Document ID: SEC-2014-0392-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Self-Regulatory Organizations
Posted Date: 2014-03-11T04:00Z

[Federal Register Volume 79, Number 47 (Tuesday, March 11, 2014)]
[Notices]
[Pages 13711-13726]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-05179]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71655; File No. SR-NYSEMKT-2014-17]

Self-Regulatory Organizations; Self-Regulatory Organizations; 
Notice of Filing of Proposed Rule Change Adopting Rule 971.1NY for an 
Electronic Price Improvement Auction for Single-Leg Orders

March 5, 2014.
    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 February 21, 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, 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.
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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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to adopt Rule 971.1NY for an electronic price 
improvement auction for single-leg orders. 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 
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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to adopt new Rule 971.1NY that sets forth an 
electronic crossing mechanism with a price improvement auction on the 
Exchange to be referred to as the CUBE Auction, which stands for 
Customer Best Execution. Proposed Rule 971.1NY provides for a CUBE 
Auction for single-leg orders. The CUBE Auction may also be referred to 
herein simply as the Auction. The Exchange notes that the CUBE Auction, 
as proposed, would operate in a manner consistent with--but not 
identical to--the operation of electronic price improvement auctions 
available on other options markets.\4\
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    \4\ See Chicago Board Options Exchange, Inc. (``CBOE'') Rule 
6.74A--Automated Improvement Mechanism (``AIM''); NASDAQ OMX PHLX, 
INC. (``PHLX'') Rule 1080--Price Improvement XL (``PIXL''); BOX 
Options Exchange LLC (``BOX'') Rule 7150--Price Improvement Period 
(``PIP''); International Securities Exchange (``ISE'') Rule 723--
Price Improvement Mechanism (``PIM''). In general, the AIM, PIXL, 
PIP and PIM have features similar to those proposed in the Auction 
including: (a) Providing the opportunity for price improvement; (b) 
delineating an exposure period for original agency order; (c) 
setting guidelines for the types of orders eligible for 
participation; and (d) setting allocation rules for orders 
considered by the mechanism.
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    As proposed, the CUBE Auction would be available to ATP Holders 
both on and off the Trading Floor of the Exchange, subject to the 
requirements of Section 11(a) of the Act (discussed below). In addition 
to the CUBE Auction, Floor-based ATP Holders may continue to use 
existing Floor-based crossing rules.
CUBE Overview
    As described below, 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

[[Page 13712]]

and limit orders sent to the Exchange are placed and reside as a file 
on the NYSE Amex System. Under proposed Rule 971.1NY(a), an ATP Holder 
may seek to guarantee the execution of a limit order it represents as 
agent on behalf of a public customer, broker dealer, or any other 
entity via the CUBE Auction. As proposed, this agency order would be 
referred to as the CUBE Order. The ATP Holder that submits the CUBE 
Order (the ``Initiating Participant'') would agree to guarantee the 
execution of the CUBE Order by submitting a contra-side order (``Contra 
Order'') representing principal interest or interest it has solicited 
to trade with the CUBE Order at a specified price (``single stop 
price'') or by utilizing auto-match or auto-match limit features as 
described in proposed Rule 971.1NY(c)(1). The Initiating Participant's 
manner of guaranteeing the CUBE Order and the price(s) at which the 
CUBE Order is stopped would not be displayed.
    Although the Contra Order would guarantee the CUBE Order an 
execution, the purpose of the Auction is to provide the opportunity for 
price improvement for the CUBE Order as well as the opportunity for 
other market participants to interact with the CUBE Order. Accordingly, 
the Exchange will notify market participants when an Auction is 
occurring so that they may have an opportunity to participate. And as 
discussed in more detail below, if, during an Auction, the Exchange 
receives quotes or orders that are marketable, the Auction will 
conclude and those marketable orders or quotes would have an 
opportunity to interact with interest in the Auction and then will 
continue with regular order processing, without delay. So from the 
perspective of ATP Holders entering orders or quotes, the fact that an 
Auction may be occurring will not impact their order or quote 
processing, other than the possibility of additional trading 
opportunities by virtue of trading with interest that is designated for 
the Auction.
Criteria for Starting a CUBE Auction
    As set forth in proposed Rule 971.1(a), an Auction begins with an 
``initiating price,'' which for a CUBE Order to buy (sell) shall be the 
lower (higher) of the CUBE Order's limit price or the National Best 
Offer (``NBO'') (National Best Bid) (``NBB''), except as provided for 
in paragraph (b)(1)(B) of the proposed Rule (discussed below). For 
example, if both National Best Bid or Offer (``NBBO'') or Exchange Best 
Bid or Offer (``BBO'') are $2.00 x $2.05, and there is no Customer 
interest in the BBO, a CUBE Order to buy 60 contracts with a limit 
price of $2.06 would have an initiating price of $2.05 (the NBO).\5\ 
However, if the limit price of the CUBE Order to buy were $2.04, the 
initiating price would be $2.04 (the CUBE Order to buy's limit price is 
lower than the NBO). The initiating price of the CUBE Order, as well as 
the Contra Order and any responsive GTX Orders (discussed below) may be 
priced in $0.01 increments, regardless of the Minimum Price Variation 
(``MPV'') applicable to the series.\6\ For example, in a series with a 
$0.05 MPV, if a CUBE Order to buy 10 contracts with a limit price of 
$2.05 is entered when both the NBBO and BBO throughout the Auction are 
$2.00 x $2.05, with no Customer interest in the BBO, the initiating 
price could be $2.04 if the Contra Order guarantees the execution of 
the CUBE Order with a single stop price at or below $2.04 or utilizes 
auto-match or auto-match limit (discussed below). At the conclusion of 
the CUBE Auction, the CUBE Order may execute at multiple prices within 
a permissible range but would always execute at the best-priced 
interest in the Auction.
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    \5\ See proposed Rule 971.1NY (b)(1). For purposes of this Rule, 
the term ``Customer'' shall have the definition set forth in Rule 
900.2NY(18). As proposed in amended Rule 900.2NY(18A), for purposes 
of the proposed CUBE Auction, Professional Customers as defined in 
that Rule shall be treated as broker dealers. Treatment of 
Professional Customers as broker dealers for purposes of the CUBE 
Auction is consistent with the approved rules of the CBOE. See CBOE 
Rule 1.1(ggg). The Exchange notes that it also proposes to make a 
technical, non-substantive amendment to Rule 900.2NY(18A) to delete 
the cross reference to Rule 963.1NY, which was deleted when the 
Exchange revised various rules relating to Complex Order trading 
(see Securities Exchange Act Release No. 64558 (Dec. 16, 2010), 75 
FR 80552 (Dec. 22, 2010).
    \6\ See proposed Rule 971.1NY(b)(7).
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    Proposed Rule 971.1NY(b) sets forth the eligibility requirements 
for initiating a CUBE Auction. As proposed, the time at which the 
Auction is initiated would be considered the time of execution for the 
CUBE Order, and therefore even though the execution will print after 
the Auction has completed, the Exchange acknowledges that the Auction 
would qualify as an exception to the general prohibition against Trade-
Throughs, pursuant to Rule 991NY(b)(9).\7\ Similarly, because the 
Auction has a maximum duration of 750 milliseconds (as discussed 
below), the Auction also qualifies as an exception to Trade-Through 
Liability to the extent that the NBBO may improve during the Auction, 
pursuant to Rule 991NY(b)(5).\8\ The Exchange notes that the proposed 
Auction is consistent with how the electronic price improvement 
auctions of other markets operate.\9\
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    \7\ See Rule 991NY(b)(9) (Order Protection, Exceptions to Trade-
Through Liability) (``The transaction that constituted the Trade-
Through was the execution of an order that was stopped at a price 
that did not Trade-Through an Eligible Exchange at the time of the 
stop'').
    \8\ See Rule 991NY(b)(5) (Order Protection, Exceptions to Trade-
Through Liability) (``The Eligible Exchange displaying the Protected 
Quotation that was traded through had displayed, within one second 
prior to execution of the Trade-Through, a Best bid or Best offer, 
as applicable, for the options series with a price that was equal or 
inferior to the price of the Trade-Through transaction'').
    \9\ See, e.g., CBOE Rule 6.74A; PHLX Rule 1080; BOX Rule 7150; 
ISE Rule 723.
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    As stated above, pursuant to proposed Rule 971.1NY(a), an Auction 
begins with an ``initiating price,'' which for a CUBE Order to buy 
(sell) shall be the lower (higher) of the CUBE Order's limit price or 
the NBO (NBB), except as provided for in paragraph (b)(1)(B) of the 
proposed Rule (discussed below). And, at the conclusion of the CUBE 
Auction, the CUBE Order may execute at multiple prices within a 
permissible range.
    To assure that a CUBE Auction does not result in a Trade-Through of 
the NBBO or execute ahead of Customer interest with priority that may 
be present in the Consolidated Book at the initiation of an Auction, 
the Exchange proposes that a CUBE Auction have a defined range of 
permissible executions that are based on a snapshot of the market at 
the initiation of the Auction. This range of permissible executions may 
change, however, if the BBO on the same side as the CUBE Order updates 
during the Auction, as provided in proposed paragraph (b)(1)(C) 
(discussed below).
    As set forth in proposed Rule 971.1NY(b)(1), a CUBE Order to buy 
(sell) would generally have a proposed permissible range of executions 
with an upper (lower) bound equal to the initiating price and the lower 
(upper) bound equal to the NBB (NBO). However, pursuant to proposed 
paragraphs (b)(1)(A) and (b)(1)(B), the Exchange proposes tighter 
ranges of executions for when there is Customer interest in the BBO for 
orders of 50 contracts or more or for when there are orders for fewer 
than 50 contracts, which is consistent with how electronic price 
improvement auctions of other markets operate.\10\
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    \10\ See, e.g., CBOE Rule 6.74A(a)(3).
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    First, pursuant to proposed Rule 971.1NY(b)(1)(A), if the CUBE 
Order to buy (sell) is for 50 contracts or more and there is Customer 
interest in the Consolidated Book at the Exchange Best Bid (``BB'') 
(Exchange Best Offer (``BO'')), the lower (upper) bound of

[[Page 13713]]

executions shall be the higher (lower) of the BB plus one cent (BO 
minus one cent) or the NBB (NBO).\11\ The Exchange believes that this 
is appropriate to assure that any Customer interest at the BB (BO) 
retains priority at that price. Second, pursuant to proposed Rule 
971.1NY(b)(1)(B), if the CUBE Order to buy (sell) is for fewer than 50 
contracts, the initiating price shall be the lower (higher) of the CUBE 
Order's limit price, the NBO (NBB), or the BO minus one cent (BB plus 
one cent) and the lower (upper) bound of executions shall be the higher 
(lower) of the NBB (NBO) or the BB plus one cent (BO minus one 
cent).\12\ Consistent with rules of other exchanges, and as discussed 
in further detail below, the Exchange proposes paragraph (b)(1)(B) of 
the proposed Rule be adopted on a pilot basis.\13\
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    \11\ The Auction is similar to CBOE Rule 6.74A(a)(2) and ISE 
Rule 723(b)(1), to the extent that it has an upper bound of 
permissible executions, whereas the CBOE and ISE Rules cited have a 
lower bound.
    \12\ The Auction is consistent with CBOE 6.74A(a)(3), to the 
extent that it has an upper bound of permissible executions.
    \13\ See, e.g., CBOE Rule 6.74A Interpretation and Policies .03; 
PHLX Rule 1080(n)(vii); ISE Rule 723 Supplementary Material .03; BOX 
IM-7150-1.
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    The following examples show the initiating price and the 
permissible range of executions for various potential CUBE Orders, 
pursuant to proposed paragraphs (b)(1)(A) and (b)(1)(B) of Rule 
971.1NY.
Examples of CUBE Orders Subject to Proposed Rule 971.1(NY)(b)(1)(A)
    Example #1 (Customer interest on BB):

NBBO = $2.00 x $2.05
BBO= $2.00 x 2.05, Customer interest $2.00 bid
CUBE Order $2.05 bid for 60 contracts
Initiating Price is $2.05. Permissible range of execution: $2.01 to 
$2.05

    Example #2 (Customer interest on BB):

NBBO = $2.00 x $2.05
BBO= $2.00 x 2.05, Customer interest $2.00 bid
CUBE Order $2.03 bid for 60 contracts
Initiating Price is $2.03. Permissible range of execution: $2.01 to 
$2.03
Examples of CUBE Orders Subject to Proposed Rule 971.1(NY)(b)(1)(B)
    Example #3 (No Customer interest on BB):

