 3 This order refers to both NYSE Rule 104 and Letter’’). The Citadel Letter addressed only the
Director and Associate General Counsel, SIFMA, NYSE MKT Rule 104—Equities as ‘‘Exchange Rule NYSE proposal, which is substantively identical to
dated June 23, 2017. 104.’’ NYSE MKT Rule 104—Equities is based on the NYSE MKT proposal. The NYSE Letter was
10 These amendments modified Section 2 of the
and, in relevant part, substantively identical to submitted on behalf of both NYSE and NYSE MKT.
Form 19b–4 submitted by each of NASDAQ, BX, NYSE Rule 104. See Securities Exchange Act
8 See Securities Exchange Act Release Nos. 80552
ISE, and Phlx to state that on June 1, 2017, the Release Nos. 58705 (Oct. 1, 2008), 73 FR 58995 (Apr. 28, 2017), 82 FR 20927 (May 4, 2017) and
exchange obtained the necessary approval from its (Oct. 8. 2008) (SR–Amex–2008–63) and 59022 (Nov. 80550 (Apr. 28, 2017), 82 FR 20926 (May 4, 2017).
Board of Directors for the proposed rule change. 26, 2008), 73 FR 73683 (Dec. 3, 2008) (amending 9 See Exchange Rule 104(g)(i)(A)(III).
11 15 U.S.C. 78s(b)(2).
NYSE MKT equity rules to conform to NYSE New 10 See id.; see also Exchange Rule
12 15 U.S.C. 78s(b)(2)(A)(ii)(I). Market Model Pilot rules). 104(g)(i)(A)(II)(2)(i).
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![Federal Register / Vol. 82, No. 138 / Thursday, July 20, 2017 / Notices 33537
aware of interest represented by floor of participation in the auction and to For the Commission, by the Division of
brokers, which is not publicly influence the closing price.49 Trading and Markets, pursuant to delegated
disseminated.44 When offsetting an Additionally, the argument by Citadel authority.53
imbalance during the closing auction, that the current prohibition creates an Jill M. Peterson,
DMM interest trades at parity with limit uneven playing field, and that it limits Assistant Secretary.
orders on the Exchange order book, and DMMs’ ‘‘ability to provide competitive [FR Doc. 2017–15195 Filed 7–19–17; 8:45 am]
DMM interest takes priority over limit- quotations,’’ 50 fails to address that BILLING CODE 8011–01–P
on-close orders with a price equal to the DMMs have unique privileges on NYSE
closing price and over closing-offset and NYSE MKT and that the proposed
orders.45 In approving the entire set of rule change is not limited to DEPARTMENT OF STATE
advantages given to DMMs in 2008 circumstances in which DMMs would
through the New Market Model, the [Delegation of Authority: 437]
be allowed to quote competitively and
Commission specifically assessed
provide liquidity, but would also allow Delegation of Authority to the Director
‘‘whether the rewards granted to DMMs
. . . are commensurate with their them to aggressively take liquidity. of the Office of U.S. Foreign
obligations’’ and found that the Additionally, while NYSE and NYSE Assistance Resources To Concur in
proposed New Market Model pilot MKT have argued that the proposal is Assistance Programs
reflected ‘‘an appropriate balance of consistent with the Exchange Act By virtue of the authority vested in
DMM obligations against the benefits because remaining exchange rules the Secretary of State, including section
provided to DMMs.’’ 46 address the possibility of disruptive or 1 of the State Department Basic
In proposing to remove the Prohibited improper DMM trading during the last Authorities Act (22 U.S.C. 2651a) and
Transactions Rule, however, NYSE and ten minutes of the day, the Commission 10 U.S.C. 333, I hereby delegate to the
NYSE MKT have failed to adequately does not believe that NYSE and NYSE Director the Office of U.S. Foreign
explain or justify how the proposed MKT have met their burden to Assistance Resources, to the extent
alteration to the balance of benefits and demonstrate that these other rules— authorized by law, the authority to
obligations of a DMM previously which require the exercise of judgment concur in programs authorized by
approved by the Commission is as to what is ‘‘reasonable,’’ ‘‘excessive,’’ section 333 of title 10 of the U.S. Code.
consistent with Section 6(b)(5) of the ‘‘appropriate,’’ or ‘‘commensurate’’ 51— Notwithstanding this delegation of
Exchange Act, or how allowing DMMs authority, any function or authority
are adequate substitutes for a clear,
to aggressively take liquidity in the last delegated herein may be exercised by
meaningful, and enforceable bright-line
ten minutes of trading is both consistent the Secretary or a Deputy Secretary. Any
with a DMM’s obligation to maintain a rule that limits aggressive DMM trading
at a particularly sensitive and important reference in this delegation of authority
fair and orderly market in its assigned to any statute or delegation of authority
securities and designed to prevent time of the trading day and that
addresses the risk of destabilizing or shall be deemed to be a reference to
fraudulent or manipulative acts and such statute or delegation of authority as
practices regarding the closing auction, even manipulative activity.
