Document ID: SEC-2016-1793-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2016-10-06T04:00Z

[Federal Register Volume 81, Number 194 (Thursday, October 6, 2016)]
[Notices]
[Pages 69562-69565]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-24146]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79017; File No. SR-NYSEARCA-2016-123]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Partial Amendment No. 1 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Partial Amendment No. 1, Amending 
Rule 7.46 Relating to the Exchange's Order Types To Implement the Tick 
Size Pilot Program

September 30, 2016.

I. Introduction

    On August 25, 2016, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'') 
filed with the Securities and Exchange Commission (``Commission'') 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to: 
(1) Change system functionality to implement the Plan to Implement a 
Tick Size Pilot Program (``Plan'' or ``Pilot'') \3\ submitted to the 
Commission pursuant to Rule 608 of Regulation NMS \4\ under the Act; 
(2) clarify the operation of certain exceptions to the Trade-at 
Prohibition \5\ on Pilot Securities in Test Group Three; (3) amend the 
Limit Up/Limit Down (``LULD'') price controls pursuant to the 
Regulation NMS Plan to Address Extraordinary Market Volatility (``LULD 
Plan''); \6\ and (4) amend the Exchange's limit order price protection 
rule. The proposed rule change was published for comment in the Federal 
Register on September 15, 2016.\7\ The Commission received two comment 
letters in response to the Notice.\8\ On September 27, 2016, the 
Exchange filed a partial amendment to the proposed rule change 
(``Amendment No. 1'').\9\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 74892 (May 6, 2015), 
80 FR 27513 (May 13, 2015) (``Approval Order''). Unless otherwise 
specified, capitalized terms used in this rule filing are defined as 
set forth in the Plan.
    \4\ 17 CFR 242.608.
    \5\ Exchange Rule 7.46(e)(4)(A) defines the ``Trade-at 
Prohibition'' to mean the prohibition against executions by a 
Trading Center of a sell order for a Pilot Security at the price of 
a Protected Bid or the execution of a buy order for a Pilot Security 
at the price of a Protected Offer during regular trading hours. See 
also Plan Section I(LL) and Plan Section VI(D).
    \6\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631).
    \7\ Securities Exchange Act Release No. 78801 (September 9, 
2016), 81 FR 63525 (``Notice'').
    \8\ See Letters from Eric Swanson, EVP, General Counsel, Bats 
Global Markets, Inc., Elizabeth K. King, General Counsel and 
Corporate Secretary, New York Stock Exchange; and Thomas A. Wittman, 
EVP, Global Head of Equities, Nasdaq, Inc., dated September 9, 2016 
(``Comment Letter No. 1''); and Eric Swanson, EVP, General Counsel, 
Bats Global Markets, Inc., dated September 12, 2016 (``Comment 
Letter No. 2'').
    \9\ In Amendment No. 1, the Exchange proposes to do the 
following: (1) Delete the proposal to amend Rule 7.35P because the 
Exchange recently filed a separate proposed rule change to make the 
same amendment, which is now operative. See Securities Exchange Act 
Release No. 78861 (September 16, 2016) (SR-NYSEArca-2016-129) 
(``Rule 7.35P Filing''); (2) modify Rule 7.46(f)(3) to provide that 
Market Pegged Orders in all Pilot Securities would be rejected and 
delete references to Market Pegged Orders in Rule 7.46(f)(5)(H); and 
(3) correct typographical errors in the original proposal.
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    This order provides notice of filing of Amendment No. 1 and 
approves the proposal, as modified by Amendment No. 1, on an 
accelerated basis.

II. Description of the Amended Proposal

    The Exchange proposes to: (1) Change system functionality to 
implement the Plan; (2) clarify the operation of certain exceptions to 
the Trade-at Prohibition on Pilot Securities in Test Group Three; (3) 
amend the LULD price controls pursuant to the LULD Plan; and (4) amend 
the Exchange's limit order price protection rule.

