Federal Register / Vol. 79, No. 233 / Thursday, December 4, 2014 / Notices 72049 

67 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 73410 

(October, 23, 2014), 79 FR 64447 (SR–BX–2014– 

048) (‘‘Notice’’). 

4 17 CFR 242.612 (‘‘Sub-Penny Rule’’). 

5See Letter from Jeffrey Davis, Deputy General 

Counsel, NASDAQ OMX BX, Inc., to Brent J. Fields, 

Secretary, Commission, dated October 10, 2014 

(‘‘Request for Sub-Penny Rule Exemption’’). The 

Request for Sub-Penny Rule Exemption was 

submitted contemporaneously with the Exchange’s 

original filing for this proposed rule change, which 

was filed on October 10, 2014. Because that filing 

did not comply with the rules of the Commission 

relating to the required form of a filing on Form 

19b-4, it was rejected. 

6See Letter from Jeffrey Davis, Deputy General 

Counsel, NASDAQ OMX BX, Inc., to Stephen 

Luparello, Director, Division of Trading and 

Markets, Commission, dated October 10, 2014. This 

letter was submitted contemporaneously with the 

Exchange’s original filing for this proposed rule 

change, which was filed on October 10, 2014. As 

noted above, that filing was rejected because it did 

not comply with the rules of the Commission 

relating to the required form of a filing on Form 

19b–4. 

7The Exchange notes that certain orders 

submitted to the Program designated as eligible to 

interact with liquidity outside of the Program— 

Type 2 Retail Orders, discussed below—could 

execute at prices below $1.00 if they do in fact 

execute against liquidity outside of the Program. 

8An RMO would be a Member (or a division 

thereof) that has been approved by the Exchange to 

submit Retail Orders. See Proposed BX Rule 4780. 

A ‘‘Member’’ is any registered broker or dealer that 

has been admitted to membership in the Exchange. 

See BX Rule 0120(i). 

9The terms Protected Bid and Protected Offer are 

defined in Rule 600(b)(57) of Regulation NMS. 17 

CFR 242.600(b)(57). The Exchange represents that, 

generally, the Protected Bid and Protected Offer, 

and the national best bid (‘‘NBB’’) and national best 

offer (‘‘NBO,’’ together with the NBB, the ‘‘NBBO’’), 

will be the same. However, it further represents that 

a market center is not required to route to the NBB 

or NBO if that market center is subject to an 

exception under Regulation NMS Rule 611(b)(1) or 

if such NBB or NBO is otherwise not available for 

an automatic execution. In such case, the Exchange 

states that the Protected NBBO would be the bestpriced protected bid or offer to which a market 

center must route interest pursuant to Rule 611 of 

Regulation NMS. 

10As explained further below, the Exchange has 

proposed two types of Retail Orders, one of which 

could execute against other contra-side interest if it 

was not completely filled by contra-side RPI 

Interest or other price-improving liquidity. All 

Retail Orders would first execute against available 

contra-side RPI Orders or other price-improving 

liquidity. Any remaining portion of the Retail Order 

would then either cancel, be executed as an 

immediate-or-cancel order, or be routed to another 

market for execution, depending on the type of 

Retail Order. The Exchange notes that other price 

improving liquidity may include, but is not limited 

to: Booked non-displayed orders with a limit price 

that is more aggressive than the then-current NBBO; 

midpoint-pegged orders (which are by definition 

non-displayed and priced more aggressively than 

the NBBO); non-displayed orders pegged to the 

NBBO with an aggressive offset, as defined in 

Proposed BX Rule 4780(a)(4) as Other Price 

Improving Contra-Side Interest. Orders that do not 

constitute other price improving liquidity include, 

but are not limited to: Orders with a time-in-force 

instruction of IOC; displayed orders; limit orders 

priced less aggressively than the NBBO. 

11 In order to qualify as a ‘‘Retail Order,’’ a 

‘‘riskless principal’’ order must satisfy the criteria 

set forth in FINRA Rule 5320.03. RMOs that submit 

riskless principal orders as Retail Orders must 

maintain supervisory systems to reconstruct such 

orders in a time-sequenced manner, and the RMOs 

must submit reports contemporaneous with the 

execution of the facilitated orders that identify such 

trades as riskless principal. 

proposed rule change, as modified by 

Amendment Nos. 1 and 2, (SR–CBOE– 

2014–062), be, and it hereby is, 

approved on an accelerated basis. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.67

Brent J. Fields, 

Secretary. 

[FR Doc. 2014–28475 Filed 12–3–14; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73702; File No. SR–BX– 

2014–048] 

Self-Regulatory Organizations; 

NASDAQ OMX BX, Inc.; Order Granting 

Approval to Proposed Rule Change To 

Establish the Retail Price Improvement 

Program on a Pilot Basis Expiring 

Twelve Months From the Date of 

Implementation 

November 28, 2014. 

I. Introduction 

On October 17, 2014, The NASDAQ 

OMX BX Stock Market LLC (the 

‘‘Exchange’’ or ‘‘BX’’) 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 

establish a Retail Price Improvement 

(‘‘RPI’’) Program (the ‘‘Program’’) on a 

pilot basis for a period of 12 months 

from the date of implementation, if 

approved. The proposed rule change 

was published for comment in the 

Federal Register on October 29, 2014.3

The Commission did not receive any 

comments on the proposed rule change. 