NBBO = $2.00 x $2.05
BBO= $2.00 x 2.05
CUBE Order $2.05 bid for 10 contracts
Initiating Price is $2.04. Permissible range of execution: $2.01 to 
$2.04

    Example #4 (No Customer interest on BB):

NBBO = $2.00 x $2.05
BBO= $1.95 x 2.10
CUBE Order $2.05 bid for 10 contracts
Initiating Price is $2.05. Permissible range of execution: $2.00 to 
$2.05

    Pursuant to proposed Rule 971.1NY(b)(1)(C), 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) (as 
discussed below). The Exchange believes that this practice of honoring 
the updated BBO would help ensure a fair and orderly market by 
maintaining the priority of quotes and orders on the Consolidated Book 
as they update.
    Example #4a (With No Customer interest on BBO):

NBBO = $1.00 x $1.20
BBO= $1.00 x $1.20
CUBE Order $1.10 bid for 100 contracts
Initiating Price is $1.10. Permissible range of execution: $1.00 to 
$1.10
BB updates during Auction to $1.04 (No Customer interest in BB); 
Updated permissible range of executions: $1.04-$1.10 \14\
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    \14\ The update to the BB in this example would not cause an 
early conclusion of the Auction because the updated BB does not 
improve the initiating price. See, e.g., proposed Rule 
971.1NY(c)(4)(D).
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    Example #4b (With Customer interest in the updated BBO):

NBBO = $1.00 x $1.20
BBO= $1.00 x $1.20
CUBE Order $1.10 bid for 100 contracts
Initiating Price is $1.10. Permissible range of execution: $1.00 to 
$1.10
BB updates during Auction to $1.04 (Customer interest in BB); Updated 
permissible range of executions: $1.05-$1.10 (BB plus one penny)

    To mitigate the risk of advancing too far through the Consolidated 
Book during periods of increased volatility or reduced liquidity, the 
Exchange utilizes price protection mechanisms, including Trade Collar 
Protection, as defined in Rule 967NY(a).\15\ A Marketable Order held at 
a Trading Collar represents interest that is eligible to trade at a 
specific price, even though that price is not displayed, and therefore 
must be taken into consideration when determining the range of 
permissible executions. Thus, if, at the time a CUBE Order is 
submitted, there are orders subject to Trade Collar Protection, i.e., 
collared orders, the range of permissible executions for the CUBE Order 
will be narrowed to ensure the priority of the collared order(s). 
Specifically, pursuant to proposed Rule 971.1NY(b)(1)(D), if at the 
time the Auction is initiated, there is a Marketable Order to sell 
(buy) that has been displayed pursuant to Rule 967NY(a)(4)(A), the 
displayed price of the collared order minus (plus) one Trading Collar 
would be considered the BO (BB) when determining the range of 
permissible executions.\16\ For example, if the NBBO and BBO at the 
beginning of an Auction for a CUBE Order to buy 60 contracts is $1.00 x 
$2.00, and the $2.00 BO is a marketable sell order (non-Customer) that 
has been displayed pursuant to Rule 967NY(a), the upper bound of the 
range of executions would be the price at which the Marketable Order 
would be eligible to trade, which in this example, would be $1.75. 
Accordingly, the permissible range of executions for this CUBE Order to 
buy would be $1.00 x $1.75. The inclusion of collared orders when 
determining the range of permissible executions will help ensure a fair 
and orderly market by maintaining the priority of orders and quotes on 
the Consolidated Book, while still affording the opportunity for price 
improvement on each Auction commenced on the Exchange.
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    \15\ See Rule 967NY(a)(1) (``The Exchange will not immediately 
execute (i) incoming Market Orders or marketable Limit Orders 
(`Marketable Orders') if the width of the NBBO is greater than one 
Trading Collar, as defined in paragraph (a)(2) below or, (ii) the 
balance of an incoming Marketable Order to buy (sell) that would 
execute at a price that exceeds the [NBO] ([NBB]) plus (minus) the 
value of one Trading Collar.''). See also Rule 967NY(a)(4)(A) (``An 
incoming Marketable Order to buy (sell) will be displayed at a price 
equal to the NBB (NBO) plus (minus) one Trading Collar (the 
`collared order')'').
    \16\ See Rule 967NY(a)(2) (``A `Trading Collar' shall be 
determined by the Exchange on a class-by-class basis and, unless 
announced otherwise via Trader Update, shall be the same value as 
the bid-ask differential guidelines established pursuant to Rule 
925NY(b)(4). To preserve a fair and orderly market, the Exchange 
may, with the approval of two Trading Officials, grant intra-day 
relief to widen or narrow the Trading Collar for one or more option 
series'').
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    Paragraphs (b)(2)-(9) of proposed Rule 971.1NY set forth the 
various reasons that a proposed CUBE Order would be rejected--and 
deemed ineligible to commence an Auction.
    First, pursuant to proposed Rule 971.1NY(b)(2), a CUBE Order to buy 
(sell) with a limit price below (above) the lower (upper) bound of the 
permissible range of executions specified in paragraph (b)(1) of the 
proposed Rule would not be eligible to initiate an Auction and would be 
rejected along with the Contra Order. For example, if both the NBBO and 
the BBO were $2.00 x $2.05 and there is a proposed CUBE Order to buy 
for $1.99 for 60 contracts, this CUBE Order would be rejected because 
the limit price is below the lower bound of permissible executions, 
which here would have been $2.00. The Exchange believes that

[[Page 13714]]

it is appropriate to reject CUBE Orders to buy (sell) that are priced 
below (above) the lower (upper) bound because they are not the best-
priced interest available and should not trade ahead of better-priced 
interest on the same side of the market.
    Consistent with proposed Rule 971.1NY(b)(2), a CUBE Order to buy 
would be rejected if its limit price were below the lower bound of the 
permissible range of executions that has been calculated based on the 
presence of a marketable buy order subject to Rule 967NY(a). For 
example, if the NBBO and BBO at the beginning of an Auction for a CUBE 
Order to buy 60 contracts is $1.00 x $2.00, and the $1.00 BB represents 
a marketable buy order that has been displayed pursuant to Rule 
967NY(a), a CUBE Order to buy with an initiating price of $1.15 will be 
rejected because it falls below the lower bound of permissible 
executions, which here would have been $1.25 (the BB plus one trading 
collar of $0.25).
    Pursuant to proposed paragraph (b)(3), a CUBE Order, once accepted, 
will never execute outside the range of permissible executions and will 
never trade through its own limit price or the price of an unrelated 
quote or order. For example, if during the Auction, the NBB, but not 
BB, improved (to a price better than the CUBE Order to buy) and an 
unrelated order that was marketable against the updated NBB caused the 
Auction to conclude early, per proposed paragraph (c)(4) of this Rule 
(as discussed below), the CUBE Order would not trade through its own 
limit price to trade at the price of the updated NBB. Likewise, 
although the Auction would have concluded early, the incoming 
marketable sell order would not participate in the Auction and 
therefore would not trade through the updated NBB price. As discussed 
above, the CUBE Auction ignores updates to the NBBO during the Auction, 
per Rule 991NY(b)(5). Thus, as discussed below, the CUBE Order would 
trade with any interest received during the Auction, or if no interest 
was received during the Auction, with the Contra Order, at prices equal 
to or at prices that improved the CUBE Order's limit price.
    The following are additional reasons that a proposed CUBE Order 
would be deemed ineligible to commence an Auction and therefore 
rejected, as set forth in proposed Rule 971.1NY(b)(4)-(6) and (b)(9).
    1. CUBE Orders submitted before the opening of trading would not be 
eligible to initiate an Auction and would be rejected, along with the 
Contra Order. Because a CUBE Order is deemed executed at the time of 
entry, any CUBE Orders entered before the opening of trading would not 
be able to execute, and therefore the Exchange believes it would be 
appropriate to reject these CUBE Orders.
    2. CUBE Orders submitted during the final second of the trading 
session in the affected series would not be eligible to initiate an 
Auction and would be rejected, along with the Contra Order. As 
discussed below, the length of the Auction would be at least 500 
milliseconds and the Exchange believes it would be appropriate to 
reject CUBE Orders submitted during the final second of the trading 
session to assure that the processing of a CUBE Order may be complete
    3. CUBE Orders for fewer than 50 contracts submitted when the BBO 
is $0.01 wide would likewise be rejected. For example, if both the NBBO 
and BBO were $2.00 x $2.01, and Customer interest may or may not be 
part of the BBO, a CUBE Order to buy 10 contracts for $2.01 would 
reject, because the market is only $0.01 wide. The Exchange believes it 
is appropriate to reject CUBE Orders in this scenario because these 
CUBE Orders would not be able to meet the permissible range of 
executions as specified in proposed Rule 971.1NY(b)(1).
    4. CUBE Orders submitted when the NBBO is crossed would result in 
the CUBE Order being rejected. The Exchange believes that this is 
appropriate because the Exchange would not be able to determine a 
permissible range of executions if the NBBO is crossed.
    The Exchange proposes that CUBE Orders may be entered in $.01 
increments regardless of the MPV of the series involved.\17\ To assure 
that the CUBE Order can receive price improvement, the Exchange also 
proposes that Contra Orders may be priced in one cent increments when 
specifying the stop price or the auto-match limit price pursuant to 
paragraphs (c)(1)(A) and (c)(1)(C) of the proposed Rule.\18\ This 
practice is consistent with the rules of other exchanges operating 
electronic price improvement auctions.\19\ In addition, the Exchange 
proposes that the minimum size requirement for a CUBE Order is one 
contract, which, as discussed below, would be adopted on a pilot 
basis.\20\
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    \17\ See proposed Rule 971.1NY(b)(7).
    \18\ Id.
    \19\ See, e.g., ISE Rule 723(b)(2).
    \20\ See proposed Rule 971.1NY(b)(8).
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    The Exchange believes that the above-described restrictions and 
requirements would ensure that the existing priority and display rules 
for the Consolidated Book \21\ are preserved, while still providing ATP 
Holders an opportunity to guarantee either price improvement, more 
liquidity beyond the displayed size, or both, for orders they represent 
as agent.
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    \21\ See Rule 964NY.
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CUBE Auction Process: Initiation of Auction
    Proposed Rule 971.1NY(c) sets forth the Auction process. As 
described in more detail below, once initiated, a CUBE Auction is 
announced via a broadcast message, known as a Request For Response 
(``RFR''), and market participants indicate their interest in the 
Auction by submitting acceptable RFR Responses. To initiate a CUBE 
Auction, pursuant to proposed Rule 971.1NY(c)(1), the Initiating 
Participant can elect one of three ways in which it would guarantee the 
execution of a CUBE Order--a single stop price, ``auto-match'', or 
``auto-match limit'', which is consistent with the rules of other 
options exchanges that offer electronic price improvement auctions.\22\ 
The Exchange believes that these three options afford the Initiating 
Participant flexibility and control over the price(s) at which it would 
be willing to guarantee the execution of a CUBE Order.
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    \22\ See, e.g., CBOE Rule 6.74A(b)(1)(A).
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    First, pursuant to proposed Rule 971.1NY(c)(1)(A), the Initiating 
Participant can elect to specify a single stop price at which it would 
participate in the Auction. If elected, under this option, the 
Initiating Participant will only participate in the Auction at a single 
price, regardless of the prices of other responses to the Auction. For 
a CUBE Order to buy (sell), an Initiating Participant may specify a 
single stop price that is at or below (above) the initiating price of 
the Auction. A stop price specified for a CUBE Order to buy (sell) that 
is below (above) the lower (upper) bound of the range of permissible 
executions will be repriced to the lower (upper) bound (the best-priced 
interest). In this instance, the stop price is below the lower bound of 
permissible execution prices, and thus the execution can be priced back 
to within the permissible execution range. However, a stop price 
specified for a CUBE Order to buy (sell) that is above (below) the 
initiating price is not eligible to initiate an Auction because it 
would be priced higher--and therefore at a worse price--than pre-
existing trading interest and both the CUBE Order and the Contra Order 
would be rejected. In this instance, the stop price

[[Page 13715]]

is inferior to the pre-existing trading interest, and thus it would not 
result in an execution within the permissible range. The following 
example shows the impact of various single stop prices on a CUBE Order.
Example of Single Stop Price, per proposed Rule 971.1(NY)(c)(1)(A)
    Example #5 (No Customer interest on BB):

NBBO = $2.00 x $2.05
BBO = $2.00 x $2.05
CUBE Order $2.06 bid for 60 contracts
Initiating Price is $2.05. Permissible Range of Executions is $2.00-
$2.05
Stop price $2.06 and above = CUBE Order and Contra Order rejected 
(because exceeds the initiating price)
Stop Price $2.00 - $2.05 = CUBE Order and Contra Order accepted
Stop Price $1.99 and below = CUBE Order accepted, Contra Order repriced 
to $2.00

