Document ID: SEC-2020-0694-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2020-05-01T04:00Z

[Federal Register Volume 85, Number 85 (Friday, May 1, 2020)]
[Notices]
[Pages 25493-25496]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-09251]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88755; File No. SR-NYSEArca-2020-36]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Rule 6.40-
O Relating to the Risk Limitation Mechanism

April 27, 2020.
    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 April 17, 2020, NYSE Arca, Inc. (``NYSE Arca'' or the 
``Exchange'') 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 6.40-O (Risk Limitation 
Mechanism) to reflect modifications to the operation of the trade and 
trigger counters as well as the applicable time periods for determining 
if a risk setting is triggered in the event of a trading halt or for 
transactions at the open in regards to the Risk Limitation Mechanism. 
The Exchange also proposes to relocate certain text from Rule 6.40-O to 
Rule 6.86-O (Firm Quotes). The proposed rule change is available on the 
Exchange's website 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Rule 6.40-O (Risk Limitation 
Mechanism) (the ``Rule'') to reflect modifications to the operation of 
the trade and trigger counters as well as the applicable time periods 
for determining if a risk setting is triggered in the event of a 
trading halt or for transactions at the open in regards to the Risk 
Limitation Mechanism. The Exchange also proposes to relocate certain 
text from Rule 6.40-O to Rule 6.86-O (Firm Quotes).
Risk Limitation Mechanism
    Rule 6.40-O sets forth the risk-limitation mechanism (the 
``Mechanism''), which is designed to help Market Makers, as well as OTP 
Holders and OTP Firms (collectively, ``OTP Holders'' for the purpose of 
this filing) better manage risk related to quoting and submitting 
orders during periods of increased and significant trading activity.\4\ 
Specifically, the Mechanism calculates for quotes and orders, 
respectively: The number of trades executed by the Market Maker or OTP 
Holder in a particular options class; the volume of contracts traded by 
the Market Maker or OTP Holder in a particular options class; or the 
aggregate percentage of the Market Maker's quoted size or OTP Holder's 
order size(s) executed in a particular options class.\5\ To determine 
whether the Mechanism is triggered (i.e., the risk setting breached), 
the Exchange maintains separate trade counters that are incremented 
every time a trade is executed; that aggregate the number of contracts 
traded during each such execution; and that calculate applicable 
percentages depending on the risk setting at issue.\6\ A breach of the 
Mechanism occurs if the number of increments to the trade counter, 
within a time period specified by the Exchange, exceeds the threshold 
set by the OTP Holder. Under the current Rule, the applicable time 
period will not be less than 100 milliseconds.\7\
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    \4\ Market Makers are included in the definition of OTP Holders 
and therefore, unless the Exchange is discussing the quoting 
activity of Market Makers, the Exchange does not distinguish Market 
Makers from OTP Holders when discussing the risk limitation 
mechanisms. See Rule 1.1(nn) (defining OTP Holder as ``a natural 
person, in good standing, who has been issued an OTP, or has been 
named as a Nominee'' that is ``a registered broker or dealer 
pursuant to Section 15 of the Securities Exchange Act of 1934, or a 
nominee or an associated person of a registered broker or dealer 
that has been approved by the Exchange to conduct business on the 
Exchange's Trading Facilities''). See also Rule 6.32-O(a) (defining 
a Market Maker as an individual ``registered with the Exchange for 
the purpose of making transactions as a dealer-specialist on the 
Floor of the Exchange or for the purpose of submitting quotes 
electronically and making transactions as a dealer-specialist 
through the NYSE Arca OX electronic trading system'').
    \5\ See Rule 6.40-O(b)-(d) (setting forth the three risk 
limitation mechanisms available).
    \6\ See Rule 6.40-O(a).
    \7\ See Commentary .03 to Rule 6.40-O.
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Proposed Clarification to Time Period for Triggering of Risk Limitation 
Mechanism
    Currently, the timer elapses at the conclusion of the time period 
specified by the Exchange, unless a breach occurs sooner than the timer 
expiration. The Exchange proposes to modify this functionality such 
that the time period is rolling (as opposed to static) and is activated 
each time a trade counter is incremented such that the Exchange ``looks 
back'' at other trades that occurred within the time period specified 
by the Exchange to see if a breach has occurred (See examples at the 
end of this section). The Exchange believes this modification will 
enhance the operation of the timer--and hence the risk protection. The 
Exchange proposes to modify the Rule to ensure that it is consistent 
with this proposed functionality change.
    First, the Exchange proposes to modify the Rule regarding the 
applicable time period during which the increments of the trade 
counters are tallied, including, to account for the occurrence of 
trading halts or transactions occurring at the open of trading in a 
series. Specifically, the Exchange proposes to modify Commentary .03 to 
Rule 6.40-O to provide that the minimum time period determined by the 
Exchange would be ``inclusive of the duration of any trading halt 
occurring within that time''; however, ``[f]or transactions occurring 
at the open per Rule 6.64-O, the applicable time period is the lesser 
of (i) the time between the opening of a series and the initial 
transaction or (ii) the time period specified by the Exchange.'' \8\ 
The Exchange believes this

