Document ID: SEC-2011-0381-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Amex LLC
Posted Date: 2011-03-22T04:00Z

[Federal Register Volume 76, Number 55 (Tuesday, March 22, 2011)]
[Notices]
[Pages 16024-16026]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-6709]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64085; File No. SR-NYSEAmex-2011-14]

 Self-Regulatory Organizations; NYSE Amex LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Adopting Rules 
Related to Qualified Contingent Cross Orders

March 17, 2011.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that on March 14, 2011, NYSE Amex LLC (the ``Exchange'' or ``NYSE 
Amex'') 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\ 15 U.S.C. 78a.
    \3\ 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 adopt rules related to Qualified 
Contingent Cross Orders (``QCCs''). The text of the proposed rule 
change is available at the Exchange, the Commission's Public Reference 
Room, and http://www.nyse.com.

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 
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 purpose of this filing is to adopt rules related to QCCs. The 
proposed rule change is based on an International Securities Exchange 
(``ISE'') proposal recently approved by the Securities and Exchange 
Commission (``Commission'').\4\
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    \4\ See Securities Exchange Act Release No. 62523 (July 16, 
2010), 75 FR 43211 (July 23, 2010) (SR-ISE-2010-73) (``ISE 
Proposal''). See also Securities Exchange Act Release No. 63955 
(February 24, 2011), 76 FR 11533 (March 2, 2011) (SR-ISE-2010-73) 
(``ISE Approval''). The Exchange notes that letters commenting on 
the ISE Proposal were submitted on its behalf by the Exchange's 
parent company, NYSE Euronext. See e.g., letters dated August 9, 
2010 and October 21, 2010 from Janet L. McGinness, Senior Vice 
President--Legal & Corporate Secretary, Legal & Government Affairs, 
NYSE Euronext (``NYSE Euronext Comment Letters'').
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Background
    The Exchange is currently a party to the Options Order Protection 
and Locked/Crossed Market Plan (``Distributive Linkage Plan''),\5\ and 
has implemented Exchange rules in conjunction with that plan (the 
``Distributive Linkage Rules'').\6\ Similar to Regulation NMS under the 
Securities Exchange Act of 1934 (``Exchange Act or ``Act''), the 
Distributive Linkage Plan requires, among other things, that the 
Exchange establish, maintain and enforce written policies and 
procedures that are reasonably designed to prevent ``Trade-Throughs.'' 
\7\ A Trade-Through is a transaction in an options series at a price 
that is inferior to the best price available in the market.\8\
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    \5\ See Securities Exchange Act Release No. 60405 (July 30, 
2009), 74 FR 39362 (August 6, 2009) (File No. 4-546).
    \6\ See Securities Exchange Act Release No. 60526 (August 18, 
2009), 74 FR 43185 (August 26, 2009) (SR-NYSEAmex-2009-19).
    \7\ Section 5(a) of the Distributive Linkage Plan.
    \8\ Section 2(21) of the Distributive Linkage Plan.
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    The Distributive Linkage Plan replaced the Plan for the Purpose of 
Creating and Operating an Intermarket Option Linkage (``Old Linkage 
Plan''), and the Distributive Linkage Rules replaced the then-existing 
NYSE Amex rules implementing the Old Linkage Plan (the ``Old Linkage 
Rules''). The Old Linkage Plan and the Old Linkage Rules provided a 
limited Trade-Through exemption for ``Block Trades,'' defined to be 
trades of 500 or more contracts with a premium value of at least 
$150,000.\9\ However, as with Regulation NMS, the Distributive Linkage 
Plan does not provide a Block Trade exemption.
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    \9\ Old Linkage Plan Sections 2(3) and 8(c)(i)(C); and former 
NYSE Amex Options Rule 991NY.
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    The ISE Proposal stated that the loss of the Block Trade exemption, 
among other things, adversely affects the ability of its members to 
effect large trades that are tied to stock,\10\ and therefore proposed 
the QCC as a limited substitute for the Block Trade exemption. While 
our views with respect to the potential impact that the ISE Proposal 
may have on market structure remain unchanged,\11\ we nonetheless are 
proposing to adopt rules related to QCCs based on those approved for 
ISE. In particular, we believe that such a rule change would permit the 
Exchange to remain competitive with ISE, and the other options 
exchanges that may also adopt rules for QCCs, by making QCCs available 
to ATP Holders and their customers through the Exchange.
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    \10\ See ISE Proposal at 43212.
    \11\ See NYSE Euronext Comment Letters, supra note 1[sic].
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Discussion
    While Regulation NMS does not provide a block trade exemption from 
trade-through liability for stocks, the Commission, by order, has 
provided trade-through relief for ``Qualified Contingent Trades'' 
(``QCTs'').\12\ The QCT Release provides an exemption from trade-
through liability in the equity market for multi-component, fully-
hedged trades where one order is contingent on the execution of one or 
more additional orders. Building on this concept, and as approved for 
ISE, the Exchange proposes that when an NYSE Amex ATP Holder effects a 
QCT trade in a Regulation NMS Stock, that ATP Holder be permitted to 
cross the options leg of the trade on the Exchange immediately upon 
entry if the order is