    Rather than opt for a single stop price, an Initiating Participant 
may, pursuant to proposed Rule 971.1NY(c)(1)(B), elect the ``auto-
match'' option, which would automatically match both the price and size 
of all RFR Responses. Accordingly, the Initiating Participant may 
receive executions at multiple prices. Where the auto-match option is 
selected for a CUBE Order to buy (sell), the Initiating Participant 
would automatically match as principal or as agent on behalf of a 
Contra Order the price and size of all RFR Responses that are lower 
(higher) than the initiating price and within the range of permissible 
executions. For example, if both the NBBO and the BBO were $2.00 x 
$2.05 and the CUBE Order is to buy for $2.06 for 60 contracts, with no 
Customer interest at the BBO, and the RFR Responses are to sell 10 
contracts at $2.01, and 10 contacts at $2.02, then the Contra Order 
would auto-match these Responses by likewise selling 10 contracts to 
the CUBE Order at $2.01, and 10 contracts at $2.02. Thus, a total of 20 
contracts would be sold to the CUBE Order at $2.01 and 20 contracts 
would be sold at $2.02. The remaining 20 contracts in the CUBE Order 
would trade against the Contra Order at $2.05 (the initiating price/the 
NBO), assuming no other RFR Responses were received. If, in the 
preceding example, the CUBE Order limit price was instead $2.03 (not 
$2.06), the initiating price would be $2.03 (lower than the NBO at 
$2.05) and the CUBE Order would execute against the Responses and the 
Contra Order in exactly the same manner (i.e., a total of 20 contracts 
at $2.01 and 20 contracts at $2.02); however, the remaining 20 
contracts would trade against the Contra Order at $2.03 limit price.
    Finally, pursuant to proposed Rule 971.1NY(c)(1)(C), ATP Holders 
may guarantee the execution of a CUBE Order by electing the ``auto-
match limit'' option, which would automatically match the price and 
size of all RFR Responses at each price to match the trading interest 
up or down to the limit price specified, referred to as the ``auto-
match limit price.'' Thus, for a CUBE Order to buy (sell), the 
Initiating Participant would automatically match, as principal or as 
agent on behalf of a Contra Order, the price and size of RFR Responses 
that are lower (higher) than the initiating price down (up) to the 
auto-match limit price. Assume, for example, that both the NBBO and the 
BBO were $2.00 x $2.05 and the CUBE Order is to buy for $2.06 for 60 
contracts, with no Customer interest at the BBO, and the Contra Order 
selects an auto-match limit price of $2.03.\23\ If the RFR Responses 
are to sell at or between $2.00 and $2.02, the CUBE Order would execute 
with those better-priced RFR Responses, but the Contra Order would not. 
Instead, the Contra Order would only match those RFR Responses, if any, 
priced $2.03 or higher.
---------------------------------------------------------------------------

    \23\ In this example, the initiating price is $2.05 and the 
permissible range of executions is $2.00-$2.05.
---------------------------------------------------------------------------

    Once a CUBE Order has been submitted for processing, the CUBE Order 
(as well as the Contra Order) may not be cancelled or modified.\24\ 
This is consistent with the rules of other options exchanges that 
operate electronic price improvement auctions.\25\ The Exchange 
believes that this requirement reduces the potential for misuse of the 
Auction by ATP Holders that are not legitimately interested in making a 
bona fide trade in the Auction.
---------------------------------------------------------------------------

    \24\ See proposed Rule 971.1NY(c).
    \25\ See, e.g., CBOE Rule 6.74A(b); ISE Rule 723(b)(3); ISE Rule 
723 Supplementary Material .04.
---------------------------------------------------------------------------

CUBE Auction Process: RFRs, Response Time Interval and Responses
    As noted above, upon receipt of a valid CUBE Order, the Exchange 
would announce the Auction by disseminating an RFR to all participants 
who subscribe to Auction messages over ArcaBook for options.\26\ The 
RFR would identify the following characteristics of a CUBE Order: The 
series, the side of the market, the size, and the initiating price, 
which is consistent with the practice of other options exchanges.\27\ 
The Exchange believes that including this level of detail in each RFR 
may lead to better prices for the CUBE Order.
---------------------------------------------------------------------------

    \26\ ArcaBook is a proprietary data feed offered by the Exchange 
and available to anyone (including all ATP Holders) by subscription. 
The RFRs for CUBE Auctions would be included in the options data 
feed at no incremental cost to the ArcaBook subscriber. Thus, any 
subscriber that opts to receive the options data, including any ATP 
Holder subscriber, has the ability to enter an order in response to 
those RFRs (i.e., the election to receive RFRs would not be on a 
case-by-case basis).
    \27\ See, e.g., CBOE Rule 6.74A(b)(1)(B); ISE Rule 723(c).
---------------------------------------------------------------------------

    After the RFR is disseminated, the Exchange would begin a random 
timer for the duration of the Auction, referred to as the Response Time 
Interval, which would last between 500 and 750 milliseconds. As 
proposed, the length of the Response Time Interval would be determined 
by the CUBE Auction mechanism following the receipt of a valid CUBE 
Order and contemporaneously with the dissemination of the RFR. The 
Exchange believes that the use of an undisclosed random Response Time 
Interval of between 500 and 750 milliseconds would provide the CUBE 
Auction with a functional difference to distinguish it from similar 
price improvement mechanisms offered by other exchanges.\28\ The 
Exchange believes that the length of time allotted on the proposed 
Auction timer would provide ATP Holders with sufficient time to submit 
RFR Responses and would encourage competition among participants, 
thereby enhancing the potential for price improvement for the CUBE 
Order.\29\
---------------------------------------------------------------------------

    \28\ See, e.g., CBOE Rule 6.74A(b)(2)(A); PHLX Rule 
1080(n)(ii)(B)(1); ISE Rule 723(c)(5)(I).
    \29\ In December 2013, to determine whether the proposed Auction 
timer would provide sufficient time to respond to an RFR, the 
Exchange asked ATP Holders that both subscribe to ArcaBook and act 
as Market Makers on the Exchange (the ``Relevant ATP Holders'') 
whether their firms ``could respond to an Auction with a random 
duration of 500-750 milliseconds.'' Of the 21 Relevant ATP Holders 
that responded to the question, 100% (n = 21) indicated that their 
firm could respond in this time frame. Thus, the Exchange believes 
that the proposed Auction duration of at least 500 milliseconds, 
which is the mid-range of approved mechanisms at other market 
centers, would provide a meaningful opportunity for participants on 
NYSE Amex to respond to an Auction while at the same time 
facilitating the prompt execution of orders.
---------------------------------------------------------------------------

    During the Response Time Interval, any ATP Holder may respond to 
the RFR, either as principal or as agent on behalf of customers, 
provided such response is properly marked specifying price, size, and 
side of the market (each, an ``RFR Response'' or ``Response'').
    The Exchange proposes to add the ``GTX Order,'' which is a non-
routable order with a time-in-force contingency for the Response Time 
Interval, and thus would be considered an RFR Response. As an RFR 
Response, the GTX Order must specify price, size, and side of the

[[Page 13716]]

market. As proposed in Rule 971.1NY(c)(2)(C)(i):
     GTX Orders would not be displayed to the Consolidated Book 
or disseminated to any participants, i.e., not sent to OPRA as these 
orders would only interact with liquidity available during the Auction;
     Any portion of a GTX Order that is not executed in the 
CUBE Auction would be cancelled at the conclusion of the Auction 
because a GTX order would only interact with liquidity available during 
the Auction--including any unrelated order that is marketable against a 
GTX Order that causes the early conclusion of the Auction per paragraph 
(c)(4) of this Rule;
     The minimum price increment for a GTX Order would be one 
cent, regardless of the MPV for the series involved in the Auction, to 
maximize opportunities for price improvement in the Auction;
     GTX Orders with a size greater than the CUBE Order, would 
be capped at the size of the CUBE Order, to enable interaction with the 
CUBE Order and to discourage manipulation of the Auction process;
     GTX Orders may be cancelled, which would afford ATP 
Holders opting to utilize this order type additional flexibility and 
control; and
     GTX Orders on the same side of the market as the CUBE 
Order will be rejected. Because GTX Orders can only trade against a 
CUBE Order or an unrelated order on the same side as a CUBE Order, 
same-side GTX Orders are unnecessary to the CUBE Auction process. 
Therefore, the Exchange proposes that same-side GTX Responses will be 
rejected. Rejecting same-side GTX Orders is consistent with the 
processing of same-side RFR Responses to the Exchange's Complex Order 
Auction.\30\
---------------------------------------------------------------------------

    \30\ See Rule 980NY(e)(4).
---------------------------------------------------------------------------

     For a CUBE Order to buy (sell), GTX Orders priced below 
(above) the lower (upper) bound of executions shall be repriced to the 
lower (upper) bound of executions, as specified in proposed paragraph 
(b)(1) of this Rule. For example, assuming the facts of Example 4a 
above, if before the BB is updated to $1.04, the Exchange receives a 
GTX Order to sell priced at $1.02, because the new lower bound is 
$1.04, that GTX Order would be repriced to $1.04. The Exchange believes 
that this practice will ensure that GTX Orders eligible to participate 
in the Auction will not be excluded if they are priced more 
aggressively than the lower (upper) bound of execution.
    The Exchange believes that adding the GTX Order, which is good only 
for the duration of the Auction, would encourage participation in the 
Auction and would further enhance the opportunity for price improvement 
on the CUBE Order. The Exchange notes that the electronic price 
improvement auctions of other markets similarly utilize non-displayed 
trade interest in response to those auctions to enable market 
participants to enter non-displayed interest that would only 
participate in the auction. This type of non-displayed interest 
generally operates in the same manner as the Exchange's proposed GTX 
Order.\31\
---------------------------------------------------------------------------

    \31\ See, e.g., CBOE Rule 6.74A(b)(1) (non-displayed interest 
intended only for the auction may be cancelled); ISE Rule 723(c)(3) 
(non-displayed interest intended only for the auction may be 
modified, but not cancelled).
---------------------------------------------------------------------------

    The CUBE Auction would also consider any other unrelated orders and 
quotes (``unrelated orders'') received during an Auction that are 
priced within the permissible range of executions as eligible to 
participate in the Auction. Because such unrelated orders would be 
eligible to participate in the Auction, the Exchange proposes to 
include these orders in the definition of RFR Responses, even if such 
unrelated orders were submitted coincidentally during an Auction, as 
opposed to purposefully in response to an RFR. Specifically, pursuant 
to proposed Rule 971.1NY(c)(2)(C)(ii), the Exchange would consider 
unrelated orders on the opposite side of the market and in the same 
series as the CUBE Order to be RFR Responses provided that the orders 
were received during the Response Time Interval; were not marked as 
GTX; and would be eligible to participate within the range of 
permissible executions specified by proposed paragraph (b)(1). The 
Exchange believes that considering these unrelated orders as RFR 
Responses should increase the number of participants against which the 
CUBE Order may be executed, and should thus maximize opportunities for 
price improvement on the CUBE Order.
    However, the Exchange would not consider as RFR Responses those 
unrelated orders that either would not provide an opportunity for price 
improvement on the CUBE Order or would not trade at the initiating 
price of the CUBE Order. Specifically, pursuant to proposed Rule 
971.1NY(c)(2)(C)(ii)(a), unrelated orders received during the Response 
Time Interval that are not marketable against the NBBO, not marked GTX, 
or are otherwise unable to participate in the Auction, would be posted 
to the Consolidated Book. In addition, unrelated orders received during 
the Response Time Interval that are on the same side of the market as 
the CUBE Order to buy (sell) and that are priced higher (lower) than 
the initiating price, and therefore would create a new BBO on the same 
side as the CUBE Order, shall be posted to the Consolidated Book and 
would result in an early conclusion of the Auction pursuant to 
paragraph (c)(4) of the proposed Rule. In both cases, as discussed 
further below, such unrelated orders would cause the Auction to 
conclude early. The Exchange believes that early conclusion would avoid 
disturbing priority in the Consolidated Book, in accordance with Rule 
964NY, which dictates the priority of bids within the NYSE Amex System, 
and would allow the Exchange to appropriately handle unrelated orders 
without the Auction impacting that handling, while at the same time 
allowing the CUBE Order to execute against the Contra Order and any RFR 
Responses that may have been entered up to that point.
    To be eligible to participate in the Auction, unrelated orders must 
be priced in the MPV for the series in the Auction. Only CUBE Orders, 
GTX Orders and Contra Orders--which are specifically slated for the 
Auction--would be permitted to be priced in one cent increments, 
regardless of the MPV for that option. The Exchange believes that it is 
appropriate to allow such orders to trade in one cent increments to 
enhance the opportunity for price improvement during the Auction. Thus, 
a quote or order other than a CUBE Order, GTX Order or Contra Order 
submitted in a one cent increment when the series has either a $0.05 or 
$0.10 MPV would be rejected as invalid. Rejecting quotes and orders 
with invalid prices submitted during an Auction is consistent with the 
treatment of invalid priced quote and orders entered at all other 
times.
Conclusion of the CUBE Auction and Order Allocation
    As proposed in Rule 971.1NY(c)(3), and similar to the operation of 
price improvement mechanisms offered by other exchanges, the CUBE 
Auction would conclude at the end of the Response Time Interval.\32\ 
However, as described in proposed Rule 971.1NY(c)(4) (and discussed 
below), certain events may result in the early conclusion of the CUBE 
Auction. Consistent with the rules of other exchanges that operate 
electronic price

