Document ID: SEC-2014-1015-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE MKT LLC
Posted Date: 2014-06-19T04:00Z

[Federal Register Volume 79, Number 118 (Thursday, June 19, 2014)]
[Notices]
[Pages 35201-35205]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-14312]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72389; File No. SR-NYSEMKT-2014-51]

Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change Amending Rule 
971.1NY(c)(4)(D) To Add Specificity Regarding When a Customer Best 
Execution Auction Would Conclude Early

June 13, 2014.
    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 June 4, 2014, NYSE MKT LLC (the ``Exchange'' or ``NYSE MKT'') 
filed with the Securities and Exchange Commission (``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.
---------------------------------------------------------------------------

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

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

[[Page 35202]]

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

    The Exchange proposes to amend Rule 971.1NY(c)(4)(D) to add 
specificity regarding when a Customer Best Execution (``CUBE'') Auction 
would conclude early. The text of the proposed rule change is available 
on the Exchange's Web site 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 the 
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 Exchange proposes to amend Rule 971.1NY(c)(4)(D) to add 
specificity regarding when a CUBE Auction would conclude early. The 
Exchange recently received approval for new Rule 971.1NY, which sets 
forth an electronic crossing mechanism with a price improvement auction 
on the Exchange to be referred to as the Auction or CUBE Auction, which 
stands for Customer Best Execution.\3\ The Exchange has not yet 
implemented the CUBE Auction mechanism.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 34-72025 (April 25, 
2014), 79 FR 24779 (May 1, 2014) (SR-NYSEMKT-2014-17) (Approval 
Order).
---------------------------------------------------------------------------

Background
    Rule 971.1NY provides for an electronic price improvement auction 
for single-leg options orders. The CUBE Auction is designed to work 
seamlessly with the Exchange's Consolidated Book, which is the 
Exchange's single electronic order book where all quotes and limit 
orders sent to the Exchange are placed and reside as a file on the NYSE 
Amex System (``System''). As specified in Rule 971.1NY(a), using the 
CUBE Auction, an ATP Holder can guarantee the execution of a limit 
order it represents as agent on behalf of a public customer, broker-
dealer, or any other entity (``CUBE Order''). The ATP Holder that 
submits the CUBE Order (``Initiating Participant'') agrees to guarantee 
the execution of the CUBE Order at a specified price by submitting a 
contra-side order (``Contra Order'') that represents principal interest 
or interest it has solicited to trade with the CUBE Order. An Auction 
begins with an ``initiating price,'' which for a CUBE Order to buy 
(sell) is the lower (higher) of the CUBE Order's limit price or the 
National Best Offer (``NBO'') (National Best Bid (``NBB'')).\4\ 
Although there is a specified period for the Auction, the time at which 
the Auction is initiated is considered the time of execution for the 
CUBE Order and the execution of orders in the Auction qualify as 
exceptions to Trade-Through Liability, pursuant to Rule 991NY(b)(5) and 
(9).\5\
---------------------------------------------------------------------------

    \4\ See Rule 971.1NY(a). Pursuant to Rule 971.1NY(b)(1)(B), the 
initiating price for a CUBE Order to buy (sell) must be lower 
(higher) than the NBO (NBB) by at least one penny if the CUBE Order 
is for less than 50 contracts.
    \5\ See Rule 971.1NY(b).
---------------------------------------------------------------------------

    Rule 971.1NY(b)(1) sets forth the ranges of permissible execution 
for a CUBE Auction. Unless otherwise specified, the references to 
National Best Bid or Offer (``NBBO'') and Exchange Best Bid or Offer 
(``BBO'') in the rule refer to the NBBO and BBO at the time the Auction 
was initiated.\6\ Specifically, Rule 971.1NY(b)(1) provides that a CUBE 
Order to buy (sell) would generally have a range of permissible 
executions with an upper (lower) bound equal to the initiating price 
and the lower (upper) bound equal to the NBB (NBO). However, pursuant 
to paragraphs (b)(1)(A) and (b)(1)(B) of Rule 971.1NY, there is a 
tighter range of permissible executions for when there is Customer 
interest in the BBO on the same-side as the CUBE Order of 50 contracts 
or more or for when the CUBE Order is for fewer than 50 contracts. In 
addition, Rule 971.1NY(b)(1)(C) separately provides that if the BBO on 
the same side as the CUBE Order updates during the Auction, the range 
of permissible executions will adjust in accordance with the updated 
BBO, unless the Auction concludes early pursuant to paragraph (c)(4)(D) 
of the Rule.
---------------------------------------------------------------------------

    \6\ See Rule 971.1NY(b).
---------------------------------------------------------------------------

