Document ID: SEC-2008-1363-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2008-10-06T04:00Z

[Federal Register: October 6, 2008 (Volume 73, Number 194)]
[Notices]               
[Page 58285-58288]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06oc08-127]                         

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58681; File No. SR-NYSEArca-2008-90]

 
 Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Accelerated Approval of Proposed Rule Change, as Modified by Amendment 
No. 1 Thereto, Amending NYSE Arca Equities Rule 7.31(x) to Change the 
Permissible Order Entry Time and Eligibility of Its Primary Only Order 
and Amending NYSE Arca Equities Rule 14.3 to Establish Procedures 
Designed To Manage Potential Informational Advantages Resulting From 
the Affiliation Between the Exchange and Archipelago Securities L.L.C.

September 29, 2008.

I. Introduction

    On August 20, 2008, NYSE Arca, Inc., (``NYSE Arca'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to (i) amend NYSE Arca Equities 
Rule 7.31(x) to change the permissible order entry time and eligibility 
of its Primary Only Order type (``PO Order'') and (ii) amend NYSE Arca 
Equities Rule 14.3 to establish procedures designed to manage

[[Page 58286]]

potential information advantages resulting from the affiliation between 
the Exchange and Archipelago Securities L.L.C. (``Arca Securities''). 
On September 4, 2008, the proposed rule change was published for 
comment in the Federal Register.\3\ The Commission received no comments 
on the proposed rule change. On September 25, 2008, NYSE Arca filed 
Amendment No. 1.\4\ This order approves the proposed rule change, as 
modified by Amendment No. 1, on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 58431 (August 27, 
2008), 73 FR 51681 (``PO Plus Notice'').
    On February 13, 2008, NYSE Arca filed a proposal to modify its 
PO Order pursuant to 19(b)(3)(A), making it effective upon filing 
with the Commission. See Securities Exchange Act Release No. 57377 
(February 25, 2008), 73 FR 11177 (February 29, 2008) (SR-NYSEArca-
2008-19). The Commission abrogated the proposal on April 11, 2008, 
noting that it has, in the past, expressed concern about the 
potential for unfair competition and conflicts of interest between 
an exchange's self-regulatory obligations and its commercial 
interests if an exchange were affiliated with one of its members, as 
well as the potential for unfair competitive advantage that the 
affiliated member could have by virtues of informational or 
operational advantages, or the ability to receive preferential 
treatment. See Securities Exchange Act Release No. 57648 (April 11, 
2008), 73 FR 20981 (April 17, 2008) at note 9 and accompanying text. 
The Commission noted that NYSE Arca's filing raised this issue by 
expanding the activities of Arca Securities in sending orders to its 
affiliate, the NYSE, and therefore should be subject to notice and 
comment and review pursuant to Sections 19(b)(1) and 19(b)(2) of the 
Act. See id. at note 10 and accompanying text. Further, the 
Commission stated that the issue of whether the routing of PO Orders 
by Arca Securities to the NYSE is consistent with existing NYSE and 
NYSE Arca rules should be subject to notice and comment and review 
pursuant to Sections 19(b)(1) and 19(b)(2) of the Act. See id. at 
note 11 and accompanying text.
    \4\ In Amendment No. 1, NYSE Arca requested that the Commission 
accelerate approval of the proposed rule change. Because Amendment 
No. 1 is technical in nature, the Commission is not publishing it 
for comment.
---------------------------------------------------------------------------

II. Background

A. PO Plus Proposal

    NYSE Arca proposes to expand the availability of its PO Order type. 
NYSE Arca's PO Order is a market or limit order that is to be routed to 
the primary market in that security without first attempting to access 
liquidity on the NYSE Arca book. Such orders, currently, may only be 
entered until a cut-off time established from time to time by the 
Exchange.\5\ The orders are routed to the primary market through NYSE 
Arca's routing broker-dealer, Arca Securities, which is an affiliate of 
NYSE Arca as described more fully below. The ``primary market'' may be 
the New York Stock Exchange LLC (``NYSE'') or the American Stock 
Exchange LLC (``Amex''),\6\ each of which, as described more fully 
below, also is (or will be) an affiliate of NYSE Arca and Arca 
Securities.
---------------------------------------------------------------------------

