106630 Federal Register / Vol. 89, No. 249 / Monday, December 30, 2024 / Notices 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Rule 7.31–E(h)(3). As defined in NYSE Arca 

Rule 1.1, ‘‘PBBO’’ means the Best Protected Bid and 

the Best Protected Offer. Rule 1.1 also defines 

‘‘PBB’’ as the highest Protected Bid and ‘‘PBO’’ as 

the lowest Protected Offer. 4See Securities Exchange Act Release No. 95154 

(June 24, 2022), 87 FR 39134 (June 30, 2022) (SR– 

NYSEArca–2022–13) (Notice of Filing of 

Amendment No. 2 and Order Granting Accelerated 

Approval of a Proposed Rule Change, as Modified 

by Amendment No. 2, To Amend Rule 7.31–E(h)(3) 

Relating to Discretionary Pegged Orders). 

5See Securities Exchange Act Release No. 96322 

(November 15, 2022), 87 FR 69376 (November 18, 

2022) (SR–NYSEARCA–2022–76) (Notice of Filing 

and Immediate Effectiveness of Proposed Rule 

Change to Amend Rule 7.31–E). The Exchange 

resumed offering the DPO in November 2022, after 

previously filing to temporarily suspend its use in 

August 2022. See Securities Exchange Act Release 

No. 95584 (August 23, 2022), 87 FR 52826 (August 

29, 2022) (SR–NYSEARCA–2022–54) (Notice of 

Filing and Immediate Effectiveness of Proposed 

Rule Change To Amend Rule 7.31–E). 

FOR FURTHER INFORMATION CONTACT: 

Sean C. Robinson, 202–268–8405. 

SUPPLEMENTARY INFORMATION: The 

United States Postal Service® hereby 

gives notice that, pursuant to 39 U.S.C. 

3642 and 3632(b)(3), on December 19, 

2024, it filed with the Postal Regulatory 

Commission a USPS Request to Add 

Priority Mail Express, Priority Mail & 

USPS Ground Advantage® Contract 

1159 to Competitive Product List. 

Documents are available at 

www.prc.gov, Docket Nos. MC2025–944, 

K2025–945. 

Sean C. Robinson, 

Attorney, Corporate and Postal Business Law. 

[FR Doc. 2024–31115 Filed 12–27–24; 8:45 am] 

BILLING CODE 7710–12–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–102005; File No. SR– 

NYSEARCA–2024–112] 

Self-Regulatory Organizations; NYSE 

Arca, Inc.; Notice of Filing of Proposed 

Rule Change To Amend Rule 7.31–E To 

Adopt the Selective Midpoint Order 

December 19, 2024. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (the 

‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on December 

18, 2024, NYSE Arca, Inc. (‘‘NYSE 

Arca’’ or the ‘‘Exchange’’) filed with the 

Securities and Exchange Commission 

(the ‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III below, which Items have been 

prepared by the Exchange. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to amend 

Rule 7.31–E to adopt the Selective 

Midpoint Order. The proposed rule 

change is available on the Exchange’s 

website 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 7.31–E(h)(3) to decommission the 

Discretionary Pegged Order (‘‘DPO’’) 

and introduce the Selective Midpoint 

Order (‘‘SeMi Order’’). The SeMi Order 

will be similar to the DPO in that it is 

a discretionary order type, but will, 

unlike the current DPO, provide price 

protection during periods of market 

instability based on input from a 

gradient-boosting machine learning 

model. 

Background 

The Exchange currently offers the 

DPO, which is a non-displayed order to 

buy (sell) that is pegged to the same side 

of the PBBO and assigned a working 

price equal to the lower (higher) of the 

midpoint of the PBBO (the ‘‘Midpoint 

Price’’) or the limit price of the order.3

Any untraded shares of such order are 

assigned a working price equal to the 

lower (higher) of PBB (PBO) or the 

order’s limit price, which is 

automatically adjusted in response to 

changes to the PBB (PBO) for buy (sell) 

orders up (down) to the order’s limit 

price. A DPO will exercise the least 

amount of discretion necessary from its 

working price to its discretionary price 

(defined as the lower (higher) of the 

Midpoint Price or the limit price of the 

order) to trade with contra-side interest. 

