Document ID: SEC-2022-1637-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2022-12-21T05:00Z

[Federal Register Volume 87, Number 244 (Wednesday, December 21, 2022)]
[Notices]
[Pages 78166-78169]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-27651]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96504; File No. SR-NYSEARCA-2022-82]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Rule 
6.40P-O

December 15, 2022.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that, on December 14, 2022, NYSE Arca, Inc. (``NYSE Arca'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 6.40P-O (Pre-Trade and 
Activity-Based Risk Controls) pertaining to pre-trade risk controls to 
make additional pre-trade risk controls available to Entering Firms. 
The proposed rule change is available on the Exchange's website at 
www.nyse.com, at the principal office of the Exchange, and at the 
Commission's Public Reference Room.

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

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at

[[Page 78167]]

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 6.40P-O (Pre-Trade and 
Activity-Based Risk Controls) pertaining to pre-trade risk controls to 
make additional pre-trade risk controls available to entering Firms.\4\
---------------------------------------------------------------------------

    \4\ The term ``Entering Firm'' refers to an OTP Holder or OTP 
Firm (including those acting as Market Makers). See Rule 6.40P-
O(a)(1).
---------------------------------------------------------------------------

Background and Purpose
    In 2022, in connection with the Exchange's migration to Pillar and 
to better assist OTP Holders and OTP Firms in managing their risk, the 
Exchange adopted Rule 6.40P-O, which included pre-trade risk controls, 
among other activity-based controls, wherein an Entering Firm had the 
option of establishing limits or restrictions on certain of its trading 
behavior on the Exchange and authorizing the Exchange to take action if 
those limits or restrictions were exceeded.\5\ Specifically, the 
Exchange added a Single Order Maximum Notional Value Risk Limit, and a 
Single Order Maximum Quantity Risk Limit \6\ (collectively, the 
``Initial Pre-Trade Risk Controls'').
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 94072 (January 26, 
2022), 87 FR 5592 (February 1, 2022) (Notice of filing Notice of 
Filing of Amendment No. 4 and Order Granting Accelerated Approval of 
a Proposed Rule Change, as Modified by Amendment No. 4) (SR-
NYSEArca-2021-47).
    \6\ The terms ``Single Order Maximum Notional Value Risk Limit, 
and ``Single Order Maximum Quantity Risk Limit'' are defined in Rule 
6.40P-O(a)(2).
---------------------------------------------------------------------------

    The Exchange now proposes to expand the list of the optional pre-
trade risk controls available to Entering Firms by adding several 
additional pre-trade risk controls that would provide Entering Firms 
with enhanced abilities to manage their risk with respect to orders on 
the Exchange. Like the Initial Pre-Trade Risk Controls, use of the pre-
trade risk controls proposed herein is optional, but all orders on the 
Exchange would pass through these risk checks. As such, an Entering 
Firm that does not choose to set limits pursuant to the new proposed 
pre-trade risk controls would not achieve any latency advantage with 
respect to its trading activity on the Exchange. In addition, the 
Exchange expects that any latency added by the pre-trade risk controls 
would be de minimis.
Proposed Amendment to Rule 6.40P-O
    To accomplish this rule change, the Exchange proposes to amend the 
definition of the term ``Pre-Trade Risk Controls'' set forth in Rule 
6.40P-O(a)(2) to adopt the definition of ``Single-Order Risk 
Controls,'' which controls would be listed in proposed paragraph (A) to 
Rule 6.40P-O(a)(2). As proposed, the ``Single-Order Risk Controls'' 
would include the already-defined risk controls of the Single Order 
Maximum Notional Value Risk Limit and Single Order Maximum Quantity 
Risk Limit (collectively referred to herein as the ``existing Single-
Order Risk Checks''), with non-substantive changes to streamline the 
descriptions of these controls into new paragraph (i) of proposed Rule 
6.40P-O(a)(2)(A).\7\ However, because of a lack of demand for the 
option to apply the existing Single-Order Risk Checks to Market Maker 
quotes, the Exchange proposes to discontinue functionality supporting 
this optional feature.
---------------------------------------------------------------------------