[[Page 13717]]

improvement auctions, the Auction would conclude in the event of a 
trading halt in the affected series \33\ and the CUBE Order would be 
executed per proposed Rule 971.1NY(c)(5).\34\
---------------------------------------------------------------------------

    \32\ See, e.g., CBOE Rule 6.74A(b)(2)(A); PHLX Rule 
1080(n)(ii)(B)(1); ISE Rule 723(c)(5)(I).
    \33\ See, e.g., CBOE Rule 6.75A(b)(2)(F); PHLX Rule 
1080(n)(ii)(B)(3).
    \34\ Because the execution of the CUBE Auction is deemed to have 
occurred at the time the CUBE Auction is initiated, if a trading 
halt occurs in the series during the Response Time Interval causing 
the Auction to conclude early, the Exchange does not believe that 
such execution needs to be nullified pursuant to Rule 953NY 
Commentary .03.
---------------------------------------------------------------------------

    Proposed Rule 971.1NY(c)(5) sets forth the order allocation 
procedures for the CUBE Auction. Pursuant to proposed Rule 
971.1NY(c)(5)(A), at each price level, any Customer orders resting on 
the Consolidated Book at the start of the CUBE Auction shall have first 
priority, followed by Customer orders that arrived during the CUBE 
Auction as RFR Responses. The Exchange notes, however, that pursuant to 
proposed paragraph (b)(1)(B), the permissible range of executions for a 
CUBE Order would have already preserved the integrity of the priority 
of any Customer orders resting at the start of the Auction. Generally, 
at the conclusion of the CUBE Auction, the Auction mechanism would 
determine whether the total RFR Responses can fill the CUBE Order at a 
price or prices better than the initiating price. If so, the CUBE Order 
is matched against the better-priced RFR Responses granting the CUBE 
Order the maximum amount of price improvement possible. As noted above, 
certain unrelated orders may be considered RFR Responses and may 
interact with the CUBE Order (thus maximizing opportunities for price 
improvement) and any portion of these unrelated orders remaining 
thereafter would be placed on the Consolidated Book.
    When there are multiple RFR Responses at a given price, the CUBE 
Order would be executed against the RFR Responses on a pro-rata basis 
pursuant to the size pro rata algorithm set forth in Rule 964NY(b)(3), 
except that Customers at a given price are executed first in priority. 
The Exchange believes that, as proposed, the Auction maximizes the 
opportunity for price improvement while maintaining the priority of 
Customer orders. In addition, per proposed paragraph (c)(5), any single 
RFR Response that has a contract size that exceeds the size of the CUBE 
Order would be treated as if it were the same size as (i.e., would be 
capped at) the size of the CUBE Order for allocation purposes, per Rule 
964NY(b)(3). The Exchange believes that this would encourage 
participation in the Auction (by not rejecting these Responses) and 
would assist in avoiding the opportunity for an ATP Holder to subvert 
the size pro rata allocation method by submitting outsized trading 
interest.
    The Exchange proposes that the Contra Order, having guaranteed the 
execution of the CUBE Order, should be entitled to a certain level of 
participation in the Auction, provided there is sufficient size 
remaining after better-priced interest and Customer interest has been 
satisfied. As proposed, assuming sufficient interest in the CUBE Order 
remains after executing against Customer interest or better-priced 
interest, the Contra Order would then be entitled to a participation 
guarantee equal to the greater of one contract or either (a) 40% of the 
size of the initial CUBE Order (if there are multiple RFR Responses to 
the Auction) or (b) 50% of the size of the initial CUBE Order (if there 
is only one RFR Response to the Auction). The Exchange believes that 
the proposed participation guarantee, which is consistent with the 
rules of this and other option exchanges, is a fair inducement in 
exchange for guaranteeing the entire size of the Initiating 
Participant's agency order (i.e., the CUBE Order).\35\ As discussed 
above, and similar to the operation of electronic auctions on other 
options exchanges, an Initiating Participant can opt to guarantee the 
execution of a CUBE Order via a single stop price, by auto-match or by 
specifying an auto-match limit price.\36\
---------------------------------------------------------------------------

    \35\ See, e.g., Rule 934.1NY(4)(A) (providing for a 40% 
allocation for facilitation orders in facilitation cross 
transactions). See also PHLX Rule 1080(n)(2)(E)(2)(a) (providing up 
to 50% allocation with participation guarantees); ISE Rule 713 
Commentary .03 (providing up to 60% allocation for participation 
guarantees); CBOE Rule 6.74A(b)(3)(F).
    \36\ See, e.g., CBOE Rule 6.74A(b)(3); PHLX Rule 1080(n)(ii)(E); 
ISE Rule 723(d)(4); BOX Rule 7150(g)(1).
---------------------------------------------------------------------------

    Proposed paragraphs (b)(i)-(iii) to the proposed Rule set forth how 
a CUBE Order would trade with Responses and/or the Contra Order, which 
depends upon the RFR Responses, if any, and how the Contra Order 
guaranteed the execution of the CUBE Order. Pursuant to proposed Rule 
971.1NY(c)(5)(B)(i), a CUBE Order guaranteed by a single stop price 
would first execute against better-priced Responses or Customer 
interest, and, if there is sufficient size remaining, the CUBE Order 
would then execute against the Contra Order at the stop price. It is 
possible, however, that after the CUBE Order executes against the 
better-priced RFR Responses, the Contra Order would not receive the 
full extent (or, perhaps, any) of its participation guarantee at the 
stop price, as shown in the second example below.
Examples of Trade Allocation--Single Stop Price
    Example #6 (No Customer interest on BB):

NBBO = $1.15-$1.25 200 x 200
BBO = $1.15-$1.25 100 x 100
CUBE Order to buy 50 contracts with a limit price of $1.20
Contra Order selling 50 contracts with a single stop price of $1.20
Permissible range of executions is $1.15 to $1.20
RFR sent identifying the series, side and size, with initiating price 
of $1.20
(Auction Starts)
MM1GTX Order received @ 410 milliseconds Sell 5 at $1.17
MM4 GTX Order received @ 530 milliseconds Sell 10 at $1.18
MM3 GTX Order received @ 650 milliseconds Sell 40 at $1.20
651 milliseconds (Auction Ends)

    Under this scenario the CUBE Order would be executed as follows:

5 contracts trade with MM1 @ $1.17
10 contracts trade with MM4 @ $1.18
20 contracts trade with the Contra Order @ $1.20 (This satisfies their 
40% participation guarantee)
15 contracts trade with MM3 @ $1.20
(This fills the entire CUBE Order)

    Example #7 (No Customer interest on BB):

NBBO = $1.15-$1.25 200 x 200
BBO = $1.15-$1.25 100 x 100
CUBE Order to buy 50 contracts with a limit price of $1.20
Contra Order selling 50 contracts with a single stop price of $1.20
Permissible range of executions is $1.15 to $1.20
RFR sent identifying the series, side and size, with initiating price 
of $1.20
(Auction Starts)
MM1GTX Order received @ 410 milliseconds Sell 20 at $1.17
MM4 GTX Order received @ 430 milliseconds Sell 20 at $1.18
MM3 GTX Order received @ 450 milliseconds Sell 40 at $1.20
557 milliseconds (Auction Ends)

    Under this scenario, the CUBE Order would be executed as follows:

20 contracts trade with MM1 @ $1.17
20 contracts trade with MM4 @ $1.18
10 contracts trade with the Contra Order @ $1.20 (Contra Order does not 
receive 40% participation guarantee because there is not sufficient 
size available)
(This fills the entire CUBE Order)
MM3 does not trade any contracts
Example of Trade Allocation--Single Stop Price & Unrelated Order
    Example #8 (No Customer interest on BB):

[[Page 13718]]

NBBO = $1.20-$1.24 200 x 100
BBO = $1.20-$1.24 100 x 100
CUBE Order to buy 20 contracts with a limit of $1.22
Contra Order selling 20 contracts with a single stop price of $1.22
Permissible range of executions is $1.20 to $1.22
RFR sent identifying the series, side and size, with initiating price 
of $1.22
(Auction Starts)
MM3 GTX Order received @ 200 milliseconds Sell 20 at $1.22
MM1GTX Order received @ 210 milliseconds Sell 20 at $1.22
MM4 GTX Order received @ 230 milliseconds Sell 20 at $1.22
F1 Unrelated Order received @ 400 milliseconds Sell 50 at $1.21
523 milliseconds (Auction concludes)

    Under this scenario the CUBE Order would be executed as follows:

20 contracts trade with the unrelated order for F1 @ $1.21 (the best-
priced Response)
(This fills the CUBE Order in its entirety and the Contra Order does 
not receive an execution)
GTX responses cancel
30 contracts remaining from the unrelated order for F1 post to the 
Consolidated Book resulting in new BBO
BBO = $1.20-$1.21 100 x 30

    Where the Initiating Participant elects auto-match or auto-match 
limit to guarantee the execution of a CUBE Order, the Contra Order 
would be allocated size equal to all other RFR Responses at each price 
point or at each price point within the limit price range--if a limit 
is specified--until a price point is reached where the balance of the 
CUBE Order could be fully executed (the ``clean-up price''). At the 
clean-up price, if there is sufficient interest in the CUBE Order 
remaining after better-priced interest and Customer interest has been 
executed, the Contra Order would be allocated additional contracts to 
ensure its guaranteed participation rate--the greater of one contract 
or 40% (or 50%, if only one Response) of the size of the initial CUBE 
Order. If the Contra Order meets its allocation guarantee at a price 
below (above) the clean-up price, it will cease matching RFR Responses 
that may be priced above (below) the price at which the Contra Order 
received its allocation guarantee. In addition, if there are other RFR 
Responses at the clean-up price, the remaining CUBE Order contracts 
will be allocated pursuant to the size pro rata algorithm set forth in 
Rule 964NY(b)(3) and any remaining CUBE Order contracts shall be 
allocated to the Contra Order at the initiating price. In the event 
that there are no RFR Responses to the Auction and an auto-match 
feature is selected, the CUBE Order shall execute against the Contra 
Order at the initiating price.
Examples of Trade Allocation--Auto-Match and Auto-Match limit
    Example #9 (No Customer interest on BB):

NBBO = $1.15-$1.25 200 x 200
BBO = $1.15-$1.25 100 x 100
CUBE Order to buy 50 contracts with a limit price of $1.24
Contra Order selling 50 contracts auto-match
Permissible range of executions is $1.15 to $1.24
RFR sent identifying the series, side and size, with initiating price 
of $1.24
(Auction Starts)
MM2 GTX Order received @ 350 milliseconds Sell 5 at $1.17
MM4 GTX Order received @ 430 milliseconds Sell 10 at $1.18
MM3 GTX Order received @ 450 milliseconds Sell 40 at $1.21
623 milliseconds (Auction Ends)

    Under this scenario the CUBE Order would be executed as follows:

5 contracts trade with MM2 @ $1.17
5 contracts trade with Contra Order @ $1.17 (due to auto-match)
10 contracts trade with MM4 @ $1.18
10 contracts trade with Contra Order @ $1.18 (due to auto-match)
5 contracts trade with Contra Order @ $1.21 (due to auto-match capped 
at 40% participation guarantee)
15 contracts trade with MM3 @ $1.21 (the Contra Order trades zero 
contracts at this price having already received their 40% participation 
guarantee at $1.21)
(This fills the entire CUBE Order)

    Example #10 (No Customer interest on BB):