    Rule 971.1NY(c)(4) specifies scenarios when a CUBE Auction would 
conclude early. The purpose of these provisions is to enable the CUBE 
Auction to integrate seamlessly within the Exchange's Consolidated 
Book. Accordingly, a CUBE Auction will conclude early as a result of 
certain events that would otherwise disrupt the priority of the Auction 
within the Consolidated Book. Early conclusion allows the System to 
appropriately handle unrelated orders without the CUBE Auction 
impacting that handling, and further allows the CUBE Order, which has 
been guaranteed an execution, to execute against the Contra Order and 
any RFR Responses that may have been entered up to that point.
    Rule 971.1NY(c)(4)(D) specifies that the CUBE Auction will conclude 
early if same-side incoming interest improves the initiating price. For 
example, if both the NBBO and BBO (with no customer interest) at the 
time a CUBE Auction initiates is $1.00-$1.10, and the initiating price 
for a CUBE Order to buy 60 contracts is $1.04, the permissible range of 
executions for that Auction is $1.00-$1.04. If the Exchange receives an 
unrelated order to buy priced at $1.05, because that order would set a 
new BB that is priced higher than the initiating price of $1.04, 
pursuant to Rule 971.1NY(b)(1)(C), the new lower bound of the range of 
permissible executions would be adjusted to $1.05, which does not allow 
for any execution opportunity because an execution of the CUBE Order to 
buy would trade through the new BB. Because this would prevent proper 
conclusion of the auction and price improvement for the CUBE Order, 
pursuant to Rule 971.1NY(c)(4)(D), the Auction is instead subject to an 
early conclusion event, in order both to allow the CUBE order to 
receive its guaranteed execution and to allow the Book to update its 
BB. The rationale for this early conclusion scenario therefore ties 
back to Rule 971.1NY(b)(1)(C), which provides that the permissible 
range of executions of a CUBE Auction adjusts if the BBO on the same 
side of the CUBE Order updates during the Auction.
Proposed Amendment
    The Exchange proposes to amend Rule 971.1NY(c)(4)(D) to add 
additional specificity regarding when a CUBE Auction would conclude 
early. The proposed revisions are intended to add transparency 
regarding when the arrival of interest on the same side as the CUBE 
Order that would require an updated BBO during an Auction would require 
the Auction to conclude early. Specifically, the arrival of same-side 
interest that is priced the same as the initiating price may, in 
certain circumstances, similarly require an early conclusion to a CUBE 
Auction.
    Assuming the same facts as above, if there is new same-side 
interest priced at $1.04 entered during the Auction on behalf of a 
Customer, pursuant to Rule 971.1NY(b)(1)(C), such interest would need 
to update the BB and would adjust

[[Page 35203]]

the lower bound of the range of permissible executions for the Auction 
to $1.05.\7\ This adjusted lower bound for the range of permissible 
executions would also not allow for any execution opportunity because 
it would be higher than the initiating price, and therefore the CUBE 
Order would not be able to execute. Therefore, just as in the case 
described above, the Exchange proposes that the CUBE Auction instead 
conclude early, before the BBO is updated. An early conclusion would 
allow the CUBE Order to receive its guaranteed execution and to allow 
the Book to update its BB.
---------------------------------------------------------------------------

    \7\ See Rule 971.1NY(b)(1)(A) (lower (upper) bound of the range 
of permissible executions for a CUBE Order to buy (sell) when there 
is customer interest on the BB (BO) is the BB (BO) plus (minus) one 
cent).
---------------------------------------------------------------------------

    Similarly, assuming the same facts as above, but the CUBE Order to 
buy is for 40 contracts, if there is new same-side interest priced at 
$1.04 entered during the Auction, pursuant to Rule 971.1NY(b)(1)(C), 
such interest would need to update the BB and would again adjust the 
lower bound of the range of permissible executions to $1.05.\8\ As 
above, this adjusted lower bound for the range of permissible 
executions would not allow for any execution opportunity because it 
would similarly be higher than the initiating price, and therefore the 
CUBE Order would not be able to execute. Therefore, again for the same 
reasons as above, the Exchange proposes that the CUBE Auction conclude 
early, before the BBO is updated. An early conclusion would similarly 
allow the CUBE Order to receive its guaranteed execution and allow the 
Book to update its BB.
---------------------------------------------------------------------------

    \8\ See Rule 971.1NY(b)(1)(B) (lower (upper) bound of the range 
of permissible executions for a CUBE Order to buy (sell) for fewer 
than 50 contracts is the BB (BO) plus (minus) one cent).
---------------------------------------------------------------------------