In connection with the proposal, the 

Exchange requested exemptive relief 

from Rule 612 of Regulation NMS,4

which, among other things, prohibits a 

national securities exchange from 

accepting or ranking orders priced 

greater than $1.00 per share in an 

increment smaller than $0.01.5 On 

October 10, 2014, the Exchange 

submitted a letter requesting that the 

staff of the Division of Trading and 

Markets not recommend any 

enforcement action under Rule 602 of 

Regulation NMS based on the 

Exchange’s and its Members’ 

participation in the Program.6

This order approves the proposed rule 

change and grants the exemption from 

the Sub-Penny Rule sought by the 

Exchange in relation to the proposed 

rule change. 

II. Description of the Proposal 

The Exchange is proposing a 12- 

month pilot program to attract 

additional retail order flow to the 

Exchange, while also providing the 

potential for price improvement to retail 

order flow. The Program would be 

limited to trades occurring at prices 

equal to or greater than $1.00 per share.7

All Regulation NMS securities traded on 

the Exchange would be eligible for 

inclusion in the Program. 

Under the Program, a new class of 

market participants called Retail 

Member Organizations (‘‘RMOs’’) 8

would be eligible to submit certain retail 

order flow (‘‘Retail Orders’’) to the 

Exchange. All Exchange Members 

would be permitted to provide potential 

price improvement for Retail Orders in 

the form of designated non-displayed 

interest, called a Retail Price 

Improvement Order (‘‘RPI Order’’ or 

‘‘RPI interest’’), that is priced more 

aggressively than the Protected National 

Best Bid or Offer (‘‘Protected NBBO’’) 9

by at least $0.001 per share. When RPI 

interest priced at least $0.001 per share 

better than the Protected Bid or 

Protected Offer for a particular security 

is available in the Exchange’s system 

(the ‘‘System’’), the Exchange would 

disseminate an identifier, known as the 

Retail Liquidity Identifier, indicating 

that such interest exists. A Retail Order 

would interact, to the extent possible, 

with available contra-side RPI Orders 

and other price improving liquidity.10

Types of Orders and Identifier 

A Retail Order would be an agency or 

riskless principal 11 order that originates 

from a natural person and is submitted 

to the Exchange by an RMO, provided 

that no change is made to the terms of 

the order with respect to price (except 

in the case of a market order being 

changed to a marketable limit order) or 

side of market and provided that the 

order does not originate from a trading 

algorithm or any other computerized 

methodology. A Retail Order is an 

Immediate or Cancel Order. As 

discussed in greater detail below, Retail 

Orders may be designated as Type 1 or 

Type 2. Retail Orders, regardless of 

Type, may be entered in sizes that are 

odd lots, rounds lots, or mixed lots. 

An RPI Order would be non-displayed 

liquidity on the Exchange that is priced 

better than the Protected NBBO by at 

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72050 Federal Register / Vol. 79, No. 233 / Thursday, December 4, 2014 / Notices 

12As noted above, supra note 5 and 

accompanying text, in connection with the 

Program, the Exchange requested exemptive relief 

from the Sub-Penny Rule of Regulation NMS, 

which, among other things, prohibits a national 

securities exchange from accepting or ranking 

orders priced greater than $1.00 per share in an 

increment smaller than $0.01. 

13For example, a prospective RMO could be 

required to provide sample marketing literature, 

Web site screenshots, other publicly disclosed 

materials describing the retail nature of their order 

flow, and such other documentation and 

information as the Exchange may require to obtain 

reasonable assurance that the applicant’s order flow 

would meet the requirements of the Retail Order 

definition. 

14The Exchange represents that it or another selfregulatory organization on behalf of the Exchange 

will review an RMO’s compliance with these 

requirements through an exam-based review of the 

RMO’s internal controls. See Notice, supra note 3, 

79 FR at 6449 n.8. 

15See also BX Rule 4757 (setting forth the 

Exchange’s price-time priority methodology). 

16The Exchange has provided three examples of 

how the priority and ranking of RPI Orders would 

operate. See Notice, supra note 3, 79 FR at 64449– 

50. 

least $0.001 per share and that is 

identified as such. RPI interest can be 

priced either as an explicitly priced 

limit order or implicitly priced as 

relative to the NBBO with an offset of 

at least $0.001. The price of an RPI 

Order with an offset would be 

determined by a Member’s entry of the 

following into the Exchange: (1) RPI buy 

or sell interest; (2) an offset from the 

Protected NBBO, if any; and (3) a ceiling 

or floor price. RPI Orders submitted 

with an offset would be similar to other 

peg orders available to Members in that 

the order is tied or ‘‘pegged’’ to a certain 

price, and would have its price 

automatically set and adjusted upon 

changes in the Protected NBBO, both 

upon entry and any time thereafter. 

RPI Orders in their entirety (the buy 

or sell interest, the offset, and the 

ceiling or floor) will remain nondisplayed. The Exchange will also allow 

Members to enter RPI Orders that 

establish the exact limit price, which is 

similar to a non-displayed limit order 

currently accepted by the Exchange 

today, except that the Exchange will 

accept sub-penny limit prices on RPI 

Orders in increments of $0.001.12 The 

Exchange will monitor whether RPI buy 

or sell interest, adjusted by any offset 

and subject to the ceiling or floor price, 

is eligible to interact with incoming 

Retail Orders. 

