[Federal Register Volume 76, Number 155 (Thursday, August 11, 2011)]
[Notices]
[Pages 49812-49815]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-20388]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65047; File No. SR-NYSEAmex-2011-56]


Self-Regulatory Organizations; NYSE Amex LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Amending NYSE Amex 
Options Rule 985NY To Permit Qualified Contingent Cross Orders To Be 
Electronically Submitted to the NYSE Amex System From the Floor of the 
Exchange for Potential Execution

August 5, 2011.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that on August 1, 2011, NYSE Amex LLC (the ``Exchange'' or ``NYSE 
Amex'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend NYSE Amex Options Rule 985NY to 
permit Qualified Contingent Cross Orders (``QCCs'') to be 
electronically submitted to the NYSE Amex System from the Floor of the 
Exchange for potential [sic]. The text of the proposed rule change is 
available at the Exchange's Web site at http://www.nyse.com, on the 
Commission's Web site at http://www.sec.gov, at the Exchange's 
principal office, 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,

[[Page 49813]]

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 purpose of this filing is to amend Rule 985NY to permit QCCs to 
be electronically submitted to the NYSE Amex System from the Floor of 
the Exchange for potential execution.\4\ This filing is modeled after a 
recently approved rule change by NASDAQ OMX PHLX (``PHLX'').\5\
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    \4\ The NYSE Amex System is configured to automatically reject a 
QCC entered when the order is for less than 1,000 contracts, is 
entered at a price worse than the national best bid or offer 
(``NBBO'') or is entered at the same price as Customer orders in the 
Exchange's Consolidated Book.
    \5\ See Securities Exchange Act Release No. 64688 (June 16, 
2011), 76 FR 36606 (June 22, 2011) (SR-Phlx-2011-56).
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Background
    The Exchange recently adopted rules that permit ATP Holders to 
submit QCCs electronically from off the Floor through the NYSE Amex 
System.\6\ The QCC permits an NYSE Amex ATP Holder to effect a 
qualified contingent trade (``QCT'') in a Regulation NMS stock and 
cross the options leg of the trade on the Exchange immediately upon 
entry and without order exposure if the order is for at least 1,000 
contracts, is part of a QCT, is executed at a price at least equal to 
the NBBO and if there are no Customer Orders in the Exchange's 
Consolidated Book at the same price.\7\
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    \6\ See Securities Exchange Act Release No. 64085 (March 17, 
2011), 76 FR 16024 (March 22, 2011) (SR-NYSEAmex-2011-14) (``NYSE 
Amex Electronic QCC Filing'').
    \7\ A QCT is a transaction consisting of two or more component 
orders, executed as agent or principal, where: (a) At least one 
component is an NMS stock, as defined in Rule 600 of Regulation NMS 
under the Exchange Act; (b) all components are effected with a 
product or price contingency that either has been agreed to by all 
the respective counterparties or arranged for by a broker-dealer as 
principal or agent; (c) the execution of one component is contingent 
upon the execution of all other components at or near the same time; 
(d) the specific relationship between the component orders (e.g., 
the spread between the prices of the component orders) is determined 
by the time the contingent order is placed; (e) the component orders 
bear a derivative relationship to one another, represent different 
classes of shares of the same issuer, or involve the securities of 
participants in mergers or with intentions to merge that have been 
announced or cancelled; and (f) the transaction is fully hedged 
(without regard to any prior existing position) as a result of other 
components of the contingent trade. See Securities Exchange Act 
Release No. 57620 (April 4, 2008), 73 FR 19271 (April 9, 2008) (the 
``QCT Release''). That release superseded a release initially 
granting the QCT exemption. See Securities Exchange Act Release No. 
54389 (August 31, 2006), 71 FR 52829 (September 7, 2006) (``Original 
QCT Exemption'').
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    The NYSE Amex Electronic QCC Filing was based on an International 
Securities Exchange (``ISE'') rule approved by the Commission.\8\ The 
ISE QCC Proposal was controversial, attracting opposition from multiple 
exchanges including NYSE Amex.\9\ The Commission, however, ultimately 
approved the ISE QCC Proposal, finding it to be consistent with the 
Securities Exchange Act of 1934 (the ``Act''). NYSE Amex implemented 
the NYSE Amex Electronic QCC Filing, and is proposing this rule change, 
as a competitive response to the approval of the PHLX floor-based QCC 
filing.
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    \8\ See Securities Exchange Act Release No. 63955 (February 24, 