[[Page 25494]]

proposed change adds clarity and transparency to Exchange rules making 
them easier to comprehend and navigate.
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    \8\ See proposed Commentary .03 to Rule 6.40-O. See also Rule 
6.65-O (Trading Halts and Suspensions) and Rule 6.64-O (OX Opening 
Process).
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    The Exchange also proposes to modify Commentary .06 to the Rule, 
which relates to the operation of trade and trigger counters once the 
Mechanism is activated. Current Commentary .06 to Rule provides that 
``[t]he trade counters will automatically reset and commence a new 
count for the OTP Holder (1) when a time period specified by the 
Exchange elapses or, (2) if one of the Risk Limitation Mechanisms is 
triggered'', upon the OTP Holder submitting a message to the Exchange 
to be re-enabled.\9\ The Exchange proposes to clarify that the trade 
counters do not reset, per se, when the time period specified by 
Exchange elapses as the trade counters only commence a new count after 
a breach of the risk settings upon the OTP Holder's re-entry to the 
market. As proposed, modified Commentary .06 to the Rule would provide 
in relevant part that ``[f]ollowing a breach of any of the Risk 
Limitation Mechanisms set forth in paragraphs (b), (c) or (d), the 
trade counters will commence a new count for the OTP Holder'' upon the 
OTP Holder submitting a message to the Exchange to be re-enabled.\10\ 
Consistent with this change, the Exchange also proposes to modify the 
rule text regarding the operation of the timer as it relates to the 
trigger counter.\11\ As proposed, the Exchange would remove language 
regarding instances resulting in the automatic reset of the trigger 
counter and instead state simply that ``[f]ollowing any breach pursuant 
to Rule 6.40-O(f), the trigger counter will commence a new count'' when 
the OTP Holder submits a request to be re-enabled.\12\ The Exchange 
believes this proposed clarification adds specificity and transparency 
to Exchange rules.
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    \9\ See Commentary .06 to Rule 6.40-O.
    \10\ See proposed Commentary .06 to Rule 6.40-O.
    \11\ See Commentary .06 to Rule 6.40-O (providing that 
``[a]bsent a breach pursuant to Rule 6.40-O(f), the trigger counter 
will automatically reset and commence a new count for the OTP Holder 
(1) when a time period specified by the Exchange elapses; or (2) 
following any intraday update to configurable thresholds, as 
provided in Commentary .03 to this Rule 6.40-O'' and that 
``[f]ollowing any breach pursuant to Rule 6.40-O (f), the trigger 
counter will be reset and commence a new count'' when the OTP Holder 
makes non-automated contact requesting to be re-enabled).
    \12\ See proposed Commentary .06 to Rule 6.40-O.
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Examples Illustrating Current and Proposed Functionality
    Assumptions: The OTP Holder utilizes the transaction-based risk 
setting for orders with a maximum of three transactions before the 
setting is breached and the time period announced by the Exchange is 
100ms.
    Current Mechanism: Timer is asynchronous and covers fixed, non-
overlapping periods. Timer starts at 10:10:00.101 (end of fixed period 
is 10:10:00.201).
    Event 1: At 10:10:00.150, the OTP Holder trades 10 contracts.

--The Exchange determines there was one transaction (Event 1) since 
start of timer (i.e., 10:10:00.101-10:10:00.201) = no breach.

    Event 2: At 10:10:00.190, the OTP Holder trades 15 contracts.