When RPI interest priced at least 

$0.001 better than the Exchange’s 

Protected Bid or Protected Offer for a 

particular security is available in the 

System, the Exchange would 

disseminate an identifier, known as the 

Retail Liquidity Identifier, indicating 

that such interest exists. The Exchange 

would implement the Program in a 

manner that allowed the dissemination 

of the identifier through consolidated 

data streams (i.e., pursuant to the 

Consolidated Tape Association Plan/

Consolidated Quotation Plan (‘‘CTA/CQ 

Plan’’) for Tape A and Tape B securities, 

and the Nasdaq UTP Plan for Tape C 

securities as well as through proprietary 

Exchange data feeds). The Retail 

Liquidity Identifier would reflect the 

symbol and the side (buy or sell) of the 

RPI Order, but it would not include the 

price or size. In particular, the 

consolidated quoting outputs would 

include a field for codes related to the 

Retail Liquidity Identifier. The codes 

will indicate RPI interest that is priced 

better than the Exchange’s Protected Bid 

or Protected Offer by at least the 

minimum level of price improvement as 

required by the Program. 

Retail Member Organizations 

In order to become an RMO, a 

Member must conduct a retail business 

or handle retail orders on behalf of 

another broker-dealer. Any Member that 

wishes to obtain RMO status would be 

required to submit: (1) An application 

form; (2) supporting documentation 

sufficient to demonstrate the retail 

nature and characteristics of the 

applicant’s order flow; 13 and (3) an 

attestation, in a form prescribed by the 

Exchange, that substantially all orders 

submitted by the Member as a Retail 

Order would meet the qualifications for 

such orders under Proposed BX Rule 

4780(b). If the Exchange disapproves the 

application, it would provide a written 

notice to the Member. The disapproved 

applicant could appeal the disapproval 

as provided below or re-apply 90 days 

after the disapproval notice is issued by 

the Exchange. An RMO also could 

voluntarily withdraw from RMO status 

at any time by giving written notice to 

the Exchange. 

The Exchange would require an RMO 

to have written policies and procedures 

reasonably designed to assure that it 

will only designate orders as Retail 

Orders if all the requirements of a Retail 

Order are met. Such written policies 

and procedures would have to require 

the Member to exercise due diligence 

before entering a Retail Order to assure 

that entry as a Retail Order is in 

compliance with the proposed rule and 

to monitor whether orders entered as 

Retail Orders meet the applicable 

requirements. If the RMO represents 

Retail Orders from another broker-dealer 

customer, the RMO’s supervisory 

procedures must be reasonably designed 

to assure that the orders received from 

the broker-dealer customer that are 

designated as Retail Orders meet the 

definition of a Retail Order. The RMO 

must obtain, from each broker-dealer 

customer that sends it orders to be 

designated as Retail Orders, an annual 

written representation, in a form 

acceptable to the Exchange, that entry of 

orders as Retail Orders will be in 

compliance with the requirements of 

this proposed rule, and the RMO must 

monitor whether its broker-dealer 

customer’s Retail Order flow continues 

to meet the applicable requirements.14

Retail Order Designations 

Under Proposed BX Rule 4780(f), an 

RMO submitting a Retail Order could 

choose one of two designations dictating 

how the Retail Order would interact 

with available contra-side interest. First, 

a Retail Order could interact only with 

available contra-side RPI interest and 

other price-improving liquidity. The 

RMO would label this a Type 1 Retail 

Order, and such orders would not 

interact with available non-priceimproving, contra-side interest in the 

System or route to other markets. 

Portions of a Type 1 Retail Order that 

were not executed would be cancelled 

immediately and automatically. 

Second, an RMO could label a Retail 

Order as a Type 2-designated Retail 

Order. A Type 2-designated Retail Order 

would interact first with available 

contra-side RPI Orders and other priceimproving liquidity, and any remaining 

portion would be eligible to interact 

with other interest in the System and, if 

designated as eligible for routing, would 

route to other markets in compliance 

with Regulation NMS and pursuant to 

BX Rule 4758. Any portion of the Retail 

Order that remained unexecuted would 

then be cancelled. 

Priority and Allocation 

Under Proposed BX Rule 4780(g), the 

Exchange would follow price-time 

priority, ranking RPI interest in the 

same security according to price and 

then time of entry into the System.15

Any remaining unexecuted RPI Orders 

would remain available to interact with 

other incoming Retail Orders if such 

interest is at an eligible price. Any 

remaining unexecuted portion of a 

Retail Order would cancel or execute in 

accordance with Proposed BX Rule 

4780(f).16

Failure of RMO To Abide by Retail 

Order Requirements 

Proposed BX Rule 4780(c) addresses 

an RMO’s failure to abide by Retail 

Order requirements. If an RMO were to 

designate orders submitted to the 

Exchange as Retail Orders and the 

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Federal Register / Vol. 79, No. 233 / Thursday, December 4, 2014 / Notices 72051 

17 15 U.S.C. 78f(b)(5). 

18The Commission has approved similar 

programs for New York Stock Exchange LLC and 

NYSE MKT LLC, Securities Exchange Act Release 

No. 67347 (July 3, 2012), 77 FR 40673 (July 10, 

2012) (SR–NYSE–2011–55; SR–NYSEAmex–2011– 

84) (‘‘NYSE RLP Approval Order’’), BATS YExchange, Inc., Securities Exchange Act Release No. 

68303 (November 27, 2012), 77 FR 71652 

(December 3, 2012) (SR–BYX–2012–019) (‘‘BATS Y 

RPI Approval Order’’), and The NASDAQ Stock 

Market LLC, Securities Exchange Act Release No. 

68937 (February 15, 2013), 78 FR 12397 (February 

22, 2013) (SR–NASDAQ–2012–129) (‘‘NASDAQ RPI 

Approval Order’’). 