    \5\ See NYSE Arca Equities Rule 7.31(x). Currently, a PO Order 
entered for participation in the primary market opening must be 
entered before 6:28 a.m. (Pacific Time), and a PO Order entered for 
participation in the primary market re-opening after a trading halt 
must be entered after trading was halted on NYSE Arca and before the 
re-opening time. See id.
    \6\ Amex will change its name to NYSE Alternext US LLC in 
connection with the acquisition of Amex by NYSE Euronext. See 
Securities Exchange Act Release No. 58673 (September 29, 2008) (SR-
Amex-2008-62; SR-NYSE-2008-60) (order approving a proposed rule 
change related to the acquisition of the Amex by NYSE Euronext) 
(``NYSE Alternext US Order''). The transaction is expected to close 
shortly.
---------------------------------------------------------------------------

    NYSE Arca proposes to modify the PO Order type so that such orders 
may be entered at any time throughout the trading day and be 
immediately routed to the primary, listing market for execution. A PO 
Order would have to be a day or immediate-or-cancel (``IOC'') order. If 
the PO Order is not an IOC order it would remain at the venue to which 
it was routed, until executed, cancelled, or the end of day. Further, 
under the proposal, PO Orders entered for participation in the primary 
market, other than for participation in the primary market opening or 
primary market re-opening, must be marked with the modifier PO+. Such 
orders would be eligible for entry and execution throughout the trading 
day. Finally, the proposal permits an entering party to designate a PO 
Order as an Intermarket Sweep Order (as defined in Rule 600(b) of 
Regulation NMS under the Act).\7\
---------------------------------------------------------------------------

    \7\ 17 CFR 240.600(b).
---------------------------------------------------------------------------

    In addition, NYSE Arca proposes that: (1) The use of certain non-
public information by Arca Securities would be restricted; (2) NYSE 
Regulation, Inc. (``NYSE Regulation'') would collect and maintain 
certain information with respect to Arca Securities; and (3) routing by 
Arca Securities to NYSE Arca, in Arca Securities's capacity as a 
facility of NYSE, be authorized for a pilot period of 12 months.

B. Arca Securities Routing Function

    NYSE Euronext, a Delaware Corporation (``NYSE Euronext'') currently 
indirectly owns Arca Securities, a broker-dealer, that is a member of 
NYSE Arca. In addition, NYSE Euronext indirectly owns two registered 
securities exchanges--NYSE Arca and NYSE--and has entered into an 
agreement to acquire a third securities exchange--Amex.\8\ Thus, Arca 
Securities is (or will be) an affiliate of each of these exchanges.
---------------------------------------------------------------------------

    \8\ See NYSE Alternext US Order, supra note 6.
---------------------------------------------------------------------------

    NYSE Arca Equities Rule 3.10 prohibits: (1) An NYSE Arca member 
from being affiliated with NYSE Group, Inc. (``NYSE Group''); \9\ and 
(2) NYSE Group, or any entity with which it is affiliated, from 
maintaining an ownership interest in a member. Thus, Arca Securities's 
affiliation with NYSE Arca would violate NYSE Arca rules, absent 
Commission approval.
---------------------------------------------------------------------------

    \9\ NYSE is wholly owned by NYSE Group, which is in turn wholly 
owned by NYSE Euronext.
---------------------------------------------------------------------------