Prior to November 2022, the DPO 

would not exercise discretion if the 

PBBO was determined to be unstable via 

a ‘‘quote instability calculation’’ that 

assessed the probability of a change to 

the PBB or PBO.4 The Exchange used 

the quote instability calculation along 

with real-time relative quoting activity 

of protected quotations to assess the 

probability of an imminent change to 

the PBBO (the ‘‘quote instability 

factor’’). When the quoting activity met 

certain predefined criteria and the quote 

instability factor calculated was greater 

than the Exchange’s predefined quote 

instability threshold, the Exchange 

treated the quote as unstable and 

restricted DPOs from exercising 

discretion. In November 2022, the 

Exchange amended Rule 7.31–E(h)(3) to 

eliminate the quote stability calculation, 

allowing DPOs to exercise discretion 

even during potential periods of quote 

instability.5

Proposed Rule Change 

The Exchange proposes to modify 

Rule 7.31–E(h)(3) to replace the DPO 

with the SeMi Order. The SeMi Order 

will share the same basic attributes as 

the DPO. Like the DPO, the SeMi Order 

would be a non-displayed order to buy 

(sell) that is pegged to the same side of 

the PBBO and assigned a working price 

equal to the lower (higher) of the 

Midpoint Price or the limit price of the 

order. Any untraded shares of a SeMi 

Order would be assigned a working 

price equal to lower (higher) of the PBB 

(PBO) or the order’s limit price and 

automatically adjusted in response to 

changes to the PBB (PBO) for buy (sell) 

orders up (down) to the order’s limit 

price. In order to trade with contra-side 

orders on the NYSE Arca Book, a SeMi 

Order to buy (sell) would exercise the 

least amount of price discretion 

necessary from its working price to its 

discretionary price, which is defined as 

the lower (higher) of the Midpoint Price 

or the SeMi Order’s limit price. 

SeMi Orders would not be displayed, 

must be designated Day, and would be 

eligible to be designated for the Core 

Trading Session only. SeMi Orders 

designated for the Early Trading Session 

or Late Trading Session would be 

rejected. 

When exercising discretion, SeMi 

Orders (like DPOs today) would 

maintain their time priority at their 

working price as Priority 3—NonDisplay Orders and are prioritized 

behind Priority 3—Non-Display Orders 

with a working price equal to the 

discretionary price of a SeMi Order at 

the time of execution. If multiple SeMi 


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6The Exchange also proposes conforming 

changes in Rules 7.18–E(b)(1), 7.18–E(c)(1) and (5), 

7.31–E(i)(3), and 7.34–E(c)(1)(A) to replace 

references to ‘‘Discretionary Pegged Orders’’ with 

references to ‘‘Selective Midpoint Orders.’’ 

7The Exchange also proposes related conforming 

changes to Rules 7.31–E(d)(2)(B), 7.31–E(d)(3)(F), 

and 7.31–E(e)(1)(C) to provide that Non-Displayed 

Limit Orders, MPL Orders, and Non-Routable Limit 

Orders designated with a Non-Display Remove 

Modifier will trade as takers against Liquidity 

Providing SeMi Orders. 

8The Exchange notes that allowing Liquidity 

Providing SeMi Orders to trade with resting orders 

with a Non-Display Remove Modifier, as well as 

adjusting the discretionary range of such orders, 

would be consistent with how similar discretionary 

order types function on other equities exchanges. 

See, e.g., Cboe EDGX Exchange, Rule 11.8(g)(5) 

(‘‘[Midpoint Discretionary Orders (‘‘MDOs’’)] that 

are not entered with a [Quote Depletion Protection 

(‘‘QDP’’)] instruction, as defined in Rule 11.8(g)(10), 

will only act as the liquidity provider. MDOs 

entered with a QDP instruction will instead be 

allowed to remove liquidity, by default, unless the 

User chooses to require that the MDO only act as 

a liquidity provider. If the instructions included on 

an MDO do not permit the MDO to remove 

liquidity, it will only execute on entry against 

resting orders that include a Super Aggressive 

instruction priced at the MDO’s pegged price if the 

MDO also contains a Displayed instruction, and 

against resting orders that include an NDS 

instruction priced either at the MDO’s pegged price 

or within its discretionary range. If a resting contraside order that does not include [a Non-Displayed 

Swap] instruction is priced within the discretionary 

range of an incoming MDO that is not permitted to 

remove liquidity, the incoming MDO will be placed 

on the EDGX Book and its discretionary range will 

be shortened to equal the limit price of the resting 

contra-side order. Likewise, where an incoming 

order with a Post Only instruction does not remove 

liquidity on entry pursuant to Rule 11.6(n)(4) 

against a resting MDO, the discretionary range of 

the resting MDO will be shortened to equal the limit 

price of the incoming contra-side order with a Post 

Only instruction.’’). 

9The Exchange notes that this proposed handling 

is also consistent with the handling of similar 

discretionary order types by other equities 

exchanges. See id. 

10See Exhibit 3, Selective Midpoint Indicator 

(SMI): A Gradient Boosted Signal Enabling Stable 

Order Executions (the ‘‘White Paper’’). 

Orders are exercising price discretion 

during the same book processing action, 

they would maintain their relative time 

priority at the discretionary price. 