19See Securities Exchange Act Release No. 61358 

(Jan. 14, 2010), 75 FR 3594, 3600 (Jan. 21, 2010) 

(‘‘Concept Release on Equity Market Structure’’). 

20See id. 

21See id. 

22See Notice, supra note 3, 79 FR at 64450. 

23See NASDAQ RPI Approval Order, supra note 

18, BATS Y RPI Approval Order, supra note 18 and 

NYSE RLP Approval Order, supra note 18. See also 

Concept Release on Equity Market Structure, supra 

note 19; Securities Exchange Act Release No. 64781 

(June 30, 2011), 76 FR 39953 (July 7, 2011) (SR– 

BATS–2011–009) (approving a program proposed 

by an options exchange that would provide price 

improvement opportunities to retail orders based, 

in part, on questions about execution quality of 

retail orders under payment for order flow 

arrangements in the options markets). 

24See NASDAQ RPI Approval Order, supra note 

18, BATS Y RPI Approval Order, supra note 18 and 

NYSE RLP Approval Order, supra note 18. See also 

Securities Exchange Act Release No. 64781 (June 

30, 2011), 76 FR 39953, 39957 n.50 (July 7, 2011) 

(SR–BATS–2011–009) (noting that ‘‘it is well 

known in academic literature and industry practice 

that prices tend to move against market makers after 

trades with informed traders, often resulting in 

losses for market makers,’’ and that such losses are 

often borne by uninformed retail investors through 

wider spreads (citing H.R. Stoll, ‘‘The supply of 

dealer services in securities markets,’’ Journal of 

Finance 33 (1978), at 1133–51; L. Glosten & P. 

Milgrom, ‘‘Bid ask and transaction prices in a 

specialist market with heterogeneously informed 

agents,’’ Journal of Financial Economics 14 (1985), 

at 71–100; and T. Copeland & D. Galai, 

‘‘Information effects on the bid-ask spread,’’ Journal 

of Finance 38 (1983), at 1457–69)). 

Exchange determined, in its sole 

discretion, that those orders failed to 

meet any of the requirements of Retail 

Orders, the Exchange could disqualify a 

Member from its status as an RMO. 

When disqualification determinations 

are made, the Exchange would provide 

a written disqualification notice to the 

Member. A disqualified RMO could 

appeal the disqualification as provided 

below or re-apply 90 days after the 

disqualification notice is issued by the 

Exchange. 

Appeal of Disapproval or 

Disqualification 

Under Proposed BX Rule 4780(d), the 

Exchange would establish a Retail Price 

Improvement Program Panel (‘‘RPI 

Panel’’) to review disapproval or 

disqualification decisions. If a Member 

disputes the Exchange’s decision to 

disapprove or disqualify it as an RMO, 

such Member could request, within five 

business days after notice of the 

decision is issued by the Exchange, that 

the RPI Panel review the decision to 

determine if it was correct. The RPI 

Panel would consist of the Exchange’s 

Chief Regulatory Officer (or his or her 

designee) and two officers of the 

Exchange designated by the Exchange’s 

Chief Executive Officer, and it would 

review the facts and render a decision 

within the timeframe prescribed by the 

Exchange. The RPI Panel could overturn 

or modify an action taken by the 

Exchange under Proposed Rule 4780, 

and all determinations by the RPI Panel 

would constitute final action by the 

Exchange on the matter at issue. 

III. Discussion and Commission 

Findings 

After careful review of the proposal, 

the Commission finds that the proposed 

rule change is consistent with the 

requirements of the Act and the rules 

and regulations thereunder that are 

applicable to a national securities 

exchange. In particular, the Commission 

finds that the proposed rule change, 

subject to its term as a pilot, is 

consistent with Section 6(b)(5) of the 

Act,17 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 and 

that the rules of a national securities 

exchange not be designed to permit 

unfair discrimination between 

customers, issuers, brokers or dealers. 

The Commission finds that the 

Program, as it is proposed on a pilot 

basis, is consistent with the 

requirements of the Act because the 

Program is reasonably designed to 

benefit retail investors by providing 

price improvement to retail order 

flow.18 The Commission also believes 

that the Program could promote 

competition for retail order flow among 

execution venues and that this could 

benefit retail investors by creating 

additional price improvement 

opportunities for their order flow. 

Currently, most marketable retail order 

flow is executed in the over-the-counter 

(‘‘OTC’’) markets, pursuant to bilateral 

agreements, without ever reaching a 

public exchange. The Commission has 

noted that ‘‘a very large percentage of 

marketable (immediately executable) 

order flow of individual investors’’ is 

executed, or ‘‘internalized,’’ by brokerdealers in the OTC markets.19 A 

previous review of the order flow of 

eight retail broker-dealers revealed that 

nearly 100% of their customer market 

orders were routed to OTC market 

makers.20 The same review found that 

such routing is often done pursuant to 

arrangements under which retail brokers 

route their order flow to certain OTC 

market makers in exchange for payment 

for such order flow.21 To the extent that 

the Program may provide price 

improvement to retail orders that equals 

what would be provided under such 

OTC internalization arrangements, the 

Program could benefit retail investors. 

