Document ID: SEC-2013-1798-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE MKT LLC
Posted Date: 2013-10-22T04:00Z

[Federal Register Volume 78, Number 204 (Tuesday, October 22, 2013)]
[Notices]
[Pages 62766-62771]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-24546]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70588; File No. SR-NYSEMKT-2013-59]

Self-Regulatory Organizations; NYSE MKT LLC; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change Relating to NDX and RUT Combination Orders

October 1, 2013.

I. Introduction

    On June 21, 2013, NYSE MKT LLC (``NYSE MKT'') 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

[[Page 62767]]

thereunder,\2\ a proposed rule change to amend NYSE MKT Rule 965NY to 
revise the procedures governing the trading of NDX and RUT combination 
orders. The proposed rule change was published for comment in the 
Federal Register on July 9, 2013.\3\ The Commission received two 
comments regarding the proposal.\4\ NYSE MKT responded to the comments 
on August 19, 2013.\5\ On August 20, 2013, the Commission extended to 
October 7, 2013, the time within which the Commission must approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\6\ This order institutes proceedings under Section 19(b)(2)(B) 
of the Act \7\ to determine whether to approve or disapprove the 
proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 69919 (July 2, 
2013), 78 FR 41168 (``Notice'').
    \4\ See letters to Elizabeth M. Murphy, Secretary, Commission, 
from Darren Story, CFA, Student Options, LLC, dated July 12, 2013 
(``Story Letter''); and from David Spack, Chief Compliance Officer, 
Casey Securities, LLC, dated August 2, 2013 (``Casey Letter'').
    \5\ See letter from Janet McGinness, Executive Vice President 
and Corporate Secretary, NYSE Euronext, to Elizabeth M. Murphy, 
Secretary, Commission, dated August 19, 2013 (``NYSE MKT 
Response'').
    \6\ See Securities Exchange Act Release No. 70235 (August 20, 
2013), 78 FR 52818 (August 26, 2013).
    \7\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

II. Description of the Proposal

    NYSE MKT Rule 965NY(b) provides procedures for trading Nasdaq 100 
Index (``NDX'') and Russell 2000 Index (``RUT'') combination orders.\8\ 
Currently, NYSE MKT Rule 965NY(b) allows an ATP Holder holding an NDX 
or RUT combination order to execute the order at the best net debit or 
credit so long as (A) no leg of the order would trade at a price 
outside the currently displayed bids or offers in the trading crowd or 
bids or offers in the NDX or RUT Consolidated Book; and (B) at least 
one leg of the order would trade at a price that is better than the 
corresponding bid or offer in the NDX or RUT Consolidated Book.\9\ An 
NDX or RUT combination order that is not executed immediately may be 
executed and printed at the prices originally quoted for each of the 
component option series within two hours after the time of the original 
quotes, provided that, at the time of execution, no individual leg of 
the NDX or RUT combination order may trade ahead of the corresponding 
bid or offer in the NDX or RUT Consolidated Book.\10\
---------------------------------------------------------------------------

    \8\ See NYSE MKT Rule 965NY(b)(4)(iii). A ``NDX combination 
order'' is an order to purchase or sell NDX options and the 
offsetting number of NDX combinations defined by the delta. An ``NDX 
Combination'' is a long (short) NDX call and a short (long) NDX put 
having the same expiration date and strike price. A ``RUT 
combination order'' is an order to purchase or sell RUT options and 
the offsetting number of RUT combinations defined by the delta. An 
``RUT Combination'' is a long (short) RUT call and a short (long) 
RUT put having the same expiration date and strike price. A 
``delta'' is the positive (negative) number of NDX or RUT 
combinations that must be sold (bought) to establish a market 
neutral hedge with the corresponding NDX or RUT option position. See 
NYSE MKT Rule 965NY(b)(1)-(3).
    \9\ The ATP Holder holding the NDX or RUT combination order must 
be bidding or offering in a multiple of the minimum price variation 
on the basis of a total debit or credit for the order, and must 
determine that the combination order may not be executed by a 
combination of transactions with the bids and offers displayed in 
the NDX or RUT Consolidated Book before executing the order at the 
best net debit or credit. See NYSE MKT Rule 965NY(b)(4)(i).
    \10\ See NYSE MKT Rule 965NY(b)(4)(ii).
---------------------------------------------------------------------------