Accordingly, the Exchange proposes 

to replace existing references to the 

‘‘Discretionary Pegged Order’’ in Rule 

7.31–E(h)(3) and subparagraphs (A) and 

(B) thereunder with references to the 

‘‘Selective Midpoint Order.’’ 6

The Exchange proposes to add new 

Rule 7.31–E(h)(3)(C) to provide that the 

SeMi Order, as proposed, would 

exercise price discretion to its 

discretionary price, except during 

periods of quote instability as identified 

by the Selective Midpoint Indicator 

(‘‘SMI’’) (as discussed in further detail 

below). If the SMI determines the PBBO 

for a particular security to be an 

unstable quote, both an arriving and 

resting SeMi Order would wait for a 

PBBO that is stable before the order’s 

working price is adjusted and the order 

becomes eligible to trade. In other 

words, a SeMi Order would be ineligible 

to trade when the SMI identifies 

unstable market conditions and would 

remain in that state until the SMI 

determines that market conditions have 

stabilized, thereby preventing 

potentially undesirable executions 

during volatile or unstable market 

conditions. Whereas the DPO previously 

relied on one static logistical regression 

model to forecast market instability and 

prevented DPOs in any symbol from 

exercising discretion to trade when the 

model anticipated an unstable market, 

the SeMi Order, as proposed, would rely 

on the SMI to predict market instability 

using a symbol-specific gradientboosting machine learning model and 

would protect SeMi Orders from trading 

when the SMI predicts quote instability 

for a given symbol. 

The Exchange also proposes new Rule 

7.31–E(h)(3)(D) to provide for SeMi 

Orders to be optionally designated as 

Liquidity Providing. Proposed Rule 

7.31–E(h)(3)(D)(i) would provide that a 

SeMi Order designated as Liquidity 

Providing will only execute on arrival 

against resting orders that include a 

Non-Display Remove Modifier and are 

priced within the Liquidity Providing 

SeMi Order’s discretionary range.7

Proposed Rule 7.31–E(h)(3)(D)(ii) 

would provide that if a resting contraside order that does not include a NonDisplay Remove Modifier is priced 

within an arriving Liquidity Providing 

SeMi Order’s discretionary range, the 

Liquidity Providing SeMi Order will be 

placed on the NYSE Arca Book, and its 

discretionary range will be adjusted to 

equal the resting price of a nondisplayed contra-side order or to one 

MPV less aggressive than the resting 

price of a displayed contra-side order.8

Proposed Rule 7.31–E(h)(3)(D)(iii) 

provides that a Liquidity Providing 

SeMi Order resting on the NYSE Arca 

Book will not trade with an arriving 

contra-side order that cannot remove 

liquidity.9 Once such arriving contraside order is placed on the NYSE Arca 

Book, the discretionary range of the 

Liquidity Providing SeMi Order will be 

adjusted to equal the resting price of a 

non-displayed contra-side order or to 

one MPV less aggressive than the resting 

price of a displayed contra-side order. 

Proposed Rule 7.31–E(h)(3)(D)(iv) 

would provide that, once resting on the 

NYSE Arca Book, the discretionary 

range of a Liquidity Providing SeMi 

Order will be adjusted based on resting 

contra-side interest as described in 

proposed subparagraphs (ii) and (iii) of 

this Rule when its working price 

Changes. In addition, proposed Rule 

7.31–E(h)(3)(D)(iv)(a) and (b) provide 

that a Liquidity Providing SeMi Order to 

buy (sell) will not be eligible to trade at 

a price equal to or above (below) any 

sell (buy) orders that are displayed and 

that have a working price equal to or 

below (above) the working price of such 

Liquidity Providing SeMi Order, or at a 

price above (below) any sell (buy) orders 

that are not displayed and that have a 

working price below (above) the 

working price of such Liquidity 

Providing SeMi Order. 

Finally, the Exchange proposes to 

renumber current Rule 7.31–E(h)(3)(C) 

as 7.31–E(h)(3)(E). The Exchange 

proposes that, as with DPOs, if the 

PBBO is locked or crossed, SeMi Orders 

would wait for a PBBO that is not 

locked or crossed before the working 

price is adjusted and the order becomes 

eligible to trade. Accordingly, the 

Exchange proposes to substitute 

‘‘Selective Midpoint Order’’ for 

‘‘Discretionary Pegged Order’’ in the text 

of proposed Rule 7.31–E(h)(3)(E). 

Selective Midpoint Indicator 

As described in further detail in the 

white paper attached as Exhibit 3 to this 

proposed rule change,10 the SMI was 

developed using a decision tree model, 

which is a supervised learning 

algorithm used for classification and 

regression tasks. A decision tree model 

is trained sequentially, and each 

successive model seeks to improve on 

errors in the previous model by focusing 

on accurately predicting where the 

previous model performs poorly. 

The Exchange determined to use a 

decision tree model in developing the 

SMI in large part because of the 

transparency it offers to its designers. 

