Document ID: SEC-2013-1644-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2013-09-23T04:00Z

[Federal Register Volume 78, Number 184 (Monday, September 23, 2013)]
[Notices]
[Pages 58356-58359]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-23006]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70425; File No. SR-NYSEArca-2013-90]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Amending Rule 6.91 
To Specify That LMMs Receive Execution Allocations of Incoming 
Electronic Complex Orders and Complex Order Auction Eligible Orders in 
Accordance With the Guaranteed Participation Provision of Rule 
6.76A(a)(1)(A), Without Any Exceptions

September 17, 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 September 12, 2013, NYSE Arca, Inc. (the ``Exchange'' or 
``NYSE Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 6.91 to specify that LMMs 
receive execution allocations of incoming Electronic Complex Orders and 
Complex Order Auction (``COA'') eligible orders in accordance with the 
guaranteed participation provision of Rule 6.76A(a)(1)(A), without any 
exceptions. 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 is proposing to amend Rules 6.91(a)(2)(i), (a)(2)(ii), 
(c)(6)(A), and (c)(6)(D) to specify that LMMs receive execution 
allocations of the individual components of a legged out incoming 
Electronic Complex Order or COA-eligible order in accordance with the 
guaranteed participation provision of Rule 6.76A(a)(1)(A), without any 
exceptions, which is how the Exchange currently operates.

[[Page 58357]]

