Document ID: SEC-2010-0511-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Amex LLC
Posted Date: 2010-04-06T04:00Z

[Federal Register: April 6, 2010 (Volume 75, Number 65)]
[Notices]               
[Page 17457-17459]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06ap10-93]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61818; File No. SR-NYSEAmex-2010-18]

 
Self-Regulatory Organizations; NYSE Amex LLC; Order Granting 
Accelerated Approval of the Proposed Rule Change Relating to the 
Designation of a ``Professional Customer''

March 31, 2010.

I. Introduction

    On February 25, 2010, the NYSE Amex LLC (``NYSE Amex'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder \2\ to designate any Customer \3\ that places more than 390 
orders in listed options per day on average during a calendar month for 
its own beneficial account(s) as a ``Professional Customer.'' The 
proposed rule change was published for comment in the Federal Register 
on March 9, 2010.\4\ The Commission did not receive any comments on the 
proposed rule change. This order approves the proposal on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Under NYSE Amex rules, ``Customer'' is defined as ``an 
individual or organization that is not a Broker/Dealer.'' See NYSE 
Amex Rule 900.2NY(18).
    \4\ See Securities Exchange Act Release No. 61629 (March 2, 
2010), 75 FR 10851 (March 9, 2010) (``Notice'').
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II. Description of NYSE Amex's Proposal

    NYSE Amex proposes to adopt a new term, ``Professional Customer,'' 
which would be defined in NYSE Amex Rule 900.2NY(18A) as a person or 
entity that (i) is not a broker or dealer in securities, and (ii) 
places more than 390 orders in listed options per day on average during 
a calendar month for its own beneficial account(s). Under the proposal, 
a Professional Customer would be treated in the same manner as a broker 
or dealer in securities for purposes of certain execution rules of the 
Exchange. Specifically, the orders of a Professional Customer generally 
would be treated in the same manner as a broker-dealer in securities 
for the purposes of NYSE Amex Rules 900.3NY(j) (Facilitation Order), 
904G(f) (FLEX Trading Procedures and Principles--Crossing Limitations), 
934NY (Crossing), 934.1NY (Facilitation Cross Transactions), 934.2NY 
(At-Risk Cross Transactions), 934.3NY (Solicitation), 963NY (Priority 
and Order Allocation Procedures--Open Outcry), 963.1NY (Complex Order 
Transactions), 964NY (Display, Priority and Order Allocation--Trading 
Systems), 964.2NY(b)(1)(iii) (Participation Entitlement of Specialists 
and e-Specialists), 964.2NY(b)(3)(B) (Allocation of Participation 
Entitlement Amongst Specialist Pool), 980NY(b) (Electronic Complex 
Order Trading), Rule 995NY(b) (Prohibited Conduct--Limit Orders) and 
the Exchange's schedule of fees.
    Under the proposal, a Professional Customer would participate in 
NYSE Amex's allocation process on equal terms with broker-dealers--
i.e., Professional Customers would not receive priority over broker-
dealers in the allocation of orders on the Exchange. The Exchange 
states that the proposal would not otherwise affect non-broker-dealer 
individuals or entities under NYSE Amex rules. All Customer orders, 
including non-broker-dealer orders included in the definition of 
``Professional Customers,'' would continue to be treated equally for 
purposes of the Exchange's rules concerning away market protection.
    The proposal requires ATP holders to indicate whether Customer 
orders are ``Professional Customer'' orders.\5\ To comply with this 
requirement, ATP holders would be required to review their customers' 
activity on at least a quarterly basis to determine whether orders that 
are not for the account of a broker or dealer should be represented as 
Customer orders or Professional Customer orders.\6\ The Exchange states 
that it intends to file a separate proposed rule change to adopt fees 
for professional orders.\7\
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    \5\ The Exchange intends to require firms to identify 
Professional Customer orders submitted electronically to the system 
by identifying them with the number ``8'' in the customer type 
field--a mandatory field required for order entry. Manual orders 
submitted outside the electronic system would be marked with an 
origin code of ``PC.'' These Professional Customer identifiers would 
also flow through Exchange systems into audit trail and trade 
reporting data. See Notice, supra note 4 at 10852.
    \6\ Orders for any customer that had an average of more than 390 
orders per day during any month of a calendar quarter must be 
represented as Professional Customer orders for the next calendar 
quarter. ATP Holders would be required to conduct a quarterly review 
and make any appropriate changes to the way in which they are 
representing orders within five business days after the end of each 
calendar quarter. While members only would be required to review 
their accounts on a quarterly basis, if during a quarter the 
Exchange identifies a customer for which orders are being 
represented as Customer orders but that has averaged more than 390 
orders per day during a month, the Exchange would notify the ATP 
Holder and the ATP Holder would be required to change the manner in 
which it is representing the customer's orders within five business 
days. The Exchange confirmed that references to ``five days'' in 
footnote 10 of the Notice should be read as ``five business days.'' 
E-mail from Matthew Vaughn, Counsel, NYSE Euronext to Ronesha 
Butler, Special Counsel, Division of Trading and Markets, dated 
March 31, 2010.
    \7\ See Notice, supra note 4 at 10852.
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III. Commission Findings and Order Granting Approval of the Proposed 
Rule Change Change