The output of a decision tree is a 

hierarchy of questions that allows a user 

to follow the model’s decision-making 

process, assess the importance of a 

given feature to the model’s output, and 

examine the reasons underlying a 

specific output from the model. The 

Exchange believed it was important to 

build a model that could be interpreted 

and understood in this way to allow for 

the evaluation of, among other things, 

the relationships between market shifts, 

feature selection, and feature 

weightings, as well as to be able to 

assess overall model performance. 

Market Instability Assessment 

The Exchange set out to develop a 

model that would allow the SMI to 

predict market instability. For purposes 

of the model, the Exchange defined 


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11Figure 1 in Section 4.1 of the White Paper 

provides a detailed example of how a price jump 

is calculated. 

12Figure 2 in Section 4.2 of the White Paper 

provides an example of the identification of 

unstable windows. 

13Figure 3 in Section 4.2 of the White Paper 

demonstrates the operation of the minimum time 

increment parameter. 

14The full symbol list is included in Appendix 

B of the White Paper. Symbols were chosen based 

on criteria including absolute price level, spread in 

dollars, spread in basis points, and liquidity (daily 

ADV). Because stable periods generally far 

outnumber unstable periods in the U.S. equity 

markets, the Exchange used under-sampling 

methods where appropriate to reduce the number 

of stable data points in the data set and randomly 

shuffled data before training. 

15The full list of features is included in Appendix 

A to the White Paper. Appendix A also identifies 

the subset of features that were selected for the 

model training described in the White Paper. 

16Once the SMI is implemented in production, 

the full list of features currently calculated in realtime and available for evaluation for inclusion in 

the SMI models will be published daily on the 

Exchange’s website. 

‘‘instability’’ at a high level as relatively 

large price moves during a relatively 

short time frame. The Exchange chose 

PBBO updates as the fundamental data 

points for the model based on the 

evenly distributed nature of PBBO 

updates throughout the trading day and 

the granular level of information such 

updates offer. The model’s objective is 

to identify windows where changes to 

the PBBO are unstable, in order to 

predict unstable markets in real time 

and prevent SeMi Order trading 

accordingly. 

The Exchange established the concept 

of a ‘‘price jump’’ to further understand 

and categorize periods of instability. A 

price jump is defined as a PBBO midprice change of a pre-defined percentage 

of a symbol’s spread (referred to as the 

spread threshold X), in either direction, 

within a configurable time interval 

(referred to as the time horizon G). The 

Exchange sought to identify price jumps 

following a PBBO update, whether 

positive or negative. A price jump is 

marked at a given point in time if, 

looking back to the start of the time 

horizon, the mid-price was at least the 

spread threshold in difference from the 

current mid-price. This approach 

identifies discrete price jumps over 

configurable time intervals, thereby 

offering the Exchange flexibility to 

adjust the spread threshold and/or time 

horizon parameters according to 

symbol-specific dynamics.11

To build the SMI as a continuous 

signal of market instability, the 

Exchange next applied the price jump 

definition to delineate continuous 

periods of market instability. At each 

PBBO update (at index time i), the 

Exchange determined whether there had 

been a price jump. If there was no price 

jump, the market would be considered 

stable. If there was a price jump, the 

Exchange continued to look for price 

jumps within the time horizon G, until 

no price jump occurred. At that point, 

the Exchange would mark an unstable 

time window starting at the PBBO 

update that occurred at i–1 or 50 

microseconds prior to the PBBO update 

at time i, whichever is closest to i, and 

ending at the last price jump 

identified.12

Finally, the Exchange employed an 

additional parameter for a minimum 

time increment g to establish that 

unstable windows identified using the 

spread threshold and time horizon 

parameters are indicative of persistent 

price instability. If multiple price jumps 

occur within a small timeframe, such 

that the distance between the first and 

last price jumps is less than g, the 

Exchange would not mark the window 

as unstable. The application of the 

minimum time increment parameter 

allows the Exchange to more accurately 

identify true periods of instability by 

filtering out temporary price jumps that 

are quickly followed by a reversion to 

the price prior to the observed price 

jump.13

In developing the SMI to facilitate the 

SeMi Order’s ability to provide 

protection against potentially 

unfavorable executions, the Exchange 

also wanted to be able to differentiate 

between quote instability on the bid 

side and ask side. For example, the 

Exchange would not want to prevent 

executions of buy orders based on 

upwards instability of the mid-price of 

the PBBO because executions under 

those conditions would likely be 

favorable. Accordingly, if the mid-price 

of the PBBO is higher at the end of an 

unstable window, the Exchange would 

only mark PBBO updates during such 

window as unstable for the ask side 

(and vice versa for the bid side). 

Model Development 

To develop and train the models 

underlying the SMI, the Exchange used 

data from the NYSE Arca Book from 

August 29, 2024 through October 22, 

2024 for a set of 500 symbols selected 

to reflect a representative sample of the 

U.S. equity markets.14 The Exchange 

created evaluation data points for each 

PBBO update that include the closest 

book depth state at the time of that 

update. This merged data set of PBBO 

updates and book depth data has the 

benefit of the information from both 

types of data without overinflating the 

size of the data set. All features and 

parameters used by the models are 

calculated based on this merged data 

set. 