    Rule 6.91 governs trading of ``Electronic Complex Orders,'' as that 
term is defined in NYSE Arca Options Rule 6.62(e).\4\ Rule 
6.91(a)(2)(i) currently provides that Electronic Complex Orders 
accepted in the Exchange's Complex Matching Engine (``CME'') \5\ are 
executed automatically against other Electronic Complex Orders in the 
Consolidated Book,\6\ unless individual orders or quotes in the 
Consolidated Book can execute against incoming Electronic Complex 
Orders, subject to specified conditions, in which case such individual 
orders and quotes have priority. Rule 6.91(a)(2)(ii) currently provides 
that Electronic Complex Orders in the CME that are not marketable 
against other Electronic Complex Orders automatically execute against 
individual quotes or orders in the Consolidated Book, provided that the 
Electronic Complex Orders can be executed in full or in a permissible 
ratio by the individual quotes or orders.
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    \4\ NYSE Arca Options Rule 6.62(e) defines an Electronic Complex 
Order as ``any order involving the simultaneous purchase and/or sale 
of two or more different option series in the same underlying 
security, for the same account, in a ratio that is equal to or 
greater than one-to-three (.333) and less than or equal to three-to-
one (3.00) and for the purpose of executing a particular investment 
strategy.''
    \5\ NYSE Arca Options Rule 6.91(a) defines the CME as ``the 
mechanism in which Electronic Complex Orders are executed against 
each other or against individual quotes and orders in the 
Consolidated Book.''
    \6\ NYSE Arca Options Rule 6.1(b)(37) defines the Consolidated 
Book as ``the Exchange's electronic book of limit orders for the 
accounts of Public Customers and broker-dealers, and Quotes with 
Size. All orders and Quotes with Size that are entered into the Book 
will be ranked and maintained in accordance with the rules of 
priority as provided in Rule 6.76. There is no limit to the size of 
orders or quotes that may be entered into the Consolidated Book.''
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    Rule 6.91(c) governs the electronic COA process, and specifically, 
Rule 6.91(c)(6) governs the execution of COA-eligible orders.\7\ Upon 
receiving a COA-eligible order and a request by the OTP Holder 
representing the order that an auction be initiated, the Exchange sends 
an automated request for responses (``RFR'') message to OTP Holders 
with an interface connection to the Exchange that have elected to 
receive such RFR messages. Market Makers with an appointment in the 
relevant options class, and OTP Holders acting as agent for orders 
resting at the top of the Consolidated Book in the relevant options 
series, may electronically submit responses (``RFR Responses''), and 
modify, but not withdraw, the RFR response at anytime during the 
request response time interval (the ``Response Time Interval''). When 
the Response Time Interval expires, the COA-eligible order is executed 
and allocated to the extent it is marketable, or routed to the 
Consolidated Book to the extent it is not marketable.
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    \7\ Rule 6.91(c)(1) defines a COA-eligible order as ``an 
Electronic Complex Order that, as determined by the Exchange on a 
class-by-class basis, is eligible for a COA considering the order's 
marketability (defined as a number of ticks away from the current 
market), size, number of series, and complex order origin types 
(i.e., Customers, broker-dealers that are not Market-Makers or 
specialists on an options exchange, and/or Market-Makers or 
specialists on an options exchange).''
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    Rule 6.91(c)(6) provides that COA-eligible orders are executed 
against the best priced contra-side interest, and provides an 
allocation process for orders at the same net price. Rule 6.91(c)(6)(A) 
currently provides that individual orders and quotes in the leg markets 
resting in the Consolidated Book prior to the initiation of a COA will 
have first priority to trade against a COA-eligible order, provided 
that the COA-eligible order can be executed in full (or in a 
permissible ratio) by the orders and quotes in the Consolidated Book. 
Rule 6.91(c)(6)(D) currently provides that individual orders and quotes 
in the leg markets that cause the derived Complex Best Bid/Offer to be 
improved during the COA and match the best RFR Response and/or 
Electronic Complex Orders received during the Response Time Interval 
will be filled after Electronic Complex Orders and RFR Responses at the 
same net price. Allocations to individual orders or quotes in the leg 
markets that cause the derived BBO to be improved occur on a Customer/
order/size pro rata basis.
    Under Rules 6.91(a)(2)(i) and (a)(2)(ii), incoming orders or 
quotes, or those residing in the Consolidated Book, that execute 
against Electronic Complex Orders are allocated pursuant to Rule 6.76A. 
Additionally, under Rules 6.91(c)(6)(A) and (c)(6)(D), individual 
orders or quotes residing in the Consolidated Book that execute against 
a COA-eligible order are allocated pursuant to Rule 6.76A. Rule 
6.76A(a)(1)(A) grants LMMs guaranteed participation, which means that 
if an LMM is quoting at a price equal to the National Best Bid or Offer 
(``NBBO'') in an option series that the LMM is assigned, incoming bids 
and offers in that series will, depending on order ranking provisions 
of Rule 6.76A, be matched against the LMM's quote, up to specified 
thresholds.\8\ Currently, Rules 6.91(a)(2)(i), (a)(2)(ii), (c)(6)(A), 
and (c)(6)(D) provide that the LMM guaranteed participation afforded in 
Rule 6.76A(a)(1)(A) will not apply to executions against an Electronic 
Complex Order or a COA-eligible order. However, Exchange systems do 
apply the LMM guaranteed participation afforded in Rule 6.76A(a)(1)(A) 
to Electronic Complex Orders and COA-eligible orders that execute 
against individual quotes and orders in the Consolidated Book.
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    \8\ Rule 6.76(a)(1)(A) also provides for guaranteed 
participation for Directed Order Market Makers; however, there are 
not currently any Directed Order Market Markers on NYSE Arca.
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    The Exchange is proposing to amend Rules 6.91(a)(2)(i), (a)(2)(ii), 
(c)(6)(A), and (c)(6)(D) to specify that LMMs receive execution 
allocations of incoming Electronic Complex Orders and COA-eligible 
orders in accordance with the guaranteed participation provision of 
Rule 6.76A(a)(1)(A), without any exceptions.\9\ The proposed change 
would codify existing processing of Electronic Complex Orders that leg 
out to the individual markets and how they may interact with the LMM in 
the individual markets.
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    \9\ The Exchange will announce, via Trader Update, the 
allocation process when an Electronic Complex Order legs out to the 
individual markets.
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    The Exchange notes that under the proposed amendment to Rule 6.91 
the execution of an Electronic Complex Order against another Electronic 
Complex Order in the Consolidated Book would not result in a guaranteed 
participation for an LMM. Rather, the guaranteed participation 
provision of that rule is only applicable if an Electronic Complex 
Order legs out individual components to trade with the quotes of an 
LMM.
    The Exchange believes that it is appropriate to provide LMMs with 
guaranteed participation in relation to execution allocations of the 
individual components of an Electronic Complex Order. The guaranteed 
participation strikes a reasonable balance between rewarding certain 
participants for making markets, and providing other market 
participants an incentive to quote aggressively.\10\ Although Exchange 
rules did not originally afford LMMs any guaranteed participation when 
a Complex Order executes against the individual leg markets, the 
Exchange believes that permitting such guaranteed participation will 
further incentivize the provision of liquidity