    \7\ See proposed Rule 6.40P-O(a)(2)(A)(i) (setting forth 
``controls related to the maximum dollar amount for a single order 
to be applied one time (`Single Order Maximum Notional Value Risk 
Limit') and the maximum number of contracts that may be included in 
a single order before it can be traded (`Single Order Maximum 
Quantity Risk Limit'). Orders designated GTC will be subject to 
these checks only once.'') Consistent with the foregoing changes, 
the Exchange proposes to delete current paragraph (B) to Rule 6.40P-
O(a)(2)(B). See id.
---------------------------------------------------------------------------

    In the addition, the Exchange proposes to add paragraphs 
(a)(2)(A)(ii) through (v) to enumerate the proposed new Single-Order 
Risk Controls, as follows:

    (ii) controls related to the price of an order or quote 
(including percentage-based and dollar-based controls);
    (iii) controls related to the order types or modifiers that can 
be utilized;
    (iv) controls to restrict the options class transacted; and
    (v) controls to prohibit duplicative orders.

    Each of the new Single-Order Risk Controls in proposed paragraph 
(a)(2)(A)(ii)-(v) is substantively identical to risk settings already 
in place on the Exchange's affiliate equities exchange NYSE American 
LLC (``NYSE American''),\8\ as well as those on the Cboe and MEMX 
equities exchanges,\9\ except that the proposed controls account for 
options trading, such as including reference to ``an order or quote'' 
versus ``an order'' and reference to restrictions on trading in an 
``options class'' versus on ``the types of securities transacted 
(including but not limited to restricted securities).'' \10\ As such, 
the proposed new optional Pre-Trade Risk Controls are familiar to 
market participants and are not novel.
---------------------------------------------------------------------------

    \8\ See NYSE American Rule 7.19E; see also Securities Exchange 
Act Release No. 96403 (November 29, 2022) (SR-NYSEAMER-2022-53).
    \9\ See Cboe BZX Exchange, Inc. (``Cboe BZX'') Rule 11.13, 
Interpretations and Policies .01; Cboe BYX Exchange, Inc. (``Cboe 
BYX'') Rule 11.13, Interpretations and Policies .01; Cboe EDGA 
Exchange, Inc. (``Cboe EDGA'') Rule 11.10, Interpretations and 
Policies .01; Cboe EDGX Exchange, Inc. (``Cboe EDGX'') Rule 11.10, 
Interpretations and Policies .01; and MEMX LLC (``MEMX'') Rule 
11.10, Interpretations and Policies .01.
    \10\ See proposed Rule 6.40P(a)(2)(A)(ii) and (a)(2)(A)(iv) as 
compared to NYSE American Rule 7.19E(b)(2)(B) and (b)(2)(F), 
respectively.
---------------------------------------------------------------------------

    The Exchange proposes to modify current paragraph (b)(2) regarding 
the setting and adjusting of the Pre-Trade Risk Controls to state that, 
in addition to Pre-Trade Risk Controls being available to be set at the 
MPID level or at one or more sub-IDs associated with that MPID, or 
both, that Pre-Trade Risk Controls to restrict the options class(es) 
transacted must be set per option class.\11\
---------------------------------------------------------------------------

    \11\ See, e.g.,. Rule 7.19E(d)(2) (specifying that pre-trade 
risk controls related to transacting in restricted securities must 
be set per symbol).
---------------------------------------------------------------------------

    The Exchange proposes to modify paragraph (c)(1) regarding ``Breach 
Action for Pre-Trade Risk Controls.'' First, the Exchange proposes to 
specify that ``[a] Limit Order that breaches any Single-Order Risk 
Control will be rejected.'' \12\ The proposed functionality is 
consistent with the treatment of Limit Orders that breach the existing 
Single Order Risk Checks and simply extends the application of the 
breach action to the newly proposed Single-Order Risk Controls. Next, 
proposed Rule 6.40P-O(c)(1)(A)(ii) specifies that ``[a] Market Order 
that arrives during a pre-open state will be cancelled if the quantity 
remaining to trade after an Auction breaches the Single Order Maximum 
Notional Value Risk Limit,'' which functionality is identical to 
treatment of such interest under the current Rule.\13\ Proposed Rule 
6.40P-O(c)(1)(A)(ii) further specifies that ``[a]t all other times, a 
Market Order that triggers or breaches any Single-Order Risk Control 
will be rejected.'' \14\ The proposed functionality is consistent with 
the treatment of Market Orders (that arrive other than during a pre-
open state) that breach the existing Single Order Risk Checks and 
simply extends the

