Document ID: SEC-2018-1708-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange LLC
Posted Date: 2018-11-07T05:00Z

[Federal Register Volume 83, Number 216 (Wednesday, November 7, 2018)]
[Notices]
[Pages 55763-55765]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-24303]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84515; File No. SR-NYSE-2018-34]

Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Amend NYSE Rule 104 Governing Transactions by 
Designated Market Makers

November 1, 2018.

I. Introduction

    On July 31, 2018, New York Stock Exchange LLC (``Exchange'' or 
``NYSE'') 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 amend NYSE Rule 104 governing transactions by 
Designated Market Makers (``DMMs''). The proposed rule change was 
published for comment in the Federal Register on August 16, 2018.\3\ On 
September 24, 2018, the Commission extended to November 14, 2018, the 
time period in which to approve, disapprove, or institute proceedings 
to determine whether to approve or disapprove, the proposal.\4\ The 
Commission has received no comments on the proposal. This order 
institutes proceedings under Section 19(b)(2)(B) of the Act \5\ to 
determine whether to approve or disapprove the proposal.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 83821 (Aug. 10, 
2018), 83 FR 40808 (Aug. 16, 2018) (``Notice'').
    \4\ See Securities Exchange Act Release No. 84276 (Sep. 24, 
2018), 83 FR 49143 (Sep. 28, 2018).
    \5\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

II. Summary of the Proposed Rule Change

    The Exchange proposes to amend NYSE Rule 104, which governs the 
dealings and responsibilities of Designated Market Makers (``DMMs'') on 
the Exchange.\6\ According to the Exchange, the proposal would 
consolidate and restructure current Rules 104(g), (h), and (i), which 
would be deleted and incorporated into a new subsection (g) titled 
``Transactions by DMMs.'' \7\
---------------------------------------------------------------------------

    \6\ Details of the proposal rule change can be found in the 
Notice. See Notice, supra note 3.
    \7\ See id. at 40809-10.
---------------------------------------------------------------------------

    Rule 104 currently defines four types of DMM transactions. Current 
Rule 104(g) defines Neutral Transactions, Non-Conditional Transactions, 
and Prohibited Transactions, and current Rule 104(h) defines 
Conditional Transactions.\8\ The Exchange proposes to eliminate the 
definitions of Neutral Transactions, Non-Conditional Transactions, and 
Prohibited Transactions and to amend the rules regarding Conditional 
Transactions and rename them ``Aggressing Transactions'' under an 
amended Rule 104(g).\9\
---------------------------------------------------------------------------

    \8\ See id. at 40808-09 (describing current provisions regarding 
these transaction types).
    \9\ See id. at 40809-10.
---------------------------------------------------------------------------

    The Exchange proposes to define an Aggressing Transaction in 
proposed Rule 104(g)(1)(A) as a DMM unit transaction that is (1) a 
purchase (sale) that reaches across the market to trade as the contra-
side to the Exchange published offer (bid); and (2) priced above 
(below) the last differently-priced trade on the Exchange and above 
(below) the last differently-priced published offer (bid) on the 
Exchange.\10\ According to the Exchange, under proposed Rule 
104(g)(1)(B), an Aggressing Transaction during the last ten seconds 
prior to the scheduled close of trading that would result in a new 
consolidated high (low) price for a security during that trading day 
would be prohibited, unless the transaction would bring the price of 
the security

[[Page 55764]]

into parity with an underlying or related security or asset.\11\
---------------------------------------------------------------------------

    \10\ See id. at 40810.
    \11\ See id.
---------------------------------------------------------------------------

    According to the Exchange, proposed Rule 104(g)(2)--``Re-Entry 
Obligations''--would provide that the DMM unit's obligation to maintain 
a fair and orderly market may require re-entry on the opposite side of 
the market after effecting one or more transactions.\12\ According to 
the Exchange, proposed Rule 104(g)(2) would provide that this re-entry 
should be commensurate with the size of the transactions and the 
immediate and anticipated needs of the market, and the Exchange states 
that these are the same requirements currently specified for Neutral 
and Non-Conditional Transactions and for certain Conditional 
Transactions.\13\
---------------------------------------------------------------------------