[[Page 58358]]

that is aggressively priced. Therefore, the Exchange believes it is 
reasonable to provide LMMs with guaranteed participations whether the 
contra-side order is a leg of an Electronic Complex Order or an 
individual order. The Exchange notes that the proposed rule change is 
consistent with the allocation process for executing Complex Orders 
against individual orders and quotes on the Chicago Board Options 
Exchange (``CBOE'') and NASDAQ OMX PHLX LLC (``PHLX'').\11\
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    \10\ See Exchange Act Release No. 59472 (Feb. 27, 2009), 74 FR 
9843, 9847 (Mar. 6, 2009) (SR-NYSEALTR-2008-14) (``The Commission 
has also previously approved Specialist Pool participations of up to 
40% of the size of incoming orders (after any Customer Orders have 
been satisfied and only when the Directed Order guarantee has not 
been applied), provided that the Specialist Pool is quoting at the 
NBBO when the order is received by the Exchange. The Commission 
believes that these guarantees strike a reasonable balance between 
rewarding certain participants for making markets . . . , with 
providing other market participants an incentive to quote 
aggressively.'')
    \11\ See CBOE Rules 6.53C(c)(ii)(2), 6.53C(d)(v)(1), 
6.45A(a)(i)(C), and 6.45B(a)(ii)(C) and Commentaries 
.08(e)(vi)(A)(1) and .08(f)(iii) to PHLX Rule 1080 and PHLX Rule 
1014(g)(vii).
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    The Exchange notes, moreover, that to receive a guaranteed 
participation, the LMM is subject to heightened quoting obligations. An 
LMM must provide continuous two-sided quotations throughout the trading 
day in its appointed issues for 90% of the time the Exchange is open 
for trading in each issue.\12\
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    \12\ See Rule 6.37B(b).
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    Finally, the Exchange also believes that eliminating the 
inconsistency between Rule 6.76A and Rule 6.91 with respect to the 
guarantee will eliminate potential confusion as to whether an LMM is 
receiving its guaranteed participation when it quotes at a price equal 
to the NBBO. The Exchange is also proposing a non-substantive, 
technical amendment to Rule 6.91(a)(2)(ii) to fix a typographical 
error.
 2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act,\13\ in general, and furthers the objectives of Section 
6(b)(5),\14\ in particular, in that it is designed to promote just and 
equitable principles of trade, to remove impediments to, and perfect 
the mechanism of a free and open market and, in general, to protect 
investors and the public interest. The Exchange believes that providing 
the guaranteed participation allocation for LMMs for the execution of 
incoming Electronic Complex Orders and COA-eligible orders removes 
impediments to, and perfects the mechanism of a free and open market by 
(1) promoting liquidity on the Exchange because LMM quotes interact 
with incoming Electronic Complex Orders and COA-eligible orders, (2) 
providing consistency among Exchange rules by applying the same 
allocation logic to the execution of incoming Electronic Complex 
Orders/COA-eligible orders and single-leg orders, and (3) eliminating 
potential confusion with respect to guaranteed participation for LMMs 
trading in Electronic Complex Orders. Additionally, the Exchange 
believes that the proposal is designed to protect investors and the 
public interest because the proposed rule change is consistent with the 
allocation process for executing Complex Orders against individual 
orders and quotes on CBOE and PHLX. The Exchange further believes that 
the proposal will promote liquidity on the Exchange because the LMM 
guaranteed participation strikes a reasonable balance between rewarding 
certain participants for making markets, and providing other market 
participants an incentive to quote aggressively.
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    \13\ 15 U.S.C. Sec.  78f(b).
    \14\ 15 U.S.C. Sec.  78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes the proposed rule change will not impose a 
significant burden on competition; instead, the Exchange believes the 
proposed rule change will enhance competition by increasing liquidity 
in the options market. By permitting the guaranteed participation 
allocation with respect to Electronic Complex Orders and COA-eligible 
orders, LMMs are encouraged to quote at the NBBO in their assigned 
options series, which increases the level of liquidity in the options 
market. While allocations due to guaranteed participations may direct 
order flow to particular participants, the Commission has previously 
approved such allocations as a reasonable balance between rewarding 
such participants for making markets, and providing other market 
participants an incentive to quote aggressively.\15\ By allocating 40 
percent of the order to LMMs, the Exchange believes that it properly 
incentivizes the provision of liquidity from LMMs, while still ensuring 
that other market participants are able to participate and receive 
allocations.
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    \15\ See 74 FR at 9847.
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    In addition, eliminating the current exception from the guaranteed 
participation allocation will also provide consistency and eliminate 
potential confusion concerning guaranteed participation allocation for 
LMMs with respect to Electronic Complex Orders and COA-eligible orders. 
Further, the Exchange does not believe the proposal will impose a 
significant burden on competition since the proposal is consistent with 
the allocation process on CBOE and PHLX.

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: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, 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) 
\17\ thereunder.
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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) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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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    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. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \18\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \18\ 15 U.S.C. 78s(b)(2)(B).
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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-2013-90 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission,

[[Page 58359]]

100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2013-90. 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-2013-90 and should 
be submitted on or before October 15, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-23006 Filed 9-20-13; 8:45 am]
BILLING CODE 8011-01-P