Document ID: SEC-2011-0911-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2011-06-29T04:00Z

[Federal Register Volume 76, Number 125 (Wednesday, June 29, 2011)]
[Notices]
[Pages 38237-38240]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-16227]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64731; File No. SR-NYSEArca-2011-39]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Include Text in 
Its Options Rules Governing the Use of Its Affiliate Broker-Dealer, 
Archipelago Securities LLC for Outbound Routing of Option Orders, and 
To Adopt Text in Its Options Rules To Permit the Exchange To Receive 
Inbound Routes of Option Orders From Arca Securities, Acting as the 
Outbound Router for NYSE Amex LLC

 June 23, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 38238]]

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on June 16, 2011, 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 NYSE Arca. 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 (1) To include text in its options rules 
governing the use of its affiliate broker-dealer, Archipelago 
Securities LLC (``Arca Securities''), for outbound routing of option 
orders, and (2) to adopt text in its options rules to permit the 
Exchange to receive inbound routes of option orders from Arca 
Securities, acting as the outbound router for NYSE Amex LLC (``NYSE 
Amex''). The text of the proposed rule change is available at the 
Exchange's principal office, at http://www.nyse.com, at the 
Commission's Public Reference Room, and at the Commission's Web site at 
http://www.sec.gov.

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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to include text in its options rules 
governing the use of Arca Securities for outbound routing of option 
orders, and to adopt text in its options rules to permit the Exchange 
to receive inbound routes of option orders from Arca Securities when it 
is acting as the outbound router for NYSE Amex.\3\ The Exchange notes 
that it currently uses third-party broker-dealers to route orders to 
other options exchanges and to have orders routed to it from other 
options exchanges, including NYSE Amex. In an effort to provide more 
clarity regarding the functions of Arca Securities and to provide NYSE 
Arca with the flexibility to use Arca Securities as an outbound and 
inbound routing broker in the future, the Exchange is filing this 
proposed rule change.
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    \3\ The Exchange's affiliate, NYSE Amex, is proposing a 
substantially similar rule change. See SR-NYSEAmex-2011-40.
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Background--Authority To Use Arca Securities as Routing Broker
    NYSE Arca currently has the authority to use Arca Securities as an 
outbound router to send option orders to an away market center for 
execution whenever such routing is required by Exchange Rules and 
Federal securities laws.\4\ As noted above, however, the Exchange does 
not currently use Arca Securities for this function. The terms of the 
outbound option order routing function of Arca Securities generally are 
as follows:
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    \4\ See Securities Exchange Act Release No. 54238 (July 28, 
2006), 71 FR 44758 (August 7, 2006) (SR-NYSEArca-2006-13). The terms 
of the outbound options order routing function for the Exchange are 
generally set forth in the Commission's approval orders, rather than 
rule text.
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    Arca Securities operates and is regulated as a facility of the 
Exchange, subject to and consistent with Section 6 of the Securities 
Exchange Act of 1934 (``Act'').
    A self-regulatory organization (``SRO'') unaffiliated with the 
Exchange or any of its affiliates (currently the Financial Industry 
Regulatory Authority or ``FINRA''), carries out oversight and 
enforcement responsibilities as the Designated Examining Authority 
(``DEA'') designated by the Commission pursuant to Rule 17d-1 of the 
Act with the responsibility for examining Arca Securities for 
compliance with the applicable financial responsibility rules.