A. Amendments to System Functionality To Implement the Plan

1. Trade-at Intermarket Sweep Orders (``TA ISO'') \10\
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    \10\ See proposed Exchange Rule 7.46(f)(1).
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    The Exchange proposes to accept TA ISOs in all securities. Further, 
TA ISOs must be designated as Immediate or Cancel (``IOC''), may be 
designated with a ``no midpoint execution'' modifier, may not be 
designated with a minimum trade size, and do not route. TA ISO would be 
immediately traded with contra-side displayed and non-displayed 
interest in the NYSE Arca Book up to its full size and limit price and 
the quantity not so traded will be immediately and automatically 
cancelled.
2. Permitted Price Increment for Pilot Securities \11\
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    \11\ See proposed Exchange Rule 7.46(f)(2).
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    The Exchange proposes that references in Exchange rules to the 
minimum price variation (``MPV'') \12\ would mean $0.05 instead of the 
current $0.01 for Pilot Securities in Test Groups One, Two, and Three. 
Further, references to truncating to the MPV in Exchange rules would 
mean rounding down to the applicable quoting MPV for Pilot Securities 
in Test Groups One, Two, and Three. Mid-Point Liquidity Orders \13\ 
must be entered with a limit price in a $0.05 pricing increment.
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    \12\ See Exchange Rule 7.6 for a definition of the MPV.
    \13\ A Mid-Point Liquidity Order is a Limit Order that is not 
displayed, does not route, and has with a working price at the 
midpoint of the PBBO. See Exchange Rule 7.31P(d)(3).
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3. Rejection of Market Pegged Orders in Pilot Securities \14\
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    \14\ See proposed Exchange Rule 7.46(f)(3). See also Amendment 
No. 1.
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    The Exchange proposes that Market Pegged Orders \15\ will be 
rejected for all Pilot Securities.
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    \15\ A Market Pegged Order is an order to buy (sell) with a 
working price that is pegged to the PBO (PBB). See Exchange Rule 
7.31P(h). A Market Pegged Order to buy (sell) will be rejected on 
arrival, or cancelled when resting, if there is no PBO (PBB) against 
which to peg. Market Pegged Orders will not participate in any 
auctions. Market Pegged Orders are not displayed and are ranked 
``Priority 3--Non-Display Orders.'' A Market Pegged Order to buy 
(sell) may include an offset value that will set the working price 
below (above) the PBO (PBB) by a specified offset.
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4. Retail Price Improvement Orders Increment \16\
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    \16\ See proposed Exchange Rule 7.46(f)(4).
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    The Exchange proposes that for Test Group Two and Test Group Three, 
Retail Price Improvement Orders \17\

[[Page 69563]]