    NYSE MKT proposes to amend NYSE MKT Rule 965NY(b) to implement a 
one-year pilot program that would revise the procedures for trading NDX 
and RUT combination orders. NYSE MKT believes that the pilot program's 
revised trading procedures would make the trading of NDX and RUT 
combination orders more competitive with the trading of combinations in 
Nasdaq 100 Index futures and Russell 2000 Index futures on the Chicago 
Mercantile Exchange (``CME'') and the Intercontinental Exchange 
(``ICE''), respectively.\11\
---------------------------------------------------------------------------

    \11\ See Notice, 78 FR at 41169.
---------------------------------------------------------------------------

    NYSE MKT notes that its rules currently preclude trading the legs 
of an NDX or RUT combination order outside of the prevailing market 
quotes in the individual component series legs.\12\ Further, NYSE MKT 
states that an NDX or RUT combination order must be executed at the 
prices originally quoted, with no window to find liquidity.\13\ 
According to NYSE MKT, the rules of the CME and ICE allow spread and 
combination executions to take place without regard to market prices, 
and these executions are bound only by the daily price limit.\14\ 
Although NYSE MKT believes that traders prefer to use NDX or RUT 
combinations, rather than futures, to hedge positions in NDX or RUT 
options to avoid the execution risk and increased costs involved in 
trading in the futures markets, NYSE MKT believes that the constraints 
in NYSE MKT's rules can make it more difficult for an NYSE Amex Options 
market participant to execute a complex NDX or RUT option trading 
strategy than it is for a CME or ICE market participant to execute 
substantially the same strategy using Nasdaq 100 Index futures or 
Russell 2000 Index futures.\15\ NYSE MKT believes that the additional 
burden associated with trading on the Exchange may discourage trading 
on NYSE MKT in favor of trading on the CME and ICE.\16\ NYSE MKT 
believes, further, that it may be at a competitive disadvantage because 
market participants who frequently trade spreads or combinations, or 
who trade spreads or combinations as a strategy for hedging risk, would 
tend to utilize a market venue where they can more consistently depend 
on achieving a net price execution.\17\
---------------------------------------------------------------------------

    \12\ See id. at 41170.
    \13\ See id.
    \14\ See id.
    \15\ See id.
    \16\ See id.
    \17\ See id.
---------------------------------------------------------------------------

    To further level the field of competition between market 
participants trading on NYSE Amex Options and on the CME and ICE, NYSE 
MKT proposes to revise its NDX and RUT combination order trading 
procedures.\18\ Specifically, NYSE MKT proposes to amend NYSE MKT Rule 
965NY(b)(4) to implement a one-year pilot program that would allow an 
ATP Holder to execute an NDX or RUT combination order at the best net 
debit or credit price, which may be outside the current derived net 
market,\19\ so long as: (a) The best net debit or credit price would 
have been at or within the derived net market over the preceding two 
hours of trading that day; (b) no leg of the order would trade at a 
price outside the displayed bids or offers in the trading crowd or 
customer interest in the NDX or RUT Consolidated Book at a point in 
time over the preceding two-hour period; and (c) at least one leg of 
the order would trade at a price that is better than the corresponding 
customer bid or offer in the NDX or RUT Consolidated Book at the same 
point in time over the preceding two-hour period.\20\ The ``derived net 
market'' is NYSE MKT's best bids and offers displayed in the individual 
option series for the strategy at any one point in time over the 
previous two hours, not at separate points in time for each of the 
series.\21\ For example, an ATP Holder could not use the price of the 
April 2790 puts at 10:20 a.m. and the price of the April 2810 calls and 
puts at 10:30 a.m. to calculate a derived net market.\22\
---------------------------------------------------------------------------

    \18\ See Notice, 78 FR at 41171.
    \19\ The proposal defines the ``derived net market'' as NYSE 
MKT's best bids and offers displayed in the individual option series 
for the strategy at any one point in time. See NYSE MKT Rule 
965NY(b)(4)(iii).
    \20\ See NYSE MKT Rule 965NY(b)(4)(iii).
    \21\ See NYSE MKT Rule 965NY(b)(4)(iii) and Notice, 78 FR at 
41171.
    \22\ See Notice, 78 FR at 41171.