    The agreement between the Exchange and FINRA pursuant to Rule 17d-2 
under the Act allocates to FINRA the responsibility to receive 
regulatory reports from Arca Securities, to examine Arca Securities for 
compliance and to enforce compliance by Arca Securities with the Act, 
the rules and regulations thereunder and FINRA rules, and to carry out 
other specified regulatory functions with respect to Arca Securities.
    The operation of Arca Securities as a facility of the Exchange 
providing outbound routing services is subject to Exchange and 
Commission oversight and the Exchange must file with the Commission 
rule changes relating to Arca Securities' order routing function.
Proposed Rule Change
    The Exchange proposes to include text in its options rules 
governing the use of Arca Securities for outbound and inbound routing 
of option orders.\5\ In particular, the Exchange proposes to replace 
the definition of ``OX Routing Broker'' found in Rule 6.1A(a)(15) with 
the definition currently proposed for the defined term ``Routing 
Broker'' within NYSE Arca Equities Rule 7.41. This change is designed 
to provide consistency with respect to rules related to the routing 
function on the Exchange for equity and option orders.
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    \5\ The Exchange notes that the outbound routing function of 
Arca Securities is only available with respect to orders of OTP 
Holders.
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    In addition, the Exchange proposes to adopt in Exchange Rule 
6.96(b) [sic] rule text governing the outbound routing function for 
option orders.\6\ This change would set forth in the options rules the 
conditions for using Arca Securities as the outbound routing broker for 
option orders for the Exchange.
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    \6\ This proposed rule text is substantially the same as is 
proposed for outbound equity order routing on the Exchange and, 
except for certain recently-proposed changes, substantially the same 
as is currently reflected in Rule 17(c)--NYSE Amex Equities.
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    In addition, the Exchange currently does not have the authority to 
receive routes of option orders from Arca Securities on behalf of the 
Exchange's affiliate NYSE Amex.\7\ In order to address concern that the 
Commission has previously expressed regarding the potential for 
conflicts of interest in instances where a member firm is affiliated 
with an exchange to which it is routing orders, the Exchange hereby 
proposes to accept inbound option orders that its affiliate, Arca 
Securities, routes in its capacity as a facility of NYSE Amex, subject 
to the following limitations and conditions and as reflected in 
proposed Rule 6.96(b): \8\
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    \7\ NYSE Amex has previously represented that if Arca Securities 
were to route option orders directly from NYSE Amex to an affiliated 
market that it would do so only after the affiliated market had 
rules approved that authorize it to receive such routed option 
orders from its broker-dealer affiliate. See Securities Exchange Act 
Release No. 59473 (February 27, 2009), 74 FR 9853 (March 6, 2009) 
(SR-NYSEALTR-2009-18) at note 8.
    \8\ The Exchange notes that the limitations and conditions 
proposed herein would be substantially the same as those applicable 
to the Exchange's current pilot program to accept routes of inbound 
equity orders by Arca Securities, on behalf of the Exchange's 
affiliates NYSE Amex and New York Stock Exchange, LLC (``NYSE''). 
See Securities Exchange Act Release No. 58681 (September 29, 2008), 
73 FR 58285 (October 6, 2008) (SR-NYSEArca-2008-90). See also 
Securities Exchange Act Release No. 59010 (November 24, 2008), 73 FR 
73373 (December 2, 2008) (SR-NYSEArca-2008-130). The Exchange notes 
that it has proposed specific rule text for this inbound equity 
routing functionality, the terms of which are currently generally 
set forth in the Commission's approval orders, rather than rule 
text, and have already been approved in substance by the Commission 
for the Exchange.

