Document ID: SEC-2013-1256-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE MKT LLC
Posted Date: 2013-07-09T04:00Z

[Federal Register Volume 78, Number 131 (Tuesday, July 9, 2013)]
[Notices]
[Pages 41168-41173]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-16384]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69919; File No. SR-NYSEMKT-2013-59]

Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of 
Proposed Rule Change Amending Rule 965NY, Which Governs NDX and RUT 
Combination Orders

July 2, 2013.
    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 June 21, 2013, NYSE MKT LLC (the ``Exchange'' or ``NYSE 
MKT'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

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

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

    The Exchange proposes to amend Rule 965NY, which governs NDX and 
RUT combination 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 amend Rule 965NY, which governs NDX and

[[Page 41169]]

RUT combination orders,\4\ to adopt a one-year pilot program containing 
revised procedures that the Exchange believes would make the trading of 
certain combination orders in Nasdaq 100 Index options (NDX) and 
Russell 2000 Index options (RUT) more competitive with the trading of 
combinations in Nasdaq 100 Index futures contracts on the Chicago 
Mercantile Exchange (``CME'') and the trading of combinations in 
Russell 2000 Index futures contracts on the IntercontinentalExchange 
(``ICE''). As discussed further below, the Exchange is also proposing 
to revise the existing Combo Order text to make certain amendments.
---------------------------------------------------------------------------

    \4\ NDX is the trading symbol for Nasdaq 100 index options, and 
RUT is the trading symbol for Russell 2000 index options. An ``NDX 
Combination'' is a long (short) NDX call and a short (long) NDX put 
having the same expiration date and strike price. An ``RUT 
Combination'' is a long (short) RUT call and a short (long) RUT put 
having the same expiration date and strike price. The delta is the 
positive (negative) number of NDX or RUT combinations that must be 
sold (bought) to establish a market neutral hedge with the 
corresponding NDX or RUT option position. An ``NDX combination 
order'' is an order to purchase or sell NDX options and the 
offsetting number of NDX combinations defined by the delta, and a 
``RUT combination order'' is an order to purchase or sell RUT 
options and the offsetting number of RUT combinations defined by the 
delta. See Rule 965NY(b)(1)-(3).
---------------------------------------------------------------------------

Background
NDX
    When NDX traders and customers trade NDX options, they hedge their 
underlying risk with either Nasdaq 100 Index futures traded at CME or 
with NDX call and put options traded as combinations at one of the 
option Exchanges where it is multiply listed (including the Exchange). 
In order for NDX traders and customers to hedge the risk of their 
options positions using Nasdaq 100 Index futures, they have to execute 
two separate trades in two separate markets.
    Example 1: Assume a trader or customer wants to buy NDX April 2790 
puts and hedge with the April futures contract trading at 2810. First, 
the NDX April 2790 put option position could be traded at the Exchange. 
After the options trade, the trader or customer then has to submit an 
order to CME to trade the appropriate number of Nasdaq 100 Index April 
futures contracts to hedge the options trade.
    Example 2: Assume a trader or customer wants to trade a conversion 
involving the purchase of NDX April 2790 puts and the sale of the NDX 
April 2790 calls with the purchase of the April futures contract 
trading at 2810. First, the NDX April 2790 put-call option position 
could be traded at the Exchange. After the options trade, the trader or 
customer then has to submit an order to CME to trade the appropriate 
number of Nasdaq 100 Index April futures contracts to hedge the options 
trade.
    Hedging NDX options by using Nasdaq 100 Index futures in this 
manner is not preferred by traders and customers because of the 
execution risk that is involved in having to trade in two separate 
markets. In other words, the trader or customer is exposed to the risk 
of the Nasdaq 100 Index moving significantly before the hedging futures 
transaction can be executed (e.g., assume the trader or customer in 
Example 1 above completes the purchase of the NDX April 2790 puts but 
the Nasdaq 100 Index declines sharply before the futures can be traded. 
Given the market decline, the trader or customer must sell the futures 
at a much lower price to complete the hedge.) As a result, NDX traders 
and customers prefer trading NDX combinations against their NDX options 
positions in order to hedge the risk associated with those positions.
    Example 3: Assume the Nasdaq 100 Index April futures contract is 
trading at 2810 and a customer wants to trade the 35 delta NDX April 
2790 puts tied to the April 2810 calls and April 2810 puts (instead of 
the April futures contract). Under this scenario, all three legs of the 
strategy could be traded on the Exchange.
    Example 4: Assume a trader or customer wants to trade a conversion 
involving the purchase of the NDX April 2790 puts and the sale of the 
NDX April 2790 calls tied to the April 2810 calls and April 2810 puts 
(instead of the April futures contract). Under this scenario, all four 
legs of the strategy could be traded on the Exchange.
    One reason that the use of combinations by NDX traders and 
customers is preferred is that all the required transactions can be 
effected as a package in one market, which avoids the execution risk 
and the increased costs involved in trading in the futures market. 
Another reason that the use of combinations is preferred is that an 
options order can be ``tied'' to a particular level of the Nasdaq 100 
Index in order to establish the hedge price.\5\ When NDX options are 
tied to NDX combinations, the underlying hedge level of the NDX 100 
Index is established and traders and customers can determine the exact 
implied volatilities of their options trades.\6\ Hedging options with 
combinations acts as an incentive for market-makers to reduce the price 
width of their markets because they know that their hedge price has 
been established and they will not have to trade in another market. 
Thus, customers who trade options tied to combinations enjoy tighter 
and more liquid markets.
---------------------------------------------------------------------------