---------------------------------------------------------------------------

[[Page 62768]]

    NYSE MKT states that the proposed procedure is generally modeled 
after CME Rule 542 and ICE Rule 27.11(a)(v), in that it would allow an 
NDX or RUT combination order to be executed out-of-range from the 
current market prices in the individual component option series legs, 
provided that the reported net price and related component series 
prices were in range within the preceding two hours.\23\ According to 
NYSE MKT, the rules of the CME and ICE require only that the reported 
price of each component futures contract leg be within the daily price 
limit, a number that the Exchange believes is generally much wider than 
the two-hour derived net market range proposed by the Exchange.\24\
---------------------------------------------------------------------------

    \23\ See id. To be ``in range,'' the net price of the NDX or RUT 
combination order must have been at or within the derived net market 
over the preceding two-hour period, each leg of the order must trade 
at a price that would have been at or inside the best bids and 
offers displayed in the individual option series legs at a single 
point in time over the preceding two hours, and a least one leg of 
the order must trade at a price that would have been better than the 
corresponding customer orders in the NDX or RUT Consolidated Book at 
the same point in time. See id.
    \24\ See id.
---------------------------------------------------------------------------

    Each component leg of an NDX or RUT combination order would 
continue to be reported to the trading floor and the Options Price 
Reporting Authority (``OPRA'') with a special indicator identifying the 
reported price as part of a combination order trade.\25\
---------------------------------------------------------------------------

    \25\ See id.
---------------------------------------------------------------------------

    NYSE MKT states its belief that the proposed procedure would not 
lessen the obligation of ATP Holders to obtain best execution of 
options orders for their customers.\26\ If the Commission approves the 
proposal, NYSE MKT will issue a regulatory bulletin to ATP Holders 
explaining the operation of Rule 965NY, as amended, and reminding ATP 
Holders that the new procedure does not lessen the obligation of ATP 
Holders to obtain best execution of option orders for their 
customers.\27\
---------------------------------------------------------------------------

    \26\ See id.
    \27\ See id.
---------------------------------------------------------------------------

    NYSE MKT characterizes the proposed pilot program as a narrowly 
tailored trading process that does not go as far as existing CME and 
ICE rules.\28\ NYSE MKT believes that its proposed procedure would 
provide market participants with additional flexibility in achieving 
desired combination order strategies in NDX and RUT and in determining 
whether to execute their strategies using options traded on NYSE MKT or 
with comparable products traded on CME or ICE, respectively.\29\
---------------------------------------------------------------------------

    \28\ See Notice, 78 FR at 41172.
    \29\ See id.
---------------------------------------------------------------------------

    NYSE MKT believes that the proposed pilot program would facilitate 
the orderly execution of combination orders in NDX and RUT at all 
times, including during volatile markets, in a manner that is more 
competitive with the existing CME and ICE trading procedures.\30\ In 
addition, NYSE MKT believes that the proposal will address customers' 
desire to show an order to other market participants to seek price 
improvement or additional liquidity.\31\ NYSE MKT believes, further, 
that the proposal would continue to provide an incentive for market 
makers to reduce the width of their quotes for an options position that 
is ``tied'' to a combination because, under the proposed procedure, a 
market maker would know that its hedge price has been established and 
that he or she would not have to trade in another market, which would 
result in tighter and more liquid markets for customers who trade 
options tied to combinations.\32\
---------------------------------------------------------------------------