So that the Exchange and the 

Commission can better understand the 

Program’s potential impact, the 

Exchange represents that it ‘‘will 

produce data throughout the pilot, 

which will include statistics about 

participation, the frequency and level of 

price improvement provided by the 

Program, and any effects on the broader 

market structure.’’ 22

The Program proposes to create 

additional price improvement 

opportunities for retail investors by 

segmenting retail order flow on the 

Exchange and requiring liquidity 

providers that want to interact with 

such retail order flow to do so at a price 

at least $0.001 per share better than the 

Protected NBBO. The Commission finds 

that, while the Program would treat 

retail order flow differently from order 

flow submitted by other market 

participants, such segmentation would 

not be inconsistent with Section 6(b)(5) 

of the Act, which requires that the rules 

of an exchange are not designed to 

permit unfair discrimination. The 

Commission previously has recognized 

that the markets generally distinguish 

between individual retail investors, 

whose orders are considered desirable 

by liquidity providers because such 

retail investors are presumed on average 

to be less informed about short-term 

price movements, and professional 

traders, whose orders are presumed on 

average to be more informed.23 The 

Commission has further recognized that, 

because of this distinction, liquidity 

providers are generally more inclined to 

offer price improvement to less 

informed retail orders than to more 

informed professional orders.24 Absent 

opportunities for price improvement, 

retail investors may encounter wider 

spreads that are a consequence of 

liquidity providers interacting with 

informed order flow. By creating 

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72052 Federal Register / Vol. 79, No. 233 / Thursday, December 4, 2014 / Notices 

25See 15 U.S.C. 78c(f). 

26 In addition, the Commission believes that the 

Program’s provisions concerning the approval and 

potential disqualification of RMOs are not 

inconsistent with the Act. See, e.g., NASDAQ RPI 

Approval Order, supra note 18, 78 FR at 12400 

n.32, BATS Y RPI Approval Order, supra note 18, 

77 FR at 71656 n.41 and NYSE RLP Approval 

Order, supra note 18, 77 FR at 40680 n.77. 

27As the Commission noted when approving the 

comparable NASDAQ, BATS Y-Exchange, and 

NYSE programs, the Commission believes that the 

Program will not create any best execution 

challenges for brokers that are not already present 

in today’s markets. A broker’s best execution 

obligations are determined by a number of facts and 

circumstances, including: (1) The character of the 

market for the security (e.g., price, volatility, 

relative liquidity, and pressure on available 

communications); (2) the size and type of 

transaction; (3) the number of markets checked; (4) 

accessibility of the quotation; and (5) the terms and 

conditions of the order that results in the 

transaction. See NASDAQ RPI Approval Order, 

supra note 18, 78 FR at 12400 n.33, BATS Y RPI 

Approval Order, supra note 18, 77 FR at 71657, and 

NYSE RLP Approval Order, supra note 18, 77 FR 

at 40680 n.75 (all citing FINRA Rule 5310). 

28See NASDAQ RPI Approval Order, supra note 

18. 

29See BATS Y RPI Approval Order, supra note 

18. 

30See NYSE RLP Approval Order, supra note 18. 

31See Notice, supra note 3, 79 FR at 64451. 

32See id. at 64450. The NYSE’s Retail Liquidity 

Program creates a category of members, Retail 

Liquidity Providers, who are required to maintain 

a NYSE Retail Price Improvement Order that betters 

the protected best bid or offer at least 5% of the 

trading day in each assigned security and who 

receive lower execution fees as a result. 

33See Notice, supra note 3, 79 FR at 64450. In 

contrast, pursuant to NYSE Rule 107C(k)(1), a NYSE 

Type 1-designated Retail Order will interact only 

with available contra-side NYSE Retail Price 

Improvement Orders and NYSE Mid-Point Passive 

Liquidity Orders. Pursuant to NYSE Rule 13, a MidPoint Passive Liquidity Order ‘‘is an undisplayed 

limit order that automatically executes at the midpoint of the protected best bid or offer.’’ 

34See Notice, supra note 3, 79 FR at 64450–51. 

Under the NYSE’S Retail Liquidity Program, Retail 

Orders execute at the single price at which the 

order will be fully executed, unless there are 

separate MPL Orders with better pricing on the 

other side of the Retail Order. See NYSE Rule 

107C(l) (providing examples of how orders execute 

under the NYSE’s Retail Liquidity Program). 

additional competition for retail order 

flow, the Program is reasonably 

designed to attract retail order flow to 

the exchange environment, while 

helping to ensure that retail investors 

benefit from the better price that 

liquidity providers are willing to give 

their orders. 

The Commission notes that the 

Program might also create a desirable 

opportunity for institutional investors to 

interact with retail order flow that they 

are not able to reach currently. Today, 

institutional investors often do not have 

the chance to interact with marketable 

retail orders that are executed pursuant 

to internalization arrangements. Thus, 

by submitting RPI Orders, institutional 

investors may be able to reduce their 

possible adverse selection costs by 

interacting with retail order flow. 

When the Commission is engaged in 

rulemaking or the review of a rule filed 

by a self-regulatory organization, and is 

required to consider or determine 

whether an action is necessary or 

appropriate in the public interest, the 

Commission shall also consider, in 

addition to the protection of investors, 

whether the action will promote 

efficiency, competition, and capital 

formation.25 As discussed above, the 

Commission believes this Program will 

promote competition for retail order 

flow by allowing Exchange Members to 

submit RPI Orders to interact with 

Retail Orders. Such competition may 

promote efficiency by facilitating the 

price discovery process. Moreover, the 

Commission does not believe that the 

Program will have a significant effect on 

market structure, or will create any new 

inefficiencies in current market 

structure. Finally, to the extent the 

Program is successful in attracting retail 

order flow, it may generate additional 

investor interest in trading securities, 

thereby promoting capital formation. 

