Document ID: SEC-2011-0189-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Stock Exchange, Inc.
Posted Date: 2011-02-10T05:00Z

[Federal Register Volume 76, Number 28 (Thursday, February 10, 2011)]
[Notices]
[Pages 7604-7607]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-2925]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63832; File No. SR-NSX-2011-01]

Self-Regulatory Organizations; National Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Expand Use of Self Trade Prevention Order Modifiers

February 3, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 28, 2011, National Stock Exchange, Inc. filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the Exchange. The Exchange has designated the proposed 
rule change as constituting a non-controversial rule change under Rule 
19b-4(f)(6) under the Act,\3\ which renders the proposal effective upon 
filing with the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    National Stock Exchange, Inc. (``NSX[supreg]'' or the ``Exchange'') 
proposes to allow the Self Trade Prevention order modifier to be used 
in conjunction with Zero Display Reserve Orders.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nsx.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 Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed

[[Page 7605]]

any comments it received on the proposed rule change. The text of these 
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 Self Trade Prevention (``STP'') modifier under NSX Rule 
11.11(c)(1) allows an ETP Holder to submit orders that may avoid 
trading against other orders of the same ETP Holder. Currently, Rule 
11.11(c)(1)(D) excludes the use of the STP Modifier with Zero Display 
Reserve Orders (as defined in Rule 11.11(c)(2)(A)). In the instant rule 
change, the Exchange proposes to allow the use of the STP modifier with 
Zero Display Reserve Orders. The proposed changes are more fully 
discussed below.
Background
    As more fully discussed in the rule filing pursuant to which this 
order modifier was introduced,\4\ the ``Self Trade Prevention'' 
modifier is instructions designed to prevent two orders with the same 
designated Unique Identifier (as defined below) from executing against 
each other. The ETP Holder elects at the time an STP modified order is 
submitted whether the new order, an existing order (which must also 
have been submitted with an STP modifier) or both orders will be 
cancelled (or rejected, as applicable) instead of otherwise 
interacting.
---------------------------------------------------------------------------

    \4\ Securities Exchange Act Release No. 61781 (March 25, 2010), 
75 FR 16540 (April 1, 2010) (SR-NSX-2010-02).
---------------------------------------------------------------------------

    Three STP modifiers can be set at one of three identification 
levels: the market participant level (pursuant to the ``MPID''), the 
FIX session level (pursuant to ``FIX Session ID'') or an ETP Holder's 
user level (pursuant to the ``Party ID'') (any such identifier, a 
``Unique Identifier'').\5\ The STP instruction on the incoming order 
controls the interaction between two orders marked with STP modifiers 
from the same Unique Identifier. As further described in the rule 
filing pursuant to which the STP modifier became available,\6\ the 
three STP modifiers are ``STP Reject Newest (``STPN'')'', STP Cancel 
Oldest (``STPO''), and STP Cancel Both (``STPB'').
---------------------------------------------------------------------------

    \5\ Each ETP Holder is issued a unique MPID identifier that 
allows the Exchange to determine the ETP Holder for each order and/
or execution. The FIX Session ID is unique to each physical 
connection between the Exchange and an ETP Holder. The Party ID 
identifies a unique user of an ETP Holder.
    \6\ See supra, footnote 3.
---------------------------------------------------------------------------