    \5\ Using the example in note 3 [sic], supra, the customer will 
request a market for the calls that the customer wishes to purchase 
based on a specified level of the Nasdaq 100 Index. The customer 
specifies an underlying level of the Nasdaq 100 Index to allow 
market participants to determine the delta (in this case 35) and a 
theoretical value of the puts. A market participant will then give 
his or her market for the 35 delta puts and for the component call 
and put options that will make up the combination. The combination 
portion of the order is equivalent to an order to trade futures at 
the underlying value of the Nasdaq 100 Index that has been specified 
by the parties. The prices quoted for the call and put components of 
the combination establish the hedge price for the transaction. When 
the foregoing occurs, NDX traders and customers say that the calls 
have been ``tied'' to the combination or ``tied to the combo.''
    \6\ Implied volatility is defined as the volatility percentage 
that justifies an option's price. When the customer and the market-
maker establish the underlying hedge level of the NDX 100 Index and 
a market price for the calls, the market-maker and the customer are 
able to use option pricing models to determine the implied 
volatility of the puts and calls. Knowing the implied volatility 
that is being quoted in the market is useful to customers and 
traders in that customers and traders frequently take positions in 
the market based on the implied volatility level.
---------------------------------------------------------------------------

RUT
    Similarly, when RUT traders and customers trade RUT options, they 
hedge their underlying risk with either Russell 2000 Index futures 
traded at ICE or with RUT call and put options traded as combinations 
at one of the option Exchanges where it is multiply listed (including 
the Exchange). In order for RUT traders and customers to hedge the risk 
of their options positions using Russell 2000 Index futures, they have 
to execute two separate trades in two separate markets.
    Example 1: Assume a trader or customer wants to buy RUT April 915 
puts and hedge with the April futures contract trading at 935. First, 
the RUT April 915 put option position could be traded at the Exchange. 
After the options trade, the trader or customer then has to submit an 
order to ICE to trade the appropriate number of Russell 2000 Index 
April futures contracts to hedge the options trade.
    Example 2: Assume a trader or customer wants to trade a conversion 
involving the purchase of RUT April 915 puts and the sale of the RUT 
April 915 calls with the purchase of the April futures contract trading 
at 935. First, the RUT April 915 put-call option position could be 
traded at the Exchange. After the options trade, the trader or customer 
then has to submit an order to ICE to trade the appropriate number of 
Russell

[[Page 41170]]