--The Exchange determines there were two transactions (Events 1 and 2) 
since start of timer (i.e., 10:10:00.101-10:10:00.201) = no breach.

    Timer expires at 10:10:00.201.
    Timer re-starts at 10:10:00.202 (end of fixed period is 
10:10:00.302).
    Event 3: At 10:10:00.210, the OTP Holder trades 20 contracts.

--The Exchange determines there was one transaction (Event 3 since 
start of timer (i.e., 10:10:00.202-10:10:00.302) = no breach.

    Event 4: At 10:10:00.220, the OTP Holder trades 10 contracts.

--The Exchange determines there were two transactions (Events 3 and 4) 
since start of timer (i.e., 10:10:00.202-10:10:00.302) = no breach.

    Event 5: At 10:10:00.240, the OTP Holder trades 15 contracts.

--The Exchange determines there were three transactions (Events 3, 4 
and 5) since start of timer (i.e., 10:10:00.202-10:10:00.302) = BREACH.

    Proposed Mechanism: Timer ``looks back'' prior 100ms each time a 
transaction occurs.
    Event 1: At 10:10:00.150, the OTP Holder trades 10 contracts.

--The Exchange determines there was one transaction (Event 1) that 
occurred in the prior 100ms (i.e., 10:10:00.150-10:10:00.050) = no 
breach.

    Event 2: At 10:10:00.190, the OTP Holder trades 15 contracts.

--The Exchange determines there were two transactions (Events 1 and 2) 
that occurred in the prior 100ms (i.e., 10:10:00.190-10:10:00.090) = no 
breach.

    Event 3: At 10:10:00.210, the OTP Holder trades 20 contracts.

--The Exchange determines there were three transactions (Events 1, 2 
and 3) that occurred in the prior 100ms (i.e., 10:10:00.210-
10:10:00.110) = BREACH.
Technical Changes
    Finally, the Exchange also proposes to delete the text located in 
Commentary .05 to Rule and to hold this Commentary as ``Reserved.'' 
\13\ Current Commentary .05 to the Rule relates to the Exchange's 
dissemination of a best bid and offer when no Market Makers are quoting 
in a class, which information is irrelevant to the operation of the 
Mechanism.\14\ At the time Rule 6.40-O was implemented, the Exchange 
noted that it would ``no longer generate two-sided quotes on behalf of 
a Specialist in the event that there are no Market Makers quoting in an 
issue'' but would instead disseminate as the BBO ``the best bids and 
offers of those orders residing in the Consolidated Book in the 
issue''--if such orders existed--or would ``disseminate a bid of zero 
and an offer of zero in that issue.'' \15\ In retrospect, the Exchange 
believes that Rule 6.40-O--which is focused on managing risk not quote 
dissemination--was not the optimal placement for this information. 
Instead, the Exchange believes such information would be more 
appropriately included with information regarding quote dissemination 
requirements. The Exchange therefore proposes to relocate this text to 
Rule 6.86-O (Firm Quotes) as market participants would be more likely 
to consult this rule (as opposed to Rule 6.40-O) in regards to quoting 
information. The Exchange believes the proposed relocation of this text 
would add clarity and consistency to Exchange rules, making them easier 
to navigate.\16\
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    \13\ See proposed Commentary .05 to Rule 6.40-O.
    \14\ See Commentary .05 to Rule 6.40-O (providing that ``[i]n 
the event that there are no Market Makers quoting in a class, the 
best bids and offers of those orders residing in the Consolidated 
Book in the class will be disseminated as the BBO. If there are no 
Market Makers quoting in the class and there are no orders in the 
Consolidated Book in the class, the System shall disseminate a bid 
of zero and an offer of zero'').
    \15\ See Securities Exchange Act Release No. 54238 (July 28, 
2006), 71 FR 44758 (August 7, 2006) (SR-NYSEArca-2006-13) (order 
approving adoption of, among others, Rule 6.40-O).
    \16\ See proposed Rule 6.86-O(b)(1)(A). The Exchange notes that 
it proposes to change ``System'' to ``Exchange'' regarding the 
source that disseminates the BBO for consistency with the rest of 
Rule 6.86-O.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\17\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\18\ 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

[[Page 25495]]