The Commission also believes that the 

Program is sufficiently tailored to 

provide the benefits of potential price 

improvement only to bona fide retail 

order flow originating from natural 

persons.26 The Commission finds that 

the Program provides an objective 

process by which a Member 

organization could become an RMO and 

that the Program provides for 

appropriate oversight by the Exchange 

to monitor for continued compliance 

with the terms of these provisions. The 

Exchange has limited the definition of 

Retail Order to an agency or riskless 

principal order that originates from a 

natural person and not from a trading 

algorithm or any other computerized 

methodology. Furthermore, a Retail 

Order must be submitted by an RMO 

that is approved by the Exchange. In 

addition, RMOs would be required to 

maintain written policies and 

procedures to help ensure that they 

designate as Retail Orders only those 

orders that qualify under the Program. If 

a Member’s application to become an 

RMO is denied by the Exchange, that 

Member may appeal the determination 

or re-apply. The Commission believes 

that these standards should help ensure 

that only retail order flow is submitted 

into the Program and that these 

standards thereby promote just and 

equitable principles of trade and protect 

investors and the public interest, while 

also providing an objective process 

through which Members may become 

RMOs. 

In addition, the Commission finds 

that the Program’s proposed 

dissemination of a Retail Liquidity 

Identifier would increase the amount of 

pricing information available to the 

marketplace and that is consistent with 

the requirement of the Act. The 

identifier would be disseminated 

through the consolidated public market 

data stream and proprietary Exchange 

data feeds to advertise the presence of 

a RPI Order with which Retail Orders 

could interact. The identifier would 

reflect the symbol for a particular 

security and the side of the RPI Order 

interest, but it would not include the 

price or size of such interest. The 

identifier would alert market 

participants to the existence of a RPI 

Order and should provide market 

participants with more information 

about the availability of price 

improvement opportunities for retail 

orders than is currently available.27

The Exchange asserts that the Program 

will operate in substantially the same 

manner as NASDAQ Rule 4780 28 and 

BATS Y-Exchange Rule 11.24,29 which 

set forth the NASDAQ and BATS YExchanges’ Retail Price Improvement 

Programs, respectively, and that it 

would be similar to, but with 

distinctions from, New York Stock 

Exchange LLC’s (‘‘NYSE’’) Rule 107C, 

which governs NYSE’s Retail Liquidity 

Program.30 Accordingly, the Exchange 

believes that the Program should both 

enhance competition among market 

participants and encourage competition 

among exchange venues.31 Specifically, 

the Exchange asserts that allowing all 

Members to enter RPI Orders on equal 

terms, as opposed to adopting a special 

category of retail liquidity providers, as 

NYSE did with its Retail Liquidity 

Program, could result in a higher level 

of competition and maximize price 

improvement to incoming Retail 

Orders; 32 that the Program should 

provide the maximum price 

improvement available to incoming 

Retail Orders because they will always 

interact with resting RPI Orders and 

other resting non-displayed liquidity; 33

and that the Program will provide all of 

the price improvement available to 

incoming Retail Orders by allowing 

executions at multiple price levels, as 

opposed to a single clearing price 

level.34 The Commission finds that the 

Program is reasonably designed to 

enhance competition among market 

participants and encourage competition 

among exchange venues. The 

Commission also finds that the 

distinctions between the Exchange’s 

Program and the approved programs on 

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Federal Register / Vol. 79, No. 233 / Thursday, December 4, 2014 / Notices 72053 

35See supra note 22 and accompanying text. 

36 17 CFR 242.612(c). 

37See Securities Exchange Act Release No. 51808 

(June 9, 2005), 70 FR 37496, 37551–52 (June 29, 

2005). 

38 Id. at 37553. 

39When adopting the Sub-Penny Rule, the 

Commission considered certain comments that 

asked the Commission to prohibit broker-dealers 

from offering sub-penny price improvement to their 

customers, but declined to do so. The Commission 

stated that ‘‘trading in sub-penny increments does 

not raise the same concerns as sub-penny quoting’’ 

and that ‘‘sub-penny executions due to price 

improvement are generally beneficial to retail 

investors.’’ Id. at 37556. 

other exchanges are reasonably designed 

to enhance the Program’s priceimprovement benefits to retail investors 

and are, therefore, consistent with the 

Act. 

The Commission notes that it is 

approving the Program on a pilot basis. 

Approving the Program on a pilot basis 

will allow the Exchange and market 

participants to gain valuable practical 

experience with the Program during the 

pilot period. This experience should 

allow the Exchange and the Commission 

to determine whether modifications to 

the Program are necessary or 

appropriate prior to any Commission 

decision to approve the Program on a 

permanent basis. The Exchange also has 

agreed to provide the Commission with 

a significant amount of data that should 

assist the Commission in its evaluation 

of the Program. Specifically, the 

Exchange has represented that it ‘‘will 

produce data throughout the pilot, 

which will include statistics about 

participation, the frequency and level of 

price improvement provided by the 

Program, and any effects on the broader 

market structure.’’ 35 The Commission 

expects that the Exchange will monitor 

the scope and operation of the Program 

and study the data produced during that 

time with respect to such issues and 

that the Exchange will propose any 

modifications to the Program that may 

be necessary or appropriate. 

The Commission also welcomes 

comments, and empirical evidence, on 

the Program during the pilot period to 

further assist the Commission in its 

evaluation of the Program. The 

Commission notes that any permanent 

approval of the Program would require 

a proposed rule change by the 

Exchange, and any such proposed rule 

change would provide an opportunity 

for public comment prior to further 

Commission action. 