2000 Index April futures contracts to hedge the options trade.
    Hedging RUT options by using Russell 2000 Index futures in this 
manner is not preferred by traders and customers because of the 
execution risk that is involved in having to trade in two separate 
markets. In other words, the trader or customer is exposed to the risk 
of the Russell 2000 Index moving significantly before the hedging 
futures transaction can be executed (e.g., assume the trader or 
customer in Example 1 above completes the purchase of the RUT April 915 
puts but the Russell 2000 Index declines sharply before the futures can 
be traded. Given the market decline, the trader or customer must sell 
the futures at a much lower price to complete the hedge.) As a result, 
RUT traders and customers prefer trading RUT combinations against their 
RUT options positions in order to hedge the risk associated with those 
positions.
    Example 3: Assume the Russell 2000 Index April futures contract is 
trading at 935 and a customer wants to trade the 23 delta RUT April 915 
puts tied to the April 935 calls and April 935 puts (instead of the 
April futures contract). Under this scenario, all three legs of the 
strategy could be traded on the Exchange.
    Example 4: Assume a trader or customer wants to trade a conversion 
involving the purchase of the RUT April 915 puts and the sale of the 
RUT April 915 calls tied to the April 935 calls and April 935 puts 
(instead of the April futures contract). Under this scenario, all four 
legs of the strategy could be traded on the Exchange.
    One reason that the use of combinations by RUT traders and 
customers is preferred is that all the required transactions can be 
effected as a package in one market, which avoids the execution risk 
and the increased costs involved in trading in the futures market. 
Another reason that the use of combinations is preferred is that an 
options order can be ``tied'' to a particular level of the Russell 2000 
Index in order to establish the hedge price.\7\ When RUT options are 
tied to RUT combinations, the underlying hedge level of the RUT 2000 
Index is established and traders and customers can determine the exact 
implied volatilities of their options trades.\8\ Hedging options with 
combinations acts as an incentive for market-makers to reduce the price 
width of their markets because they know that their hedge price has 
been established and they will not have to trade in another market. 
Thus, customers who trade options tied to combinations enjoy tighter 
and more liquid markets.
---------------------------------------------------------------------------

    \7\ Using the example in note 3 [sic], supra, the customer will 
request a market for the calls that the customer wishes to purchase 
based on a specified level of the Russell 2000 Index. The customer 
specifies an underlying level of the Russell 2000 Index to allow 
market participants to determine the delta (in this case 23) and a 
theoretical value of the puts. A market participant will then give 
his or her market for the 23 delta puts and for the component call 
and put options that will make up the combination. The combination 
portion of the order is equivalent to an order to trade futures at 
the underlying value of the Russell 2000 Index that has been 
specified by the parties. The prices quoted for the call and put 
components of the combination establish the hedge price for the 
transaction. When the foregoing occurs, RUT traders and customers 
say that the calls have been ``tied'' to the combination or ``tied 
to the combo.''
    \8\ Implied volatility is defined as the volatility percentage 
that justifies an option's price. When the customer and the market-
maker establish the underlying hedge level of the RUT 2000 Index and 
a market price for the calls, the market-maker and the customer are 
able to use option pricing models to determine the implied 
volatility of the calls. Knowing the implied volatility that is 
being quoted in the market is useful to customers and traders in 
that customers and traders frequently take positions in the market 
based on the implied volatility level.
---------------------------------------------------------------------------

    Occasionally, certain market activity occurs that makes it 
difficult to effect these types of trades. If an order for options tied 
to a combination receives an initial quote but does not trade 
immediately, it remains a live order until the party that submitted the 
order cancels it. The order may not trade immediately for any reason, 
but some of the more common reasons are that the customer submitting 
the order may want to show the order to other market participants in 
order to improve the initial quote received or an ATP Holder may need 
time to locate a customer that it believes might like to participate in 
a trade. Specific market activity can occur hours after an order for 
options tied to a combination is submitted and initially quoted that 
would make the trade desirable to both the customer and the market-
maker to consummate. However, in a volatile market, the underlying 
index can move substantially in one direction such that the originally 
quoted priced [sic] for the options and the combinations are no longer 
within the current market quotes. In such market conditions, the 
parties would be unable to consummate the trade because Exchange Rules 
preclude trading the legs of the options and a combination strategy 
outside of the currently prevailing market quotes in the individual 
component series legs.\9\ This is not nearly as accommodating as the 
rules for trading spreads and combinations on the futures markets. 
Thus, when it comes to the existence of rule constraints that may 
prevent complex, multi-part strategy trades from occurring out-of-range 
from the prevailing market quotes in the individual component series 
legs, another significant consideration for NDX and RUT traders and 
market participants is the ease with which an execution can take place 
on other markets such as CME and ICE, which offers a comparable 
alternative to NDX and RUT (respectively) but is not subject to the 
same constraints as a national securities exchange like NYSE Amex 
Options.
---------------------------------------------------------------------------

