Document ID: SEC-2010-1352-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange LLC
Posted Date: 2010-09-07T04:00Z

[Federal Register: September 7, 2010 (Volume 75, Number 172)]
[Notices]               
[Page 54411-54414]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07se10-80]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62791; File No. SR-NYSE-2010-60]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Amending NYSE Rule 107B To Revise the Quoting Requirements and Add a 
Volume Requirement

August 30, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\, and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on August 26, 2010, New York Stock Exchange LLC (``NYSE'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and 
II, below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend NYSE Rule 107B (``Supplemental 
Liquidity Providers'') (``SLPs''), which is a pilot program, to revise 
the quoting requirements and add a volume requirement. The text of the 
proposed rule change is available on the Exchange's Web site at http://
www.nyse.com, at the Exchange's principal office, at the Commission's 
Public Reference Room, and on the Commission's Web site at http://
www.sec.gov.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received

[[Page 54412]]

on the proposed rule change. The text of those statements may be 
examined at the places specified in Item IV below. The Exchange has 
prepared summaries, set forth in sections A, B, and C below, of the 
most significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Rule 107B, which is a pilot program, 
to increase the quoting requirement applicable to SLPs and add a 
requirement that the SLP provide average daily volume (``ADV'') of more 
than 10 million shares for all assigned SLP securities on a monthly 
basis. In connection with this proposed change, the Exchange also 
proposes to revise the non-regulatory penalties associated with the SLP 
program to align them with the new quoting and volume requirements. The 
Exchange also proposes to clarify which mnemonics that a member 
organization may use for the SLP trading activity to enable a member 
organization to use the same mnemonic for non-SLP trading activity.
    Background:
    Rule 107B, which was adopted as a pilot program in October 2008, 
established a new class of market participants referred to as 
Supplemental Liquidity Providers or ``SLPs.'' \3\ Approved Exchange 
member organizations are eligible to be an SLP. SLPs supplement the 
liquidity provided by Designated Market Makers (``DMMs''). SLPs have 
monthly quoting requirements that may qualify them to receive SLP 
rebates, which are larger than the general rebate available to non-SLP 
market participants.
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    \3\ See Securities Exchange Act Release No. 58877 (October 29, 
2008), 73 FR 65904 (November 5, 2008) (SR-NYSE-2008-108) 
(establishing pilot program for market participants referred to as 
``Supplemental Liquidity Providers'' or ``SLPs.''). The pilot is 
currently scheduled to end on September 30, 2010.
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    Proposed Amendments to Rule 107B:
1. Proposed Modification of SLP Quoting Requirements
    The goal of the SLP program is to encourage participants to quote 
more often and to add displayed liquidity to the market. Thus, Rule 
107B(a) requires that an SLP maintain a bid and/or an offer at the NBB 
or NBO (e.g., the ``inside'') averaging at least 5% of the trading day 
for each assigned security. The Exchange proposes to increase this 
quoting requirement to require SLPs to maintain a bid and/or offer at 
the inside an average of at least 10% of the trading day. The Exchange 
notes that SLPs are already operating at this volume of trading for 
many of the assigned securities and have been notified that the 
Exchange intends to increase the quoting requirement for all SLP 
securities. Accordingly, the Exchange proposes to increase the quoting 
requirement set forth in the rule to ensure that SLPs continue trading 
at this level or higher.
2. Proposed SLP Monthly Volume Requirement
    Currently, as set forth in the NYSE Price List, an SLP can receive 
additional credit if it adds liquidity of an ADV of more than 10 
million shares in the applicable month. The Exchange proposes to amend 
Rule 107B to make the ADV fee structure an ongoing volume requirement. 
The Exchange therefore proposes to add to section (a) of the rule that 