[[Page 78168]]

application of the breach action to the newly proposed Single-Order 
Risk Controls. Further, proposed Rule 6.40P-O(c)(1)(A)(iii) addresses 
the breach action relevant to the new Single-Order Risk Control set 
forth in proposed Rule 6.40P-O(a)(2)(A)(ii) (i.e., a breach of controls 
related to the price of an order or quote including percentage-based 
and dollar-based controls). As proposed, a Limit Order or quote that 
would breach a price control under paragraph (a)(2)((A)(ii) would be 
rejected or cancelled as specified in Rule 6.62P-O (a)(3)(A) (Limit 
Order Price Protection).\15\
---------------------------------------------------------------------------

    \12\ See proposed Rule 6.40P(c)(1)(A)(i).
    \13\ See Rule 6.40P(c)(1)(A)(i) (providing, in relevant part, 
that ``[a] Market Order that breaches the designated limit of a 
Single Order Maximum Quantity Risk Limit'' will be ``canceled if the 
order was received during a pre-open state and the quantity 
remaining to trade after an Auction concludes breaches the 
designated limit.'').
    \14\ See proposed Rule 6.40P(c)(1)(A)(ii).
    \15\ See proposed Rule 6.40P(c)(1)(A)(iii).
---------------------------------------------------------------------------

    Finally, the Exchange proposes to add new Commentary .02 to specify 
the interplay between the Exchange's Limit Order Price Protection 
(``LOPP'') functionality and the price controls that may be set by an 
Entering Firm pursuant to proposed paragraph (a)(2)(A)(ii). Proposed 
Commentary .02 specifies that an Entering Firm may set price controls 
under paragraph (a)(2)(A)(ii) that are equal to or more restrictive 
than levels set by the Exchange LOPP functionality.
Continuing Obligations of OTP Holders Under Rule 15c3-5
    The proposed Pre-Trade Risk Controls described here are meant to 
supplement, and not replace, the OTP Holders' own internal systems, 
monitoring, and procedures related to risk management. The Exchange 
does not guarantee that these controls will be sufficiently 
comprehensive to meet all of an OTP Holder's needs, the controls are 
not designed to be the sole means of risk management, and using these 
controls will not necessarily meet an OTP Holder's obligations required 
by Exchange or federal rules (including, without limitation, the Rule 
15c3-5 under the Act \16\ (``Rule 15c3-5'')). Use of the Exchange's 
Pre-Trade Risk Controls will not automatically constitute compliance 
with Exchange or federal rules and responsibility for compliance with 
all Exchange and SEC rules remains with the OTP Holder.\17\
---------------------------------------------------------------------------

    \16\ See 17 CFR 240.15c3-5.
    \17\ See also Commentary .01 to Rule 6.40P-O, which provides 
that the Pre-Trade Risk Controls set forth in Rule 6.40P-O ``are 
meant to supplement, and not replace, the OTP Holder's or OTP Firm's 
own internal systems, monitoring, and procedures related to risk 
management and are not designed for compliance with Rule 15c3-5 
under the Exchange Act. Responsibility for compliance with all 
Exchange and SEC rules remains with the OTP Holder or OTP Firm.'').
---------------------------------------------------------------------------