    The Commission has approved Arca Securities affiliation with, and 
operation as a facility of, NYSE Arca for the provision of outbound 
routing from NYSE Arca to other market centers,\10\ subject to certain 
conditions.\11\ Arca Securities's operation as a facility providing 
outbound routing for NYSE Arca was (and continues to be) subject to the 
conditions that: (1) Arca Securities continue to operate and be 
regulated as a facility of NYSE Arca; (2) Arca Securities only provide 
outbound routing services; (3) the primary regulatory responsibility 
for Arca Securities would lie with an unaffiliated SRO; and (4) the use 
of Arca Securities for outbound routing is available only to NYSE Arca 
members and use of Arca Securities's routing function remains 
optional.\12\ Arca Securities also operates as a facility of NYSE and 
similarly provides outbound routing from NYSE to other market centers, 
subject to conditions similar to those listed above.\13\
---------------------------------------------------------------------------

    \10\ Such outbound routing includes the routing of PO Orders to 
the primary market.
    \11\ See Securities Exchange Act Release No. 52497 (September 
22, 2005), 70 FR 56949 (September 29, 2005) (SR-PCX-2005-90) (order 
approving proposed rule changes in connection with the acquisition 
of the Pacific Exchange, Inc. (``PCX,'' n/k/a NYSE Arca) by 
Archipelago Holdings, Inc.).
    \12\ Id.
    \13\ See PO Plus Notice, supra note 3, at notes 19-21 and 
accompanying text. See also Securities Exchange Act Release No. 
55590 (April 5, 2007), 72 FR 18707 (April 13, 2007) (SR-NYSE-2007-
29) (order filed for immediate effectiveness to among other things, 
establish a mechanism to route orders from NYSE to away market 
centers).
---------------------------------------------------------------------------

    Currently, the operation of Arca Securities as a facility of NYSE 
Arca and NYSE providing outbound routing services from those exchanges 
is subject, respectively, to NYSE Arca and NYSE oversight, as well as 
Commission oversight. NYSE Arca and NYSE are each responsible for 
ensuring that Arca Securities is operated consistent with Section 6 of 
the Act and their respective rules. In addition, NYSE Arca and NYSE, 
respectively, must file with the Commission rule changes and fees 
relating to Arca Securities.
    Recognizing that the Commission has previously expressed concern 
regarding the potential for conflicts of interest in instances where a 
member firm is affiliated with an exchange to which it is routing 
orders, NYSE Arca proposes

[[Page 58287]]

to accept inbound orders that its affiliate, Arca Securities, routes in 
its capacity as a facility of NYSE, subject to the following 
limitations and conditions:
     First, NYSE Arca states that FINRA and NYSE Arca have 
entered into an agreement pursuant to Rule 17d-2 under the Act. 
Pursuant to this agreement, FINRA is allocated regulatory 
responsibilities to review Arca Securities' compliance with certain 
NYSE Arca rules.\14\ NYSE Arca, however, retains ultimate 
responsibility for enforcing its rules with respect to Arca Securities.
---------------------------------------------------------------------------

    \14\ NYSE Arca also states that Arca Securities is subject to 
independent oversight by FINRA, its Designated Examining Authority, 
for compliance with financial responsibility requirements. See PO 
Plus Notice, supra note 3, at section II.A.1.c.
---------------------------------------------------------------------------

     Second, NYSE Regulation\15\ will monitor Arca Securities 
for compliance with NYSE Arca's trading rules, and will collect and 
maintain certain related information.\16\
---------------------------------------------------------------------------

    \15\ NYSE Regulation is a wholly owned subsidiary of the NYSE 
that performs the regulatory functions of the NYSE pursuant to a 
delegation agreement. NYSE Regulation also performs many of the 
regulatory functions of NYSE Arca pursuant to a regulatory services 
agreement. See Securities Exchange Act Release No. 53382 (February 
27, 2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) (``NYSE/
Arca Order'') at 11255.
    \16\ Specifically, NYSE Regulation ``will collect and maintain 
the following information of which NYSE Regulation staff becomes 
aware--namely, all alerts, complaints, investigations and 
enforcement actions where Arca Securities (in its capacity as a 
facility of NYSE, routing orders to NYSE Arca) is identified as a 
participant that has potentially violated NYSE Arca or applicable 
SEC rules--in an easily accessible manner so as to facilitate any 
review conducted by the SEC's Office of Compliance Inspections and 
Examination.'' See PO Plus Notice, supra note 3, at section 
II.A.1.c.
---------------------------------------------------------------------------