an SLP must provide an ADV of more than 10 million shares for all 
assigned SLP securities on a monthly basis. Meeting this volume 
requirement will enable an SLP to receive the basic SLP rebate 
(currently $0.0020 per executed share) on security-by-security basis 
and to maintain their SLP status.\4\ An SLP will not receive the SLP 
rebate for any assigned SLP securities if it fails to also meet the 
volume requirement for all assigned SLP securities.
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    \4\ The Exchange may, from time to time, change the amounts of 
the scaled SLP rebates by filing a proposed rule change under Rule 
19b-4(f)(2) of the Act. 17 CFR 240.19b-4(f)(2).
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    As proposed, Rule 107B's volume requirement will be calculated by 
aggregating all liquidity an SLP provides in all of its assigned SLP 
securities each month and calculating the ADV by dividing the total 
aggregated providing volume by the number of trading days in the 
applicable month.\5\ For example, if an SLP provides liquidity of 200 
million shares in Security X and 200 million shares in Security Y in a 
month with 20 regular trading days, the SLP would meet the month's 
volume requirement pursuant to Rule 107B because the ADV is 20 million 
shares (200 plus 200, divided by 20 days).
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    \5\ Pursuant to the NYSE Equities Price List, SLPs will receive 
a higher rebate when they provide liquidity that is executed in 
excess of the specified levels of ADV in the applicable month 
aggregated across all of their assigned SLP securities.
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    As further proposed, days on which the Exchange ends the regular 
trading hours early (i.e., earlier than 4 p.m.) will not be included in 
the ADV for the applicable month. The Exchange believes that these 
trading days, i.e., the day after Thanksgiving, should not be included 
because there is less trading time and trading is typically light and 
therefore the low volume numbers may distort the ADV calculation for 
the SLP.
    An SLP does not have to meet this volume requirement for each 
individual SLP assigned security in a given month. This is an 
aggregated amount of shares for all assigned securities of an SLP. The 
Exchange notes that in assigning securities to SLPs, the SLP Liaison 
Committee will take into consideration this volume requirement to 
ensure that the SLP are assigned securities for which they would be 
able to meet this volume requirement. Similar to the quoting 
requirement, the volume requirement will not be in effect for the first 
calendar month that an SLP begins operations.
3. Proposed Modifications of SLP Non-Regulatory Penalties
    Rule 107B imposes certain non-regulatory penalties if an SLP fails 
to meet the quoting requirements. The Exchange seeks to modify these 
non-regularity penalties to align them with the new quoting and volume 
requirements for SLPs.
    Currently, if an SLP fails to meet a 3% average quoting requirement 
in its assigned securities, the SLP is not eligible for SLP rebates on 
executions for that month. Further, if an SLP fails to meet its 5% 
average quoting requirement in its assigned securities for three (3) 
consecutive months (not including the first month of SLP operation), 
the SLP Liaison Committee may, in its discretion, impose the following 
non-regulatory penalties: (1) Revocation of the affected security(ies); 
(2) each time a security(ies) is revoked for failure to meet the 
quoting requirement for a particular security, revocation of an 
additional unaffected security; and/or (3) disqualification from the 
SLP program.
    The Exchange proposes to eliminate the ability of an SLP to earn a 
rebate if it maintains a quote in assigned SLP securities at the NBB or 
NBO at least 3%, up to, but not including 5% of the time. Instead, to 
align the rebate with the 10% quoting requirement set forth in Rule 
107B(a), as proposed, an SLP would not be able to earn a rebate unless 
it maintained a quote at the NBB or NBO an average of 10% of the 
trading day. The Exchange proposes to make conforming amendments to 
Rule 107B(i)(1)(A) and (B) by deleting the last sentence of each 
paragraph as no longer necessary. The Exchange believes that this 
proposed change strengthens the SLP program by ensuring that rebates 
are paid only if the SLP meets the minimum quoting requirement of an 
SLP.