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[[Page 38239]]

     First, the Exchange will (1) Maintain an agreement 
pursuant to Rule 17d-2 under the Exchange Act with a non-affiliated SRO 
(presently the Financial Industry Regulatory Authority (``FINRA'')) to 
relieve the Exchange of regulatory responsibilities for Arca Securities 
with respect to rules that are common rules between the Exchange and 
the non-affiliated SRO, and (2) maintain a regulatory services 
agreement with a non-affiliated SRO (presently FINRA) to perform 
regulatory responsibilities for Arca Securities for unique Exchange 
rules.\9\
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    \9\ The Exchange notes that FINRA reviews both inbound and 
outbound routing via Arca Securities pursuant to an existing 17d-2 
agreement and an existing regulatory services agreement. The 
Exchange will review the terms of the regulatory services agreement 
in connection with this proposed rule change, and will amend it to 
reflect the specific terms of this filing.
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     Second, the regulatory services agreement discussed above 
will require the Exchange to provide the non-affiliated SRO with 
information, in an easily accessible manner, regarding all exception 
reports, alerts, complaints, trading errors, cancellations, 
investigations, and enforcement matters (collectively ``Exceptions'') 
in which Arca Securities is identified as a participant that has 
potentially violated Exchange or SEC Rules and of which the Exchange 
becomes aware, and shall require that the non-affiliated SRO provide a 
report, at least quarterly, to the Exchange quantifying all Exceptions 
in which Arca Securities is identified as a participant that has 
potentially violated Exchange or SEC Rules.
     Third, the Exchange, on behalf of the holding company 
owning both the Exchange and Arca Securities, will establish and 
maintain procedures and internal controls reasonably designed to 
prevent Arca Securities from receiving any benefit, taking any action 
or engaging in any activity based on non-public information regarding 
planned changes to Exchange systems, obtained as a result of its 
affiliation with the Exchange, until such information is available 
generally to similarly situated OTP Holders in connection with the 
provision of inbound order routing to the Exchange.
     Fourth, the Exchange may furnish to Arca Securities the 
same information on the same terms that the Exchange makes available in 
the normal course of business to any other OTP Holder.
     Fifth, the inbound routing functionality would operate 
pursuant to a pilot program that would end on September 30, 2011.
    The proposed text within Rule 6.96(b) corresponding to these 
limitations and conditions would be substantially the same as the 
language set forth in the Commission orders applicable to the Exchange, 
as described above, and virtually identical to the inbound router rule 
text already implemented for another exchange.\10\ The Exchange 
proposes that the operation of the inbound routing function would cover 
all types of option orders approved for use on NYSE Amex.
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    \10\ See BATS Rule 2.12. See also Securities Exchange Act 
Release No. 62901 (September 13, 2010), 75 FR 57097 (September 17, 
2010) (SR-BATS-2010-024).
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) \11\ of 
the Act, in general, and furthers the objectives of Section 
6(b)(5),\12\ in particular, in that 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 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. The Exchange believes that the 
proposed rule change, which in part would add specific rule text for 
routing functionality that has already been approved in substance by 
the Commission for the Exchange, would enhance the clarity and 
transparency surrounding such functionality, including the 
responsibilities and obligations attendant therewith, while also 
reflecting the Exchange's ongoing efforts to effectively address the 
concerns previously identified by the Commission regarding the 
potential for informational advantages favoring Arca Securities vis-
[agrave]-vis other non-affiliated Exchange OTP Holders. The Exchange 
also believes that the proposed rule change would support the 
principles of Section 11A(a)(1) of the Act \13\ in that it seeks to 
assure economically efficient execution of securities transactions.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ 15 U.S.C. 78k-1(a)(1).
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    Additionally, the Exchange believes that the proposal to permit the 
Exchange to receive inbound routes of option orders from Arca 
Securities, acting as the outbound router for NYSE Amex, is consistent 
with previous Commission orders authorizing the Exchange to receive 
inbound routes of equity orders from Arca Securities on behalf of the 
Exchange's affiliate exchanges, NYSE and NYSE Amex. Furthermore, by 
including rule text governing both outbound and inbound routing in 
proposed Rule 6.96, the Exchange would establish a single, central 
location in its Rules describing all option order routing broker 
functions. Additionally, the proposed amendments to align the 
definition of Routing Broker in the Exchange's equity and option rules 
would result in greater consistency in defined terms on the Exchange.

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 proposed rule change: (i) Does not significantly affect 
the protection of investors or the public interest; (ii) does not 
impose any significant burden on competition; and (iii) does not become 
operative for 30 days after the date of the filing, or such shorter 
time as the Commission may designate if consistent with the protection 
of investors and the public interest, the proposed rule change has 
become effective pursuant to Section 19(b)(3)(A) of the Act \14\ and 
Rule 19b-4(f)(6) thereunder.\15\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under 19b-4(f)(6) normally may not 
become operative prior to 30 days after the date of filing.\16\ 
However, Rule 19b-4(f)(6)(iii) \17\ permits the Commission to

[[Page 38240]]

designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange requests 
that the Commission waive the 30-day operative delay. The Exchange 
believes that waiver of the 30-day operative delay would provide more 
clarity and transparency in its rule text concerning all of the 
functions that Arca Securities performs on behalf of the Exchange 
without undue delay. In addition, the Exchange notes that the proposal 
is consistent with the rules of another national securities exchange. 
For these reason, the Commission believes that waiving the 30-day 
operative delay is consistent with the protection of investors and the 
public interest, and designates the proposed rule change to be 
operative upon filing with the Commission.\18\
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    \16\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires that a self-regulatory organization submit to 
the Commission written notice of its 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.
    \17\ Id.
    \18\ 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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2011-39 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-2011-39. This 
file number should be included on the subject line if e-mail 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 a.m. and 3 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-2011-39 and should be submitted on or before July 20, 2011.

    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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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-16227 Filed 6-28-11; 8:45 am]
BILLING CODE 8011-01-P