must be entered in pricing increments of $0.005.
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    \17\ A Retail Price Improvement Order consists of non-displayed 
interest in NYSE Arca-listed securities and UTP Securities, 
excluding NYSE-listed (Tape A) securities, that would trade at 
prices better than the PBB or PBO by at least $0.001 and that is 
identified as such. See Exchange Rule 7.44P(a)(4).
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5. Trading in Test Group Three Pilot Securities
a. Change in Priority \18\
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    \18\ See proposed Exchange Rule 7.46(f)(5)(A).
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    The Exchange proposes to revise the priority of resting orders \19\ 
for Pilot Securities in Test Group Three, as follows: (A) First 
priority would be given to ``Priority 2--Display Orders,'' which are 
non-marketable Limit Orders with a displayed working price; (B) second 
priority would be given to ``protected quotations of Away Markets 
\20\;'' (C) third priority would be given to ``Priority 1--Market 
Orders,'' which are unexecuted Market Orders; and (D) fourth priority 
would be given to ``Priority 3--Non-Display Orders,'' which are non-
marketable Limit Orders for which the working price is not displayed, 
including reserve interest of Reserve Orders.
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    \19\ Exchange Rule 7.36P(e) sets forth the priority of orders 
for all securities.
    \20\ See Exchange Rule 1.1(ffP).
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b. Routing to Away Markets \21\
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    \21\ See proposed Exchange Rule 7.46(f)(5)(B).
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    The Exchange proposes that for Pilot Securities in Test Group 
Three, orders would not be routed to Away Markets that are not 
displaying Protected Quotations.
c. Repricing of Limit Orders \22\
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    \22\ See proposed Exchange Rule 7.46(f)(5)(C).
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    The Exchange proposes to assign a working price equal to the re-
priced display price in Test Group Three for displayed limit orders to 
avoid ranking orders undisplayed at the price of a Protected Quotation. 
The Exchange currently assigns a display price of a displayed Limit 
Order one MPV below (above) the contra-side PBO (PBB), and a working 
price equal to the contra-side PBBO to prevent locking or crossing the 
PBBO.\23\
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    \23\ See Exchange Rule 7.31P(a)(2)(C).
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d. Non-Displayed Portion of Reserve Orders \24\
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    \24\ See proposed Exchange Rule 7.46(f)(5)(D).
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    The Exchange proposes that for Pilot Securities in Test Group 
Three, if a Reserve Order \25\ to buy (sell) is displayed at a price 
that is locked or crossed by a protected offer (bid), the non-displayed 
portion of the Reserve Order would be assigned a working price of $0.05 
below (above) the protected offer (bid), but if routable, would route 
to a protected offer (bid) based on the limit price of the order.
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    \25\ A Reserve Order is defined as a limit or inside limit order 
with a quantity of the size displayed and with a reserve quantity of 
the size (``reserve interest'') that is not displayed. See Exchange 
Rule 7.31P(d)(1).
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e. Limit Non-Displayed Orders \26\
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    \26\ See proposed Exchange Rule 7.46(f)(5)(E).
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    The Exchange proposes that for Pilot Securities in Test Group 
Three, a Limit Non-Displayed Order would be assigned a working price 
one MPV away from the PBBO. Currently, if the limit price of a Limit 
Non-Displayed Order to buy (sell) is equal to the PBO (PBB), the order 
will be assigned a working price equal to the limit price, i.e., the 
same price as the PBO (PBB).\27\
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    \27\ See Rule 7.31P(d)(2)(A).
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f. Orders That Do Not Route \28\
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    \28\ See proposed Exchange Rule 7.46(f)(5)(F).
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    The Exchange proposes changes to how orders with instructions do 
not route would interact with the NYSE Arca Book. These orders include: 
``Arca Only Orders,'' \29\ ``ALO Orders,'' \30\ and ``Intermarket Sweep 
Orders.'' \31\ The Exchange proposes that on arrival, orders that do 
not route would trade with resting orders in the NYSE Arca Book, 
consistent with the terms of the order and the Trade-at Prohibition. 
Day ISOs, on arrival, would be eligible for the Trade-at Intermarket 
Sweep Orders exception to the Trade-at Prohibition. An IOC ISO to buy 
(sell) would not trade with orders to sell (buy) ranked ``Priority 1--
Market Orders'' or ``Priority 3--Non-Display Orders'' that are the same 
price as a protected offer (bid) unless the limit price of such IOC ISO 
is higher (lower) than the price of the protected offer (bid).
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    \29\ An ``Arca Only Order'' is a limit order that does not 
route. See Exchange Rule 7.31P(e)(1).
    \30\ An ``ALO Order'' is an Arca Only Order that, with some 
exceptions, will not remove liquidity from the NYSE Arca Book and 
must have a minimum on one displayed round lot. See Exchange Rule 
7.31P(e)(2).
    \31\ An ``Intermarket Sweep Order'' is a Limit Order that does 
not route and meets the requirements of Rule 600(b)(30) of 
Regulation NMS. See Exchange Rule 7.31P(e)(3).
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    For Arca Only Order or ALO Orders, the Exchange proposes that when 
being added to the NYSE Arca Book, such orders to buy (sell) with a 
limit price equal to or above (below) the PBO (PBB) would be assigned a 
display price and working price one MPV below (above) the PBO (PBB). 
Once the Arca Only Order or ALO Order to buy (sell) is resting on the 
NYSE Arca Book, such orders would not be eligible to trade with later-
arriving orders to sell (buy) ranked ``Priority 2--Display Orders'' 
priced equal to the PBO (PBB). A later-arriving order to buy (sell) 
that is eligible to trade with the PBO (PBB) may trade before such 
resting order.
g. Block Size Exception to the Trade-at Prohibition \32\
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    \32\ See proposed Exchange Rule 7.46(f)(5)(G).
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    The Exchange proposes that the only orders eligible for the block 
size exception to the Trade-at Prohibition would be Limit IOC Cross 
Orders \33\ that meet the Block Size definition. A Limit IOC Cross 
Order that is at the same price as the PBBO but does not meet the Block 
Size definition would be rejected in Test Group Three.
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    \33\ A Limit IOC Cross Order is a two-sided order with 
instructions to match the buy-side with the identified sell-side at 
a specified price and that does not route and will cancel at the 
time of entry if the cross price is not between the BBO or would 
trade through the PBBO. See Exchange Rule 7.31P(g)(1).
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h. Rejection of Tracking Orders \34\
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    \34\ See proposed Exchange Rule 7.46(f)(5)(H).
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    The Exchange proposes that Tracking Orders \35\ will be rejected 
for Test Group Three Pilot Securities.
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    \35\ A Tracking Order is an order to buy (sell) with a limit 
price that is not displayed, does not route, must be entered in 
round lots and designated Day, and will trade only with an order to 
sell (buy) that is eligible to route. The working price of a 
Tracking Order to buy (sell) is the PBB (PBO), provided that such 
price is at or below (above) the limit price of the Tracking Order. 
See Exchange Rule 7.31P(d)(4).
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B. Limit Up-Limit Down (``LULD'') Price Bands