    \30\ See id.
    \31\ See id.
    \32\ See id. As explained more fully in footnote 5 in the 
Notice, a customer may request a market for the NDX puts that the 
customer wishes to purchase based on a specified level of the Nasdaq 
100 Index. Specifying the index level allows market participants to 
determine the delta and a theoretical value of the puts. A market 
participant will then give his or her market for the puts and for 
the component NDX call and put options that would comprise the 
combination portion of the order. The combination portion of the 
order is equivalent to an order to trade futures at the underlying 
value of the Nasdaq 100 Index that has been specified by the 
parties. The prices quoted for the combination establish the hedge 
price for the transaction. When this occurs, market participants say 
that the puts have been ``tied'' to the combination. See Notice, 78 
FR at 41169 at footnote 5 and accompanying text. (The Commission 
notes that footnote 5 in the Notice refers to the position being 
hedged by the offsetting NDX combination first as NDX calls, then as 
NDX puts. Example 3 in the Notice, on which footnote 5 is based, 
refers to a customer that wishes to trade the 35 delta NDX April 
2790 puts tied to a combination. Accordingly, the Commission 
believes that NYSE MKT intends to refer to NDX puts as the position 
being hedged in footnote 5.)
---------------------------------------------------------------------------

    If NYSE MKT were to propose to extend the pilot program or to make 
it permanent, NYSE MKT would provide the Commission with a pilot report 
analyzing the pilot program.\33\ The pilot report, which NYSE MKT would 
submit to the Commission on a confidential basis at least two months 
prior to the expiration of the pilot program, would include information 
on the number of combination trades in NDX and RUT and best bid or 
offer trade through/trade at analysis of those trades.\34\ The pilot 
report also would include information on the NDX and RUT options 
classes and other broad-based index option products, including 
information on average contract value, average daily volume, open 
interest, average order size, percentage of complex orders, percentage 
of volume from complex orders, and average daily notional value 
traded.\35\
---------------------------------------------------------------------------

    \33\ See Notice, 78 FR at 41171-72.
    \34\ See Notice, 78 FR at 41172.
    \35\ See id.
---------------------------------------------------------------------------

III. Summary of Comments and NYSE MKT's Response

    The Commission received two comments regarding the proposal,\36\ 
and NYSE MKT responded to the comments.\37\ One commenter opposes the 
proposal, stating its belief that it would cause ``irreparable harm'' 
to customers and prohibit competition that might provide improved 
prices for marketable orders.\38\ The commenter believes that the 
prohibition in the current rule against trading any leg of an NDX or 
RUT combination order through a contemporaneous resting order for that 
series does not impede the trading of NDX or RUT combination orders 
because, in some circumstances, it would be possible to adjust the 
component legs of an NDX or RUT combination order in response to a 
change in the markets so that the combination order would achieve its 
desired net price and each leg of the order would trade within the 
range of the current quoted market for the series.\39\ The commenter 
states that traders frequently make such adjustments, and that trades 
should continue to be executed at or within current market prices 
because current prices reflect available information and represent the 
best estimate of the true value of an option at a given time.\40\ In 
addition, the commenter states its view that executing a leg of a 
combination order outside of the current market would result in a worse 
price for the customer.\41\ The commenter also does

[[Page 62769]]

not believe that the two-hour look back window would mitigate the 
potential impact of trade-throughs on market participants that provide 
liquidity in the underlying leg options.\42\
---------------------------------------------------------------------------

    \36\ See Story Letter and Casey Letter.
    \37\ See NYSE MKT Response.
    \38\ See Story Letter at 1.
    \39\ See id. For example, the commenter states that if a 
customer seeks to sell 100 RUT April 950 puts at 30.00 tied to a 
combination based on a Russell 2000 Index level of 975 with a 20 
delta, and the market moves so that the combination must be printed 
at an index level of 980, rather than 975, the price of the April 
950 puts can be lowered by a corresponding equivalent amount to 
account for the increase in the index level. The 5.00-point change 
in the index level would require a corresponding reduction of 1.00 
for the April puts (5.00 x .20 (20 delta) = 1.00). Reducing the 
April puts to 29.00 to account for the 5.00-point increase in the 
index level results in a $10,000 reduction for the April puts (30.00 
- 29.00 = 1.00 x 100 x 100 = $10,000) and a corresponding $10,000 
increase for the hedging combination (975 - 980 = - 5.00 x 20 x 100 
= $10,000), so that, after the adjustments, the net price for the 
combination order remains the same. See id.
    \40\ See Story Letter at 1-2.
    \41\ See id.
    \42\ See Story Letter at 2.
---------------------------------------------------------------------------