[[Page 16025]]

for at least 1,000 contracts, is part of a QCT, is executed at a price 
at least equal to the national best bid or offer (``NBBO''), and there 
are no Customer Orders on the Exchange's Consolidated Book at the same 
price.\13\
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    \12\ See Securities Exchange Act Release No. 57620 (April 4, 
2008), 73 FR 19271 (April 9, 2008) (the ``QCT Release''). That 
release superseded a release initially granting the Qualified 
Contingent Trade exemption. See Securities Exchange Act Release No. 
54389 (August 31, 2006), 71 FR 52829 (September 7, 2006).
    \13\ We propose to define a QCC trade substantively identical to 
the Commission's definition in the QCT release as well as that in 
the ISE Proposal. A QCC trade must meet the following conditions: 
(i) At least one component must be an NMS Stock; (ii) all the 
components must be effected with a product price contingency that 
either has been agreed to by all the respective counterparties or 
arranged for by a broker-dealer as principal or agent; (iii) the 
execution of one component must be contingent upon the execution of 
all other components at or near the same time; (iv) the specific 
relationship between the component orders (e.g., the spread between 
the prices of the component orders) must be determined by the time 
the contingent order is placed; (v) the component orders must bear a 
derivative relationship to one another, represent different classes 
of shares of the same issuer, or involve the securities of 
participants in mergers or with intentions to merge that have been 
announced or cancelled; and (vi) the transaction must be fully 
hedged (without regard to any prior existing position) as a result 
of other components of the contingent trade. Consistent with the QCT 
Release and the ISE Proposal, ATP Holders must demonstrate that the 
transaction is fully hedged using reasonable risk-valuation 
methodologies. See QCT Release, supra note 9[sic], at footnote 9.
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    The QCC would permit ATP Holders to provide their customers a net 
price for the entire trade, and then allow the ATP Holder to execute 
the options leg of the trade on NYSE Amex at a price at least equal to 
the NBBO while using the QCT exemption to effect the trade in the 
equities leg at a price necessary to achieve the net price.\14\ Under 
the proposal, the Exchange would not permit the options component of a 
stock-option order to trade through the NBBO.\15\ However, there are 
times when the quotation spread for the option on the Exchange would 
not permit an execution of the options component between the Exchange 
BBO, particularly in options that trade in increments greater than 
$0.01. In those cases, the Exchange proposes to permit an execution of 
the options component at a price that matches the Exchange BBO. 
Moreover, under the proposal, the Exchange would not permit the 
execution of a QCC at the same price as a Customer Order on the 
Consolidated Book. In such a case, the QCC will be rejected.\16\
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    \14\ NYSE Amex will adopt policies and procedures to ensure that 
ATP Holders use the Qualified Contingent Cross Order properly. 
First, we will require ATP Holders to properly mark all Qualified 
Contingent Cross Orders as such. In addition, FINRA, on behalf of 
NYSE Amex, will implement an examination and surveillance program to 
assess ATP Holder compliance with the requirements applicable to 
Qualified Contingent Cross Orders, including the requirement that 
the stock leg of the transaction be executed at or near the same 
time as the options leg.
    \15\ While the QCC would not provide exposure for price 
improvement for the options leg of a stock-option order, the options 
leg must be executed at the NBBO or better. The Commission has 
previously approved crossing transactions with no opportunity for 
price improvement. See e.g., ISE Rule 721(a) and Chicago Board 
Options Exchange (``CBOE'') Rule 6.74A, Interpretations and Policies 
.08.
    \16\ The Commission has previously approved the rejection of 
crossing transactions when there is a priority customer order on the 
book at the same price. See, e.g., ISE Rule 721(a); and CBOE Rule 
6.74A, Interpretations and Policies .08.
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    Furthermore, under this proposal, the Exchange would only permit 
