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[Federal Register Volume 89, Number 237 (Tuesday, December 10, 2024)]
[Notices]
[Pages 99320-99322]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-28897]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101812; File No. SR-NYSE-2024-67]

Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Approving a Proposed Rule Change To Amend NYSE Rule 7.31(f)(1)

December 4, 2024.

I. Introduction

    On October 24, 2024, New York Stock Exchange LLC (the ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
amend NYSE Rule 7.31(f)(1). The proposed rule change was published for 
comment in the Federal Register on November 4, 2024.\3\ The Commission 
has received no comment letters on the proposed rule change. This order 
approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 101471 (October 29, 
2024), 89 FR 87675 (``Notice'').
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II. Description of the Proposal

    The Exchange has proposed to amend NYSE Rule 7.31(f)(1) regarding 
Directed Orders. NYSE Rule 7.31(f)(1) currently defines a Directed 
Order as a Limit Order with instructions to route on arrival at its 
limit price to a specified alternative trading system (``ATS'') with 
which the Exchange maintains an electronic linkage. According to the 
Exchange, Directed Orders are available for all securities eligible to 
trade on the Exchange, are not assigned a working time, and do not 
interact with interest on the Exchange Book.\4\ NYSE Rule 7.31(f)(1) 
further provides that the ATS to which a Directed Order is routed is 
responsible for validating whether the order is eligible to be 
accepted, and if that ATS determines to reject the order, the order 
would be canceled.
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    \4\ See id. at 87675.
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    The Exchange has proposed to amend NYSE Rule 7.31(f)(1) to provide 
for Directed Orders to be routed to a broker-dealer algorithm for 
execution. Specifically, the Exchange has proposed to permit Directed 
Orders to be designated by the entering member organization to route to 
a broker-dealer algorithm selected from of a set of broker-dealer 
algorithms with which the Exchange has established connectivity. The 
Exchange proposes to route Directed Orders only to a range of broker-
dealer algorithms that have completed its onboarding process and 
established routing connectivity with the Exchange.\5\ The Exchange 
represents that any FINRA-registered broker-

[[Page 99321]]

