Document ID: SEC-2012-1228-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2012-07-31T04:00Z

[Federal Register Volume 77, Number 147 (Tuesday, July 31, 2012)]
[Notices]
[Pages 45401-45403]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-18598]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67498; File No. SR-NYSEArca-2012-76]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change Amending NYSE 
Arca Options Rule 6.40 To Specify That the Potential Range for the 
Settings Applicable to the Market Maker Risk Limitation Mechanism Will 
Be Between One and 100 Executions per Second, To Eliminate the Current 
Reference to the Default Setting and, in the Future, To Specify the 
Applicable Minimum, Maximum and Default Settings via Regulatory 
Bulletin

July 25, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on July 12, 2012, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. 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\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend NYSE Arca Options Rule 6.40 to 
specify that the potential range for the settings applicable to the 
Market Maker Risk Limitation Mechanism (``Mechanism'') will be between 
one and 100 executions per second, to eliminate the current reference 
to the default setting and, in the future, to specify the applicable 
minimum, maximum and default settings via Regulatory Bulletin. 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 NYSE Arca Options Rule 6.40 to 
specify that the potential range for the settings applicable to the 
Mechanism will be between one and 100 executions per second, to 
eliminate the current reference to the default setting and, in the 
future, to specify the applicable minimum, maximum and default settings 
via Regulatory Bulletin.
    The Mechanism protects Market Makers from the risk associated with 
an excessive number of nearly simultaneous executions in a single 
option class.\3\ Specifically, if ``n'' executions occur within one 
second against the Market Maker's quotes in an appointed class, the 
NYSE Arca System automatically cancels all quotes posted by the Market 
Maker in that class.
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    \3\ See Securities Exchange Act Release No. 54238 (July 28, 
2006), 71 FR 44758 (August 7, 2006) (SR-NYSEArca-2006-13).
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    The Mechanism currently defaults the ``n'' number of executions to 
50 executions per second.\4\ However, a Market Maker may instead set 
the ``n'' number of executions between five and 100 executions per 
second.\5\ The Exchange proposes to decrease the low end of this range 
from five to one.\6\ The Exchange also proposes to eliminate the 
reference to the default setting that is applicable to the Mechanism. 
In addition, the Exchange proposes that, in the future, it will specify 
the applicable minimum, maximum and default settings for the Mechanism 
via Regulatory Bulletin, all of which would be within the proposed 
range of one to 100 executions per second.\7\
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    \4\ See NYSE Arca Options Rule 6.40(b)(1).
    \5\ See NYSE Arca Options Rule 6.40(b)(2).
    \6\ The high end of the range would remain unchanged at 100 
executions per second.
    \7\ See proposed NYSE Arca Options Rule 6.40(b)(1). The Exchange 
proposes to designate NYSE Arca Options Rule 6.40(b)(2) as 
``reserved.''
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    The Exchange believes that this proposed change would provide the 
Exchange with greater flexibility with respect to changing these 
settings in the future. In particular, the Exchange may need to change 
the settings from time to time to accommodate systems capacity 
concerns. The Exchange believes that specifying these settings via 
Regulatory

[[Page 45402]]