    After careful consideration of the proposed rule change, the 
Commission finds that the proposed rule change is consistent with the 
Act. Specifically, the Commission finds that the proposed rule change 
is consistent with Section

[[Page 17458]]

6(b) \8\ of the Act and the rules thereunder,\9\ and in particular 
with:
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    \8\ 15 U.S.C. 78f(b).
    \9\ In approving the proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
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    Section 6(b)(5) of the Act, which requires that the rules of a 
national securities exchange, among other things, be designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism for a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest; and not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers; \10\ and
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    \10\ 15 U.S.C. 78f(b)(5).
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    Section 6(b)(8) of the Act, which requires the rules of an exchange 
not to impose any burden on competition not necessary or appropriate in 
furtherance of the Act.\11\
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    \11\ 15 U.S.C. 78f(b)(8).
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    Under the proposed rule change, customers who place orders on the 
level of frequency specified in proposed NYSE Amex Rule 900.2NY(18A) 
would be deemed Professional Customers and would no longer receive the 
priority treatment currently granted to all public customers. The 
Commission has previously approved similar proposals to give the orders 
of certain customers, identified as ``Professional Orders'' \12\ or 
``Professionals'',\13\ no greater priority than that given to broker-
dealer orders.\14\ Under the Professional Customer Approval Orders, the 
orders of public customers that are deemed Professional orders are no 
longer accorded the priority granted to the orders of all other public 
customers.\15\ While NYSE Amex Rule 900.2NY (18A) differs slightly from 
the rules adopted in the Professional Customer Approval Orders, the 
Commission believes that the Exchange's proposed rule change is 
comparable to rules of the ISE, CBOE and Phlx, which the Commission 
found to be consistent with the Act.
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    \12\ See International Securities Exchange, LLC (``ISE'') Rule 
100 (a)(37C).
    \13\ See Chicago Board Options Exchange, Incorporated (``CBOE'') 
Rule 1.1 (ggg). See also NASDAQ OMX PHLX, Inc. (``Phlx'') Rule 
1000(b)(14).
    \14\ See Securities Exchange Act Release Nos. 59287 (January 23, 
2009), 74 FR 5694 (January 30, 2009) (``ISE Approval Order''); 61198 
(December 17, 2009), 74 FR 68880 (December 29, 2009) (``CBOE 
Approval Order''); 61802 (March 30, 2010) (``Phlx Approval Order'') 
(together, the ``Professional Customer Approval Orders'').
    \15\ Id.
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    In the ISE Approval Order, the Commission reviewed the background 
and history of customer order priority rules on national securities 
exchanges, and analyzed the role played in the shaping of these rules 
by various considerations and principles. In this regard, the 
Commission discussed the requirement of Section 6(b)(5) of the Act that 
the rules of an exchange be designed to protect investors and the 
public interest; traditional notions of customer priority in exchange 
trading; the agency obligations of exchange specialists; and the 
requirements of Section 11(a) of the Act.\16\ In approving the ISE 
proposal, the Commission articulated its view that priority for public 
customer orders is not an essential attribute of an exchange,\17\ and 
noted that in the past it has approved trading rules at options 
exchanges that do not give priority to orders of public customers that 
are priced no better than the orders of other market participants.\18\
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    \16\ ISE Approval Order, supra note 14. For a brief synopsis of 
the requirements of Section 11(a), see infra, note 20.
    \17\ See ISE Approval Order, supra note 14, at 5697.
    \18\ See ISE Approval Order, supra note 14, at 5697, n. 41-44.
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    In the ISE Approval Order, the Commission concluded that Section 
6(b)(5) of the Act does not require an exchange to treat the orders of 
public customers who place orders at the frequency of more than 390 
orders per day on average identically to the orders of public customers 
who do not meet that threshold.\19\ For the same reason, the Commission 
believes that the Exchange's proposed rule change is consistent with 
Section 6(b)(5) of the Act.
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    \19\ See ISE Approval Order, supra note 14, at 5697. See also 
CBOE Approval Order and Phlx Approval Order, supra note 14.
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    The Commission believes that its view with respect to the ISE 
Approval Order is equally applicable to the NYSE Amex proposal. In this 