    Another commenter supports implementing the proposal on a pilot 
basis.\43\ The commenter states that its customers consider NDX and RUT 
spreads and combination orders to be equivalent to Nasdaq 100 Index and 
Russell 2000 Index futures, respectively, and that its customers find 
futures contracts to be more attractive than combination orders due to 
ease of execution.\44\ The commenter believes that the restriction in 
the current rule that prohibits the execution of NDX and RUT 
combination orders at a price that would result in any underlying 
option leg trading through a contemporaneous resting order for that 
option impedes the trading of combinations. In particular, the 
commenter noted that there are instances when, by the time a customer 
has been found and both parties are ready to trade, the market has 
moved in such a way that consummating the trade would create a trade-
through of a protected quote, requiring the trade to either be 
cancelled, adjusted, or moved to the futures market.\45\ The commenter 
believes that the proposed two-hour look back would mitigate an 
impediment to trading combination orders by permitting an NDX or RUT 
combination order to trade through resting interest in instances where 
the combination order was at or within the quoted market at the time of 
the initial quote, even though quotes for one of the legs may move such 
that the leg is outside of the market by the time both parties are able 
to consummate the transaction.\46\ Noting that options prices may move 
quickly and that combination orders in active index derivatives are 
difficult to complete, the commenter emphasizes that the ``important 
aspect to consider is that these kinds of combination orders, if they 
could be executable immediately (when the initial quote was received) 
would be in line with all quotes, and no trade-through issues would 
exist.'' \47\
---------------------------------------------------------------------------

    \43\ This commenter recommends collecting data concerning the 
volume of NDX and RUT combination order trades before and after the 
implementation of the pilot, as well as data regarding the available 
liquidity and spread sizes in the individual legs of the 
combinations. See Casey Letter at 2.
    \44\ See Casey Letter at 3.
    \45\ See Casey Letter at 1.
    \46\ See id.
    \47\ Id. at 2.
---------------------------------------------------------------------------

    The commenter believes, further, that because NDX and RUT 
combination orders are difficult to complete, they require different 
rules from options transactions that can be executed almost immediately 
with the current quotes.\48\ In addition, the commenter believes that 
the trade-throughs that would be permitted under the proposed rule 
would have a negligible impact on market participants that provide 
liquidity in the individual leg markets because there are comparable 
trade-through exceptions in the equity markets for block and contingent 
trades that do not have a negative impact on liquidity in the equity 
market.\49\ Finally, the commenter believes that the proposed pilot 
program could tighten spreads because it would lock in hedge prices and 
eliminate the need for market participants to find their hedge in a 
different market.\50\
---------------------------------------------------------------------------

    \48\ See id.
    \49\ According to the commenter, market participants ``generally 
understand that these trade-throughs are not indicative of the real 
market, and thus they do not have an adverse impact on quote size or 
spread width.'' See Casey Letter at 2. The commenter believed, 
further, that equity market participants have absorbed the 
alternative rules for large and complex orders and continue to 
interact in meaningful ways without disruption to the overall 
market. See Casey Letter at 4.
    \50\ See Casey Letter at 4.
---------------------------------------------------------------------------