IV. Exemption From the Sub-Penny 

Rule 

Pursuant to its authority under Rule 

612(c) of Regulation NMS,36 the 

Commission hereby grants the Exchange 

a limited exemption from the SubPenny Rule to operate the Program. For 

the reasons discussed below, the 

Commission determines that such an 

exemption is necessary or appropriate 

in the public interest and is consistent 

with the protection of investors. The 

exemption shall operate for a period of 

12 months, ending on the same date as 

the 12-month pilot period of the 

Program. 

When the Commission adopted the 

Sub-Penny Rule in 2005, it identified a 

variety of problems caused by subpennies that the Sub-Penny Rule was 

designed to address: 

• If investors’ limit orders lose 

execution priority for a nominal 

amount, investors may over time 

decline to use them, thus depriving the 

markets of liquidity. 

• When market participants can gain 

execution priority for a nominal 

amount, important customer protection 

rules such as exchange priority rules 

and the Manning Rule could be 

undermined. 

• Flickering quotations that can result 

from widespread sub-penny pricing 

could make it more difficult for brokerdealers to satisfy their best execution 

obligations and other regulatory 

responsibilities. 

• Widespread sub-penny quoting 

could decrease market depth and lead to 

higher transaction costs. 

• Decreasing depth at the inside 

could cause institutions to rely more on 

execution alternatives away from the 

exchanges, potentially increasing 

fragmentation in the securities 

markets.37

At the same time, the Commission 

‘‘acknowledge[d] the possibility that the 

balance of costs and benefits could shift 

in a limited number of cases or as the 

markets continue to evolve.’’ 38

Therefore, the Commission also adopted 

Rule 612(c), which provides that the 

Commission may grant exemptions from 

the Sub-Penny Rule, either 

unconditionally or on specified terms 

and conditions, if it determined that 

such an exemption is necessary or 

appropriate in the public interest, and is 

consistent with the protection of 

investors. 

The Commission believes that the 

Exchange’s proposal raises such a case. 

As described above, under the current 

market structure, few marketable retail 

orders in equity securities are routed to 

exchanges. The vast majority of 

marketable retail orders are internalized 

by OTC market makers, who typically 

pay retail brokers for their order flow. 

Retail investors can benefit from such 

arrangements to the extent that OTC 

market makers offer them price 

improvement over the NBBO. Price 

improvement is typically offered in subpenny amounts.39 An internalizing 

broker-dealer can offer sub-penny 

executions, provided that such 

executions do not result from 

impermissible sub-penny orders or 

quotations. Accordingly, OTC market 

makers typically select a sub-penny 

price for a trade without quoting at that 

exact amount or accepting orders from 

retail customers seeking that exact price. 

Exchanges—and exchange member 

firms that submit orders and quotations 

to exchanges—cannot compete for 

marketable retail order flow on the same 

basis, because it would be impractical 

for exchange electronic systems to 

generate sub-penny executions without 

exchange liquidity providers or retail 

brokerage firms having first submitted 

sub-penny orders or quotations, which 

the Sub-Penny Rule expressly prohibits. 

The limited exemption granted today 

should promote competition between 

exchanges and OTC market makers in a 

manner that is reasonably designed to 

minimize the problems that the 

Commission identified when adopting 

the Sub-Penny Rule. Under the Program, 

sub-penny prices will not be 

disseminated through the consolidated 

quotation data stream, which should 

avoid quote flickering and reduced 

depth at the inside quotation. 

Furthermore, while the Commission 

remains concerned about providing 

enough incentives for market 

participants to display limit orders, the 

Commission does not believe that 

granting this exemption (and approving 

the accompanying proposed rule 

change) will reduce such incentives. 

Market participants that display limit 

orders currently are not able to interact 

with marketable retail order flow 

because it is almost entirely routed to 

internalizing OTC market makers that 

offer sub-penny executions. 

Consequently, enabling the Exchanges 

to compete for this retail order flow 

through the Program should not 

materially detract from the current 

incentives to display limit orders, while 

potentially resulting in greater order 

interaction and price improvement for 

marketable retail orders. To the extent 

that the Program may raise Manning and 

best-execution issues for broker-dealers, 

these issues are already presented by the 

existing practices of OTC market 

makers. 

The exemption being granted today is 

limited to a one-year pilot. The 

Exchange has stated that ‘‘sub-penny 

trading and pricing could potentially 

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72054 Federal Register / Vol. 79, No. 233 / Thursday, December 4, 2014 / Notices 

40See Request for Sub-Penny Rule Exemption, 

supra note 5, at 3, n.6. 

41See supra note 22 and accompanying text. 

42 In particular, the Commission expects the 

Exchange to observe how maker/taker transaction 

charges, whether imposed by the Exchange or by 

other markets, might impact the use of the Program. 

Market distortions could arise where the size of a 

transaction rebate, whether for providing or taking 

liquidity, is greater than the size of the minimum 

increment permitted by the Program ($0.001 per 

share). 

43 15 U.S.C. 78s(b)(2). 