     Third, NYSE Arca states that NYSE Regulation has agreed 
with NYSE Arca that it will provide a report to NYSE Arca's CRO, on a 
quarterly basis, that: (i) Quantifies all alerts (of which NYSE 
Regulation is aware) that identify Arca Securities as a participant 
that has potentially violated NYSE Arca or Commission rules, and (ii) 
quantifies the number of all investigations that identify Arca 
Securities as a participant that has potentially violated NYSE Arca or 
Commission rules.\17\
---------------------------------------------------------------------------

    \17\ See id.
---------------------------------------------------------------------------

     Fourth, NYSE Arca proposes new Rule 14.3(e) that will 
require NYSE Euronext, as the holding company owning both NYSE Arca and 
Arca Securities, to establish and maintain procedures and internal 
controls reasonably designed to ensure that Arca Securities does not 
develop or implement changes to its system, based on non-public 
information obtained regarding planned changes to the NYSE Arca systems 
as a result of its affiliation with NYSE Arca, until such information 
is available generally to similarly situated members of NYSE Arca, in 
connection with the provision of inbound order routing to NYSE 
Arca.\18\
---------------------------------------------------------------------------

    \18\ See proposed NYSE Arca Equities Rule 14.3(e).
---------------------------------------------------------------------------

     Fifth, NYSE Arca proposes that routing from Arca 
Securities to NYSE Arca, in Arca Securities's capacity as a facility of 
NYSE, be authorized for a pilot period of twelve months.\19\

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\20\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\21\ which 
requires, among other things, that the rules of an exchange be designed 
to prevent fraudulent and manipulative acts and practices; to promote 
just and equitable principles of trade; to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities; to remove impediments to and perfect the mechanism of a 
free and open market and a national market system; and, in general, to 
protect investors and the public interest; and are not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers.
---------------------------------------------------------------------------

    \19\ See PO Plus Notice, supra note 3, at section II.A.1.(e).
    \20\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \21\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In the past, the Commission has expressed concern that the 
affiliation of an exchange with one of its members raises potential 
conflicts of interest, and the potential for unfair competitive 
advantage.\22\ Although the Commission continues to be concerned about 
potential unfair competition and conflicts of interest between an 
exchange's self-regulatory obligations and its commercial interest when 
the exchange is affiliated with one of its members, for the reasons 
discussed below, the Commission believes that it is consistent with the 
Act to permit Arca Securities to provide inbound routing to NYSE Arca, 
on a pilot basis, subject to the conditions described above.\23\
---------------------------------------------------------------------------

    \22\ See, e.g. , Securities Exchange Act Release No. 54170 (July 
18, 2006), 71 FR 42149 (July 25, 2006) (SR-NASDAQ-2006-006) (order 
approving Nasdaq's proposal to adopt Nasdaq Rule 2140, restricting 
affiliations between Nasdaq and its members), and NYSE/Arca Order, 
supra note 15.
    \23\ See supra notes 14-19 and accompanying text. See also 
Securities Exchange Act Release No. 58680 (September 29, 2008) (SR-
NYSE-2008-76) (approving the expansion of the routing of order by 
Arca Securities, in its capacity as a facility of NYSE Arca, to 
NYSE) and NYSE Alternext US Order, supra note 6 (including approval 
of NYSE Alternext US's affiliation with Arca Securities for purposes 
of Arca Securities routing orders, in its capacity as a facility of 
NYSE Arca and NYSE, to NYSE Alternext US).
    This order approves only the routing of orders by Arca 
Securities, in its capacity as a facility of the NYSE, to NYSE Arca, 
subject to the conditions discussed herein. This approval does not 
include Arca Securities providing routing of orders from Amex, which 
will be affiliated with NYSE Arca following Amex's acquisition by 
NYSE Euronext, to NYSE Arca. Amex does not currently use Arca 
Securities to route orders to other markets and has not requested 
approval of such in its filing related to its acquisition by NYSE 
Euronext. See NYSE Alternext US Order, supra note 6.
---------------------------------------------------------------------------