Timing and Implementation
    The Exchange anticipates completing the technological changes 
necessary to implement the proposed rule change in the second quarter 
of 2023, but in any event no later than June 30, 2023. The Exchange 
anticipates announcing the availability of the Pre-Trade Risk Controls 
introduced in this filing by Trader Update in the first quarter of 
2023.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\18\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\19\ in particular, because it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in 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 because it is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Specifically, the Exchange believes that the proposed rule change 
will remove impediments to and perfect the mechanism of a free and open 
market and a national market system because the proposed optional 
additional Pre-Trade Risk Controls would provide Entering Firms 
enhanced abilities to manage their risk with respect to orders or 
quotes on the Exchange. The proposed additional Pre-Trade Risk Controls 
are not novel; they are based on existing risk settings already in 
place on NYSE American,\20\ as well as those on the Cboe and MEMX 
equities exchanges,\21\ and market participants are already familiar 
with the types of protections that the proposed risk controls afford. 
Moreover, the proposed new Single-Order Risk Controls (like the 
existing Single-Order Risk Checks) are options and, as such, Entering 
Firms are free to utilize or not at their discretion. Thus, the 
Exchange believes that the proposed additional Pre-Trade Risk Controls 
would provide a means to address potentially market-impacting events, 
helping to ensure the proper functioning of the market.
---------------------------------------------------------------------------

    \20\ See supra note 8.
    \21\ See supra note 9.
---------------------------------------------------------------------------

    In addition, the Exchange believes that the proposed rule change 
will protect investors and the public interest because the proposed 
additional Pre-Trade Risk Controls are a form of impact mitigation that 
will aid Entering Firms in minimizing their risk exposure and reduce 
the potential for disruptive, market-wide events. The Exchange 
understands that OTP Holders implement a number of different risk-based 
controls, including those required by Rule 15c3-5. The controls 
proposed here will serve as an additional tool for Entering Firms to 
assist them in identifying any risk exposure. The Exchange believes the 
proposed additional Pre-Trade Risk Controls will assist Entering Firms 
in managing their financial exposure which, in turn, could enhance the 
integrity of trading on the securities markets and help to assure the 
stability of the financial system.
    The Exchange believes that the proposed rule change will remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system by permitting Entering Firms to set price 
controls under paragraph (a)(2)(A)(ii) that are equal to or more 
restrictive than the levels established in the Exchange's LOPP 
functionality, which protects from aberrant trades, thus improving 
continuous trading and price discovery. To the extent that Entering 
Firms would like to further manage their exposure to aberrant trades, 
this proposed functionality affords such Firms the ability to set price 
controls at levels that are more restrictive than the LOPP levels. 
Additionally, because price controls set by an Entering Firm under 
paragraph (a)(2)(A)(ii) would function as a form of limit order price 
protection, the Exchange believes that it would remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system for an order that would breach such a price control to be 
rejected or cancelled as specified per Rule 6.62P-O(a)(3)(A) regarding 
the LOPP.
    Finally, the Exchange believes that the proposed rule change does 
not unfairly discriminate among the Exchange's OTP Holders because use 
of the proposed additional Pre-Trade Risk Controls is optional and is 
not a prerequisite for participation on the Exchange. In addition, 
because all orders on the Exchange would pass through the risk checks, 
there would be no difference in the latency experienced by OTP Holders 
who have opted to use the proposed additional Pre-Trade Risk Controls 
versus those who have not opted to use them.

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

[[Page 78169]]

necessary or appropriate in furtherance of the purposes of the Act. In 
fact, the Exchange believes that the proposal will have a positive 
effect on competition because, by providing Entering Firms additional 
means to monitor and control risk, the proposed rule will increase 
confidence in the proper functioning of the markets. The Exchange 
believes the proposed additional Pre-Trade Risk Controls will assist 
Entering Firms in managing their financial exposure which, in turn, 
could enhance the integrity of trading on the securities markets and 
help to assure the stability of the financial system. As a result, the 
level of competition should increase as public confidence in the 
markets is solidified.

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 \22\ and Rule 19b-4(f)(6) thereunder.\23\ 
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 and Rule 19b-
4(f)(6)(iii) thereunder.\24\
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \23\ 17 CFR 240.19b-4(f)(6).
    \24\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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 this requirement.
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such 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. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \25\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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 email to [email protected]. Please include 
File Number SR-NYSEARCA-2022-82 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEARCA-2022-82. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (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 website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSEARCA-2022-82 and should be submitted 
on or before January 11, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
---------------------------------------------------------------------------

    \26\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-27651 Filed 12-20-22; 8:45 am]
BILLING CODE 8011-01-P