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 mechanism of a free and open market and a national market 
system and, in general, to protect investors and the public interest.
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    \17\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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    OTP Holders are vulnerable to the risk from a system or other error 
or a market event that may cause them to send a large number of orders 
or receive multiple, automatic executions before they can adjust their 
exposure in the market. Without adequate risk management tools, such as 
the available risk settings, OTP Holders may opt to reduce the amount 
of order flow and liquidity that they provide to the market, which 
could undermine the quality of the markets available to market 
participants. The Exchange believes that the proposed change would 
remove impediments to and perfect the mechanism of a free and open 
market by adding clarity, transparency and specificity regarding the 
operation of the Mechanism thereby making Exchange rules easier to 
comprehend and navigate to the benefit of all market participants.
    The Exchange believes the proposal to modify the time period to a 
rolling basis (as opposed to static time segments) would remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system because it would provide OTP Holders with 
greater ability to monitor their risk. The proposed change, which 
allows for a count after each transaction on a rolling ``look back'' 
basis, would provide a more finely tuned tracking method for OTP 
Holders related to each transaction within a specified time period. As 
such, OTP Holders that use the Mechanism to reduce their risk, 
particularly in the event of a system issue or due to the occurrence of 
unusual or unexpected market activity, would have greater certainty of 
how the Mechanism would function with respect to each transaction. 
Moreover, the proposed rule change would provide OTP Holders with 
transparency regarding the manner in which the Exchange counts quotes 
and orders, which would provide OTP Holders with an increased ability 
to monitor transactions. Finally, the Exchange believes the proposed 
change is consistent with risk timers utilized by other options markets 
that offer similar risk limitation mechanisms.\19\
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    \19\ See, e.g., MIAX Rule 519A, Risk Protection Monitor 
(providing that, for orders, MIAX utilizes a counter that will 
``look back over the specified time period'' to determine if a 
market participant has triggered its risk settings) and Rule 612, 
Aggregate Risk Manager (ARM) (providing that, for quotes, MIAX 
utilizes a counter that will ``look back over the specified time 
period'' to determine if a market maker has triggered its risk 
settings).
    The Exchange believes that the non-substantive change to Rule 
6.40-O, Commentary .05 to delete and relocate text related to quote 
dissemination requirements from the Rule, which relates to managing 
risk, to the Firm Quote rule would make Exchange rules easier to 
navigate, thus adding clarity and transparency to Exchange rules to 
the benefit of the investing public.
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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.
    Rather, the Exchange believes that the proposed rule change would 
enhance the Mechanism by providing OTP Holders with greater ability to 
monitor their risk by providing a more finely tuned tracking method for 
OTP Holders related to each transaction within a specified time period. 
In addition, the Exchange does not believe the proposal creates any 
significant impact on competition as the proposed ``look back'' time 
period is consistent with risk timers utilized by other options markets 
that offer similar risk limitation mechanisms.\20\
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    \20\ See id. (regarding MIAX risk mechanisms for orders and 
quotes, both of which utilize a counter that ``looks back over the 
specified time period'' to determine if risk settings have been 
triggered).
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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 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 \21\ and Rule 19b-
4(f)(6) thereunder.\22\
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    \21\ 15 U.S.C. 78s(b)(3)(A).
    \22\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give 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.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \23\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \24\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has requested that the Commission waive the 30-day operative delay so 
that the proposed rule change may become operative upon filing. Waiver 
of the operative delay would allow the Exchange to immediately amend 
its rules to provide OTP Holders with a more finely tuned tracking 
method for each transaction within a specified time period, which could 
provide greater certainty of how the Mechanism would function with 
respect to each transaction. The Commission believes that waiver of the 
30-day operative delay is consistent with the protection of investors 
and the public interest. Accordingly, the Commission hereby waives the 
operative delay and designates the proposed rule change operative upon 
filing.\25\
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    \23\ 17 CFR 240.19b-4(f)(6).
    \24\ 17 CFR 240.19b-4(f)(6)(iii).
    \25\ For purposes only of waiving the 30-day operative delay, 
the Commission also 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. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

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-2020-36 on the subject line.

[[Page 25496]]

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-2020-36. 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-NYSEArca-2020-36 and should be submitted 
on or before May 22, 2020.
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    \26\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-09251 Filed 4-30-20; 8:45 am]
BILLING CODE 8011-01-P