    An incoming order marked with the STPN modifier will not execute 
against opposite side resting interest marked with any STP modifier 
originating from the same Unique Identifier. The incoming order marked 
with the STPN modifier will be rejected. The resting order marked with 
an STP modifier, which otherwise would have interacted with the 
incoming order from the same Unique Identifier, will remain on the NSX 
Book. An incoming order marked with the STPO modifier will not execute 
against opposite side resting interest marked with any STP modifier 
originating from the same Unique Identifier. The resting order marked 
with the STP modifier, which otherwise would have interacted with the 
incoming order by the same Unique Identifier, will be cancelled. The 
incoming order marked with the STPO modifier will remain on the NSX 
Book. An incoming order marked with the STPB modifier will not execute 
against opposite side resting interest marked with any STP modifier 
originating from the same Unique Identifier. The entire size of both 
orders will be rejected or cancelled, as applicable.
    STP modifiers are intended to prevent interaction between the same 
Unique Identifier. STP modifiers must be present on both the buy and 
the sell order in order to prevent a trade from occurring and to effect 
a cancel and/or reject instruction.
Use of STP Modifiers With Zero Display Reserve Orders
    The instant rule change proposes to delete paragraph (D) of NSX 
Rule 11.11(c)(1), which currently prohibits the use of the STP Modifier 
in connection with Zero Display Reserve Orders. At the time of the 
implementation of Rule 11.11(c)(1), Zero Display Reserve Orders were 
made unavailable in connection with the use of the STP modifier because 
of technical challenges regarding identification of the ``old'' versus 
the ``new'' Zero Display Reserve Order for STP purposes under certain 
circumstances. Since that time, the Exchange has modified the system to 
recognize, for purposes of the STP modifier and consistent with all 
other order combinations, the original timestamp of a Zero Display 
Reserve Order as definitive for purposes of identifying the ``old'' 
versus ``new'' order in the context of STP modifiers.
    The following are examples of how the STP modifier operates in 
connection with various types of Zero Display Reserve Orders.\7\ Each 
example assumes the national best bid/offer is 20.00/20.10 and that ETP 
Holder A's STP modifiers pertain to the same Unique Identifier.
---------------------------------------------------------------------------

    \7\ Other examples of how orders with the STP modifier operate 
are contained in the Exchange's rule filing proposing approval of 
the modifier. See supra, footnote 3.
---------------------------------------------------------------------------

Example 1: Interaction of Two Zero Display Reserve Orders
    ETP Holder A enters a Zero Display Reserve Order to buy 500 shares 
@ 20.05 with an STP--Cancel Old (``STPO'') modifier. Thereafter, ETP 
Holder A enters a Zero Display Reserve Order to sell 500 shares @ 
20.05, also with an STPO modifier.
    Example 1 Result: The first order is cancelled because the STP 
instruction on the incoming order controls the interaction between two 
orders marked with STP modifiers from the same Unique Identifier. The 
second order to sell 500 @ 20.05 will remain on the book.
Example 2: Interaction of a Zero Display Reserve Order (Pegged to 
Primary) and a Limit Order
    ETP Holder A enters a Zero Display Reserve Order to sell, pegged to 
track the national best offer (``Pegged to Primary'') under Rule 
11.11(c)(2)(A) (which order will track the best offer), with an STPO 
modifier. Subsequently, ETP Holder A enters a limit order to buy for 
20.05 with a STPO modifier. Thereafter, the market moves and the best 
offer becomes 20.05.
    Example 2 Result: The first order is cancelled. The second order to 
buy for 20.05 will remain on the book.\8\
---------------------------------------------------------------------------

    \8\ Absent operation of the STP modifier, entry of the second 
order would have caused the Zero Display Reserve Order to `flip' 
(i.e., change from liquidity provider to a liquidity taker) and 
interact with the limit order bid; however, since both are STP 
orders of the same ETP Holder with the same Unique Identifiers, the 
two orders will not execute. Rather, the Zero Display Reserve Order, 
as the ``old'' (resting) order based on its earlier timestamp, will 
be cancelled back to the client consistent with the instructions of 
the new STP modified order.
---------------------------------------------------------------------------

Example 3: Interaction of a Zero Display Reserve Order and a Zero 
Display Reserve Order (Midpoint Peg/Post Only)
    ETP Holder A enters a Zero Display Reserve Order to buy 500 shares 
@ 20.09, with an STPO modifier. Thereafter, ETP Holder A enters a Zero 
Display Reserve Order (Midpoint Peg) under Rule 11.11(c)(2)(A) (which 
will track the midpoint), Post Only, to sell 500 shares, with an STPO 
modifier.
    Example 3 Result: The Zero Display Reserve Order (Midpoint Peg/Post 
Only) will post to the book. The first order, the Zero Display Reserve 
Order to buy, will