2011), 76 FR 11533 (March 2, 2011) (SR-ISE-2010-73) (``ISE 
Approval''). See also Securities Exchange Act Release No. 62523 
(July 16, 2010), 75 FR 43211 (July 23, 2010) (SR-ISE-2010-73) (``ISE 
QCC Proposal'').
    \9\ The Exchange notes that letters commenting on the ISE 
Proposal were submitted on its behalf by the Exchange's parent 
company, NYSE Euronext. See e.g., letters dated August 9, 2010 and 
October 21, 2010 from Janet L. McGinness, Senior Vice President--
Legal & Corporate Secretary, Legal & Government Affairs, NYSE 
Euronext.
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    Under the NYSE Amex Electronic QCC Filing, QCCs currently may only 
be submitted electronically from off the Floor through the NYSE Amex 
System. In this regard, ATP Holders on the Floor of the Exchange are 
not allowed to enter QCCs into the NYSE Amex System, or otherwise 
effect them in open outcry. To provide a mechanism for the Exchange to 
surveil for whether QCCs were entered from off of the Floor, the 
Exchange adopted Commentary .01 to Rule 985NY, which requires ATP 
Holders to maintain books and records demonstrating that each QCC was 
routed to the NYSE Amex System from off of the Floor. Presently, any 
QCC that does not have a corresponding record required by this 
provision would be deemed to have been entered from on the Floor in 
violation of Rule 985NY. In addition, the Exchange has adopted policies 
and procedures to ensure that ATP Holders use the QCC properly.\10\
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    \10\ First, the Exchange requires ATP Holders to properly mark 
all QCCs as such. In addition, the Financial Industry Regulatory 
Authority (``FINRA''), on behalf of the Exchange, has implemented an 
examination and surveillance program to assess ATP Holder compliance 
with the requirements applicable to QCCs, including the requirement 
that the stock leg of the transaction be executed at or near the 
same time as the options leg.
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Discussion
    QCCs permit ATP Holders to provide their customers a net price for 
the entire trade, and then allow the ATP Holder to execute the options 
leg of the trade on the Exchange at a price at least equal to the NBBO 
while using the QCT exemption to effect the trade in the equities leg 
at a price necessary to achieve the net price.
    The Exchange hereby proposes to permit QCCs to be electronically 
entered from the Floor of the Exchange by Floor Brokers and executed 
immediately upon entry without exposure into the NYSE Amex System 
provided that no Customer Orders exist on the Exchange's Consolidated 
Book at the execution price, that the order is for at least 1,000 
contracts,\11\ and that the execution price is at or between the 
NBBO.\12\ QCCs entered from the Floor of the Exchange would be 
electronically entered into the NYSE Amex System by a Floor Broker.\13\ 
The impact of this proposal, coupled with the NYSE Amex Electronic QCC 
Filing, would be that ATP Holders would be able to enter QCCs both on 
and off of the Floor. The Exchange therefore proposes to eliminate the 
requirements from NYSE Amex Rule 985NY that QCCs only be submitted 
electronically from off the Floor to the NYSE Amex System and from 
Commentary .01 to NYSE Amex Rule 985NY that ATP Holders maintain books 
and records demonstrating that each QCC was routed to the NYSE Amex 
System from off of the Floor, as both will no longer be necessary if 
QCCs are available for entry from the Floor.
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    \11\ In order to satisfy the 1,000-contract requirement, a QCC 
must be for 1,000 contracts and could not be, for example, two 500-
contract orders or two 500-contract legs.
    \12\ The Exchange does not propose to change the definition of 
``Qualified Contingent Cross Order'' in NYSE Amex Rule 900.3NY. 
Thus, like QCCs effected pursuant to the NYSE Amex Electronic QCC 
Filing, QCCs entered from the Floor would need to meet the 
requirements of NYSE Amex Rule 900.3NY and Commentary .01 of that 
rule. Additionally, QCCs entered from the Floor by a Floor Broker 
would be entered electronically into the NYSE Amex System where a 
systemic check would be performed to determine whether a Customer 
Order is resting on the Exchange's Consolidated Book at the same 
price as the QCC, whether the order was for less than 1,000 
contracts or whether the execution price would be outside the NBBO, 
each of which would cause the QCC to be rejected. If, however, the 
QCC is not rejected, then the NYSE Amex System would execute the QCC 
and simultaneously assign it an execution time.
    \13\ As proposed, only Floor Brokers would be permitted to enter 
QCCs from on the Floor and QCCs would not be permitted in open 
outcry.
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    The Commission in the ISE Approval carefully considered the 
comparison between floor-based and electronic trading, including 
commissioning a