    The Exchange proposes to amend Rule 971.1NY(c)(4)(D) to provide for 
these early conclusion events. First, the Exchange proposes to amend 
the subsection title, which currently states ``Same Side New BBO 
Improves initiating price,'' to instead provide ``Same Side Incoming 
Interest Would Create an Adjusted Range of Permissible Executions that 
Improves initiating price.'' The Exchange believes that the additional 
text makes clear that this provision concerns any circumstance when the 
range of permissible executions would need to be adjusted, consistent 
with Rule 971.1NY(b)(1)(C), because of incoming same-side interest such 
that the CUBE Auction must conclude early to allow for the CUBE Order 
to receive is [sic] guaranteed execution before the Book updates its 
BBO.
    Next, the Exchange proposes to amend the body of the subsection. 
The rule text currently specifies a single event that would result in 
an early conclusion, i.e., when the Exchange receives during the 
Response Time Interval an unrelated, non-marketable quote or limit 
order that is on the same side of the market as the CUBE Order to buy 
(sell) and that is priced higher (lower) than the initiating price and 
therefore creates a new BB (BO). As noted above, an early conclusion 
must occur any time the Exchange receives during an Auction same-side 
interest that is priced such that it would require the lower (upper) 
bound of the range of permissible executions to be adjusted to be 
higher (lower) than the initiating price, which includes both the 
scenario currently specified in Rule 971.1NY(c)(4)(D) as well as the 
additional scenarios described above.
    Accordingly, the Exchange proposes to amend Rule 971.1NY(c)(4)(D) 
to provide more generally that a CUBE Auction will conclude early any 
time same-side interest arrives during an Auction that would adjust the 
lower (upper) bound of the range of permissible executions higher 
(lower) than the initiating price. The Exchange believes that the 
proposed amended text captures both the existing specified scenario in 
Rule 971.1NY(c)(4)(D), as well as the additional scenarios described 
above. The proposed new text would read as follows (new text 
italicized, deletions bracketed):
    (D) Same Side [New BBO] Incoming Interest Would Create an Adjusted 
Range of Permissible Executions that Improves initiating price. A CUBE 
Auction will conclude early if the Exchange receives during the 
Response Time Interval an unrelated, non-marketable quote or limit 
order that is on the same side of the market as the CUBE Order to buy 
(sell) and that would adjust the lower (upper) bound of the range of 
permissible executions to be higher (lower) than the initiating price. 
[is priced higher (lower) than the initiating price and therefore 
creates a new BB (BO) that is higher (lower) than the initiating 
price.] When the Auction concludes, the CUBE Order will execute 
pursuant to paragraph (c)(5) of this Rule. Unfilled GTX Orders are 
eligible to execute against the unrelated interest that caused the CUBE 
Auction to conclude early and then will cancel. Contracts remaining, if 
any, from such unrelated quote or order at the time the Auction ends 
will be processed in accordance with Rule 964NY Order Display and 
Priority.
    The Exchange further proposes to amend Rule 971.1NY(b)(1)(C) to 
clarify that the early conclusion events identified in Rule 
971.1NY(c)(4)(D) would occur before the same-side BBO is updated. 
Currently, Rule 971.1NY(b)(1)(C) provides that if the BBO on the same 
side as the CUBE Order updates during the Auction, the range of 
permissible executions adjusts in accordance with the updated BBO, 
unless the Auction concludes early pursuant to Rule 971.1NY(c)(4)(D). 
The Exchange proposes to revise the second clause of the sentence to 
instead provide: ``unless the incoming same-side interest that would 
update the BBO would cause the Auction to conclude early pursuant to 
paragraph (c)(4)(D) of this Rule.'' The Exchange believes that the 
revised text, read together with amended Rule 971.1NY(c)(4)(D), makes 
clear that the arrival of certain same-side interest may cause an 
Auction to end early, before the BBO is updated.
    The Exchange believes that the proposed rule change is consistent 
with the manner that the Auction operates, as specified in Rule 
971.1NY(b)(1)(C), and will provide transparency in the rule regarding 
the circumstances when the CUBE Auction should conclude early in order 
to allow the CUBE Order to receive its guaranteed execution without 
interfering with the priority of orders on the Book when the same-side 
BBO is updated.
    The Exchange further notes that it intends to issue guidance 
advising ATP Holders that Contra Orders for the account of a Customer 
may not be entered into a CUBE Auction. This guidance is consistent 
with how other markets operate electronic auction mechanisms.\9\
---------------------------------------------------------------------------