    \12\ See id. at 40811.
    \13\ See id.
---------------------------------------------------------------------------

    Proposed Rule 104(g)(2)(A) would require that, after an Aggressing 
Transaction, a DMM unit must re-enter the opposite side of the market 
at or before the applicable Price Participation Point--which would be 
defined in proposed Rule 104(g)(3)--for that security, commensurate 
with the size of the Aggressing Transaction.\14\ Proposed Rule 
104(g)(2)(B) would require that, following an Aggressing Transaction 
that is 10,000 shares or more or has a market value of $200,000 or more 
and exceeds 50% of the published offer (bid) size, the DMM unit must 
immediately re-enter the opposite side of the market at or before the 
applicable Price Participation Point for that security commensurate 
with the size of the Aggressing Transaction.\15\
---------------------------------------------------------------------------

    \14\ See id.
    \15\ See id.
---------------------------------------------------------------------------

    According to the Exchange, under proposed Rule 104(g)(3)(A), the 
Exchange would periodically issue Price Participation Point guidelines 
that identify the price at or before which a DMM unit is expected to 
re-enter the market following an Aggressing Transaction.\16\ Proposed 
Rule 104(g)(3)(A) would also provide that, the Price Participation 
Points are only minimum guidelines and compliance with them does not 
guarantee that a DMM unit is meeting its obligations.\17\
---------------------------------------------------------------------------

    \16\ See id. at 40812.
    \17\ See id.
---------------------------------------------------------------------------

    Proposed Rule 104(g)(3)(B) would provide that, notwithstanding that 
a security may not have reached the Price Participation Point, the DMM 
unit may be required to re-enter the market immediately after an 
Aggressing Transaction based on the price and/or volume of the DMM 
unit's trading in reference to the market in the security at the time 
of the trading.\18\ In such situations, proposed Rule 104(g)(3)(B) 
would state, DMM units may or may not rely on the fact and circumstance 
that there may have been one or more independent trades following the 
DMM unit's trading to justify a failure to re-enter the market.\19\
---------------------------------------------------------------------------

    \18\ See id.
    \19\ See id.
---------------------------------------------------------------------------

III. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \20\ to determine whether the proposal should be 
approved or disapproved. Institution of proceedings is appropriate at 
this time in view of the legal and policy issues raised by the 
proposal, as discussed below. Institution of disapproval proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described in greater 
detail below, the Commission seeks and encourages interested persons to 
provide additional comment on the proposal.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act, the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act,\21\ which requires that the rules of an 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, in general, to protect 
investors and the public interest, and which prohibits the rules of an 
exchange from being designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers, and with Section 6(b)(8) of 
the Act, which requires that the rules of an exchange not impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
concerns identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
inconsistent with Section 6(b)(5) or any other provisions of the Act, 
or the rules and regulation thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval which would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\22\
---------------------------------------------------------------------------

    \22\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by November 28, 2018. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
December 12, 2018.
    In particular, the Commission is interested in public comment on 
the following topics.
    1. What are commenters' views regarding the Exchange's proposal to 
replace the existing rule against Prohibited Transactions, which is in 
effect during the last 10 minutes of trading, with the proposed 
prohibition of Aggressing Transactions during the last 10 seconds of 
trading that would result in a new consolidated high (low) price for a 
security during that trading day? \23\
---------------------------------------------------------------------------

    \23\ As noted above, such transaction would be permitted if they 
would bring the price of the security into parity with an underlying 
security or asset. See supra note 11 & accompanying text.
---------------------------------------------------------------------------