[[Page 49814]]

study by the Division of Risk, Strategy and Financial Innovation 
(``RiskFin Study''). The RiskFin Study and the ISE Approval compare 
electronic trading and floor trading, the similarities between the two 
forms of trading, and the ability of one to replicate the other. 
Additionally, the Commission received comment letters from multiple 
floor-based exchanges that challenged the comparison that ISE drew 
between floor-based and electronic trading.
    Despite facing direct comparisons between floor-based trading and 
electronic trading by multiple commenters, as well as by its own 
Division of RiskFin, the ISE Approval focuses on similarities between 
the two. The Exchange believes that the ISE Approval, on its face, 
draws no distinctions and identifies no material differences between 
floor-based and electronic trading that would confound the comparison 
between cross orders entered electronically and those entered on an 
exchange floor. The Exchange believes that its proposal to permit the 
entry of QCCs from the Floor is consistent with the requirements stated 
in the ISE Approval and consistent with the Act. The Exchange also 
believes that the Commission, in issuing the ISE Approval, assumed that 
QCC orders entered on the floor of an exchange that meet the 
requirements stated in the ISE Approval are equally consistent with the 
Act.
    The Exchange has analyzed the application of Section 11(a) of the 
Act, and the rules thereunder, to QCCs entered from the Floor. Section 
11(a) and the rules thereunder generally prohibit members of an 
exchange from effecting transactions on the exchange for their own 
account, the account of an associated person, or an account with 
respect to which it or an associated person thereof exercises 
investment discretion unless an exemption applies.\14\ Section 11(a) 
contains multiple exemptions, including exemptions for dealers acting 
in the capacity of market makers, odd-lot dealers, and firms engaged in 
stabilizing conduct; there are also rule-based exemptions such as the 
``effect vs. execute'' exception under SEC Rule 11a2-2(T) under the 
Act.\15\
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    \14\ See 15 U.S.C. 78k(a).
    \15\ See 17 CFR 240.11a2-2(T).
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    The Exchange has in the past analyzed the application of Section 
11(a) to various Exchange systems and order types.\16\ The Exchange 
believes that the entry and execution of QCCs from the Floor raises no 
novel issues under Section 11(a) and the rules thereunder from a 
compliance, surveillance or enforcement perspective. In other words, 
ATP Holders on the Floor are currently required to comply and are 
subject to review for compliance with Section 11(a), and the rules 
thereunder, when using Exchange systems to effect transactions using 
existing order types, and they will be required to comply with Section 
11(a) and the rules thereunder when entering QCCs from the Floor.
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    \16\ See, e.g. Securities Exchange Act Release No. 59472 
(February 27, 2009), 74 9843 (March 6, 2009) (SR-NYSEALTR-2008-14).
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    Nonetheless, out of an abundance of caution, the Exchange proposes 
to amend Commentary .01 to NYSE Amex Rule 985NY to prohibit Floor 
Brokers from entering QCCs from the Floor for their own accounts, the 
account of an associated person, or an account with respect to which it 
or an associated person thereof exercises investment discretion (each a 
``prohibited account'').\17\
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    \17\ This restriction is the same as the one found in PHLX Rule 
1064(e)(2).
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    These restrictions set forth in Commentary .01 to NYSE Amex Rule 
985NY would not limit in any way the obligation of ATP Holders, on the 
Floor or otherwise, to comply with Section 11(a) or the rules 
thereunder. For example, Floor Brokers cannot avoid or circumvent their 
obligations under Section 11(a) with respect to a QCC entered from the 
Floor by transmitting that order to another ATP Holder on the Floor or 
to an ATP Holder off the Floor of the Exchange. Likewise, ATP Holders 
off the Floor must ensure that their QCCs comply with Section 11(a) and 
the rules thereunder. In both cases, ATP Holders must ensure compliance 
with Section 11(a) and the rules thereunder, including by relying upon 
an exemption such as those listed above.
    Additionally, to provide a mechanism for the Exchange to review 
whether QCCs have been entered properly by Floor Brokers, the Exchange 
proposes to further amend Commentary .01 to NYSE Amex Rule 985NY to 
require ATP Holders on the Floor to maintain books and records 
demonstrating that no QCC was entered from the Floor by the ATP Holder 
in a prohibited account. Any QCC entered from the Floor that does not 
have a corresponding record required by this provision would be deemed 
to have been entered in violation of Commentary .01 to NYSE Amex Rule 
985NY.
    The Exchange also proposes to amend Commentary .01 to NYSE Amex 
Rule 985NY to clarify that NYSE Amex Rules 934NY, 934.1NY, 934.2NY, and 
934.3NY do not apply when Floor Brokers are executing QCCs. The 
Exchange is making this clarification to eliminate any confusion about 
whether the various crossing provisions in those rules may apply to 
QCCs when they are executed by Floor Brokers.\18\ In addition, the 
Exchange is moving a recordkeeping obligation from current Commentary 
.01 to Commentary .02 and modifying it to require that with respect to 
QCCs routed to the NYSE Amex System from off of the Floor, ATP Holders 
must maintain books and records demonstrating that each such order was 
routed to the system from off of the Floor.\19\ Finally, the Exchange 
is adding Commentary .03 to NYSE Amex Rule 985NY to clarify that the 
order exposure requirements found in NYSE Amex Rule 935NY do not apply 
to QCCs. That rule generally provides that with respect to orders 
routed to the NYSE Amex System, ATP Holders may not execute as 
principal orders they represent as agent unless such orders are first 
exposed on the Exchange for at least one second.
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    \18\ This change is modeled after the changes to PHLX Rule 
1064(a), (b) and (c).
    \19\ The Exchange also is clarifying that Commentary .02 would 
not apply to a Qualified Contingent Cross Order covered by 
Commentary .01 to NYSE Amex Rule 985NY (i.e., a Qualified Contingent 
Cross Order routed to a Floor Broker for entry into the NYSE Amex 
System).
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    The Exchange's proposal addresses the mechanics of executing the 
stock and options components of a net-price transaction. The Exchange 
believes that it is necessary that it provide ATP Holders and their 
customers with the same trading capabilities available on other 
exchanges with respect to QCCs, including the change proposed herein, 
which would permit ATP Holders to execute the options legs of their 
customers' large complex orders on the Exchange.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent 
withSection 6(b) of the Act,\20\ in general, and furthers the 
objectives of Section 6(b)(5) \21\ and 6(b)(8) of the Act,\22\ 
inparticular, because it is designed to promote just and equitable 
principles of trade,remove impediments to and perfect the mechanisms of 
a free and open market and a national market system and, in general, to 
protect investors and the public interest and does not impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act. The proposed rule change is consistent with 
the protection