QCCs to be submitted electronically from off the Floor through the NYSE 
Amex System. In this regard, an ATP Holder located on the Floor of the 
Exchange would not be allowed to enter QCCs into the NYSE Amex System, 
or otherwise effect them in open outcry. In this way, our proposal 
provides for the same means to effect QCCs on the Exchange as that of 
the ISE. We plan to file a separate proposed rule change to address 
effecting QCCs in open outcry on the Floor of the Exchange.
    To provide a mechanism for the Exchange to surveil for whether QCCs 
were entered from off of the Floor, the Exchange proposes to adopt 
Commentary .01 to Rule 985NY. This provision would require ATP Holders 
to maintain books and records demonstrating that each Qualified 
Contingent Cross Order was routed to the NYSE Amex System from off of 
the Floor. Any Qualified Contingent Cross Order that does not have a 
corresponding record required by this provision would be deemed to have 
been entered from on the Floor in violation of Rule 985NY.\17\
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    \17\ The Commission notes that the Exchange inadvertently 
omitted the following paragraph from its filing and requested that 
the Commission include it in this notice: The Exchange's proposal 
addresses the mechanics of executing the stock and options 
components of a net-price transaction. The Exchange believes that it 
is necessary that it provide ATP Holders and their customers with 
the same trading capabilities available on other exchanges with 
respect to QCCs, including the change proposed herein, which would 
permit ATP Holders to execute the options legs of their customers' 
large complex orders on the Exchange. See e-mail from Joseph P. 
Corcoran, Chief Counsel, Legal and Government Affairs, New York 
Stock Exchange LLC, to Jennifer L. Colihan, Special Counsel, 
Division of Trading and Markets, Commission, dated March 16, 2011.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent 
withSection 6(b) of the Act \18\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\19\ in that it is designed to 
promote just and equitable principles of trade, remove impediments to 
and perfect the mechanisms of a free and open market and a national 
market system and, in general, to protect investors and the public 
interest. The proposed rules are consistent with the protection of 
investors in that they are designed to prevent Trade-Throughs. In 
addition, the proposed rule change would promote a free and open market 
by permitting the Exchange to compete with ISE for these types of 
orders. In this regard, competition would result in benefits to the 
investing public, whereas a lack of competition would serve to limit 
the choices that the public has for execution of their options 
business.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 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. Instead, the proposed rule 
change would prevent the otherwise significant burden on competition 
that would arise if ISE were permitted to implement QCCs without a 
similar functionality being made available to market participants 
across all U.S. markets for listed options, including ATP Holders on 
the Exchange.

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 \20\ and Rule 19b-4(f)(6) thereunder.\21\ 
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)

[[Page 16026]]

of the Act and Rule 19b-4(f)(6)(iii) thereunder.
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    \20\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \21\ 17 CFR 240.19b-4(f)(6). 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 Commission has waived this requirement.
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    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.

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-NYSEAmex-2011-14 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-NYSEAmex-2011-14. 
This file number should be included on the 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 Section, 100 
F Street, NE., Washington, DC 20549-1090 on official business days 
between the hours of 10 a.m. and 3 p.m. Copies of the filing will also 
be available for inspection and copying at the NYSE's principal office 
and on its Internet Web site at http://www.nyse.com. 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-NYSEAmex-2011-14 and should 
be submitted on or before April 12, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-6709 Filed 3-21-11; 8:45 am]
BILLING CODE 8011-01-P