The Exchange identified a set of 

features based on NYSE Arca Book 

data—e.g., book depth information, 

PBBO updates, number of IOC orders— 

that would contribute to the models. 

The Exchange selected 83 unique 

features that could be considered for 

incorporation into the model.15 These 

features were identified based on an 

iterative process, and features were 

selected based on their ability to explain 

unstable periods identified by the 

application of the parameters discussed 

above and, going forward, to predict 

market instability on a real-time basis so 

that the SMI can effectively protect 

SeMi Orders from potentially 

unfavorable executions. In production, 

the Exchange proposes to select a subset 

of these 83 features to be weighted in 

the model’s assessment of market 

instability (rather than having the model 

utilize all available features), because 

focusing on the features that have been 

identified as most important in 

predicting market instability for a given 

symbol would both optimize prediction 

accuracy and processing speed.16

Symbol-Specific Models 

The Exchange proposes that the SMI 

will rely on symbol-specific models to 

leverage the ability of the models to 

incorporate different features and 

weightings to respond to individual 

symbols’ unique profiles (e.g., the 

features most likely to accurately 

predict instability for a given symbol). 

To explore how symbol-specific models 

should be distributed, the Exchange 

ranked each of the 500 symbols in the 

representative data set according to the 

total number of unstable data points. 

The Exchange trained a model for each 

of the 500 symbols and used the model 

trained for the symbol SPY as a default 

‘‘market model.’’ 

The Exchange found that the SMI 

performed better with a symbol-specific 

model for more active symbols (i.e., 

those with more unstable data points) 

than on the market model (i.e., testing 

showed sharp declines in precision and 

increases in overlocking behavior using 

the market model), whereas the SMI 

with a market model performed well for 

less active symbols (i.e., high recall with 

relatively small loss of precision and 

minimally more overlocking). The 

Exchange concluded that, for the SMI to 

provide optimal information and 

protection to SeMi Orders, more active 

symbols would benefit significantly 

from symbol-specific models, while less 

active symbols (which have fewer 

unstable data points to inform a symbolVerDate Sep<11>2014 23:58 Dec 27, 2024 Jkt 265001 PO 00000 Frm 00227 Fmt 4703 Sfmt 4703 E:\FR\FM\30DEN1.SGM 30DEN1

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17The Exchange proposes that a new symbol will 

operate on the market model until the Exchange has 

gathered at least three days’ worth of data to be able 

to train a symbol-specific model and determine 

whether it outperforms the market model for that 

symbol. 

18Recall, precision, and overlocking are 

discussed in more detail in Section 6.1 of the White 

Paper. 

19The analysis the Exchange performed to arrive 

at these parameter values is discussed in more 

detail in Section 6.2 of the White Paper. The 

Exchange expects that the parameter values may 

change over time to ensure proper calibration. The 

Exchange anticipates implementing the SMI in 

production with these parameter values, but will 

continue to analyze data and train the models until 

the date of implementation and may update these 

values to the extent that its analysis suggests that 

different values would improve performance. 

20Additional discussion of the Exchange’s 

performance testing of the models appears in 

Section 6.4 of the White Paper. 

21Section 7 of the White Paper discusses the 

Exchange’s analysis of the model’s prediction time 

in more detail, as well as the integration of the 

model into the Pillar platform (see Figure 9). 

22 In addition to PBBO updates, Pillar will 

respond to a timer-based evaluation trigger. The 

timer-based trigger is intended to ensure that the 

model remains updated when the NYSE Arca Book 

changes in the absence of a PBBO update (such as 

when non-displayed liquidity is added to the NYSE 

Arca Book). 

specific model) could successfully 

default to a market model. 

The Exchange believes that models 

tailored to individual symbols’ specific 

characteristics would provide for better 

performance by the SMI and thus 

enhanced price protection by the SeMi 

Order. Accordingly, in production, the 

Exchange anticipates that at least 200 

(and up to approximately 1,000) 

symbols that trade on the Exchange will 

have an individualized model that 

incorporates features that have been 

specifically identified for predicting 

market stability for that symbol. The 

remaining symbols that trade on the 

Exchange would use the market model, 

which would apply the same features 

and weightings for all symbols.17 Each 

day, the Exchange will identify the 

1,000 symbols with most unstable data 

points and evaluate those symbols to 

determine whether a symbol-specific 

model or market model would yield 

better performance. The Exchange will 

publish on its website a list of the 

symbols that have an individual model 

to provide transparency to market 

participants regarding the operation of 

SeMi Orders. 