regard, the Commission does not believe that the Act requires that the 
orders of a public customer or any other market participant be granted 
priority. Historically, in developing their trading and business 
models, exchanges have adopted rules, with Commission approval, that 
grant priority to certain participants over others, in order to attract 
order flow or to create more competitive markets. However, the Act does 
not entitle any participant to priority as a right. The requirement of 
Section 6(b)(8) of the Act that the rules of an exchange not impose an 
unnecessary or inappropriate burden upon competition does not 
necessarily mandate that a Professional Customer (as defined in the 
NYSE Amex proposal) be granted priority at a time that a broker-dealer 
is not granted the same right. The NYSE Amex proposal simply restores 
the treatment of persons who would be deemed Professional Customers to 
a base line where no special priority benefits are granted.\20\ Thus, 
the Commission believes that it is consistent with the Act for the 
Exchange to amend its rules so that Professional Customer orders, like 
the orders of broker-dealers, are not granted special priority.\21\
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    \20\ In its proposal, the Exchange addressed compliance with 
Section 11(a) of the Act. Section 11(a) prohibits a member of a 
national securities exchange from effecting transactions on that 
exchange for its own account, the account of an associated person, 
or an account over which it or its associated person exercises 
discretion unless an exception applies. Section 11(a)(1) and the 
rules thereunder contain a number of exceptions for principal 
transactions by members and their associated persons, including the 
exceptions in subparagraph (G) of Section 11(a)(1) and in Rule 11a1-
1(T), as well as Rule 11a2-2(T) under the Act. The Exchange 
represents that the proposal would not affect the availability of 
the exceptions to Section 11(a) of the Act, including the exceptions 
in subparagraph (G) of Section 11(a) and in Rules 11a1-1(T) and 
11a2-2(T), as are currently available. See Notice, supra note 4 at 
10852.
    \21\ The Commission notes that certain trading practices that 
could be affected by the proposed rule change may raise issues 
outside the scope of its review of the proposal itself. 
Specifically, any entity that acts as ``dealer,'' as defined in 
Section 3(a)(5) of the Act, 15 U.S.C. 78c(a)(5), is required to 
register with the Commission under Section 15 of the Act, 15 U.S.C. 
78o, and the rules and regulations thereunder, or qualify for any 
exception or exemption from registration. Activity that may cause a 
person to be deemed a dealer includes ```quoting a market in or 
publishing quotes for securities (other than quotes on one side of 
the market on a quotations system generally available to non-broker-
dealers, such as a retail screen broker for government 
securities).'' See Definitions of Terms in and Specific Exemptions 
for Banks, Savings Associations, and Savings Banks Under Sections 
3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934, 
Securities Exchange Act Release No. 47364, 68 FR 8686, 8689, note 26 
(February 24, 2003) (quoting OTC Derivatives Dealers, Securities 
Exchange Act Release No. 40594 (October 23, 1998), 63 FR 59362, 
59370, note 61 (November 3, 1998)).
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    Pursuant to Section 19(b)(2) of the Act,\22\ the Commission may not 
approve any proposed rule change, or amendment thereto, prior to the 
30th day after the date of publication of notice of the filing thereof, 
unless the Commission finds good cause for so doing and publishes its 
reasons for so finding. The Commission hereby finds good cause for 
approving the proposed rule change before the 30th day after the date 
of publication of notice of filing thereof in the Federal Register.\23\ 
The Commission did not receive any comments on the proposed rule 
change. As noted above, the Commission previously found that exchange 
rules that distinguish between the orders of

[[Page 17459]]

customers who place orders at the frequency of more than 390 orders per 
day on average during a calendar month for its own beneficial 
account(s) and the orders of customers who do not meet that threshold 
are consistent with the Act.\24\ Accordingly, pursuant to Section 
19(b)(2) of the Act,\25\ the Commission finds good cause to approve the 
proposed rule change on an accelerated basis.
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    \22\ 15 U.S.C. 78s(b)(2).
    \23\ See Notice, supra note 4.
    \24\ See Professional Customer Approval Orders, supra note 14.
    \25\ 15 U.S.C. 78s(b)(2).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\26\ that the proposed rule change (SR-NYSEAmex-2010-18), be, and 
it hereby is, approved on an accelerated basis.
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    \26\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-7753 Filed 4-5-10; 8:45 am]
BILLING CODE 8011-01-P