Document ID: SEC-2016-1832-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange, LLC
Posted Date: 2016-10-13T04:00Z

[Federal Register Volume 81, Number 198 (Thursday, October 13, 2016)]
[Notices]
[Pages 70723-70726]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-24775]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79071; File No. SR-NYSE-2016-64]

Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Amending Supplementary Material .20 to Rule 103

October 7, 2016.
    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 22, 2016, New York Stock Exchange LLC (``NYSE'' 
or the ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or the ``Commission'') the proposed rule change as described 
in Items I, II, and III 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 Supplementary Material .20 to Rule 
103 (``NYSE Rule 103.20''), to reduce the Minimum Net Liquid Assets 
requirement for Designated Market Maker (``DMM'') units. 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend NYSE Rule 103.20, which sets forth 
the net liquid assets requirements for a member organization that 
operates as a DMM unit on the Exchange,\4\ to reduce the Minimum Net 
Liquid Assets requirement for DMM units.
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    \4\ Pursuant to Rule 2(j), a DMM unit is defined as a member 
organization or unit within a member organization that has been 
approved to act as a DMM unit under Rule 98. Pursuant to Rule 2(i), 
a DMM is defined as an individual member, officer, partner, employee 
or associated person of a DMM unit who is approved by the Exchange 
to act in the capacity of a DMM. All references to rules herein are 
to NYSE rules, unless otherwise noted.
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Current Rule
    Rule 103.20 sets forth a Net Liquid Assets requirement for each DMM 
unit \5\ in addition to the SEC Net Capital Rule \6\ minimum net 
capital requirement applicable to market-making activities. The purpose 
of the Exchange's requirement is to reasonably assure that each DMM 
unit maintains sufficient liquidity to carry out its obligation to 
maintain a fair and orderly market in its assigned securities in times 
of market stress. The formula for the current net liquid assets 
requirement was established in July 2011, which resulted in the 
aggregate net liquid assets of all DMM units equaling at least $125 
million.\7\
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    \5\ All DMMs on the Exchange are required to comply with Rule 
104.
    \6\ See 17 CFR 240.15c3-1.
    \7\ See Securities Exchange Act Release No. 64918 (July 19, 
2011), 76 FR 44390 (July 25, 2011) (SR-NYSE-2011-35) (``Release No. 
64918'').
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    Under current Rule 103.20(b), each DMM unit must maintain or have 
allocated to it Net Liquid Assets that are the greater of (1) $1 
million, or (2) $125,000 for each one-tenth of one percent (0.1%) of 
Exchange transaction dollar volume \8\ in its registered securities. A 
DMM unit must inform the Exchange immediately whenever the DMM unit is 
unable to comply with these requirements.\9\
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    \8\ The term ``Exchange transaction dollar volume'' means the 
most recent Statistical Data, calculated and provided by the NYSE on 
a monthly basis. See Rule 103.20(a)(4).
    \9\ See Rule 103.20(c)(1)(A).
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    Current Rule 103.20(a) defines ``Net Liquid Assets'' as the sum of 
(A) ``Excess Net Capital'' and (B) ``Liquidity'' dedicated to the DMM 
unit. Excess Net Capital has the same meaning as the term excess net 
capital as computed in accordance with the

[[Page 70724]]