NBBO = $1.15-$1.25 200 x 200
BBO = $1.15-$1.25 100 x 100
CUBE Order to buy 51 contracts with a limit price of $1.25
Contra Order selling 51 contracts auto-match limit at $1.17
Permissible range of executions is $1.15 to $1.25
RFR sent identifying the series, side and size, with initiating price 
of $1.25
(Auction Starts)
MM2 GTX Order received @ 150 milliseconds Sell 20 at $1.16
MM5 GTX Order received @ 200 milliseconds Sell 5 at $1.19
MM4 GTX Order received @ 230 milliseconds Sell 10 at $1.18
MM3 GTX Order received @ 450 milliseconds Sell 50 at $1.19
623 milliseconds (Auction Ends)

    Under this scenario the CUBE Order would be executed as follows:

20 contracts trade with MM2 @ $1.16
10 contracts trade with MM4 @ $1.18
10 contracts trade with Contra Order @ $1.18 (due to auto-match limit)
10 contracts trade with Contra Order @ $1.19 (due to auto-match limit 
and fulfills their 40% guarantee)
1 contract trades with MM3 @ $1.19
(This fills the entire CUBE Order)
Early Conclusion of a CUBE Auction
    As noted earlier, the CUBE Auction is integrated seamlessly within 
the Exchange's Consolidated Book and is designed to maintain the 
priority of all resting quotes and orders and any timely RFR Responses, 
as well as unrelated orders that are marketable at the time of arrival. 
Thus, as proposed, a CUBE Auction would conclude early (i.e., before 
the end of the Response Time Interval) as a result of certain events 
that would otherwise disrupt the priority of the Auction within the 
Consolidated Book. The Exchange notes that this is consistent with how 
the electronic price improvement auctions of other markets operate.\37\
---------------------------------------------------------------------------

    \37\ See, e.g., CBOE 6.74A(b); PHLX 1080(n)(ii); ISE Rule 723 
Supplementary Material .04; BOX Rule 7150(i).
---------------------------------------------------------------------------

    Proposed Rule 971.1NY(c)(4), explains how a CUBE Order would be 
allocated as a result of each of the events that would cause the early 
conclusion of an Auction.\38\ First, pursuant to proposed Rule 
971.1NY(c)(4)(A), if, during a CUBE Auction, a new CUBE Auction in the 
same series is received by the Exchange, the original CUBE Order would 
conclude and execute pursuant to proposed Rule 971.1NY(c)(5) and the 
new CUBE Auction would proceed as described in proposed Rule 
971.1NY(c). The Exchange believes that this practice is consistent with 
the rules of other exchanges operating electronic auctions, which would 
ensure a fair and orderly market by maintaining the priority of the 
Consolidated Book while still affording the opportunity for price 
improvement on each Auction commenced on the Exchange.\39\
---------------------------------------------------------------------------

    \38\ Pursuant to proposed Rule 971.1NY(c)(3), and as discussed 
herein, a trading halt in the affected series would also result in 
the early conclusion of an Auction and contracts would be allocated 
pursuant to proposed paragraph (c)(5).
    \39\ See, e.g., CBOE Rule 6.74A(b); ISE Rule 723(b)(3); ISE Rule 
723 Supplementary Material .04. The Exchange notes that although 
these rules specify that auctions may not overlap or queue in any 
manner, the rules are nonetheless silent on how this is enforced 
(i.e., by rejecting new auction orders or by concluding an ongoing 
auction early).
---------------------------------------------------------------------------

    Second, pursuant to proposed Rule 971.1NY(c)(4)(B), if, during a 
CUBE Auction the Exchange receives an unrelated quote or order that is 
on the

[[Page 13719]]

same side of the market as the CUBE Order, that is marketable against 
any RFR Response or the NBBO (or BBO, if a non-routable order) \40\ at 
the time of arrival, the Auction will conclude early so that this 
incoming order may be executed following the execution of the CUBE 
Order (which has priority), consistent with the terms of the unrelated 
incoming order. The CUBE Order, upon its early conclusion, will execute 
pursuant to proposed paragraph (c)(5). The Exchange notes that this 
practice is consistent with how the electronic price improvement 
auctions of other markets operate.\41\ If there is sufficient size to 
the RFR Responses remaining after executing against the CUBE Order, the 
order that caused the early conclusion of the Auction would trade with 
the remaining RFR Responses at the best available prices, which may be 
better than the NBBO (or BBO for non-routable orders).\42\
---------------------------------------------------------------------------

    \40\ The Exchange notes that an order that has been designated 
as an order type that is not eligible to be routed away will either 
be placed on the Consolidated Book or cancelled if such order would 
lock or cross the NBBO. See Rule 964NY(c)(2)(E). If an incoming non-
routable order is marketable against the NBBO, but not the BBO, and 
by its terms, such order would cancel, e.g., an IOC Order, it would 
not cause an early conclusion to an Auction. However, if such an 
order were marketable against the BBO, i.e., if the BBO equaled the 
NBBO, it would cause an early conclusion to the Auction.
    \41\ See, e.g., CBOE Rule 6.74A(b)(2)(B); PHLX Rule 
1080(n)(ii)(B)(2); ISE Rule 723(c)(5); BOX Rule 7150(i).
    \42\ See, e.g., CBOE Rule 6.74A(b)(3)(J).
---------------------------------------------------------------------------

    The Exchange believes the early conclusion of the Auction in this 
instance would ensure that the priority of quotes and orders on the 
Consolidated Book would not be disrupted. In this circumstance, those 
GTX Orders that do not execute in the CUBE Auction would execute 
against the unrelated order that caused the CUBE Auction to conclude 
early to the extent possible (maximizing price improvement for the 
incoming same-side marketable quote or order that caused the early 
conclusion to the Auction) and would then cancel. Any contracts 
remaining from any unrelated order when the RFR Responses have been 
exhausted would be processed in accordance with Rule 964NY Order 
Display and Priority.
Example of Early Conclusion of Auction--Same Side Marketable Against 
NBBO at the Time of Arrival
    Example #11 (No Customer interest on BB):

NBBO = $1.20-$1.24 200 x 200
BBO = $1.20-$1.24 100 x 100
CUBE Order to buy 20 contracts for $1.23
Contra Order selling 20 contracts auto-match limit at $1.22
Permissible range of executions is $1.21 to $1.23
RFR sent, identifying the series, side and size, initiating price of 
$1.23
(Auction Starts)
MM3 GTX Order received @ 200 milliseconds Sell 20 at $1.23
MM1GTX Order received @ 210 milliseconds Sell 20 at $1.22
MM4 GTX Order received @ 230 milliseconds Sell 20 at $1.22
C1 Unrelated Order received @ 250 milliseconds Buy 100 at the market
(Same-side order marketable against the NBO causes an early conclusion 
to the Auction)

    Under this scenario, the CUBE Order would be executed as follows:

8 contracts trade with the Contra Order @ $1.22 (This satisfies their 
40% participation guarantee)
6 contract trades with MM1 @ $1.22
6 contract trades with
MM4 @ $1.22
(This fills the entire CUBE Order)

    C1 unrelated order to buy 100 at the market then executes as 
follows:

14 contracts trade with MM1 @ $1.22
14 contracts trade with MM4 @ $1.22
20 contracts trade with MM3 @ $1.23

The remaining 52 contracts from C1 unrelated order are handled pursuant 
to existing Rule 964NY(in this case, that means the 52 contracts would 
trade with the interest comprising the BO, which was offering 100 
contracts at $1.24)

    The third scenario that would result in the early conclusion of a 
CUBE Auction would be if, during a CUBE Auction, the Exchange receives 
any RFR Response that is marketable against the NBBO (or BBO, if a non-
routable order) at the time of arrival. The RFR Response could be a GTX 
Order or an unrelated order that is a marketable limit order or a 
market order. While the incoming order that is on the opposite side of 
the CUBE Order may be marketable against the updated NBBO, as noted 
above, the fact that the NBBO updated during the Response Time Interval 
in of itself does not cause an early conclusion to the Auction.
    Pursuant to proposed Rule 971.1NY(c)(4)(i), if the CUBE Auction 
concludes early because the Exchange receives during the Response Time 
Interval an unrelated marketable limit order or quote on the opposite 
side of the CUBE Order, the CUBE Order would execute pursuant to 
proposed paragraph (c)(5). Contracts remaining, if any, from unrelated 
quotes or orders at the time the Auction concludes would be processed 
in accordance with Rule 964NY Order Display and Priority. Any unfilled 
GTX Orders would cancel. The Exchange believes that early conclusion in 
this circumstance would ensure that the Auction interacts seamlessly 
with the Consolidated Book so as not to disturb the priority of orders 
on the Book. The unrelated order or quote that caused the Auction to 
end early would be considered an RFR Response for purposes of 
allocation pursuant to proposed paragraph (c)(5), and thus would 
participate in the Auction consistent with its limit price and order 
instructions. The Exchange also notes that concluding the Auction early 
under this circumstance is consistent with how the electronic price 
improvement auctions of other markets operate.\43\
---------------------------------------------------------------------------

    \43\ See, e.g., CBOE 6.74A(b)(2)(B); ISE Rule 723(c)(5); BOX 
7150(j).
---------------------------------------------------------------------------

Example of Early Conclusion of Auction--Opposite Side Limit Order 
Marketable Against NBBO at the Time of Arrival
    Example #12a (No Customer interest on BB):

NBBO = $1.20-$1.24 200 x 100
BBO = $1.20-$1.24 100 x 100
CUBE Order to buy 50 contracts with a limit of $1.24
Contra Order selling 50 contracts with a stop price of $1.24
Permissible range of executions $1.20-$1.24
RFR sent identifying the series, side and size, initiating price of 
$1.24
(Auction Starts)
MM3 GTX Order received @ 200 milliseconds Sell 50 at $1.22
MM1 GTX Order received @ 210 milliseconds Sell 50 at $1.22
MM4 GTX Order received @ 230 milliseconds Sell 50 at $1.23
BD1 Unrelated Order received @ 400 milliseconds Sell 10 at $1.20
(Opposite-side order marketable against the NBB causes an early 
conclusion to the Auction)

    Under this scenario, the CUBE Order would be executed as follows:

10 contracts trade with the unrelated order for BD1 @ $1.20
20 contracts trade with MM3 @ $1.22
20 contracts trade with MM1 @ $1.22
(This fills the entire CUBE Order)
MM4 does not trade any contracts
Contra Order does not trade any contracts

    Example #12b: (Customer interest on BB):

NBBO = $1.20-$1.24 200 x 100
BBO = $1.20-$1.24 100 x 100
CUBE Order to buy 50 contracts with a limit of $1.24

[[Page 13720]]

Contra Order selling 50 contracts with a stop price of $1.24
Permissible range of executions is $1.21 to $1.24
RFR sent identifying the series, side and size, initiating price of 
$1.24
(Auction Starts)
MM3 GTX Order received @ 200 milliseconds Sell 50 at $1.22
MM1 GTX Order received @ 210 milliseconds Sell 50 at $1.22
MM4 GTX Order received @ 230 milliseconds Sell 50 at $1.23
BD1 Unrelated Order received @ 400 milliseconds Sell 10 at $1.20
(Opposite-side order marketable against the NBB causes an early 
conclusion to the Auction)

    Under this scenario, the CUBE Order would be executed as follows:

10 contracts trade with the unrelated order for BD1 @ $1.21 (Customer 
on the BB, so allowable range must improve BB by .01)
20 contracts trade with MM3 @ $1.22
20 contracts trade with MM1 @ $1.22
(This fills the entire CUBE Order)
MM4 does not trade any contracts
Contra Order does not trade any contracts

    Example #12c (No Customer interest on BB and updated NBB during 
Auction):

NBBO = $1.20-$1.24 200 x 100
BBO = $1.20-$1.24 100 x 100
CUBE Order to buy 50 contracts with a limit of $1.24
Contra Order selling 50 contracts with a stop price of $1.24
Permissible range of executions $1.20-$1.24
RFR sent identifying the series, side and size, initiating price of 
$1.24
(Auction Starts)
MM3 GTX Order received @ 200 milliseconds Sell 50 at $1.22
MM1 GTX Order received @ 210 milliseconds Sell 50 at $1.22
MM4 GTX Order received @ 230 milliseconds Sell 50 at $1.23
New NBB posted on an away market $1.23
(New NBB does not cause early conclusion) \44\
---------------------------------------------------------------------------

    \44\ See Rule 991NY(b)(5).
---------------------------------------------------------------------------

BD1 Unrelated Order received @ 400 milliseconds Sell 10 at $1.21
(Opposite-side order marketable against the updated NBB causes an early 
conclusion to the Auction)
    Under this scenario, the CUBE Order would be executed as follows:

10 contracts trade with the unrelated order for BD1 @ $1.21
20 contracts trade with MM3 @ $1.22
20 contracts trade with MM1 @ $1.22
(This fills the entire CUBE Order)
MM4 does not trade any contracts
Contra Order does not trade any contracts