[[Page 7606]]

be cancelled back to the client \9\ consistent with the STPO 
instructions on the second order.
---------------------------------------------------------------------------

    \9\ Absent operation of the STP modifier, the first order will 
flip and execute against the second order.
---------------------------------------------------------------------------

Example 4: Interaction of a Zero Display Reserve Order and a Zero 
Display Reserve Order (Market Peg/Post Only)
    ETP Holder A enters a Zero Display Reserve Order to buy 500 shares 
@ 20.00, with an STPO modifier. Thereafter, ETP Holder A enters a Zero 
Display Reserve Order (Market Peg) under Rule 11.11(c)(2)(A) (which 
will track the bid), Post Only, to sell 500 shares, with an STPO 
modifier.
    Example 4 Result: The Zero Display Reserve Order (Market Peg/Post 
Only) will post to the book. The first order, the Zero Display Reserve 
Order to buy, will be cancelled back to the client \10\ consistent with 
the STPO instructions on the second order.
---------------------------------------------------------------------------

    \10\ Absent operation of the STP modifier, the first order will 
flip and execute against the second order.
---------------------------------------------------------------------------

Additional Discussion
    The Exchange believes that expanding the STP functionality to Zero 
Display Reserve Orders will allow ETP Holders to better manage order 
flow and prevent undesirable executions with themselves or the 
potential for (or the appearance of) ``wash sales'' that may occur as a 
result of the velocity of trading in today's high speed marketplace. 
Many ETP Holders have multiple connections into the Exchange due to 
capacity and speed related demands. Orders routed by the same ETP 
Holder via different connections or in different capacities may, in 
certain circumstances, trade against each other. The availability of 
STP modifiers for use in conjunction with Zero Display Reserve Orders 
provide ETP Holders the opportunity to prevent these potentially 
undesirable trades occurring under the same Unique Identifier on both 
the buy and sell side of the execution.
    The Exchange notes that the STP modifiers do not alleviate, or 
otherwise exempt, broker-dealers from their best execution obligations. 
Broker-dealers using the STP modifiers on agency orders will be 
obligated to execute those agency orders at the same price, or a better 
price than they would have received had the orders been executed on the 
Exchange. Finally, the Exchange notes that expanding the STP modifier 
to use with Zero Display Reserve Orders will streamline certain 
regulatory functions by reducing inadvertent self-trade executions that 
would otherwise be captured by Exchange generated wash trading 
surveillance reports when orders are executed under the same Unique 
Identifier. The Exchange has developed a surveillance program to 
identify the use of the STP modifier on agency orders, in connection 
with Zero Display Reserve Orders and otherwise, and to surveil such 
orders for potential misuse. For these reasons, the Exchange believes 
the use of STP modifiers with the Zero Display Reserve Order offers ETP 
Holders enhanced order processing functionality that may prevent 
potentially undesirable executions without negatively impacting broker-
dealer best execution obligations.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6(b) of the Act,\11\ in general, and 
furthers the objectives of Section 6(b)(5) \12\ in particular in that 
it is designed, among other things, 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. The proposed 
rule change advances these objectives by making available to ETP 
Holders that use Zero Display Reserve Orders an order modifier that is 
currently in use elsewhere within the national market system \13\ and 
by allowing firms to better manage order flow and prevent undesirable 
executions against themselves.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(4).
    \13\ See BATS Rule 11.9(f)(1), (2) and (4).
---------------------------------------------------------------------------

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 Exchange Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) by its terms does not become operative for 30 days after the 
date of this 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) \14\ of the Act and Rule 19b-4(f)(6) 
thereunder.\15\
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 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. Id.
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such 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-NSX-2011-01 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-NSX-2011-01. 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 website (http://www.sec.gov/rules/sro.shtml). Copies of the submission,\16\ 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

[[Page 7607]]

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, 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-NSX-2011-01 and should be submitted on or before March 
3, 2011.
---------------------------------------------------------------------------

    \16\ The text of the proposed rule change is available on the 
Commission's Web site at http://www.sec.gov/rules/sro.shtml.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-2925 Filed 2-9-11; 8:45 am]
BILLING CODE 8011-01-P