Performance Metrics 

The Exchange strategically prioritized 

developing the models to have a high 

rate of recall, which was intended to 

maximize the models’ ability to 

accurately capture unstable PBBO 

updates while accepting that the models 

might identify more periods of 

instability than would exist in realistic 

market conditions. The Exchange 

focused on three metrics: (1) recall, or 

the model’s ability to accurately identify 

true unstable data points; (2) precision, 

or the model’s ability to identify only 

true unstable data points (i.e., to not 

misidentify stable data points as 

unstable); and (3) overlocking, or the 

model’s ability to minimize the amount 

of time (measured in seconds) that the 

model incorrectly predicts unstable 

market conditions.18 The Exchange 

intends for the models to maximize 

recall and precision, while minimizing 

overlocking. 

To evaluate the performance of the 

models, the Exchange selected initial 

baseline values for each the three 

parameters X, G, and g to maximize 

these performance metrics. To define an 

unstable PBBO period, the Exchange 

selected a minimum time increment g of 

100 microseconds; spread threshold X 

of 25%; and time horizon G of one 

millisecond.19

In final performance testing of the 

model, the aggregate results demonstrate 

that the model achieves an average 

recall rate or 90% and average precision 

of 30%, with overlocking occurring for 

an additional 3.8 seconds on average.20

Production Integration 

The models’ compact size and average 

prediction speed of approximately two 

microseconds allows for seamless 

integration of the model’s prediction 

process into the NYSE Pillar trading 

platform (‘‘Pillar’’) on which the 

Exchange operates.21 The Exchange 

believes that it has designed the SMI to 

produce an output rapidly enough to 

keep up with real-time trading, without 

overburdening Exchange systems or 

otherwise impacting current system 

performance. 

Pillar will have access to full real-time 

trading data and will continuously 

maintain required features for the 

model, including PBBO updates, order 

entries, order cancellations, and book 

depth information. The models are 

invoked as soon as an evaluation trigger 

(e.g., a PBBO update) is received.22 The 

evaluation process concludes by 

sending a message the Pillar matching 

engine to indicate the beginning and 

end of an unstable period, which would 

inform whether SeMi Orders are eligible 

to trade. For example, when Pillar 

receives a SeMi Order, the SMI will 

indicate whether the market is stable or 

unstable. If the market is stable, the 

SeMi Order will be allowed to post to 

the NYSE Arca Book and trade. If the 

market is unstable, the order will be 

prevented from trading until the SMI 

next predicts that the market is stable. 

For as long as the SMI predicts that the 

market will be unstable, a SeMi Order 

will remain ineligible to trade and will 

not execute until the SMI evaluates the 

market as stable. 

On a given trading day, the SMI 

models will use the feature weights 

determined from the previous night’s 

training, and the features will be 

calculated using real-time intraday data. 

The list of symbols with individualized 

models will be dynamically constructed 

daily and published before the start of 

trading each day. 

The model will not change intra-day. 

The Exchange proposes to continue to 

retrain the model within the parameters 

described in this filing and the White 

Paper daily, outside of the Core Trading 

Session (on days when trading takes 

place on the Exchange). Retraining will 

be based on the last three trading days’ 

worth of historical data. Retraining may 

result in changes to the features used by 

the model and/or the weighting of such 

features. The values assigned to the 

three parameters X, G, and g will not be 

adjusted as a result of regular model 

training but may be updated 

periodically based on the Exchange’s 

analysis of overall model performance. 

Retraining is a standard and accepted 

process in the use of machine learning 

models like the ones underlying the 

SMI. The retraining process is not 

intended to result in significant or 

unexpected changes to the performance 

of the SMI or the behavior of the SeMi 

Order. Rather, retraining would help 

ensure that the SMI continues to 

perform well in dynamic circumstances, 

by allowing the models to learn from 

and incorporate more recent data points 

and would facilitate improved model 

performance over time. The Exchange 

also notes that retraining would build 

on the models’ existing state (i.e., 

existing data inputs and knowledge 

base) and would not alter the model’s 

objectives; retraining would result in 

new behaviors only to the extent that 

the model had not previously 

encountered a given scenario, and even 

then, any new behavior would be 

consistent with the model’s objectives. 

If the Exchange determines that a 

retrained model would not be as 

successful as an existing model in 

achieving its objectives based on the 

metrics defined above, the Exchange 

will not implement the retrained model 

in production. 

The Exchange will file a subsequent 

proposed rule change if it seeks to 

modify the underlying structure of the 

models underlying the SMI, such as the 

parameters X, G, and g used to label 

unstable windows or new features that 


ddrumheller on DSK120RN23PROD with NOTICES1
106634 Federal Register / Vol. 89, No. 249 / Monday, December 30, 2024 / Notices 

23 15 U.S.C. 78f(b). 

24 15 U.S.C. 78f(b)(5). 