Bulletin, instead of within NYSE Arca Options Rule 6.40, is consistent 
with the manner in which the Commission currently permits other option 
exchanges to communicate settings or parameters for various exchange 
mechanisms to their members other than through the rule filing process, 
i.e., via notices, bulletins or circulars.\8\
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    \8\ See, e.g., Chapter VI, Section 16 of the Boston Options 
Exchange (``BOX'') Rules, which provides that, related to BOX's 
Quote Removal Mechanism Upon Technical Disconnect, BOX Market Makers 
will be notified of the value that ``n'' seconds represents via 
Regulatory Circular. See also Securities Exchange Act Release No. 
58140 (July 10, 2008), 73 FR 41384 (July 18, 2008) (SR-BSE-2008-40), 
in which the Commission noted that ``n'' seconds would be 
configurable by BOX and any subsequent re-configurations will be 
announced to Market Makers via Regulatory Circular. See also 
Interpretation and Policy .05 to Chicago Board Options Exchange 
(``CBOE'') Rule 6.74A, which provides that any determinations made 
by CBOE regarding CBOE's Automated Improvement Mechanism, such as 
eligible classes, order size parameters and the minimum price 
increment for certain responses, shall be communicated in a 
Regulatory Circular. See also CBOE Rule 6.13(b)(i)(C)(2)(a), which 
provides that CBOE may establish certain maximum order size 
eligibility requirements with respect to automatic executions and 
announce such determinations via Regulatory Circular. See also CBOE 
Rules 6.45A and 6.45B, which provide that CBOE will issue a 
Regulatory Circular to specify certain priority-related information, 
including specifying which priority rules will govern which classes 
of options any time the Exchange changes the priority. See also CBOE 
Rule 6.25(a)(4)(i), which provides that, for purposes of nullifying 
a trade due to an erroneous print in an underlying or related 
instrument, CBOE may announce such underlying or related instrument 
via Regulatory Circular. See also C2 Options Exchange (``C2'') Rule 
6.13, which provides that C2 may make certain determinations 
regarding the price check parameter feature and announce such 
determinations via Regulatory Circular. See also Securities Exchange 
Act Release No. 65311 (September 9, 2011), 76 FR 57094 (September 
15, 2011) (SR-C2-2011-018).
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    The Exchange anticipates announcing via Regulatory Bulletin that 
the applicable minimum, maximum and default settings for the Mechanism 
will be decreased to 2, 50 and 5 executions per second, respectively. 
The Exchange believes that decreasing these settings would provide 
Market Makers with greater flexibility with respect to managing their 
risk on the Exchange, consistent with the flexibility available on 
other option markets. In this regard, the Exchange understands that the 
Commission has previously permitted similar risk mechanisms to be 
implemented on other option exchanges without requiring any applicable 
minimum, maximum and/or default settings in the exchanges' 
corresponding rules.\9\
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    \9\ See, e.g., Chapter VI, Section 15 of the BOX Rules, which 
provides for Automatic Quote Cancellation. See also Securities 
Exchange Act Release No. 65001 (August 1, 2011), 76 FR 47635 (August 
5, 2011) (SR-BX-2011-050). See also Supplementary Material .01 to 
International Securities Exchange (``ISE'') Rule 804, which provides 
for Automated Quotation Adjustments for Market Makers.
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    When announcing changes to the Mechanism via Regulatory Bulletin 
the Exchange will issue such bulletin to all Market Makers at least one 
trading day in advance of the effective date of the change. All such 
Regulatory Bulletins will contain information regarding changes to the 
risk settings in the Mechanism, the effective date of such changes and 
contact information of Exchange staff who can provide additional 
information. The Exchange distributes Regulatory Bulletins 
simultaneously to all Market Makers via email and in addition 
Regulatory Bulletins are posted to the Exchange's Web site.
    Upon receiving notification of a change to the minimum/maximum 
settings in the Mechanism by the Exchange, Market Makers will able to 
make adjustments they deem necessary to their own risk settings within 
the Mechanism using the same electronic interface that they use to send 
quotes to the Exchange. In addition, Market Makers may elect to adjust 
risk settings in their own proprietary systems in reaction to any 
changes initiated by the Exchange. For example, if the Exchange was to 
raise the minimum number of executions per second in the Mechanism to a 
level greater than a given Market Maker was using at the time, the 
Market Maker would take that new setting into consideration and could 
make appropriate changes to their own risk settings within the 
Mechanism, and if warranted, could make additional adjustments to their 
own proprietary quoting systems to achieve risk parameters consistent 
with their individual business model. When adjusting risk parameters in 
the Mechanism and/or a proprietary system, in reaction to a change in 
the minimum/maximum settings by Exchange, Market Makers are able to 
utilize functionality that is both readily available and user 
controlled. Accordingly, the Exchange believes that providing Market 
Makers with at least one day's advance notice prior to making 
adjustments to the Mechanism will afford Market Makers sufficient time 
to review their risk settings and make operational and/or technological 
changes, to either the user controlled risk settings in the Mechanism 
or to their own proprietary systems, necessary to accommodate any such 
adjustments made to the Mechanism by the Exchange.
    The Exchange is not proposing any other changes to the Mechanism at 
this time.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Securities Exchange Act of 1934 (the 
``Act''),\10\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\11\ in particular, because it is 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 mechanisms of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest and because it is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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    In particular, the proposed rule change would prevent fraudulent 
and manipulative acts and practices and promote just and equitable 
principles of trade because it would continue to provide Market Makers 
with greater control and flexibility with respect to managing risk and 
the manner in which they enter quotes. The Exchange believes that this 
increased control and flexibility also fosters cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
and processing information with respect to, and facilitating 
transactions in, securities. The Exchange further believes that the 
proposed rule change would remove impediments to and perfect the 
mechanisms of a free and open market and a national market system 
because it would permit the Exchange to adjust the minimum, maximum and 
default settings for the Mechanism via Regulatory Bulletin, which would 
be consistent with the manner in which other option exchanges are 
permitted to communicate settings or parameters for various exchange 
mechanisms to their members other than through the rule filing process, 
i.e., via notices, bulletins or circulars.\12\ The Exchange further 
believes that the proposed rule change is consistent with, and furthers 
the objectives of, the Act because it would permit the Exchange to 
increase or decrease the minimum, maximum and default settings from 
their current levels, should the Exchange choose to do so, for example, 
to accommodate