dealer \6\ will be eligible to complete this process, which is 
intended, among other things, to ensure that algorithm providers attest 
to compliance with applicable Exchange rules, FINRA rules, and federal 
securities laws and regulations and to confirm that the algorithm 
providers can meet the applicable technical specifications to connect 
to the Exchange. The Exchange states that algorithm providers will also 
be required to enter into routing agreements with the Exchange's 
routing broker, Archipelago Securities LLC (``ArcaSec''), to facilitate 
ArcaSec's routing of Directed Orders on behalf of member organizations 
to designated algorithms.\7\
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    \5\ All broker-dealer algorithms to which Directed Orders can be 
routed will operate on the broker-dealers' respective systems, not 
on Exchange systems. The Exchange represents that it does not 
currently have and will not enter into any financial or other 
arrangements with any algorithm provider with respect to the 
proposed Directed Orders. The member organization initiating a 
Directed Order to an algorithm has ultimate responsibility for any 
transaction fees associated with the execution of that order. The 
Exchange states that it may facilitate the process by which such 
fees are passed through from the algorithm providers to the member 
organizations utilizing Directed Orders, but will not determine, 
subsidize, or benefit from any such fees. Subject to approval and 
implementation of this proposed rule change, the Exchange states 
that it intends to adopt a routing fee for Directed Orders to an 
algorithm, similar to the existing routing fee for Directed Orders 
to an ATS. See New York Stock Exchange Price List 2024, available at 
https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf (providing for Routing Fee for Directed Order to 
OneChronos LLC). See Notice, supra note 3, 89 FR 87675.
    \6\ The Exchange states that the ability to become an NYSE 
algorithm provider is open to all FINRA-registered broker-dealers, 
on an equal and non-discriminatory basis, regardless of whether they 
are also Exchange members. See id.
    \7\ See id.
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    As proposed, the member organization entering the Directed Order 
would select the algorithm to which the Directed Order would be routed 
and provide instructions for the handling of such order by the routing 
destination. The Exchange states that member organizations would select 
from the available algorithm providers without any input or control 
from the Exchange.\8\ As with the existing Directed Order routing to an 
ATS, the Exchange states that its only role would be to route the order 
to the designated algorithm as instructed. The Exchange states that 
neither the Exchange nor ArcaSec will make any routing decisions and 
will only route Directed Orders to valid destinations as instructed by 
the member organization. The Exchange further states that it will not 
have any visibility into where or how a Directed Order is executed by 
an algorithm, including whether that order may be routed back to the 
Exchange or one of its affiliated exchanges, at the time of 
execution.\9\ According to the Exchange, a Directed Order designated 
for an algorithm would not interact with the Exchange Book, and the 
Exchange would not exercise any discretion in determining where the 
order is routed.\10\ Similarly, according to the Exchange, the 
algorithm selected by the member organization entering the Directed 
Order would be responsible for validating whether the order is eligible 
to be accepted, and if the algorithm determines to reject the order, 
the Directed Order would be canceled.\11\
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    \8\ The Consolidated Audit Trail (``CAT'') for a Directed Order 
would reflect entry of the order at the Exchange; ArcaSec's receipt 
of the order from the Exchange; ArcaSec's routing of the order to 
the designated algorithm; and the algorithm's routing of the order 
to the execution venue(s) selected to effectuate its strategy. The 
Exchange states that it will not be involved in the clearing or 
settlement of Directed Orders, except to the extent that it may 
submit certain trades to clearing on behalf of member organizations 
(similar to the capacity in which it participates in the clearing 
process for orders that it routes for Regulation NMS purposes). See 
id.
    \9\ The Exchange represents that its systems would not be able 
to determine, upon receipt of a routed order, whether such order had 
originated in whole or in part from an algorithm or originated at 
the Exchange as a Directed Order to an algorithm. See Notice, supra 
note 3, 89 FR 87675-76.
    \10\ See Notice, supra note 3, 89 FR 87676.
    \11\ See id.
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    To effect this change, the Exchange first has proposed to amend the 
definition of a Directed Order in NYSE Rule 7.31(f)(1) to provide that 
a Directed Order is a Limit Order with instructions to route on arrival 
to an ATS or algorithm with which the Exchange maintains an electronic 
linkage. According to the Exchange, Directed Orders would continue to 
be available for all securities eligible to trade on the Exchange and 
would not be assigned a working time or interact with interest on the 
Exchange Book. The Exchange has further proposed to amend NYSE Rule 
7.31(f)(1) to specify that the ATS or algorithm to which the Directed 
Order is routed, as applicable, would validate whether the order is 
eligible to be accepted, and if it rejects the order, the order would 
be canceled.
    The Exchange has proposed to permit Directed Orders designated to 
route to an algorithm to be Market Orders. The Exchange states that 
permitting these Directed Orders to be entered as Market Orders would 
facilitate market participants' existing functional workflows when 
routing to algorithms.\12\ According to the Exchange, a member 
organization routing a Directed Order to an algorithm may, for example, 
wish to send a parent order with Market Order instructions for 
execution via smaller limited child orders over several hours of the 
trading day.
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    \12\ See id.
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    The Exchange has proposed to delete the first sentence of current 
NYSE Rule 7.31(f)(1)(A), which provides that Directed Orders must be 
designated for the Exchange's Core Trading Session. The Exchange has 
also proposed to delete current NYSE Rule 7.34(c)(1)(E), which provides 
that Directed Orders designated for the Early Trading Session will be 
rejected, and to make a conforming change in Rule 7.34(c)(1) to 
reference ``paragraphs (c)(1)(A) through (D)'' to reflect the deletion 
of Rule 7.34(c)(1)(E). The Exchange states that its proposal to permit 
Directed Orders to be routed during any trading session is intended to 
allow the routing destinations receiving such orders to determine 
whether they are eligible to trade in a given trading session.\13\ The 
Exchange states that it will pass on the instructions provided by the 
member organization entering the Directed Order, and the routing 
destination will be responsible for validating whether the order will 
be accepted or rejected, as contemplated by NYSE Rule 7.31(f)(1).\14\
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    \13\ See id.
    \14\ See id.
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    Further, the Exchange has proposed to amend NYSE Rule 7.31(f)(1)(A) 
to provide that a Directed Order to an ATS must be designated as IOC or 
Day and would be routed as such, whereas a Directed Order to an 
algorithm may only be designated as Day and routed as such, consistent 
with market participants' existing functional workflows when routing to 
algorithms. The Exchange also has proposed to clarify language 
currently in NYSE Rule 7.31(f)(1)(A) providing that Directed Orders may 
not be combined with any other modifiers set forth in this Rule, to 
instead provide that Directed Orders would not be processed with any 
other modifiers set forth in this Rule.
    The Exchange has also proposed to amend NYSE Rule 7.31(f)(1)(C) to 
specify that, during a trading halt or pause, Directed Orders routed to 
an ATS would continue to be rejected, whereas Directed Orders to an 
algorithm would be routed as specified. The Exchange states that it has 
proposed that Directed Orders routed to an algorithm would be routed 
during a trading halt or pause, consistent with market participants' 
existing functional workflows when routing to algorithms. The Exchange 
states that the proposed elimination of certain restrictions on 
Directed Orders currently set forth in Rules 7.31(f)(1)(A) and (C) 
would provide member organizations with additional flexibility when 
entering Directed Orders, which would remain subject to the rules and 
specifications of the destinations to which such orders are routed. As 
provided in Rule 7.31(f)(1), as amended, the ATS or algorithm to which 
a Directed Order is routed would validate whether the order is eligible 
to be accepted.\15\
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    \15\ See id.
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    Finally, the Exchange has proposed to amend Rule 7.31(f)(1)(D) to 
provide that a request to cancel a Directed Order designated Day will 
be routed to the ATS or algorithm to which the order was routed.
    According to the Exchange, the proposed change would provide member 
organizations with a technology