    The Exchange proposes that after the Exchange opens or reopens an 
Exchange-listed security but before receiving Price Bands from the 
Securities Information Processor (``SIP'') under the LULD Plan, the 
Exchange would calculate Price Bands based on the first Reference Price 
provided to the SIP and, if such Price Bands are not in the MPV for the 
security, round such Price Bands to the nearest price at the applicable 
MPV.

C. Limit Order Price Protection

    The Exchange proposes to specify that the limit order price 
protection for both buy and sell orders that are not in the MPV for the 
security would be rounded down to the nearest price at the applicable 
MPV.

D. Miscellaneous Changes

    The Exchange proposes to add the phrase ``or Intermarket Sweep 
Orders'' to the definition of ``Trade-at ISO'' as well as into the 
Trade-at ISO exception to the Trade-at Prohibition to clarify that ISOs 
may be routed to execute against

[[Page 69564]]

the full displayed size of the Protected Quotation that was traded 
at.\36\
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    \36\ See proposed Exchange Rules 7.46(a)(1)(D)(ii) and 
7.46(e)(4)(C)(x).
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    The Exchange proposes to amend the Block Size exception to the 
Trade-at Prohibition to allow a Block Size order to execute on multiple 
Trading Centers for the purpose of compliance with Rule 611 of 
Regulation NMS.\37\
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    \37\ See proposed Exchange Rule 7.46(e)(4)(C)(iii).
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    Finally, the Exchange proposes to correct numerous typographical 
errors in the proposed rule text.

III. Summary of Comment Letters

    Both comment letters express support for the proposed rule change 
and suggest that the Commission should approve the proposal. In Comment 
Letter No. 1, the commenters stated that if the proposal is approved as 
proposed, then NYSE would be able to meet the October 3, 2016 
implementation date. Further, in Comment Letter No. 1, the commenters 
stated their belief that the requirements from the Commission have been 
unclear. In Comment Letter No. 2, the commenter questioned Commission 
staff's authority.