    As discussed above, the commenter that opposes the proposal 
believes that market participants would be able, in some cases, to 
adjust the prices of the individual legs of a combination order to 
achieve the order's desired net price so that the order may be executed 
within the range of the current markets.\51\ In addition, the commenter 
expresses concern that the proposal potentially could result in harm to 
customers.\52\ In its response, NYSE MKT disagrees with the assertion 
that market participants could adjust the prices of the individual legs 
of a combination order to achieve the order's desired net price 
because, in some circumstances, such adjustments would not be feasible 
or desirable.\53\ NYSE MKT also disagrees strongly with the assertion 
that the proposal would result in harm to customers, and notes that the 
commenter fails to specify whether the proposal would result in harm to 
customer orders on the book or to a customer participating in the 
combination order.\54\ NYSE MKT notes that both the proposal and the 
adjustment process the commenter describes are designed to facilitate 
the execution of a complex order as a clean cross, to the extent 
consistent with market conditions and applicable priority rules.\55\ 
NYSE MKT states that, as a complex negotiated trade, participants to 
combination orders agree on a net debit or credit for a transaction 
based on current market conditions.\56\ In addition, NYSE MKT states 
that similar practices exist in the equity market, and that its 
proposed two-hour window is more restrictive than that of marketplaces 
offering competing products, such as ICE and CME.\57\
---------------------------------------------------------------------------

    \51\ See Story Letter at 1.
    \52\ See id. at 3.
    \53\ See NYSE MKT Response at 1.
    \54\ See NYSE MKT Response at 1-2.
    \55\ See NYSE MKT Response at 2.
    \56\ See id.
    \57\ See NYSE MKT Response at 1.
---------------------------------------------------------------------------

    NYSE MKT believes that the proposal would provide for additional 
flexibility in achieving desired combinations and hedging strategies, 
and would create a transparent and more efficient process.\58\ NYSE MKT 
believes, further, that its proposed two-hour window will enable the 
completion of combination orders in a manner that provides a reasonable 
degree of execution certainty, to the benefit of market participants 
and customers participating in the combination order.\59\ NYSE MKT 
notes that market participants would not be required to use the two-
hour look back window and that members may continue to use the current 
``adjustment'' approach.\60\
---------------------------------------------------------------------------

    \58\ See NYSE MKT Response at 2.
    \59\ See NYSE MKT Response at 1.
    \60\ See NYSE MKT Response at 2.
---------------------------------------------------------------------------

IV. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEMKT-2013-59 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \61\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the significant 
legal and policy issues raised by the proposed rule change, as 
discussed below. Institution of proceedings does not indicate that the 
Commission has reached any conclusions with respect to any of the 
issues involved. Rather, as described in greater detail below, the 
Commission seeks and encourages interested persons to provide 
additional comment on the proposed rule change.
---------------------------------------------------------------------------

    \61\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act, the Commission is 
providing notice of the grounds for disapproval under consideration. 
The sections of the Act and the rules thereunder that are applicable to 
the proposed rule change include Sections 3(a)(1), 6(b)(5), and

[[Page 62770]]

11A(a) of the Act.\62\ Section 3(a)(1) of the Act defines an exchange, 
in part, as any organization, association, or group of persons which 
constitutes, maintains, or provides a market place or facilities for 
bringing together purchasers and sellers of securities. Section 6(b)(5) 
of the Act 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 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. In Section 11A(a) of the Act, 
Congress found, in part, that it is in the public interest and 
appropriate for the protection of investors and the maintenance of fair 
and orderly markets to assure the economically efficient execution of 
securities transactions.\63\
---------------------------------------------------------------------------

    \62\ 15 U.S.C. 78c(a)(1), 15 U.S.C. 78f(b)(5), and 15 U.S.C. 
78k-1(a)(1)(C).
    \63\ 15 U.S.C. 78k-1(a)(1)(C)(i).
---------------------------------------------------------------------------