[[Page 54413]]

    In addition, the Exchange proposes to add that to be eligible for a 
financial rebate for an SLP security for which the SLP has met the 10% 
quoting requirement, the SLP would first need to meet the minimum 10 
million share ADV requirement for all assigned securities. If the SLP 
fails to meet the volume requirement, it would not be eligible for any 
rebates, notwithstanding that it may have met the quoting requirement 
for one or more assigned SLP securities. If the SLP meets the volume 
requirement for all assigned securities, but does not meet the 10% 
quoting requirement in any securities, the SLP would not receive any 
financial rebates. The Exchange believes that adding the volume 
requirement as a condition to receive a financial rebate further 
strengthens the SLP program by aligning the financial rebate incentive 
not only with the new quoting requirements, but also with the new 
volume requirement.
4. Proposed Amendments to SLP Qualifications
    Rule 107B requires a member organization to meet several 
qualifications prior to obtaining approval of their SLP application and 
obtaining SLP status. These pre-qualifications have both operational 
and regulatory aspects.
    With respect to the operational pre-qualifying requirements, among 
other things, the Exchange requires pursuant to Rule 107B(c)(1) that an 
SLP use a unique mnemonic for its SLP business, which enables the 
Exchange to identify SLP transactions for billing and regulatory 
purposes. The Exchange proposes to revise this requirement to clarify 
that the member organization must identify to the Exchange mnemonics 
that identify the SLP trading activity in assigned SLP securities. As 
proposed, because all order flow in an assigned SLP security using that 
mnemonic will be treated as SLP volume, a member organization may not 
use such identified mnemonics for trading activity at the Exchange in 
assigned SLP securities that is not SLP trading activity. However, to 
enable the member organization to use the same mnemonic for both SLP 
and non-SLP trading activity in different securities, an SLP may use 
mnemonics used for SLP trading for trading activity in securities not 
assigned to the SLP. As further proposed, the rule would specify that 
if the member organization does not identify such mnemonics to the 
Exchange, the member organization will not receive credit for such SLP 
trading.
    In addition to the above proposed changes, the Exchange proposes to 
make clarifying amendments to Rule 107B. First, because FINRA now 
conducts all market regulation functions on behalf of the Exchange, the 
Exchange proposes to delete references to the ``Division of Market 
Surveillance,'' and replace it with a reference to FINRA (see Section 
(e) of the Rule). Second, the Exchange proposes to revise section 
(g)(2)(A) of the rule (now proposed Rule (h)(2)(A)), to provide that a 
DMM unit shall not also act as an SLP in the same securities in which 
it is registered as a DMM. The Exchange does not need to spell out the 
term ``designated market maker'' as it, and the term DMM unit, are 
defined terms in Rule 2.
    The Exchange proposes to implement the changes to the quoting 
requirement and add the volume requirement effective October 1, 
2010.\6\
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    \6\ As noted above, the SLP program is a pilot program currently 
set to expire on September 30, 2010. The Exchange intends to file to 
make the program permanent or extend the pilot program so that it 
can continue past September 30, 2010.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Securities Exchange Act of 1934 (the ``Act''),\7\ in 
general, and furthers the objectives of Section 6(b)(5) of the Act,\8\ 
in particular, in that it is 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. The Exchange believes the 
proposed Rule is consistent with these principles in that it seeks to 
increase the trading performance of SLPs, which will benefit all market 
participants.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \9\ and Rule 19b-4(f)(6) thereunder.\10\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \11\ and Rule 19b-
4(f)(6)(iii) thereunder.\12\
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    \9\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \10\ 17 CFR 240.19b-4(f)(6).
    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires the Exchange to give the Commission written 
notice of the Exchange's intent to file the proposed rule change 
along with a brief description and the text of the proposed rule 
change, at least five business days prior to the date of filing of 
the proposed rule change, or such shorter time as designated by the 
Commission. The Exchange has satisfied the pre-filing requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NYSE-2010-60 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-NYSE-2010-60. This file 
number should be included on the

[[Page 54414]]

subject line if e-mail 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 a.m. and 3 p.m. Copies of the 
filing also will be available for inspection and copying at the 
principal office of the Exchange. 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-NYSE-2010-60 and should be submitted on or before 
September 28, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-22201 Filed 9-3-10; 8:45 am]
BILLING CODE 8010-01-P