25As discussed above, the Exchange will not seek 

Commission approval prior to allowing the models, 

as part of its retraining process, to vary the 

weighting of the features it uses. The Exchange 

believes this is appropriate because such variance 

will only occur to the extent that it will improve 

a model’s performance with respect to pre-defined 

objectives. 

could be incorporated into the models, 

but will not seek Commission approval 

prior to retraining the models to adjust 

the weighting of features that have been 

disclosed as potential inputs for the 

models or modifications to the value of 

any of the three identified parameters. 

The Exchange will also retain copies of 

each historical iteration of the models as 

part of its books and records and will 

make such records available to the 

Commission upon request. The 

Exchange will also publish a Trader 

Update in advance of implementing a 

retrained version of the SMI models 

when the Exchange has a reasonable 

belief that the retrained version(s) 

would yield results that differ materially 

from the prior version(s). 

* * * * * 

Because of the technology changes 

associated with this proposed rule 

change, the Exchange will announce the 

implementation of this change by 

Trader Update. Subject to approval of 

this rule filing, the Exchange is prepared 

to implement the proposed rule change 

in 2025. 

2. Statutory Basis 

The proposed rule change is 

consistent with Section 6(b) of the 

Act,23 in general, and furthers the 

objectives of Section 6(b)(5),24 in 

particular, because 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 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. 

The Exchange believes that the 

proposed change to eliminate the DPO 

and introduce the SeMi Order would 

remove impediments to, and perfect the 

mechanism of, a free and open market 

and a national market system, as well as 

protect investors and the public interest, 

by continuing to provide market 

participants with the benefits of an 

order type that can exercise discretion 

to trade with contra-side interest. The 

SeMi Order will operate in a 

substantially similar manner to the 

existing DPO, with the benefit of the 

SMI to provide price protection to SeMi 

Orders during periods of market 

instability. The Exchange also believes 

that the proposed rule change would 

remove impediments to, and perfect the 

mechanism of, a free and open market 

and a national market system and 

protect investors and the public interest 

because the SMI would provide 

improved functionality as compared to 

the regression model previously used by 

the DPO to predict market instability, 

which used static parameters for all 

symbols. Specifically, the Exchange 

believes that the SMI would provide 

enhanced price protection for SeMi 

Orders because its fast, lightweight, and 

transparent models can be seamlessly 

integrated into Pillar to predict future 

microsecond-level market stability on a 

symbol-specific basis. The Exchange 

believes that SeMi Orders, as proposed, 

would perfect the mechanism of, a free 

and open market and a national market 

system and protect investors and the 

public interest by relying on the SMI to 

restrict SeMi Orders from trading during 

times of predicted high market 

volatility, thereby avoiding potentially 

undesirable executions and increasing 

the potential for price improvement for 

such orders at the cost of slightly 

reduced fill rates. 

The Exchange further believes that the 

proposed change to allow SeMi Orders 

to be designated as Liquidity Providing 

(an option that was not previously 

available to DPOs) would remove 

impediments to, and perfect the 

mechanism of, a free and open market 

and a national market system and 

protect investors and the public interest 

because it would afford increased 

flexibility to users of the order type. 

The Exchange believes that the 

proposed change would remove 

impediments to, and perfect the 

mechanism of, a free and open market 

and a national market system and 

promote just and equitable principles of 

trade because the SeMi Order and SMI 

will operate within strict, well-defined, 

and transparent parameters. Although 

the SMI models will undergo daily 

retraining (outside of market hours), 

such retraining will aim to improve the 

performance of the SMI in achieving its 

stated objectives; retraining is not 

intended to alter the basic design 

parameters, features, or objectives of the 

models without prior Commission 

approval.25 Moreover, the Exchange will 

not deploy a retrained model if it fails 

to achieve performance improvements 

based on the metrics described above. 

As noted above, a list of all features that 

may be incorporated in the models will 

be publicly available, and the Exchange 

will publish on its website daily the full 

list of features used for real-time 

calculation and available for inclusion 

in the SMI models. The Exchange will 

also retain each historical iteration of 

models employed by the SMI as part of 

its books and records and make such 

information available to the 

Commission upon request. The 

Exchange will also publish a Trader 

Update in advance of implementing a 

retrained version of an SMI model when 

the Exchange has a reasonable belief 

that the retrained version(s) would yield 

results that differ materially from the 

prior version(s). 

The Exchange notes that neither the 

SMI nor the SeMi Order are designed or 

intended to further the performance of 

any participant or any category of 

participant over others. The Exchange 

believes the models underlying the SMI 

are objective and designed to avoid bias 

and discrimination. Use of the SeMi 

Order (like use of the DPO) remains 

voluntary for all market participants. 

Accordingly, if any market participant 

feels that the SeMi Order does not meet 

their needs, they are free to pursue other 

trading strategies. 

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 believes that the proposed 

change would promote competition by 

offering market participants the optional 

use of an order type designed to protect 

against potentially undesirable 

executions by preventing trading during 

periods of market instability as 

identified by the SMI. 