    The Commission believes that NYSE MKT's proposal raises questions 
as to whether the proposed rule change is consistent with these 
standards. As discussed above, NYSE MKT's proposed pilot program would 
allow an ATP Holder to execute an NDX or RUT combination order outside 
the current derived net market so long as: (a) The best net debit or 
credit price would have been at or within the derived net market over 
the preceding two hours of trading that day; (b) no leg of the order 
would trade at a price outside the displayed bids or offers in the 
trading crowd or customer interest in the NDX or RUT Consolidated Book 
at a point in time over the preceding two-hour period; and (c) at least 
one leg of the order would trade at a price that is better than the 
corresponding customer bid or offer in the NDX or RUT Consolidated Book 
at the same point in time over the preceding two-hour period.\64\ By 
allowing NDX and RUT combination orders to be executed outside of the 
current derived net market, the proposed rule change raises concerns 
about the potential effect of the proposal on the markets for NDX and 
RUT options, and, in particular, whether or how the potential for 
trade-throughs of prices on NYSE MKT would impact the incentives of 
market participants to provide liquidity in the individual series 
comprising the legs of an NDX or RUT combination order.
---------------------------------------------------------------------------

    \64\ See NYSE MKT Rule 965NY(b)(4)(iii).
---------------------------------------------------------------------------

    NYSE MKT states that practices similar to the trade-throughs that 
would be permitted under the proposal already exist in the equity 
markets.\65\ The Commission notes that the Qualified Contingent Trade 
exemption (``QCT Exemption'') to Rule 611(a) of Regulation NMS,\66\ 
permits inter-market trade-throughs of quotations in NMS stocks for 
qualified contingent trades, but does not provide for the intramarket 
trade-throughs that the proposal would permit.\67\ Thus, the QCT 
Exemption does not establish a precedent for an exchange seeking to 
trade through its own market.\68\ NYSE MKT does not provide an analysis 
of the potential impact of trade-throughs on the NYSE MKT NDX and RUT 
limit order books, nor does it provide a detailed discussion of how it 
would study the impact on the individual leg markets if the proposed 
pilot were approved.
---------------------------------------------------------------------------

    \65\ See NYSE MKT Response at 2. As discussed above, one 
commenter believed that the trade-throughs permitted in the equity 
market have not had a negative impact on liquidity or disrupted the 
overall market. See Casey Letter at 2 and 4. See also note 49, 
supra, and accompanying text.
    \66\ 17 CFR 242.611(a).
    \67\ See Securities Exchange Act Release No. 57620 (April 4, 
2008), 73 FR 19271 (April 9, 2008), 73 FR 19271 (order modifying the 
QCT Exemption); and 54389 (August 31, 2006), 71 FR 52829 (September 
7, 2006) (order granting the QCT Exemption).
    \68\ The Commission also notes that under the Options Order 
Protection and Locked/Crossed Market Plan, only an NDX or RUT 
combination order that qualifies as a Complex Trade would be 
permitted to trade through the quotes in the leg markets of another 
exchange that trades NDX or RUT options. See Securities Exchange Act 
Release No. 60405 (July 30, 2009), 74 FR 39632 (August 6, 2009). The 
proposal does not address how NYSE MKT would treat an NDX or RUT 
combination order that is not a Complex Trade and therefore not 
permitted to trade through the NDX or RUT quotes of another options 
exchange.
---------------------------------------------------------------------------

    In light of these issues and concerns, the Commission believes that 
questions arise regarding whether the proposal is consistent with the 
requirements of Sections 3(a)(1), 6(b)(5), and 11A(a) of the Act. As 
the Commission continues to evaluate the issues presented by the 
proposal, the Commission solicits comment on whether the proposal is 
consistent with the Act and whether the Exchange has met its burden in 
presenting a statutory analysis of how its proposal is consistent with 
the Act. In particular, the grounds for disapproval under consideration 
include whether the Exchange's proposal is consistent with Section 
6(b)(5) of the Act, 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, and to protect investors and the public interest. 
In addition, under the Commission's rules of procedure, a self-
regulatory organization that proposes to amend its rules bears the 
burden of demonstrating that its proposal is consistent with the 
Act.\69\ In this regard:
---------------------------------------------------------------------------

    \69\ Rule 700(b)(3), 17 CFR 201.700(b)(3).

the description of the proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and 
specific to support an affirmative Commission finding. Any failure 
of the self-regulatory organization to provide the information 
elicited by Form 19b-4 may result in the Commission not having a 
sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the rules and 
regulations thereunder that are applicable to the self-regulatory 
organization.\70\
---------------------------------------------------------------------------

    \70\ See id.

V. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
concerns identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Sections 3(a)(1), 6(b)(5), 11A(a), or any other 
provision of the Act, or the rules and regulations thereunder. Although 
there do not appear to be any issues relevant to approval or 
disapproval which would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4, any request for an opportunity to make an oral 
presentation.\71\
---------------------------------------------------------------------------

    \71\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding --either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by November 12, 2013. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
November 26, 2013.
    The Commission asks that commenters address the sufficiency and 
merit of the Exchange's statements in support of the proposal, in 
addition to any other comments they may wish to submit about the 
proposed rule change. In particular, the Commission seeks comment on 
the following:

[[Page 62771]]

    1. What, if any, effect do commenters believe the proposal may have 
on the incentives of market participants to provide liquidity in the 
series comprising an NDX or RUT combination order? Do commenters 
believe that permitting NDX and RUT combination orders to trade through 
interest in the leg market potentially could discourage market 
participants from placing limit orders in the individual series on the 
NDX and RUT limit order books? Why or why not?
    2. Do commenters believe that NYSE MKT has adequately analyzed the 
potential effects of the proposal on the markets for NDX and RUT 
options, including the potential impact on market participants 
providing liquidity in the series comprising the legs of an NDX or RUT 
combination order? Why or why not?
    3. As noted above, one commenter expresses concern that the 
flexibility to trade outside of the current derived net market could 
result in harm to customers.\72\ NYSE MKT disagrees, stating in its 
response that participants to complex negotiated trades agree on a net 
price for a transaction based on current market conditions.\73\ In 
addition, NYSE MKT notes that market participants would not be required 
to use the two-hour look back window.\74\ What, if any, impact do 
commenters believe the ability to trade outside of the current derived 
net market would have on the quality of executions for customers 
trading NDX and RUT combination orders?
---------------------------------------------------------------------------

    \72\ See Story Letter at 3.
    \73\ See NYSE MKT Response at 2.
    \74\ See id.
---------------------------------------------------------------------------

    4. NYSE MKT believes that its current combination order rule ``does 
not come close to leveling the field with the CME and ICE rules for 
spread and combination trading,'' and that the rules of the CME and ICE 
require only that the reported price of each component futures contract 
be within the daily limit price.\75\ Do commenters believe that NYSE 
MKT has fully identified the multi-legged futures strateg(ies) with 
which it believes NDX and RUT combination orders compete?
---------------------------------------------------------------------------

    \75\ See Notice, 78 FR at 441170 and 41171.
---------------------------------------------------------------------------

    5. Do commenters believe that there are characteristics associated 
with the trading of NDX and RUT options that potentially could help the 
Commission assess the concerns discussed above regarding the potential 
to impact the quality of executions or the incentives of liquidity 
providers in the individual series? If so, please explain. Do 
commenters believe that these characteristics, if any, are unique to 
NDX and RUT options, or are they also shared by other broad-based index 
options? If so, the Commission is interested in statistics or other 
data concerning the trading of NDX and RUT options that would help the 
Commission to assess these characteristics.
    6. As discussed more fully above, one commenter believes that the 
proposal is unnecessary because market participants would be able to 
adjust the prices of the legs of an NDX or RUT combination order so 
that they are at or within the current market. Another commenter states 
that the proposal would remove an impediment to the trading of NDX and 
RUT combination orders by allowing the orders to trade through the 
current market, provided that the conditions in the rule are satisfied. 
Do commenters agree or disagree with these views and why?
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEMKT-2013-59 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEMKT-2013-59. 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 Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site 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 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEMKT-2013-59 and should 
be submitted on or before November 12, 2013. Rebuttal comments should 
be submitted by November 26, 2013.
---------------------------------------------------------------------------

    \76\ 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\76\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24546 Filed 10-21-13; 8:45 am]
BILLING CODE 8011-01-P