    NYSE Arca has proposed five conditions applicable to Arca 
Securities routing activities, which are enumerated above. The 
Commission believes that these conditions mitigate its concerns about 
potential conflicts of interest and unfair competitive advantage. In 
particular, the Commission believes that FINRA's oversight of Arca 
Securities,\24\ combined with NYSE Regulation's monitoring of Arca 
Securities' compliance with NYSE Arca's trading rules and quarterly 
reporting to NYSE Arca's CRO, will help to protect the independence of 
NYSE Arca's regulatory responsibilities with respect to Arca 
Securities. The Commission also believes that proposed NYSE Arca 
Equities Rule 14.3(e) \25\ is designed to ensure that Arca Securities 
cannot use any information advantage it may have because of its 
affiliation with NYSE Arca. Furthermore, the Commission believes that 
NYSE Arca's proposal to allow Arca Securities to route orders inbound 
to NYSE Arca from NYSE, on a pilot basis, will provide NYSE Arca and 
the Commission an opportunity to assess the impact of any conflicts of 
interest of allowing an affiliated member of NYSE Arca to route orders 
inbound to NYSE Arca and whether such affiliation provides an unfair 
competitive advantage.
---------------------------------------------------------------------------

    \24\ This oversight will be accomplished through the 17d-2 
agreement among FINRA and NYSE Arca. See supra note 14 and 
accompanying text.
    \25\ See supra note 18 and accompanying text.
---------------------------------------------------------------------------

    The Commission also finds the expansion of the PO Order consistent 
with the Act. The expanded PO Order will provide NYSE Arca members 
greater choice in the handling of their orders, and their method of 
compliance with their obligations under Rule 611 of Regulation NMS.\26\
---------------------------------------------------------------------------

    \26\ 17 CFR 240.611.

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

[[Page 58288]]

IV. Accelerated Approval

    NYSE Arca has asked the Commission to accelerate approval of the 
proposed rule change. NYSE Arca states in part that ``accelerated 
approval * * * will eliminate certain competitive disadvantages that 
exist by permitting the Exchange to immediately offer directed orders 
to its Users.'' \27\ The Commission finds good cause for approving the 
proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing in the Federal Register.\28\ The 
Commission notes that the protections proposed by NYSE Arca, which are 
designed to address conflict of interest concerns identified by the 
Commission in connection with the inbound routing of orders to an 
exchange when the routing broker-dealer is an affiliate of that 
exchange, are consistent with those approved by the Commission in 
another rule filing.\29\ The Commission also notes that the proposed 
rule change was published for the full 21-day comment period,\30\ and 
the comment period ended on September 25, 2008. No comments were 
received on the proposal.
---------------------------------------------------------------------------

    \27\ See Amendment No. 1, supra note 4.
    \28\ 15 U.S.C. 78s(b)(2). Pursuant to Section 19(b)(2) of the 
Act, the Commission may not approve any proposed rule change, or 
amendment thereto, prior to the thirtieth day after the date of 
publication of notice thereof, unless the Commission finds good 
cause for so doing.
    \29\ See NYSE Alternext US Order, supra note 6, at section 
III.D.2.
    \30\ See supra note 3 and accompanying text.
---------------------------------------------------------------------------

    Accordingly, the Commission finds good cause for approving the 
proposed rule change, on an accelerated basis, pursuant to Section 
19(b)(2) of the Act.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\31\ that the proposed rule change (SR-NYSEArca-2008-90), as 
modified by Amendment No. 1 thereto, be, and hereby is, approved on an 
accelerated basis.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
---------------------------------------------------------------------------

    \32\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-23487 Filed 10-3-08; 8:45 am]

BILLING CODE 8011-01-P