[[Page 45403]]

systems capacity concerns.\13\ The Exchange also believes that 
specifying the applicable minimum, maximum and default settings for the 
Mechanism via Regulatory Bulletin would further remove impediments to 
and perfect the mechanisms of a free and open market by reducing the 
resources that would otherwise be expended, by both the Exchange and 
the Commission, if the Exchange is required to propose a rule change 
with the Commission each time it wishes to change the settings.
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    \12\ See supra note 8.
    \13\ As noted above, the Exchange anticipates that the current 
minimum, maximum and default settings will be decreased to 2, 50 and 
5 executions per second, respectively. The Exchange understands that 
the Commission has previously permitted similar risk mechanisms to 
be implemented on other option exchanges without any applicable 
minimum, maximum and/or default settings in the exchanges' 
corresponding rules. See supra note 9.
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    The Exchange believes that the proposed decrease of the low end of 
the range of the Mechanism's settings to one execution per second would 
continue to reasonably ensure that, consistent with their obligations, 
Market Makers maintain a quote on the Exchange. In this regard, the 
Exchange notes that the proposed rule change would not relieve Market 
Makers on the Exchange of their quoting obligations under the 
Exchange's Rules.\14\ As is the case today, a Market Maker quote that 
is cancelled would no longer count toward satisfying the Market Maker's 
percentage quoting obligation under NYSE Arca Options Rule 6.37B. The 
Exchange further notes that the proposed rule change would not relieve 
a Market Maker of its ``firm quote'' obligation under Rule 602 of 
Regulation NMS\15\ or NYSE Arca Options Rule 6.86, thereby promoting 
the protection of investors and the public interest.
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    \14\ See, e.g., NYSE Arca Options Rule 6.37B.
    \15\ 17 CFR 242.602.
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    The Exchange further believes that the proposed rule change is not 
unfairly discriminatory because the same minimum, maximum and default 
settings would be applicable to all Market Makers and because the 
settings would be announced via Regulatory Bulletin to all Market 
Makers at the same time.

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.

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

    Because the foregoing proposed rule change does not significantly 
affect the protection of investors or the public interest, does not 
impose any significant burden on competition, and, by its terms, does 
not become operative for 30 days from the date on which it was filed, 
or such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \16\ and Rule 19b-
4(f)(6) thereunder.\17\
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change, along with a 
brief description and text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission. The 
Exchange has satisfied this requirement.
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    The Exchange has requested that the Commission waive the 30-day 
operative delay, stating that this proposed rule change is 
substantially similar in all respects to a proposed rule change 
recently noticed and approved by the Commission and that no new 
questions or comments would be raised by this proposed rule change.\18\ 
For these reasons, the Commission believes that waiver of the operative 
delay is consistent with the protection of investors and the public 
interest. Therefore, the Commission designates the proposal operative 
upon filing.\19\
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    \18\ See Securities Exchange Act Release No. 67314 (June 29, 
2012), 77 FR 40139 (July 6, 2012) (SR-NYSEAmex-2012-23). The 
Commission notes that it received no comments on this identical 
proposal.
    \19\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please 
include File Number SR-NYSEArca-2012-76 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-NYSEArca-2012-76. 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 the 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-NYSEArca-2012-76 and should 
be submitted on or before August 21, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-18598 Filed 7-30-12; 8:45 am]
BILLING CODE 8011-01-P