[[Page 99322]]

solution to leverage their existing Exchange connectivity to route 
Directed Orders to either an ATS or algorithm, thereby affording them 
increased access to execution tools and enhanced operational 
efficiency.\16\ The Exchange states that the proposed change would 
offer member organizations greater choice and flexibility, and further 
believes that the proposed change could create efficiencies for member 
organizations by enabling them to send orders that they wish to route 
to an alternate destination through the Exchange, thereby leveraging 
order entry protocols and specifications already configured for their 
interactions with the Exchange.\17\ The Exchange states that Directed 
Orders designated to route to an algorithm would generally operate in 
the same manner as Directed Orders that are currently eligible to be 
routed to an ATS selected by the member organization entering the order 
(except as proposed above). The Exchange further states that the 
Directed Order would continue to provide functionality similar to order 
types with specific execution instructions (such as the Auction Only 
Order defined in NYSE Rule 7.31(c)) or routing instructions (such as 
Primary Only Orders that route to the primary market that are available 
on the Exchange's affiliated equities exchanges).\18\
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    \16\ The Exchange states that this proposed rule change could be 
particularly beneficial for smaller member organizations that 
cannot, for various reasons including cost, connect to multiple 
algorithm providers on their own. See id.
    \17\ See id.
    \18\ See id.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\19\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\20\ which 
requires, among other things, that the rules of a national securities 
exchange be 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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    \19\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \20\ 15 U.S.C. 78f(b)(5).
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    The Commission finds that the proposed rule change is reasonably 
designed to remove impediments to and perfect the mechanism of a free 
and open market and a national market system because it is reasonably 
designed to offer member organizations greater choice and flexibility 
in executing orders by providing routing to broker-dealer algorithms 
that have established connectivity with the Exchange and to ensure that 
such connectivity is provided to broker-dealer algorithms on a fair and 
equitable basis. The Commission also believes that the proposed rule 
change would not permit unfair discrimination among customers, brokers, 
or dealers because Directed Orders will be available to all Exchange 
members on an equal basis and because the Exchange has represented that 
it would not direct orders to any algorithm with which the Exchange has 
a financial relationship.
    Based on the foregoing, the Commission finds that the proposed rule 
change is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change (SR-NYSE-2024-67) be, and hereby 
is, approved.
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    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-28897 Filed 12-9-24; 8:45 am]
BILLING CODE 8011-01-P
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