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 

Within 45 days of the date of 

publication of this notice in the Federal 

Register or within such longer period 

up to 90 days (i) as the Commission may 

designate if it finds such longer period 

to be appropriate and publishes its 

reasons for so finding or (ii) as to which 

the Exchange consents, the Commission 

will: 


ddrumheller on DSK120RN23PROD with NOTICES1
Federal Register / Vol. 89, No. 249 / Monday, December 30, 2024 / Notices 106635 

26 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See infra note 9 and accompanying text. 

4As a neutral administrator of the arbitration 

forum, DRS does not participate in the decisionmaking process by arbitrators. DRS maintains a 

roster of over 8,300 arbitrators. See FINRA, 

Arbitration and Mediation, Dispute Resolution 

Continued 

A. by order approve or disapprove 

such proposed rule change, or 

B. institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

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 (https://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include file number SR– 

NYSEARCA–2024–112 on the subject 

line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549–1090. 

All submissions should refer to file 

number SR–NYSEARCA–2024–112. 

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 website (https:// 

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 Room, 100 F Street NE, 

Washington, DC 20549, on official 

business days between the hours of 10 

a.m. and 3 p.m. Copies of the filing also 

will be available for inspection and 

copying at the principal office of the 

Exchange. Do not include personal 

identifiable information in submissions; 

you should submit only information 

that you wish to make available 

publicly. We may redact in part or 

withhold entirely from publication 

submitted material that is obscene or 

subject to copyright protection. All 

submissions should refer to file number 

SR–NYSEARCA–2024–112 and should 

be submitted on or before January 21, 

2025. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.26

Vanessa A. Countryman, 

Secretary. 

[FR Doc. 2024–30916 Filed 12–27–24; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–101993; File No. SR– 

FINRA–2024–022] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing of a 

Proposed Rule Change To Amend the 

Codes of Arbitration Procedure To 

Make Clarifying, Technical, and 

Procedural Changes to the Arbitrator 

List Selection Process 

December 19, 2024. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (‘‘Act’’ 

or ‘‘Exchange Act’’) 1 and Rule 19b–4 

thereunder,2 notice is hereby given that 

on December 19, 2024, the Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) filed with the Securities and 

Exchange Commission (‘‘SEC’’ or 

‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III below, which Items have been 

prepared by FINRA. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

FINRA is proposing to amend the 

Code of Arbitration Procedure for 

Customer Disputes (‘‘Customer Code’’) 

and the Code of Arbitration Procedure 

for Industry Disputes (‘‘Industry Code’’) 

(together, ‘‘Codes’’) to make changes to 

certain provisions relating to arbitrator 

list selection. 

The proposed rule change would 

amend FINRA Rules 12403 (Cases with 

Three Arbitrators) and 13403 

(Generating and Sending Lists to the 

Parties) to increase the opportunity for 

public arbitrators who are not qualified 

to serve as chairpersons 3 to be selected 

by a computer algorithm, known as the 

‘‘list selection algorithm,’’ for the list of 

arbitrators that is sent to the parties in 

certain customer and industry disputes 

that have a three-arbitrator panel. 

In addition, the proposed rule change 

would make changes to the Codes that 

are consistent with FINRA’s focus on 

increasing the transparency of arbitrator 

list selection and with current practices 

that were developed to efficiently 

administer arbitrator list selection. 

Specifically, the proposed rule change 

would amend FINRA Rule 12402 (Cases 

with One Arbitrator), FINRA Rule 12403 

(Cases with Three Arbitrators), FINRA 

Rule 13403 (Generating and Sending 

Lists to the Parties), FINRA Rules 12404 

and 13407 (Additional Parties), FINRA 

Rule 13404 (Striking and Ranking 

Arbitrators), FINRA Rules 12407 and 

13410 (Removal of Arbitrator by 

Director), and FINRA Rule 13804 

(Temporary Injunctive Orders; Requests 

for Permanent Injunctive Relief). The 

proposed rule change also would make 

non-substantive, technical changes to 

FINRA Rules 13406 (Appointment of 

Arbitrators; Discretion to Appoint 

Arbitrators Not on List) and 13411 

(Replacement of Arbitrators) to update 

cross-references in those rules. 

The text of the proposed rule change 

is available on FINRA’s website at 

http://www.finra.org, at the principal 

office of FINRA 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, 

FINRA 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 these statements 

may be examined at the places specified 

in Item IV below. FINRA has prepared 

summaries, set forth in sections A, B, 

and C below, of the most significant 

aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

I. Overview of FINRA’s Arbitrator List 

Selection Process 

Decisions in the FINRA Dispute 

Resolution Services (‘‘DRS’’) arbitration 

forum are made by independent 

arbitrators.4 To ensure fairness to all 


ddrumheller on DSK120RN23PROD with NOTICES1