    \9\ See, e.g. Exchange Rule 965NY(b).
---------------------------------------------------------------------------

    From the Exchange's perspective, the combination order rule for 
options does not come close to leveling the field with the CME and ICE 
rules for spread and combination trading. The Exchange's rule still 
requires a combination order in NDX or RUT to be executed at the prices 
originally quoted, with no window to find liquidity. By comparison, the 
CME and ICE rules allow spread and combination executions to take place 
without regard to market prices and only be bound by the daily limit. 
Under these competing frameworks, it can be more difficult for an NYSE 
Amex Options market participant attempting to achieve an execution of a 
complex NDX or RUT option trading strategy compared to a CME market 
participant attempting to achieve an execution of substantially the 
same strategy using futures contracts in Nasdaq 100 Index futures [sic] 
or Russell 2000 Index, respectively. While this distinction is 
particularly exacerbated during times of market volatility, it can also 
be an issue at other times as well. In addition, the Exchange believes 
market participants who are looking to frequently trade spreads or 
combinations, in general, or as a strategy for hedging risk, in 
particular, would tend to utilize a market venue where they can more 
consistently depend on achieving a net price execution at all times--
regardless of the level of market volatility--which can put the 
Exchange at a competitive disadvantage. The additional burden placed on 
the Exchange market participants can have the effect of discouraging 
trading on the Exchange in favor of trading on the CME and ICE. The 
Exchange believes this competitive disadvantage is not consistent with 
just and equitable principles, serves as an impediment to a free and 
open market, and may ultimately not serve investors or the public 
interest. In order to compete and more effectively achieve certain 
strategy executions, as well as manage risk, the Exchange believes that 
market participants need more comparable procedures within Exchange 
Rules.

[[Page 41171]]

Proposal
    The Exchange is seeking to amend its combination order procedures 
for RUT and NDX on a pilot basis in an attempt to further level the 
field of competition between market participants trading on NYSE Amex 
Options and CME and ICE. In particular, the Exchange is proposing to 
adopt a two-hour window procedure (which would allow a trade to take 
place so long as it would have been in the permissible net price 
trading range within the preceding two hours) on a one-year pilot 
basis.
    The two-hour window procedure would be reflected in proposed new 
Commentary .03 \10\ to Rule 965NY for a pilot period ending one-year 
after this rule change filing is approved. The new Commentary would 
provide that, notwithstanding any other rules of the Exchange, 
combination orders in NDX and RUT may be transacted in open outcry in 
the following manner: An ATP Holder holding a combination order in NDX 
or RUT may execute the order at the best net debit or credit price, 
which may be outside the current derived net market so long as (i) the 
best net debit or credit price would have been at or within the derived 
net market over the preceding two hours of trading that day, (ii) no 
leg of the order would trade at a price outside the displayed bids or 
offers in the trading crowd or Customer interest in the NDX or RUT 
Consolidated Book for that series at a point in time over the preceding 
two-hour period, and (iii) at least one leg of the order would trade at 
a price that is better than a corresponding Customer bid or offer in 
the in the NDX or RUT Consolidate Book at the same point in time over 
the preceding two-hour period.\11\ The ``derived net market'' will be 
defined as the Exchange's best bids and offers displayed in the 
individual option series legs for the strategy at any one point in 
time.
---------------------------------------------------------------------------

    \10\ The Commission notes that the Exchange is proposing to add 
a new subsection (b)(4)(iii) to Rule 965NY, not a new Commentary 
.03.
    \11\ Stated another way, this provision provides that, if there 
are resting public customer orders on all of the legs of the 
individual series of the strategy at the same point in time, at 
least one leg of the order must trade at a price that is better than 
the corresponding bid or offer of a customer.
---------------------------------------------------------------------------