[[Page 49815]]

of investors in that it is designed to prevent Trade-Throughs. In 
addition, the proposed rule change would promote a free and open market 
by permitting the Exchange to compete with other exchanges for these 
types of orders. In this regard, competition would result in benefits 
to the investing public, whereas a lack of competition would serve to 
limit the choices that the public has for execution of their options 
business.
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    \20\ 15 U.S.C. 78f(b).
    \21\ 15 U.S.C. 78f(b)(5).
    \22\ 15 U.S.C. 78f(b)(8).
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    In addition, the proposed rule change is consistent with Section 
11A(a)(1)(C) of the Act,\23\ in which Congress found that it is in the 
public interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure, among other things, 
the economically efficient execution of securities transactions. As 
described in detail above, the proposed rule change is also consistent 
with Section 11(a) of the Act and the rules thereunder.
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    \23\ 15 U.S.C. 78k-1(a)(1)(C).
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    The Exchange believes, similar to the Commission's basis for 
finding that ISE's QCC proposal was consistent with the Act, that 
permitting the entry of QCCs from the Floor ``would facilitate the 
execution of qualified contingent trades, for which the Commission 
found in the Original QCT Exemption to be of benefit to the market as a 
whole, contributing to the efficient functioning of the securities 
markets and the price discovery process.'' \24\ Further, permitting the 
entry of QCCs from the Floor ``would provide assurance to parties to 
stock-option [QCTs] that their hedge would be maintained by allowing 
the options component to be executed as a clean cross.'' \25\ In 
addition, like the ISE QCC Proposal, the Exchange's proposal to permit 
the entry of QCCs from the Floor ``is narrowly drawn and establishes a 
limited exception to the general principle of exposure, and retains the 
general principle of customer priority in the options markets.'' \26\
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    \24\ See ISE Approval at 11540.
    \25\ Id.
    \26\ See ISE Approval at 11541.
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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.

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 \27\ and Rule 19b-4(f)(6) thereunder.\28\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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    \27\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \28\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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 complied with this requirement.
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an e-mail to <a href="/cdn-cgi/l/email-protection#2e5c5b424b034d4143434b405a5d6e5d4b4d00494158"><span class="__cf_email__" data-cfemail="9ae8eff6ffb7f9f5f7f7fff4eee9dae9fff9b4fdf5ec">[email protected]</span></a>. Please include 
File Number SR-NYSEAmex-2011-56 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEAmex-2011-56. This 
file number should be included on the subject line if e-mail 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 website 
viewing and printing in the Commission's Public Reference Section, 100 
F Street, NE., Washington, DC 20549-1090 on official business days 
between the hours of 10 a.m. and 3 p.m. Copies of the filing will also 
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-
NYSEAmex-2011-56 and should be submitted on or before August 31, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20388 Filed 8-10-11; 8:45 am]
BILLING CODE 8011-01-P


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