Additionally, the Commission believes amended from time to time.
for which a DMM has crucial This delegation of authority shall be
responsibilities. that NYSE and NYSE MKT have merely
published in the Federal Register.
The Exchanges and Citadel in their asserted that, but not explained how,
comment letters argue that changes in existing surveillances can act as an Dated: May 1, 2017.
market structure such as the inability of adequate substitute for this bright-line Rex W. Tillerson,
DMMs, compared to specialists, to ‘‘set rule. Secretary of State.
prices’’ in their assigned securities, and Thus, because the Exchanges’ [FR Doc. 2017–15226 Filed 7–19–17; 8:45 am]
the movement of trading volume in arguments in favor of the proposed rule BILLING CODE 4710–10–P
NYSE-listed securities away from the changes do not adequately address
NYSE, support the elimination of the
significant issues raised by the
Prohibited Transactions Rule. But, as DEPARTMENT OF STATE
proposals, the Commission does not
noted above, the Prohibited
find that the proposed rule changes are [Public Notice: 10062]
Transactions Rule was included in the
consistent with the requirements of the
New Market Model rule filing that Notice of Determinations; Culturally
established the role of DMMs, and the Exchange Act and the rules and
regulations thereunder applicable to a Significant Objects Imported for
market-share statistics offered by Exhibition Determinations: ‘‘Delirious:
Citadel—which purportedly establish national securities exchange and, in
particular, with Section 6(b)(5) of the Art at the Limits of Reason, 1950–
the relatively weak pricing power of a 1980’’ Exhibition
DMM 47—fail to acknowledge that the Exchange Act.
Exchanges have a dominant market Notice is hereby given of the
V. Conclusion
share in the closing auction,48 and that following determinations: Pursuant to
a DMM has discretion and informational It is therefore ordered that, pursuant the authority vested in me by the Act of
advantages that place the DMM in a to Section 19(b)(2) of the Exchange October 19, 1965 (79 Stat. 985; 22 U.S.C.
unique position to choose its own level Act,52 the proposed rule changes (SR– 2459), E.O. 12047 of March 27, 1978, the
asabaliauskas on DSKBBXCHB2PROD with NOTICES
NYSE–2016–71 and SR–NYSEMKT– Foreign Affairs Reform and
44 See Exchange Rule 104(j); see also NYSE Rule
2016–99) be, and hereby are, Restructuring Act of 1998 (112 Stat.
123C and NYSE MKT Rule 123C—Equities.
disapproved. 2681, et seq.; 22 U.S.C. 6501 note, et
45 See NYSE Rule 123C(7)(b); NYSE MKT Rule
seq.), Delegation of Authority No. 234 of
123C(7)(b)—Equities.
46 Securities Exchange Act Release No. 58845 49 See
supra notes 42–44 and accompanying text.
October 1, 1999, Delegation of Authority
(Oct. 24, 2008), 73 FR 64379, 64388–89 (Oct. 29, 50 Citadel
Letter, supra note 7, at 2–3. No. 236–3 of August 28, 2000 (and, as
2008) (SR–NYSE–2008–46). 51 See supra notes 25 & 40 and accompanying appropriate, Delegation of Authority No.
47 See Citadel Letter, supra note 7, at 2. text.
48 See supra note 39 and accompanying text. 52 15 U.S.C. 78s(b)(2). 53 17 CFR 200.30–3(a)(12).
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Document Created: 2017-07-20 06:57:48
Document Modified: 2017-07-20 06:57:48
| 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 | |
| Action | Neutral Transactions, Non-Conditional Transactions, Conditional Transactions, and Prohibited Transactions.\40\ DMMs may engage in Conditional Transactions throughout the trading day--generally, crossing the market to take liquidity by buying (selling) at an increasing (decreasing) price--if those transactions are followed by ``appropriate'' re-entry on the opposite side of the market ``commensurate with the size of the DMM's transaction.'' \41\ During the last ten minutes of the day, however, DMMs are subject to the Prohibited Transactions Rule at issue here--a bright-line rule against aggressively taking liquidity and moving prices on the exchange immediately before the closing auction.\42\ | |
| FR Citation | 82 FR 33534 |
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