    Example 7: Assume the Nasdaq 100 Index April futures contract is 
trading at 2810 and an ATP Holder wants to trade the 35 delta NDX April 
2790 puts tied to the April 2810 calls and April 2810 puts. Assume the 
ATP Holder wants to buy 100 NDX April 2790 puts at $15.10 tied to a 
purchase of 35 April 2810 calls at $22 and sale of 35 April 2810 puts 
at $21.00 at 10:35 a.m. At the time, assume the current displayed 
market for the April 2790 puts is $14.60-$15.10, for the April 2810 
calls is $21.50-$22.00 [sic], and for the April 2810 puts is $21.50-
$22.50. As a result, the combination order in NDX is priced ``out-of-
range'' from the current derived net market ($21 is outside the $21.50 
bid, $22.50 offered markets for the April 2810 calls and April 2810 
puts). The ATP Holder can execute the combination order in NDX at the 
desired net price so long as it is the best net price and the net price 
would have been in range over the preceding 2 hours of trading that 
day. In particular, the net price must be at or within the derived net 
market price range over the preceding 2 hours of trading that day, each 
component series leg must trade at a price at or within the displayed 
bids or offers at a point in time over the preceding 2-hour period, and 
at least one leg must trade at a price that is better than the 
corresponding Customer bid or offer in the NDX Consolidate Book at the 
same point in time. (In this particular example, the derived net market 
range would be based on the markets that existed from 9:30 a.m.-10:35 
a.m., since the market was open for less than 2 hours). Assume, for 
example, if the displayed market at 10:20 a.m. for the April 2790 puts 
was $14.90-$15.30, for the April 2810 calls was $21.00-$22.60, and for 
the April 2810 puts was $2100 [sic]-$22.60 and there are not public 
customer orders displayed at the best price in all of the component 
series, then the combination order in NDX could be executed at the 
desired net price because it would have been net priced at or within 
the derived net market over the preceding two hours of trading, the 
individual component leg prices are at or within the displayed 
component series prices, and at least one leg would trade at price that 
improves corresponding customer orders in the NDX Consolidated Book.
    It should be noted that the derived net market would be calculated 
based on the displayed price in each of the component series that exist 
[sic] at a single point in time over the preceding two-hour window, not 
separate points in time for each series (e.g. an ATP Holder cannot use 
the prices of the April 2790 puts at 10:20 a.m. and the prices of the 
April 2810 calls and puts at 10:30 a.m. to calculate a derived net 
market). The net execution price must have been ``in range'' over the 
prior two-hour window of trading. To be ``in range,'' as noted above, 
the net price must have been at or within the derived net market over 
the preceding two-hour period, and each leg of the order must ``line 
up'' and trade at a price that would have been at or inside the best 
bids and offers displayed in the individual option series legs at a 
single point in time over the two-hour window and at least one leg must 
trade at a price that is better than corresponding Customer orders in 
the NDX or RUT Consolidated Book at the same point in time.
    This procedure is generally modeled after CME Rule 542 and ICE Rule 
27.11(a)(v) (e.g., a combination order in NDX may be executed out-of-
range from the current market prices in the individual component option 
series legs), except that under NYSE Amex Options' proposed pilot the 
reported net price and related component series prices must in range 
within the preceding 2 hours. By comparison, the CME and ICE rules only 
require the reported price of each component futures contract leg to be 
within the daily limit price (a number that is, by definition, 
generally much wider than the two-hour derived net market range 
proposed by the Exchange).
    As is the case for the existing combination orders trading 
procedure today, combination orders in NDX and RUT executed under the 
proposed new pilot procedure would continue to be identified with a 
special indicator on each component leg that would be price reported to 
the trading floor and the Options Price Reporting Authority (``OPRA''). 
This indicator acts as notice to the public that the reported prices 
are part of a combination order trade. Therefore, the Exchange believes 
that price discovery should not be adversely affected by the operation 
of Exchange Rule 965NY, as proposed to be modified. In addition, as is 
the case, today, the proposed procedure under Rule 965NY would not 
lessen the obligations of ATP Holders to obtain best execution of 
options orders for their customers. Therefore, with the approval of the 
proposed rule change, the Exchange will issue a Regulatory Bulletin to 
its ATP Holders explaining the operation of Rule 965NY, as amended. In 
the Regulatory Bulletin, the Exchange will remind ATP Holders that Rule 
965NY does not lessen the obligation of ATP Holders to obtain best 
execution of options orders for their customers.
    If the Exchange were to propose an extension of the proposed pilot 
program, or should the Exchange propose to make the program permanent, 
the Exchange would submit, along with any filing proposing such 
amendments to the program, a pilot program report that would provide an 
analysis of the program covering the period during which the program 
was in