    2. Do commenters believe that a prohibition against Aggressing 
Transactions during the last 10 seconds of trading that would result in 
a new consolidated high (low) price for a security during that trading 
day would be sufficient to prevent DMMs from aggressively taking 
liquidity and moving prices on the Exchange immediately before the 
closing auction? Why or why not? What are commenters' views on the 
trading statistics offered by the Exchange to support its proposal to 
prohibit Aggressing Transactions only during the last 10 seconds of 
trading? \24\ Do commenters believe that a different

[[Page 55765]]

duration for such a prohibition would be preferable? If so, what 
duration and why?
---------------------------------------------------------------------------

    \24\ See Notice, supra note 3, 83 FR 40813, nn.14 & 18.
---------------------------------------------------------------------------

    3. What are commenters' views on the significance of the proposed 
change from the current prohibition against certain transactions that 
would set a new high or low price on the Exchange for the day to the 
proposed prohibition against certain transactions that would result in 
a new consolidated high or low price for the day? Do commenters believe 
that this change would have additional consequences for the operation 
of Rule 104?
    4. What are commenters' views on how the obligations imposed on 
DMMs by proposed NYSE Rule 104 during the rest of the trading day would 
compare with the obligations imposed by current NYSE Rule 104?
    5. What are commenters' views on the Exchange's argument that 
changes to NYSE Rule 104 would promote aggressive DMM quoting in their 
assigned securities? What are commenters' views on the Exchange's 
argument that DMMs are currently at a competitive disadvantage because 
of NYSE Rule 104 and that the current rule ``thwarts the ability of the 
DMM to meet their affirmative obligations to quote aggressively in 
assigned securities''?
    6. What are commenters' views on whether the ``Price Participation 
Points'' that the Exchange provides to its DMMs would be sufficient 
under the proposed changes to NYSE Rule 104 to prevent DMMs from 
aggressively taking liquidity and moving prices on the Exchange 
immediately before the closing auction?
    7. Existing Rules 104(g) and (h) refer to ``DMMs,'' and proposed 
Rule 104(g) would refer instead to ``DMM units.'' What are commenters' 
views of the significance, if any, of this change in wording? What are 
commenters' views on whether the amended rule should apply to the 
activities of individuals trading as DMMs on the Exchange floor?
    8. Generally, would the Exchange's proposal maintain an appropriate 
balance between the benefits and obligations of being a DMM on the 
Exchange? \25\ In light of DMMs' special responsibility for closing 
auctions under NYSE rules, would the obligations of DMMs under NYSE 
rules be reasonably designed to prevent DMMs from inappropriately 
influencing or manipulating the close if the proposed rule change were 
approved?
---------------------------------------------------------------------------

    \25\ Current NYSE Rule 104 was originally approved as part of 
the NYSE pilot program called the ``New Market Model.'' See 
Securities Exchange Act Release No. 58845 (Oct. 24, 2008), 73 FR 
64379 (Oct. 29, 2008). As the Commission stated when approving the 
NYSE's proposal to conduct the New Market Model pilot, ``[w]e 
carefully review trading rule proposals that seek to offer special 
advantages to market makers. Although an exchange may reward such 
participants for the benefits they provide to the exchange's market, 
such reward must not be disproportionate to the services provided.'' 
See id. In 2015, the Commission permanently approved the New Market 
Model pilot and noted that the pilot had been conducted to seek 
``further evidence that the benefits proposed for DMMs are not 
disproportionate to their obligations.'' See Securities Exchange Act 
Release No. 75578 (July 31, 2015), 80 FR 47008 (Aug. 6, 2015).
---------------------------------------------------------------------------

    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 [email protected]. Please include 
File Number SR-NYSE-2018-34 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-NYSE-2018-34. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSE-2018-34 and should be submitted on 
or before November 28, 2018. Rebuttal comments should be submitted by 
December 12, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
---------------------------------------------------------------------------

    \26\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-24303 Filed 11-6-18; 8:45 am]
 BILLING CODE 8011-01-P