    Example #12d (No Customer interest on BB and updated BB during 
Auction):

NBBO = $1.20-$1.24 200 x 100
BBO = $1.20-$1.24 100 x 100
CUBE Order to buy 50 contracts with a limit of $1.24
Contra Order selling 50 contracts with a stop price of $1.24
Permissible range of executions $1.20-$1.24
RFR sent identifying the series, side and size, initiating price of 
$1.24
(Auction Starts)
MM3 GTX Order received @ 200 milliseconds Sell 50 at $1.24
MM1 GTX Order received @ 210 milliseconds Sell 50 at $1.22
MM4 GTX Order received @ 230 milliseconds Sell 50 at $1.22
MM5 unrelated quote received @500 milliseconds Buy 10 at $1.21
(New BB adjusts range of permissible executions but does not cause 
early conclusion) \45\
---------------------------------------------------------------------------

    \45\ See proposed Rule 971.1NY(b)(1)(C).
---------------------------------------------------------------------------

MM6 GTX Order received @ 550 milliseconds Sell 10 at $1.20
(Opposite-side order marketable against the updated BB causes an early 
conclusion to the Auction) \46\

    \46\ See proposed Rule 971.1NY(c)(4)(C).
---------------------------------------------------------------------------

    Under this scenario, the CUBE Order would be executed as follows:

10 contracts trade with MM6 @ $1.21 (the GTX order has been re-priced 
to reflect the new BB \47\
---------------------------------------------------------------------------

    \47\ See proposed Rule 971.1NY(c)(2)(C)(i)(f).
---------------------------------------------------------------------------

20 contracts trade with MM1 @ $1.22
20 contracts trade with MM4 @ $1.22
(This fills the entire CUBE Order)
MM3 does not trade any contracts
Contra Order does not trade any contracts
    If the order that causes the Auction to conclude early is a market 
order on the opposite side of the CUBE Order, the allocation of the 
CUBE Order varies depending on how the Contra Order guaranteed the 
execution of the CUBE Order and what, if any, RFR Responses are 
received before the Auction concludes early. Proposed paragraph 
(c)(4)(C)(ii) provides that if auto-match is selected and no RFR 
Responses have arrived at the time the Auction concludes early, if the 
CUBE Order is to buy (sell) and the unrelated order that caused the 
Auction to conclude early is a market order to sell (buy), the CUBE 
Order would execute against the unrelated market order at the midpoint 
of the initiating price and the lower (upper) bound of the range of 
permissible executions, as shown in the example below.\48\ If no 
midpoint is possible, the execution would be rounded up (down) to the 
nearest whole penny toward the initiating price. The Exchange believes 
that rounding in this manner ensures not only that the CUBE Order is 
afforded price improvement, but also that the priority of existing 
interest in the Consolidated Book is protected.
---------------------------------------------------------------------------

    \48\ As noted above, the Auction may execute orders in the 
Auction as exceptions to Trade-Through Liability pursuant to Rule 
991NY(b)(5). Accordingly, an opposite-side market order that arrives 
during the Auction, which by definition is less than a second, may 
trade through any updated NBBO published by an away market. Because, 
pursuant to proposed Rule 971.1NY(b)(3), an update to the CUBE 
Order's same-side BBO would update the permissible range of 
executions, an opposite-side market order would execute consistent 
with that updated permissible range of executions.
---------------------------------------------------------------------------

Example of Early Conclusion of Auction--Opposite Side Market Order w/
Auto-Match and no Responses
    Example #13 (No Customer interest on BB):

NBBO = $1.15-$1.25 200 x 200
BBO = $1.15-$1.25 100 x 100
CUBE Order to buy 50 contracts with a limit of $1.20
Contra Order selling 50 contracts with Auto-match
Permissible range of executions $1.15--$1.20
RFR sent identifying the series, side and size, with initiating price 
of $1.20
(Auction Starts)
BD1 Order received @ 490 milliseconds Sell 5 at the market
(Opposite-side market order causes an early conclusion to the Auction)

    Under this scenario, the CUBE Order would be executed as follows:
5 contracts trade with BD1 @ $1.18 (midpoint of the initiating price 
and the lower bound of the range of permissible prices, here the NBB, 
rounded up to nearest whole $.01 closer to the initiating price) \49\
---------------------------------------------------------------------------

    \49\ In this scenario, the execution between the contra side 
market order and the CUBE Order should occur at the midpoint of the 
CUBE Order initiating price and the BBO on the same side of the 
market as the CUBE Order. In this case, that is the midpoint between 
$1.15 and $1.20 or $1.175. In such situations, where the midpoint is 
less than a full cent, the execution will round back towards the 
CUBE Order initiating price--in this case, $1.18.
---------------------------------------------------------------------------

5 contracts with Contra Order at $1.18 (Auto-match)
40 contracts trade with Contra Order at $1.20 (the initiating price)
(This fills the entire CUBE Order)

    Example #13a (No Customer interest on BB and update to BB):

NBBO = $1.15-$1.25 200 x 200
BBO = $1.15-$1.25 100 x 100
CUBE Order to buy 50 contracts with a limit of $1.20

[[Page 13721]]

Contra Order selling 50 contracts with Auto-match
Permissible range of executions $1.15-$1.20
RFR sent identifying the series, side and size, with initiating price 
of $1.20
(Auction Starts)
MM1 Quote received @ 200 milliseconds Buy 100 at $1.18
(New BB updates range of executions to $1.18-$1.20)
BD1 Order received @ 490 milliseconds Sell 5 at the market
(Opposite-side market order causes an early conclusion to the Auction)

    Under this scenario, the CUBE Order would be executed as follows:

5 contracts trade with BD1 @ $1.19 (midpoint of the initiating price 
and the lower bound of the range of permissible prices)
5 contracts with Contra Order at $1.19 (Auto-match)
40 contracts trade with Contra Order at $1.20 (the initiating price)
(This fills the entire CUBE Order)
    Proposed paragraph (c)(4)(C)(iii) provides that when auto-match is 
selected and other RFR Responses are received before the arrival of the 
market order that caused the Auction to conclude early, if the CUBE 
Order is to buy (sell) and the market order is to sell (buy), the CUBE 
Order would execute against the unrelated market order at the lowest 
(highest) RFR Response price within the range of permissible 
executions. The Exchange believes this would maximize the opportunities 
for price improvement, while maintaining the priority of the 
Consolidated Book.
Example of Early Conclusion of Auction--Opposite Side Market Order w/
Auto-Match and Responses before Early Conclusion
    Example #14 (No Customer interest on BB):

NBBO = $1.15-$1.25 200 x 200
BBO = $1.15-$1.25 100 x 100
CUBE Order to buy 50 contracts with a limit of $1.20
Contra Order selling 50 contracts with Auto-match
Permissible range of executions $1.15-$1.20
RFR sent identifying the series, side and size, with initiating price 
of $1.20
(Auction Starts)
MM4 GTX Order received @ 230 milliseconds Sell 10 at $1.18
MM3 GTX Order received @ 450 milliseconds Sell 40 at $1.20
BD1 Order received @ 490 milliseconds Sell 5 at the market
(Opposite-side market order causes an early conclusion to the Auction)

    Under this scenario, the CUBE Order would be executed as follows:

5 contracts trade with BD1 @ $1.18 (market order executes at lowest RFR 
Response price within permissible price range, which is the $1.18 offer 
from MM4 received at 230 milliseconds)
10 contracts trade with MM4 @ $1.18
15 contracts trade with Contra Order @ $1.18 (Auto-match other RFR 
Response prices)
5 contracts trade with the Contra Order @ $1.20 (This satisfies their 
40% participation guarantee)
15 contracts trade with MM3 @ $1.20
(This fills the entire CUBE Order)
    Pursuant to proposed Rule 971.1NY(c)(4)(C)(iv), and as illustrated 
by the examples that follow, if the Initiating Participant has selected 
a single stop price or auto-match limit to guarantee the execution of a 
CUBE Order to buy (sell), and the order that caused the Auction to 
conclude early is a market order to sell (buy), the CUBE Order would 
execute against the unrelated market order at the lowest (highest) 
price at which an execution could occur within the range of permissible 
executions, which may be either an RFR Response price, the single stop 
price, or the auto-match limit price.
Example of Early Conclusion of Auction--Opposite Side Market Order w/
Stop Price
    Example #15 (No Customer interest on BB):
NBBO = $1.15-$1.25 200 x 200
BBO = $1.15-$1.25 100 x 100
CUBE Order to buy 50 contracts with a limit of $1.20
Contra Order selling 50 contracts with single stop price of $1.20
Permissible range of executions $1.15- $1.20
RFR sent identifying the series, side and size, with initiating price 
of $1.20
(Auction Starts)
MM4 GTX Order received @ 230 milliseconds Sell 10 at $1.19
MM3 GTX Order received @ 450 milliseconds Sell 40 at $1.20
BD1 Order received @ 490 milliseconds Sell 5 at the market
(Opposite-side market order causes an early conclusion to the Auction)

    Under this scenario, the CUBE Order would be executed as follows:

5 contracts trade with BD1 @ $1.19 (lowest-priced Response received 
during the Auction)
10 contracts trade with MM4 @ $1.19
20 contracts trade with the Contra Order @ $1.20 (This satisfies their 
40% participation guarantee)
15 contracts trade with MM3 @ $1.20
(This fills the entire CUBE Order)
Example of Early Conclusion of Auction--Opposite Side Market Order w/
Auto-Match limit
    Example #16 (No Customer interest on BB):

NBBO = $1.20-$1.24 200 x 100
BBO = $1.20-$1.25 100 x 100
CUBE Order to buy 20 contracts with a limit of $1.24
Contra Order selling 20 contracts with an auto-match limit price of 
$1.23
Permissible range of executions $1.21-$1.24
RFR sent identifying the series, side and size, with initiating price 
of $1.24
(Auction Starts)
MM3 GTX Order received @ 200 milliseconds Sell 20 at $1.23
MM1GTX Order received @ 210 milliseconds Sell 20 at $1.23
MM4 GTX Order received @ 230 milliseconds Sell 20 at $1.23
BD1 Unrelated Order received @ 400 milliseconds Sell 10 at Market
(Opposite-side market order causes early conclusion to the Auction)

    Under this scenario, the CUBE Order would be executed as follows:

10 contracts trade with the unrelated order for BD1 @ $1.23 (the lowest 
priced Response received during the Auction.)
8 contracts trade with Contra Order @ $1.23 (this satisfies their 40% 
participation guarantee)
1 contract trades with MM3 @ $1.23
1 contract trades with MM1 @ $1.23
(This fills the entire CUBE Order)
MM4 does not trade any contracts \50\
---------------------------------------------------------------------------

    \50\ MM4 receives no allocation pursuant to Rule 964NY(b)(3), 
which defaults to time-priority allocation when, as here, the bids 
are equal.
---------------------------------------------------------------------------

    The Auction would also conclude early upon the arrival of an 
unrelated, non-marketable quote or limit order, that improves the CUBE 
Order's initiating price, pursuant to proposed Rule 971.1NY(c)(4)(D). 
Specifically, if, during a CUBE Auction where the CUBE Order is to buy 
(sell), the Exchange receives such a non-marketable unrelated order 
that is on the same side of the market as the CUBE Order that is priced 
higher (lower) than the initiating price, and therefore creates a new 
BB (BO) that is higher (lower) than the initiating price, the CUBE 
Order would execute pursuant to proposed paragraph (c)(5). Any unfilled 
GTX Orders would be eligible to execute against the unrelated order 
that caused the CUBE Auction to conclude early and would then cancel. 
Any contracts that remain from the unrelated non-marketable order after 
that order trades against interest in the Auction would then be 
processed in accordance with Rule

[[Page 13722]]

964NY Order Display and Priority. The Exchange believes that early 
conclusion in this circumstance would ensure that the Auction interacts 
seamlessly with the Consolidated Book so as not to disturb the priority 
of orders on the Book, while affording the CUBE Order (and the 
unrelated order) opportunities for price improvement.
Example of Early Conclusion of Auction--Same Side New BBO Improves 
Initiating Price
    Example #17 (No Customer interest on BB):