[[Page 41172]]

effect. This report would include information on the number of 
combination trades in NDX and RUT and best bid or offer trade through/
trade at analysis of such combination trades. The report will also 
include information on the options classes of NDX and RUT and other 
broad-based index option products, including information on average 
contract value, average daily volume, open interest, average order 
size, percentage of complex orders, percentage of volume from complex 
orders, and average daily notional value traded. The report would be 
submitted to the Commission at least two months prior to the expiration 
date of the pilot program and would be provided on a confidential 
basis.
    The Exchange believes the proposed pilot procedure will facilitate 
the orderly execution of combination orders in NDX and RUT at all 
times, including during volatile markets, in a manner that is more 
competitive with the existing CME and ICE processes. In addition, the 
Exchange believes the proposed pilot procedure will continue to address 
customers' desire to show an order to other market participants to seek 
price improvement or additional liquidity. The Exchange also believes 
the proposed pilot procedure will continue to create an incentive for 
market makers to reduce the price width of their markets because they 
know that their hedge price has been established and they will not have 
to trade in another market. Thus, customers who trade options tied to 
combinations will continue to enjoy tighter and more liquid markets.
    In proposing to introduce this pilot, the Exchange is cognizant of 
the need for market participants to have substantial options 
transaction capacity and flexibility to hedge their trading activity in 
NDX and RUT, on the one hand, and priority principles common to 
securities exchanges, on the other. The Exchange is also cognizant of 
the CME and ICE markets, in which similar restrictions do not apply. In 
light of these considerations, the Exchange believes the proposed pilot 
procedure is appropriate and reasonable and would provide market 
participants with additional flexibility in achieving desired 
combination order strategies in NDX and RUT and in determining whether 
to execute their options on the Exchange or comparable products on CME 
and ICE. In that regard, the Exchange notes that the proposed new 
procedure outlined above does not go as far as what exists today on CME 
and ICE and instead represents what the Exchange believes is a trading 
process that is very narrowly tailored. For the foregoing reasons, the 
Exchange believes that the proposed pilot procedure for trading 
combination orders in NDX and RUT is reasonable and appropriate, would 
promote just and equitable principles of trade, and would facilitate 
transactions in securities while continuing to foster the public 
interest and investor protection.
2. Statutory Basis
    The Exchange believes that the proposed rule change will allow for 
the orderly execution of combination orders in NDX and RUT and will be 
beneficial to both customers and traders. Accordingly, the Exchange 
believes the proposed rule change is consistent with and furthers the 
objectives of Section 6(b) of the Securities Exchange Act of 1934 (the 
``Act''),\12\ in general, and Section 6(b)(5) of the Act,\13\ in 
particular, in that it should promote just and equitable principles of 
trade, serve to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and protect 
investors and the public interest.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As noted above, the Exchange believes the proposed pilot procedure 
will facilitate the orderly execution of combination orders in NDX and 
RUT at all times, including during volatile markets, in a manner that 
is more competitive with the existing CME and ICE processes. In 
addition, the Exchange believes the proposed pilot procedure will 
continue to address customers' desire to show an order to other market 
participants to seek price improvement or additional liquidity. The 
Exchange also believes the proposed pilot procedure will continue to 
create an incentive for market-makers to reduce the price width of 
their markets because they know that their hedge price has been 
established and they will not have to trade in another market. Thus, 
customers who trade options tied to combinations will continue to enjoy 
tighter and more liquid markets.
    In proposing the pilot, the Exchange is cognizant of the need for 
market participants to have substantial options transaction capacity 
and flexibility to hedge their trading activity in NDX and RUT, on the 
one hand, and priority principles common to securities exchanges, on 
the other. The Exchange is also cognizant of the CME and ICE markets, 
in which similar restrictions do not apply. In light of these 
considerations, the Exchange believes the proposed pilot procedure is 
appropriate and reasonable and would provide market participants with 
additional flexibility in achieving desired combination order 
strategies in NDX and RUT and in determining whether to execute their 
options on the Exchange or a comparable product on CME or ICE, 
respectively. In that regard, the Exchange notes that the proposed 
pilot procedure outlined above does not go as far as that exists today 
on CME and ICE and instead represents what the Exchange believes is a 
trading process that is already very narrowly tailored. For the 
foregoing reasons, the Exchange believes that the proposed new 
procedure for trading combination orders in NDX and RUT is reasonable 
and appropriate, would promote just and equitable principles of trade, 
and would facilitate transactions in securities while continuing to 
foster the public interest and investor protection. Finally, the 
Exchange believes that the proposed revisions to the existing 
combination orders in NDX and RUT text will provide clarity on the 
existing application of the combination order provisions.