    \9\ See NASDAQ OMX PHLX Frequently Asked Questions regarding 
PIXL, which provides that its auction mechanism will not accept 
customer orders as the guaranteeing order, available at: http://www.nasdaqtrader.com/content/phlx/PIXLfaqs.pdf; and Chicago Board 
Options Exchange, Inc. guidance on its Automated Improvement 
Mechanism (``AIM''), which provides that customer crosses do not 
participate in the AIM auction mechanism, available at: https://www.cboe.org/hybrid/aim.aspx.
---------------------------------------------------------------------------

Implementation
    When the Exchange filed to adopt Rule 971.1NY, it stated that it 
would announce the implementation date of the proposed rule change in a 
Trader Update to be published no later than 60 days following 
Commission approval. The Exchange further provided that the 
implementation date would be no later than 60 days following 
publication of the Trader Update announcing Commission approval.
    Because the Exchange will not implement Rule 971.1NY until this 
rule

[[Page 35204]]

change is effective, the Exchange proposes to revise this 
implementation schedule to provide that it will announce the 
implementation date of Rule 971.1NY, as amended by this rule proposal, 
in a Trader Update to be published no later than 30 days following the 
effective date of this rule change. The Exchange further proposes that 
the implementation date will be no later than 30 days following 
publication of the Trader Update announcing Commission approval. The 
Exchange believes that this implementation schedule would provide ATP 
Holders with adequate notice of the Auction and would allow ample time 
for ATP Holders to prepare their systems for participation in the 
Auction process, if such participation is desired. The Exchange notes 
that this proposed rule change would not require ATP Holders to make 
any changes to their systems.
2. Statutory Basis
    For the reasons set forth above, the Exchange believes the proposed 
rule change is consistent with Section 6(b) of the Act in general, and 
furthers the objectives of Section 6(b)(5) of the Act, 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.
    In particular, the Exchange believes that the proposal would remove 
impediments to and perfect the mechanisms of a free and open market and 
a national market system because it would provide transparency in 
Exchange rules of when a CUBE Auction would conclude early. As noted 
above, the rationale for an early conclusion to an Auction is to allow 
the System to appropriately handle unrelated orders without the CUBE 
Auction impacting that handling, and further allow a CUBE Order, which 
has been guaranteed an execution, to execute against the Contra Order 
and any RFR Responses that may have been entered up to that point. The 
Exchange believes that concluding the Auction early as proposed is 
consistent with current Rule 971.1NY(b)(1)(C), which requires the 
Exchange to adjust the range of permissible executions if the same-side 
BBO as the CUBE Order updates during an Auction. As already provided 
for in Rule 971.1NY(c)(4)(D), an Auction concludes early if the same-
side interest would update the BBO to a price better than the 
initiating price, which would have required adjusting the lower (upper) 
bound of the range of permissible executions to be higher (lower) than 
the initiating price to buy (sell). The Exchange believes the same 
rationale applies in any circumstance when the Exchange receives during 
the Auction same-side interest that would update the BBO in such a 
manner as to require the lower (upper) bound of the range of 
permissible executions to be adjusted to be higher (lower) than the 
initiating price to buy (sell). The Exchange believes that the proposed 
change is therefore consistent with the protection of investors and the 
public interest because it will provide specificity in Exchange rules 
when an Auction concludes early, thereby allowing both the CUBE Order 
to receive its guaranteed execution and the Book to update the BBO.
    The Exchange further believes that the proposed revised 
implementation schedule would remove impediments to and perfect the 
mechanism of a free and open market and a national market system 
because it will enable the Exchange to delay implementation of the CUBE 
Auction until after this proposed rule change is effective, while also 
providing time to give notice to ATP Holders of the implementation 
date.

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. The rule proposal is not 
intended to address any competitive issues. Rather, the Exchange is 
proposing to add more specificity of circumstances when an Auction 
would conclude early, in a manner consistent with existing rule text. 
The Exchange notes that it operates in a highly competitive market in 
which market participants can readily direct order flow to competing 
venues who offer similar functionality. The Exchange believes the 
proposed rule change is pro-competitive because it would enable the 
Exchange to provide market participants with functionality that is 
similar to that of other options exchanges. The Exchange notes that not 
having the CUBE Auction at the Exchange places the Exchange at a 
competitive disadvantage vis-[agrave]-vis other exchanges that offer 
similar price improvement mechanisms.

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 \10\ and Rule 19b-4(f)(6) thereunder.\11\ 
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.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \11\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    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) \12\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \12\ 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 rule-comments@sec.gov. Please include 
File No. SR-NYSEMKT-2014-51 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-NYSEMKT-2014-51. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your

[[Page 35205]]

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 such filing also will be available for inspection 
and copying at the principal offices 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-2014-51, and should 
be submitted on or before July 10, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-14312 Filed 6-18-14; 8:45 am]
BILLING CODE 8011-01-P