NBBO = $1.20-$1.24 200 x 200
BBO = $1.20-$1.24 100 x 100
CUBE Order to buy 20 contracts with a limit price of $1.22
Contra Order selling 20 contracts at $1.22
Permissible range of executions $1.21-$1.22
RFR sent identifying the series, side and size, with an initiating 
price of $1.22
(Auction Starts)
MM3 GTX Order received @ 300 milliseconds Sell 20 at $1.22
MM1 GTX Order received @ 310 milliseconds Sell 20 at $1.22
MM4 GTX Order received @ 430 milliseconds Sell 20 at $1.22
C1 Unrelated Order received @ 550 milliseconds Buy 100 at $1.23
(Same side limit order to buy that improves (i.e., is priced higher 
than) the CUBE Order's initiating price causes the Auction to conclude 
early)

    Under this scenario, the CUBE Order would be executed as follows:

8 contracts trade with the Contra Order @ $1.22 (This satisfies their 
40% participation guarantee)
4 contract trades with MM3 @ $1.22
4 contract trades with MM1 @ $1.22
4 contracts trade with MM4 @ $1.22
(This fills the entire CUBE Order)

    C1 unrelated order then executes as follows:

16 contracts trade with MM3 @ $1.22
16 contracts trade with MM1 @ $1.22
16 contracts trade with MM4 @ $1.22
Remaining contracts post to the Consolidated Book as new BB paying 
$1.23 for 52 contracts

    The final scenario that would result in the early conclusion of an 
Auction, pursuant to proposed Rule 971.1NY(c)(4)(E), would occur if, 
during the Auction, the Exchange received interest sufficient to fill a 
resting AON order. After the early conclusion of the Auction, the CUBE 
Order would execute pursuant to paragraph (c)(5) and the Exchange would 
then determine whether the AON could be executed against interest in 
the Auction. The Exchange believes that early conclusion in this 
circumstance would ensure that the Auction interacts seamlessly with 
the Consolidated Book so as not to disturb the priority of orders on 
the Book, while affording the CUBE Auction opportunities for price 
improvement.
Example of Early Conclusion of Auction--Sufficient Interest To Fill AON 
Order Received During Response Time Interval
    Example #18 (No Customer interest on BB):

NBBO = $1.20-$1.24 200 x 200
BBO = $1.20-$1.24 100 x 100
CUBE Order to buy with a limit price of $1.22 for 20 contracts
Contra Order selling 20 contracts with a single stop price of $1.22
Permissible range of executions $1.21-$1.22
RFR sent identifying the series, side and size, with initiating price 
of $1.22
Resting AON Order to buy 20 contracts at $1.21
(Auction Starts)
MM3 GTX Order received @ 200 milliseconds Sell 20 at $1.21
(Arriving interest sufficient to fill resting AON order to buy causes 
the Auction to conclude early)

    Under this scenario, the CUBE Order would be executed as follows:

20 contracts trade with MM3 @ $1.21
(This fills the entire CUBE Order)
Contra Order does not trade
System reevaluates whether AON can be executed and concludes cannot, 
because interest executed with CUBE Order.
Conduct Inconsistent With Just and Equitable Principles of Trade
    The Exchange is proposing Commentary to the Rule to set forth that 
certain activity in connection with the CUBE Auction would be 
considered conduct inconsistent with just and equitable principles of 
trade to discourage ATP Holders from attempting to misuse or manipulate 
the Auction process. This practice is consistent with the rules of 
other options exchanges that offer electronic price improvement auction 
mechanisms.\51\ Specifically, pursuant to proposed Commentary .02 (a)-
(d) to Rule 971.1NY, the Exchange proposes that the following conduct 
would be considered conduct inconsistent with just and equitable 
principles of trade:
---------------------------------------------------------------------------

    \51\ See, e.g., PHLX Rule 1080(n)(iii)-(v); ISE Rule 723 
Supplementary Material .01; BOX IM-7150-2(a) and (b).
---------------------------------------------------------------------------

    (a) An ATP Holder entering RFR Responses to a CUBE Auction for 
which the ATP Holder is the Initiating Participant. The Exchange 
believes this would prevent Initiating Participants from submitting an 
inaccurate or misleading stop price or trying to improve their 
allocation entitlement by participating with multiple expressions of 
interest.
    (b) Engaging in a pattern and practice of entering unrelated orders 
and quotes for the purpose of causing a CUBE Auction to conclude early, 
i.e., before the end of the Response Time Interval. The Exchange 
believes this would prevent an ATP Holder from shortening the duration 
of the Auction thus possibly reducing the number of Responses to an 
Auction in order to gain a higher contract allocation than the 
percentage the ATP Holder may have otherwise received had the Auction 
not concluded early.
    (c) An Initiating Participant that breaks up an agency order into 
separate CUBE Orders for the purpose of gaining a higher allocation 
percentage than the Initiating Participant would have otherwise 
received in accordance with the allocation procedures contained in 
proposed paragraph (c)(5) to proposed Rule 971.1NY. The Exchange 
believes this would prevent Initiating Participants from manipulating 
the CUBE Orders size and number to gain a higher guaranteed execution 
than the Initiating Participant would have otherwise received.
    (d) Engaging in a pattern and practice of sending multiple RFR 
Responses at the same price that in the aggregate exceed the size of 
the CUBE Order. The Exchange believes this will prevent ATP Holders 
from attempting to misuse or manipulate the allocation process.
Order Exposure and Prohibited Conduct
    Current Rule 935NY prohibits Users \52\ from executing as principal 
any orders they represent as agent unless (i) agency orders are first 
exposed on the Exchange for at least one (1) second or (ii) the User 
has been bidding or offering on the Exchange for at least one (1) 
second prior to receiving an agency order that is executable against 
such bid or offer. This rule helps to ensure that orders are properly 
exposed to market participants, affording them a reasonable amount of 
time in which to participate in the execution of the agency order.
---------------------------------------------------------------------------

    \52\ Rule 900.2NY(87) defines User as any ATP Holder that is 
authorized to obtain access to the System.
---------------------------------------------------------------------------

    As previously stated in this filing, the Exchange believes that the 
proposed Response Time Interval, with a random length of between 500 
and 750 milliseconds, is of sufficient length so as

[[Page 13723]]

to permit ATP Holders time to respond to a CUBE Auction thereby 
enhancing opportunities for competition among participants and 
increasing the likelihood of price improvement for the CUBE Order. 
Accordingly, the Exchange proposes to amend Rule 935NY to stipulate 
that a User may execute as principal an order that the User represents 
as agent, provided that the User avails him or herself of the CUBE 
Auction process, pursuant to Rule 971.1NY. Such CUBE Order would not be 
subject to the one-second order exposure requirement of Rule 935NY, 
which exclusion from the one-second order exposure requirement is 
consistent with the treatment of similar orders at BOX Options.\53\ 
Consistent with Rule 935NY Commentary .01, ATP Holders shall only 
utilize the Auction where there is a genuine intention to execute a 
bona fide transaction.\54\
---------------------------------------------------------------------------

    \53\ See BOX IM-7140-2.
    \54\ See Rule 935NY Commentary .01 (``Rule 935NY prevents a User 
from executing agency orders to increase its economic gain from 
trading against the order without first giving other trading 
interest on the Exchange an opportunity to either trade with the 
agency order or to trade at the execution price when the User was 
already bidding or offering on the book.'')
---------------------------------------------------------------------------

Proposed Pilot Period for Auctions of Fewer Than 50 Contracts
    The Exchange is proposing that proposed Rules 971.1NY(b)(1)(B) 
(regarding CUBE Auctions for fewer than 50 contracts) and 971.1NY(b)(8) 
(that the minimum size for an Auction shall be one contract) be adopted 
for a pilot period effective for one year beginning on the approval 
date for this rule proposal. During this Pilot Period, the Exchange 
will submit certain data, periodically as required by the Commission, 
to provide supporting evidence that, among other things, there is 
meaningful competition for all size orders and that there is an active 
and liquid market functioning on the Exchange outside of the CUBE 
Auction. Any data that is submitted to the Commission will be provided 
on a confidential basis.
    To aid the Commission in its evaluation of the Pilot Program, the 
Exchange will provide the following additional information each month:
    (1) The number of orders of 50 contracts or greater entered into 
the CUBE Auction;
    (2) The number of orders of fewer than 50 contracts entered into 
the CUBE Auction;
    (3) The percentage of all orders of 50 contracts or greater sent to 
the Exchange that are entered into the CUBE;
    (4) The percentage of all orders of fewer than 50 contracts sent to 
the Exchange that are entered into the CUBE Auction;
    (5) The percentage of all Exchange trades represented by orders of 
fewer than 50 contracts;
    (6) The percentage of all Exchange trades effected through the CUBE 
Auction represented by orders of fewer than 50 contracts;
    (7) The percentage of all contracts traded on the Exchange 
represented by orders of fewer than 50 contracts;
    (8) The percentage of all contracts effected through the CUBE 
Auction represented by orders of fewer than 50 contracts;
    (9) The spread in the option, at the time an order of 50 contracts 
or greater is submitted into the CUBE Auction;
    (10) The spread in the option, at the time an order of fewer than 
50 contracts is submitted into the CUBE Auction;
    (11) Of CUBE Auction trades for orders of fewer than 50 contracts, 
the percentage of CUBE Auction trades executed at the NBBO, NBBO plus 
$.01, NBBO plus $.02, NBBO plus $.03, etc.;
    (12) Of CUBE Auction trades for orders of 50 contracts or greater, 
the percentage of CUBE Auction trades executed at the NBBO, NBBO plus 
$.01, NBBO plus $.02, NBBO plus $.03, etc.;
    (13) The number of orders submitted by an ATP Holder when the bid-
ask spread was at a particular increment (e.g., $.01, $.02, $.03, 
etc.).
    Also, relative to Item 13, for each spread, the Exchange will 
provide the percentage of contracts in orders of fewer than 50 
contracts submitted to the CUBE Auction where the contra-side was: (a) 
The ATP Holder that submitted the order to the CUBE Auction; (b) market 
makers assigned to the class; (c) other Exchange Participants; (d) 
Customers; (e) Professional Customers and (f) unrelated orders. For 
each spread, also specify the percentage of contracts in orders of 50 
contracts or greater submitted to the CUBE Auction where the contra-
side was: (a) The ATP Holder that submitted the order to the CUBE 
Auction; (b) market makers assigned to the class; (c) other Exchange 
Participants; (d) Customers; (e) Professional Customers and (f) 
unrelated orders.
    Further, the Exchange will provide, for the first and third 
Wednesday of each month, the: (a) Total number of CUBE Auctions on that 
date; (b) number of CUBE Auctions where the order submitted to the CUBE 
Auction was fewer than 50 contracts; (c) number of CUBE Auctions where 
the order submitted to the CUBE Auction was 50 contracts or greater; 
(d) number of CUBE Auctions (where the order submitted to the CUBE 
Auction was fewer than 50 contracts and where the order submitted was 
50 contracts or greater) where the number of Participants (excluding 
the Contra Order) was zero, one, two, three, four, etc.
    The Exchange will also provide: The percentage of all Exchange 
trades effected through the CUBE Auction in which the Initiating 
Participant has elected to auto-match with a limit price and the 
percentage of such trades in which the Initiating Participant has 
elected to auto-match without a limit price, and the average amount of 
price improvement provided to the CUBE Order when the Initiating 
Participant has elected to auto-match with a limit price and the 
average without a limit price, versus the average amount of price 
improvement provided to the CUBE Order when the Initiating Participant 
has chosen a single stop price.
    Finally, during the Pilot Program, the Exchange will provide 
information each month with respect to situations in which the CUBE 
Auction is terminated prematurely or a market or marketable limit order 
immediately executes with an initiating order before the CUBE Auction's 
conclusion. The following information will be provided:
    (a) The number of times that the Auction concluded early upon the 
arrival of an unrelated quote or order that is on the same side of the 
market as the CUBE Order, that is marketable against any RFR Responses 
or the NBBO (or the BBO, for a non-routable order) at the time of 
arrival, and at what time such unrelated order/quote ended the Auction. 
Also, (i) the number of times such orders were entered by the same (or 
affiliated) firm that initiated the CUBE Auction that was concluded 
early, and (ii) the number of times such orders were entered by a firm 
(or an affiliate of such firm) that participated in the execution of 
the CUBE Order;
    (b) For the orders addressed in each of (a)(i) and (a)(ii) above, 
the percentage of CUBE Auctions that concluded early due to the 
receipt, during the CUBE Auction, of an unrelated quote or order on the 
same side of the market as the CUBE Order, that is marketable against 
any RFR Responses or the NBBO (or the BBO, for a non-routable order) at 
the time of arrival; and the average amount of price improvement 
provided to the CUBE Order where the CUBE Auction is concluded early;
    (c) The number of times that the Auction concluded early upon the 
arrival of any RFR Response that is marketable against the NBBO (or the 
BBO, for a non-routable order) at the time of arrival, and at what time 
such RFR Response ended the Auction. Also,