IV. Discussion and Commission's Findings

    After careful review of the proposed rule change, as modified by 
Amendment No. 1, and the comment letters, the Commission finds that the 
proposal, as modified by Amendment No. 1, is consistent with the 
requirements of the Act, Rule 608 of Regulation NMS,\38\ and the rules 
and regulations thereunder that are applicable to a national securities 
exchange.\39\ Specifically, the Commission finds that the rule change 
is consistent with Section 6(b)(5) of the Act,\40\ which requires that 
the rules of a national securities exchange be designed, among other 
things, to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and to protect investors and the public interest; and 
are not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers.
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    \38\ 17 CFR 242.608.
    \39\ In approving this rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \40\ 15 U.S.C. 78f(b)(5).
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    As noted in the Approval Order, the Plan is by design, an 
objective, data-driven test to evaluate how a wider tick size would 
impact trading, liquidity, and market quality of securities of smaller 
capitalization companies. In addition, the Plan is designed with three 
Test Groups and a Control Group, to allow analysis and comparison of 
incremental market structure changes on the Pilot Securities and is 
designed to produce empirical data that could inform future policy 
decisions.
    The Exchange proposes changes to modify how the Exchange will 
handle orders during the Pilot Period. Specifically, the Exchange 
proposes to accept TA ISOs in all securities, to specify how references 
to MPV should be considered for Pilot Securities in the Test Groups, to 
require that MPL Orders with a limit price must be entered in a $0.05 
pricing increment for Pilot Securities in the Test Groups, to reject 
Market Pegged Orders \41\ and to specify the pricing increment for 
Retail Price Improvement Orders in Test Groups Two and Three. The 
Exchange further proposes changes for Pilot Securities in Test Group 
Three to comply with the Trade-at Prohibition, including a different 
priority for execution of resting orders, how display price and working 
price would be determined for certain Limit Orders, Reserve Orders and 
Non-Displayed Limit Orders, how orders that do not route would operate, 
and that Tracking Orders would be rejected for Test Group Three Pilot 
Securities. In addition, the Exchange proposes to not route to Away 
Markets that are not displaying Protected Quotations. Finally, the 
Exchange proposes to only permit Limit IOC Cross Orders that meet the 
Block Size definition to be eligible for the Block Size exception to 
the Trade-at Prohibition.\42\
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    \41\ See Amendment No. 1. The Exchange originally proposed to 
reject Market Pegged Orders only in Test Group Three. The Commission 
believes that the amendment to reject all Market Pegged Orders in 
Pilot Securities modifies the proposal so that it does not cause a 
disparate impact on different Test Groups and the Control Group.
    \42\ The Commission notes that the Limit IOC Cross Orders that 
meet the definition of Block Size must also satisfy the provisions 
of the Block Size exception, including that it may not be an 
aggregation of non-block orders, or broken into orders small than 
Block Size prior to submitting the order to a Trading Center for 
execution. See NYSE Acra Rule 7.46(e)(4)(C).
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    The Commission believes that these changes are reasonably designed 
to comply with the Plan. Further, the Commission believes that the 
proposed changes that are targeted at particular Test Groups are 
necessary for compliance with the Plan. Accordingly, the Commission 
finds that these changes are consistent with Section 6(b)(5) of the Act 
\43\ and Rule 608 of Regulation NMS \44\ because they implement the 
Plan and clarify Exchange Rules.
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    \43\ 15 U.S.C. 78f(b)(5).
    \44\ 17 CFR 242.608.
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    In addition, the Exchange proposes to adopt a rule to specify how 
the Exchange will calculate LULD Price Bands after the Exchange opens 
or reopens. The Commission believes that this change should help to 
ensure that trading does not occur outside of Price Bands when LULD is 
in effect.
    Finally, the Exchange proposes to specify that if Limit Order Price 
Protection is not in the MPV it would be rounded down to the nearest 
price at the applicable MPV. The Commission believes that this change 
should provide clarity in the Exchange's rules.
    For these reasons, the Commission finds that the proposed rule 
change, as modified by Amendment No.1, is consistent with the 
requirements of the Act and Rule 608 of Regulation NMS.

V. Solicitation of Comments on Amendment No. 1 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
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-2016-123 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR- NYSEArca-2016-123. 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

[[Page 69565]]

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 will also 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-2016-123 and should be 
submitted on or before October 27, 2016.

VI. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of notice of the proposed rule change, as 
modified by Amendment No. 1 in the Federal Register. As described 
above, the Exchange proposes to amend its rules to comply with the Plan 
and clarify other rules related to LULD and Limit Order Price 
Protection.
    The Commission believes that the proposals to clarify how LULD 
Price Bands that are calculated by the Exchange would be rounded in 
instances where they are not in the MPV for a security and how Limit 
Order Price Protection would be rounded in instances where it is not in 
the MPV for a security provides clarity in the Exchange rules.
    In addition, the Commission notes that the Pilot is scheduled to 
start on October 3, 2016, and accelerated approval of the proposal 
would ensure that the rules of the Exchange would be in place for the 
start of the Pilot. Accordingly, the Commission finds good cause, 
pursuant to Section 19(b)(2) of the Exchange Act,\45\ to approve the 
proposed rule change, as modified by Amendment No. 1, on an accelerated 
basis.
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    \45\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion

    It is therefore ordered that, pursuant to Section 19(b)(2) of the 
Act,\46\ that the proposed rule change (SR-NYSEArca-2016-123), as 
modified by Amendment No. 1, be and hereby is, approved on an 
accelerated basis.
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    \46\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\47\
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    \47\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-24146 Filed 10-5-16; 8:45 am]
BILLING CODE 8011-01-P