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 not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange believes the 
proposal will provide market participants with additional protection 
from receiving executions on one venue. Further, since NDX and RUT are 
multiply-listed products, other exchanges are free to adopt similar 
rules regarding combination orders if they so elect. Thus, the Exchange 
does not believe the proposal creates any significant impact on 
competition.

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:

[[Page 41173]]

    (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. The Commission requests comments, in 
particular, on the following aspects of the proposed rule change:
    1. Under current rules, the NDX and RUT combination orders, as 
described above, could not be executed at a price that would result in 
any underlying option leg trading through a contemporaneous resting 
order for that option. Do commenters believe this restriction impedes 
trading of such combination orders? If not, why not?
    2. If so, what is the nature of the impediment? Would the proposed 
provision of a two-hour look-back window mitigate this impediment? If 
so, why?
    3. During any look-back window, prices of underlying option legs 
may change as a result of changing buy or sell pressure for any given 
option, competition among market participants, changes in views of 
implied volatility of any option, or changes in the NDX and RUT indices 
themselves. Does the efficacy of the proposed rule change depend on why 
the bid and offer prices for the underlying legs have moved during the 
look-back window?
    4. What would be the impact of a contemporaneous trade-through on 
market participants who provide liquidity in the underlying leg 
options? Would knowing that they can be traded through as a result of 
the NDX and RUT combination orders cause them to change the way they 
quote for the underlying options? Are there any negative implications 
regarding the provision of liquidity in the underlying options? If so, 
would the proposed two-hour look-back window mitigate these effects?
    5. Do commenters believe that there is currently insufficient 
information to fully inform the implications of this proposed rule, and 
that a decision should be made only after a pilot period?
    6. If so, what type of data should be collected during the pilot 
period? What type of analyses would be performed on such data that 
could more fully inform market participants and regulators regarding 
the nature of the proposed rule? Are there specific criteria that would 
suggest the changes were either net positive or net negative to the 
markets?
    7. Do commenters believe that market participants consider NDX 
combination orders traded on NYSE MKT and spreads or combinations in 
Nasdaq 100 Index futures traded on CME to be substitutes for each other 
for purposes of hedging NDX positions? Do commenters believe that 
market participants consider RUT combination orders traded on NYSE MKT 
and spreads or combinations in Russell 2000 Index futures traded on ICE 
to be substitutes for each other for purposes of hedging RUT positions? 
If so, provide examples of the Nasdaq 100 and Russell 2000 Index 
futures strategies with which NDX and RUT combination orders may 
compete.
    8. Do commenters believe that NYSE MKT's current rules for trading 
NDX and RUT combination orders make NDX and RUT options listed on NYSE 
MKT less attractive than Nasdaq 100 Index and Russell 2000 Index 
futures traded as spreads or combinations on CME and ICE, respectively, 
as a means for hedging Nasdaq 100 Index and Russell 2000 Index 
exposure? If so, why? If not, why not?
    9. Please provide data, if available, about any preference you 
believe exists for market participants to use Nasdaq 100 Index and 
Russell 2000 Index futures combination orders traded on CME and ICE, 
respectively, over NDX and RUT combination orders traded on NYSE MKT.
    10. Do commenters believe that the proposed pilot program will make 
the trading of NDX and RUT combination orders more competitive with the 
trading of delta-hedged options strategies using CME's Nasdaq 100 Index 
futures and ICE's Russell 2000 Index futures, respectively, and 
combinations of options on those futures and, if so, why?
    11. Do commenters believe that the ability of an ATP Holder 
executing an NDX or RUT combination order to look back two hours to 
price some or all of the legs of the NDX or RUT combination order, as 
provided in the proposed pilot program, will affect the willingness of 
other market participants to trade with the NDX or RUT combination 
order? If so, how?
    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-2013-59 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-2013-59. 
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, 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-2013-59, and should be submitted on or before July 30, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-16384 Filed 7-8-13; 8:45 am]
BILLING CODE 8011-01-P