[[Page 13724]]

(i) the number of times such RFR Responses were entered by the same (or 
affiliated) firm that initiated the CUBE Auction, and (ii) the number 
of times such RFR Responses were entered by a firm (or an affiliate of 
such firm) that participated in the execution of the CUBE Order;
    (d) For the orders addressed in each of (c)(i) and (c)(ii) above, 
the percentage of CUBE Auctions that concluded early due to the 
receipt, during the CUBE Auction, of any RFR Response that is 
marketable against the NBBO (or the BBO, for a non-routable order) at 
the time of arrival; and the average amount of price improvement 
provided to the CUBE Order where the CUBE Order is immediately 
executed;
    (e) The number of times that the Auction concluded early due to a 
trading halt and at what time the trading halt ended the CUBE Auction. 
Of the CUBE Auctions that concluded early due to a trading halt, the 
number that resulted in price improvement over the CUBE Order stop 
price, and the average amount of price improvement provided to the CUBE 
Order. Further, in the Auctions that concluded early due to a trading 
halt, the percentage of contracts that received price improvement over 
the CUBE Order stop price;
    (f) The number of times that the Auction concluded early upon the 
initiation of a new CUBE Auction in the same series and at what time 
the initiation of a new CUBE Auction ended the ongoing CUBE Auction.
    (g) The number of times that the Auction concluded early upon the 
receipt of an order with either an IOC, FOK or NOW contingency and at 
what time the receipt of such order ended the ongoing CUBE Auction
    (h) The number of times that the Auction concluded early because 
sufficient interest to fill an entire AON order is received during the 
Response Time Interval and at what time the ongoing CUBE Auction was 
completed; and
    (i) The average amount of price improvement provided to the 
initiating order when the CUBE Auction is not concluded early.
Section 11(a) of the Exchange Act
    Section 11(a) of the Exchange Act prohibits any 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 persons exercises discretion 
(``covered accounts''), unless an exception applies.\55\ Section 
11(a)(1) contains a number of exceptions for principal transactions by 
members and their associated persons. As set forth below, the Exchange 
believes that the proposed rules for the CUBE Auction are consistent 
with the requirements of Section 11(a) and the rules thereunder.
---------------------------------------------------------------------------

    \55\ 15 U.S.C. 78k(a)(1).
---------------------------------------------------------------------------

    In this regard, Section 11(a)(1)(A) provides an exception from the 
prohibitions in Section 11(a) for dealers acting in the capacity of 
market makers. The Exchange believes that orders sent by on- and off-
floor market makers, for covered accounts, to the proposed CUBE Auction 
would qualify for this exception from Section 11(a).
    In addition to this market maker exception, Rule 11a2-2(T) under 
the Exchange Act, known as the ``effect versus execute'' rule, provides 
exchange members with an exception from Section 11(a) by permitting 
them, subject to certain conditions, to effect transactions for covered 
accounts by arranging for an unaffiliated member to execute the 
transactions on the exchange.\56\ To comply with the ``effect versus 
execute'' rule's conditions, a member: (i) Must transmit the order from 
off the exchange floor; (ii) may not participate in the execution of 
the transaction once it has been transmitted to the member performing 
the execution; \57\ (iii) may not be affiliated with the member 
executing the transaction on the floor, or through the facilities, of 
the Exchange; and (iv) with respect to an account over which the member 
has investment discretion, neither the member nor its associated person 
may retain any compensation in connection with effecting the 
transaction except as provided in the rule.\58\
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    \56\ 17 CFR 240.11a2-2(T).
    \57\ The member, however, may participate in clearing and 
settling the transaction. See Securities Exchange Act Release No. 
14563 (March 14, 1978), 43 FR 11542 (March 17, 1978).
    \58\ 17 CFR 240.11a2-2(T).
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    The Exchange believes that orders sent by off-floor ATP Holders, 
for covered accounts, to the proposed CUBE Auction would qualify for 
this ``effect versus execute'' exception from Section 11(a), as 
described below. In this regard, the first condition of Rule 11a2-2(T) 
is that orders for covered accounts be transmitted from off the 
exchange floor. The Exchange represents that orders for covered 
accounts from off-floor ATP Holders sent to the CUBE Auction would be 
transmitted from remote terminals that are off the Exchange floor 
directly to the mechanisms by electronic means.\59\ In the context of 
other automated trading systems, the Commission has found that the off-
floor transmission requirement is met if a covered account order is 
transmitted from a remote location directly to an exchange's floor by 
electronic means.\60\
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    \59\ In the alternative, orders for a covered account may be 
sent by an off-floor ATP Holder to an unaffiliated Floor Broker for 
entry into the CUBE Auction mechanism. Floor Brokers, however, may 
not enter orders for their own covered accounts into the Auction 
mechanism from on the floor, or transmit such orders from on the 
floor to off of the floor for entry into the CUBE Auction mechanism.
    \60\ See, e.g., Securities Exchange Act Release Nos. 59154 
(December 23, 2008), 73 FR 80468 (December 31, 2008) (SR-BSE-2008-
48) (approving, among other things, the equity rules of the Boston 
Stock Exchange (``BSE'')); 57478 (March 12, 2008), 73 FR 14521 
(March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-080) 
(approving rules governing the trading of options on The NASDAQ 
Options Market); 49068 (January 13, 2004), 69 FR 2775 (January 20, 
2004) (SR-BSE-2002-15) (approving the Boston Options Exchange as an 
options trading facility of BSE); 15533 (January 29, 1979), 44 FR 
6084 (January 31, 1979) (approving the Amex Post Execution Reporting 
System, the Amex Switching System, the Intermarket Trading System, 
the Multiple Dealer Trading Facility of the Cincinnati Stock 
Exchange, the PCX Communications and Execution System, and the 
Philadelphia Stock Exchange Automated Communications and Execution 
System) (``1979 Release''); and 14563 (March 14, 1978), 43 FR 11542 
(March 17, 1978) (approving NYSE's Designated Order Turnaround 
System) (``1978 Release'').
---------------------------------------------------------------------------

    The second condition of Rule 11a2-2(T) requires that the member not 
participate in the execution of its order once the order is transmitted 
to the floor for execution.\61\ The Exchange represents that, upon 
submission to the CUBE Auction, an order will be executed automatically 
pursuant to the proposed rules set forth for the Auction. In 
particular, execution of an order sent to the Auction depends not on 
the ATP Holder entering the order, but rather on what other orders are 
present and the priority of those orders. Thus, at no time following 
the submission of an order is an ATP Holder able to acquire control or 
influence over the result or timing of order execution.\62\
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    \61\ The description above covers the universe of the types of 
ATP Holders (i.e., on- and off-floor market makers, off-floor firms 
that are not market makers, and Floor Brokers).
    \62\ The Exchange notes that the Initiating Participant may not 
cancel or modify a CUBE Order once a CUBE Auction has started. See 
proposed Rule 971.1NY(c).
---------------------------------------------------------------------------

    The third condition of Rule 11a2-2(T) requires that the order be 
executed by an exchange member who is unaffiliated with the member 
initiating the order. The Commission has stated that this requirement 
is satisfied when automated exchange facilities, such as the CUBE 
Auction, are used, as long as the design of these systems ensures that 
members do not possess any special or unique trading advantages in 
handling

[[Page 13725]]

their orders after transmitting them to the exchange.\63\ The Exchange 
represents that the CUBE Auction is designed so that no ATP Holder has 
any special or unique trading advantage in the handling of its orders 
after transmitting its orders to the mechanism.
---------------------------------------------------------------------------

    \63\ In considering the operation of automated execution systems 
operated by an exchange, the Commission noted that, while there is 
not an independent executing exchange member, the execution of an 
order is automatic once it has been transmitted into the system. 
Because the design of these systems ensures that members do not 
possess any special or unique trading advantages in handling their 
orders after transmitting them to the exchange, the Commission has 
stated that executions obtained through these systems satisfy the 
independent execution requirement of Rule 11a2-2(T). See 1979 
Release.
---------------------------------------------------------------------------

    The fourth condition of Rule 11a2-2(T) requires that, in the case 
of a transaction effected for an account with respect to which the 
initiating member or an associated person thereof exercises investment 
discretion, neither the initiating member, nor any associated person 
thereof, may retain any compensation in connection with effecting the 
transaction, unless the person authorized to transact business for the 
account has expressly provided otherwise by written contract, referring 
to Section 11(a) of the Act and Rule 11a2-2(T) thereunder.\64\ The 
Exchange recognizes that ATP Holders relying on Rule 11a2-2(T) for 
transactions effected through the CUBE Auction must comply with this 
condition of the Rule.
---------------------------------------------------------------------------

    \64\ See 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written 
contract to retain compensation, in connection with effecting 
transactions for covered accounts over which such member or 
associated persons thereof exercises investment discretion, to 
furnish, at least annually to the person authorized to transact 
business for the account, a statement setting forth the total amount 
of compensation retained by the member in connection with effecting 
transactions for the account during the period covered by the 
statement, which amount must be exclusive of all amounts paid to 
others during that period for services rendered to effect such 
transactions. See also 1978 Release (stating ``[t]he contractual and 
disclosure requirements are designed to assure that accounts 
electing to permit transaction-related compensation do so only after 
deciding that such arrangements are suitable to their interests'').
---------------------------------------------------------------------------

Implementation
    The Exchange will 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 implementation date will be no later 
than 60 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.
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 proposal would provide ATP Holders 
and Customers with an electronic Auction mechanism equipped to 
electronically execute proposed crossing transactions while affording 
opportunities for price improvement and helping to ensure equal access 
to exposed orders. The Exchange believes that the Auction would promote 
and foster competition as it would provide more options contracts with 
the opportunity for price improvement. In this regard, the CUBE Auction 
is intended to be beneficial to investors because the Auction may 
result in increased liquidity available at improved prices, with 
competitive final pricing out of the Initiating Participant's complete 
control.
    Moreover, the Exchange notes that because the CUBE Auction is 
intended to operate seamlessly with the Consolidated Book, the proposed 
Auction would promote just and equitable principles of trade by 
providing price improvement opportunities for agency orders while at 
the same time providing an opportunity for such agency orders to 
interact with orders or quotes received during the Response Time 
Interval, including unrelated orders. Specifically, the Exchange notes 
that any ATP Holder that elects to subscribe to ArcaBook, including a 
broker dealer, is eligible to respond to an RFR and may therefore 
potentially participate in the Auction. As a result, the Exchange 
believes that the Auction will increase the number of options orders 
that are provided with the opportunity to receive price improvement.
    The Exchange believes that the proposed guaranteed allocation of 
contracts to the Contra Order removes impediments to and perfects the 
mechanism of a free and open market because it should encourage ATP 
Holders to guarantee the execution of orders they may represent on an 
agency basis by entering agency orders into the CUBE Auction. The 
Exchange notes that the proposed guarantee would also protect investors 
because the guaranteed allocation is subject to there being sufficient 
size remaining of the CUBE Order after executing against better-priced 
interest (thereby providing price improvement to the CUBE Order) and 
Customers (thereby protecting Customer interest). In addition, the CUBE 
Auction promotes equal access by providing any ATP Holder that elects 
to subscribe to ArcaBook with the opportunity to interact with orders 
in the CUBE Auction. In this regard, any ATP Holder can subscribe to 
receive the options data provided through ArcaBook. The CUBE Auction is 
also non-discriminatory by using a random timer for the exposure 
period, which period is not disclosed to any participants or Exchange 
staff, and is not even determined until the RFR is sent. The Exchange 
also believes that the proposed amendment to Rule 900.2NY to exclude 
Professional Customers from the definition of ``Customer'' for purposes 
of this rule is consistent with just and equitable principles of trade 
because it is intended to protect investors that are not broker dealers 
and ensure that their orders are protected regardless of whether there 
is an Auction.

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 Exchange is proposing 
the Auction as a market enhancement that should increase competition 
for order flow on the Exchange in a manner that would be beneficial to 
investors. Specifically, the Exchange believes that the CUBE Auction 
would provide investors seeking to effect options orders with an 
opportunity for increased liquidity available at improved prices, with 
competitive final pricing out of the Initiating Participant's complete 
control. The proposal is structured to offer the same enhancement to 
all market participants and would not impose a competitive burden on 
any participant. 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

[[Page 13726]]

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 Number SR-NYSEMKT-2014-17 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-NYSEMKT-2014-17. 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 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 20549-1090, 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 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-
NYSEMKT-2014-17, and should be submitted on or before April 1, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\65\
---------------------------------------------------------------------------

    \65\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-05179 Filed 3-10-14; 8:45 am]
BILLING CODE 8011-01-P