44 17 CFR 200.30–3(a)(12); 17 CFR 200.30– 

3(a)(83). 

result in undesirable market behavior’’ 

and that, therefore, it will ‘‘monitor the 

Program in an effort to identify and 

address any such behavior.’’ 40

Furthermore, the Exchange has 

represented that it ‘‘will produce data 

throughout the pilot, which will include 

statistics about participation, the 

frequency and level of price 

improvement provided by the Program, 

and any effects on the broader market 

structure.’’ 41 The Commission expects 

to review the data and observations of 

the Exchange before determining 

whether and, if so, how to extend the 

exemption from the Sub-Penny Rule.42

V. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,43 that the 

proposed rule change (SR–BX–2014– 

048) be, and hereby is, approved on a 

one-year pilot basis. 

It is also hereby ordered that, 

pursuant to Rule 612(c) of Regulation 

NMS, the Exchange is given a limited 

exemption from Rule 612 of Regulation 

NMS allowing it to accept and rank 

orders priced equal to or greater than 

$1.00 per share in increments of $0.001, 

in the manner described in the proposed 

rule change above, for a period of 12 

months, ending on the same date as the 

12-month pilot period of the Program. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.44

Brent J. Fields, 

Secretary. 

[FR Doc. 2014–28474 Filed 12–3–14; 8:45 am] 

BILLING CODE 8011–01–P 

DEPARTMENT OF STATE 

[Public Notice 8963] 

Determination by the Secretary of 

State Relating to Iran Sanctions 

SUMMARY: This notice is to inform the 

public that the Secretary of State 

determined on November 20, 2014, 

pursuant to Section 1245(d)(4)(D) of the 

National Defense Authorization Act for 

Fiscal Year 2012 (NDAA) (Pub. L. 112– 

81), as amended, that as of November 

20, 2014, each of the following 

purchasers of oil from Iran has qualified 

for the 180-day exception outlined in 

section 1245(d)(4)(D): Malaysia, 

Singapore, and South Africa. The 

Secretary of State last made exception 

determinations under Section 

1245(d)(4)(D) of the NDAA regarding 

these purchasers on May 27, 2014. 

Dated: November 28, 2014. 

Robert F. Ichord, 

Deputy Assistant Secretary, Bureau of Energy 

Resources, U.S. Department of State. 

[FR Doc. 2014–28520 Filed 12–3–14; 8:45 am] 

BILLING CODE 4710–09–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

Agency Information Collection 

Activities: Requests for Comments; 

Clearance of Renewed Approval of 

Information Collection: Report of 

Inspections Required by Airworthiness 

Directives 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Notice and request for 

comments. 

SUMMARY: In accordance with the 

Paperwork Reduction Act of 1995, FAA 

invites public comments about our 

intention to request the Office of 

Management and Budget (OMB) 

approval to renew an information 

collection. Airworthiness Directives 

(ADs) are regulations issued to require 

correct corrective action to correct 

unsafe conditions in aircraft, engines, 

propellers, and appliances. Reports of 

inspections are often needed when 

emergency corrective action is taken to 

determine if the action was adequate to 

correct the unsafe condition. The 

respondents are aircraft owners and 

operators. Currently, FAA has blanket 

Paperwork Reduction Act approval from 

OMB for all ADs with information 

collection requirements. Per OMB’s 

request, this collection is being 

converted to a generic information 

collection request, which will require 

FAA to submit individual ADs to OMB 

for approval prior to their release. 

DATES: Written comments should be 

submitted by February 2, 2015. 

ADDRESSES: Send comments to the FAA 

at the following address: Ms. Kathy 

DePaepe, Room 126B, Federal Aviation 

Administration, AES–200, 6500 S. 

MacArthur Blvd., Oklahoma City, OK 

73169. 

Public Comments Invited: You are 

asked to comment on any aspect of this 

information collection, including (a) 

Whether the proposed collection of 

information is necessary for FAA’s 

performance; (b) the accuracy of the 

estimated burden; (c) ways for FAA to 

enhance the quality, utility and clarity 

of the information collection; and (d) 

ways that the burden could be 

minimized without reducing the quality 

of the collected information. The agency 

will summarize and/or include your 

comments in the request for OMB’s 

clearance of this information collection. 

FOR FURTHER INFORMATION CONTACT: 

Kathy DePaepe at (405) 954–9362, or by 

email at: Kathy.DePaepe@faa.gov. 

SUPPLEMENTARY INFORMATION: 

OMB Control Number: 2120–0056. 

Title: Report of Inspections Required 

by Airworthiness Directives. 

Form Numbers: There are no FAA 

forms associated with this collection. 

Type of Review: Renewal of an 

information collection; conversion to 

generic information collection request. 

Background: Title 14 CFR part 39, 

Airworthiness Directives (AD), 

authorized by §§ 40113(a), 44701, and 

44702 of Title 49 United States Code, 

prescribes how the FAA issues ADs. 

The FAA issues ADs when an unsafe 

condition is discovered on a specific 

aircraft type. If the condition is serious 

enough and more information is needed 

to develop corrective action, specific 

information may be required from 

aircraft owners/operators. If it is 

necessary for the aircraft manufacturer 

or airworthiness authority to evaluate 

the information, owners/operators will 

be instructed to send the information to 

them. 

Respondents: Approximately 1,120 

aircraft owners/operators. 

Frequency: Information is collected 

on occasion. 

Estimated Average Burden per 

Response: 5 minutes. 

Estimated Total Annual Burden: 

3,080 hours. 

Issued in Washington, DC, on December 1, 

2014. 

Albert R. Spence, 

FAA Assistant Information Collection 

Clearance Officer, IT Enterprises Business 

Services Division, ASP–110. 

[FR Doc. 2014–28517 Filed 12–3–14; 8:45 am] 

BILLING CODE 4910–13–P 

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