SEC Net Capital Rule,\10\ which means the amount identified as item 
number 3770 of SEC Form X-17A-5 (``FOCUS Report''), except for DMM 
units that compute net capital under the alternative standard, for 
which it would mean item number 3910 of the FOCUS Report. Liquidity is 
defined as undrawn or actual borrowings that are dedicated to the DMM 
unit's business, as specified in Rule 103.20(a)(3)(A)-(C).
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    \10\ See note 6 supra.
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    If two or more DMM units are associated with each other and deal 
for the same DMM unit account, then the Net Liquid Assets requirements 
of Rule 103.20 applies to such DMM units as one unit, rather than to 
each DMM unit individually. Any joint account must be approved by the 
Exchange.\11\ The Exchange may allow a DMM unit to operate despite 
noncompliance with the provisions of the minimum requirements of Rule 
103.20, for up to five business days from the date the DMM notifies the 
Exchange of such condition.\12\
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    \11\ See Rule 103.20(b)(3).
    \12\ See id. at (c)(2).
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Background and Proposed Rule Change
    On July 25, 2006, the SEC approved amendments to the predecessor of 
current Rule 103.20 that set the Net Liquid Asset requirement 
applicable to specialist member organizations at $1 billion.\13\ In 
February 2008, based on significant changes in the NYSE's market 
structure resulting in reduced specialist participation, position 
levels, and performance during periods of high market volatility, this 
amount was reduced to $250 million.\14\ In July 2011, once again 
relying on significant changes in the NYSE's market structure as well 
as market-wide regulatory and trading developments and trends, the Net 
Liquid Asset requirement in Rule 103.20 was reduced to the current $125 
million.\15\
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    \13\ See Securities Exchange Act Release No. 54205 (July 25, 
2006), 71 FR 43260 (July 31, 2006) (SR-NYSE-2005-38) (approving 
amendments to NYSE Rules 104 and 123E (``Specialist Combination 
Review Policy'') that changed the capital requirements of specialist 
organizations). See also NYSE Information Memo 06-56 (August 2, 
2006).
    \14\ See Securities Exchange Act Release No. 57272 (February 5, 
2008), 73 FR 8098 (February 12, 2008) (SR-NYSE-2007-101).
    \15\ See note 7 supra.
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    A determination of whether the Net Liquid Assets requirement will 
be adequate to support the liquidity needs of DMM units to perform 
their obligations to the market during periods of market stress 
involves consideration and assessment of many factors, including market 
structure developments, market fragmentation, DMM unit end-of-day 
inventory positions and position duration, and the use of technology to 
manage market volatility. Since July 2011, the Exchange has continued 
to regularly assess these factors.
    Market-wide developments since 2011 have continued to dampen 
volatility and reduce DMM unit risk levels. Specifically, the 
implementation in April 2013 of market-wide volatility controls as part 
of the Regulation NMS Plan to Address Extraordinary Market Volatility 
(``Limit Up/Limit Down'') significantly mitigated industry-wide risks 
by limiting single-stock and market-wide volatility throughout the 
trading day.\16\ Additional initiatives since 2011, including enhanced 
technology resulting in reduced trading latency levels, clearing 
organization risk control enhancements, tighter percentage triggers on 
market-wide circuit breakers,\17\ pre-trade risk controls to prevent 
the routing of orders that exceed credit or capital thresholds (i.e., 
SEC Rule 15c3-5,\18\ the ``Market Access Rule''), and clearly defined 
Clearly Erroneous Execution parameters and processes,\19\ have all 
contributed to reducing the potential for significant and/or rapid 
movements in the market and to help DMM units satisfy their obligation 
to maintain an orderly market in assigned securities in times of market 
stress.
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    \16\ See Securities Exchange Act Release No. 77679 (April 21, 
2016), 81 FR 24908 (April 27, 2016) (File No. 4-631) (Order 
approving 10th Amendment to the Limit Up Limit Down Plan).
    \17\ See Rule 80B.
    \18\ See 17 CFR 240.15c3-5.
    \19\ See Rule 128.
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    Since 2011, market fragmentation has increased the amount of off-
exchange trading in NYSE-listed securities. Trading on the Trade 
Reporting Facility (``TRF'') in NYSE-listed securities increased from 
29.8% year-to-date between January-May 2011 to 34.7% year-to-date 
between January-May 2016. There are currently 13 competing exchanges 
trading NYSE-listed securities and one-third of NYSE consolidated 
volume is traded off-exchange on over 30 dark pools and over 200 
upstairs trading desks.
    The net liquid asset requirement should be reasonably related to 
the amount of trading that DMM units transact within the NYSE's market 
share and dollar value traded. The Exchange believes that as NYSE share 
and dollar volume has declined, the amount of net liquid assets 
required to meet the DMM unit's obligations should similarly decline. 
The Exchange notes that both the overall consolidated Tape A volume as 
well as the Exchange's average daily volume of shares traded have 
declined since 2011 (6% and 13% YTD, respectively), therefore resulting 
in less trading both market-wide and at the Exchange in the securities 
assigned to DMMs.
    The growth in NYSE's Supplemental Liquidity Provider (``SLP'') 
program, implemented in October 2008 and made permanent in July 
2015,\20\ has increased liquidity provider participation across a 
broader group of market participants, thereby also helping to reduce 
DMM risk. Today, around one-third of liquidity provider participation 
comes from nine firms participating in the SLP program.
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    \20\ See Securities Exchange Act Release No. 75578 (July 31, 
2015), 80 FR 47008 (August 6, 2015) (SR-NYSE-2015-26).
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    The disparity between the current capital requirement and DMM gross 
inventory levels is also significant. End-of-day DMM average gross 
inventory positions have declined 27% from $74 million in the January-
June 2011 period to $54 million in the January-June 2016 period, 
reducing overnight risk exposure. The current $125 million capital 
requirement is 2.3 times greater than the gross inventory level of $53 
million (long market value plus short market value) and 34 times 
greater than the average net inventory level of $3.6 million (long 
market value--short market value).
    DMM units are also putting fewer dollars at risk on a given trade, 
and less capital is needed to support the resultant positions. This 
trend is largely the result of the DMM units' increased use of 
algorithms to trade in smaller order sizes to reduce risk exposure. The 
industry's increased use of algorithms to trade in small order sizes to 
reduce risk exposure has resulted in a 14% decline in the average NYSE 
intraday trade size from 2011 to 2016 year-to-date through May 2016, 
resulting in fewer DMM shares at risk on a given trade.
    Moreover, DMM liquidity provider and other payments to DMMs have 
increased since 2011. In particular, DMM rebates per share have 
increased from $0.0015, $0.0025 and $0.0030 in mid-2011 to $0.0027, 
$0.0031, $0.0034 today. Further, quote market data revenue payments 
have been expanded to cover less-active securities under 1.5 million in 
consolidated volume versus 1 million in consolidated volume in 2011, 
and monthly flat payments have been introduced between $100 to $500 per 
security for less active securities under 1.5 million in consolidated 
volume. By reducing the DMM's costs per share traded, the Exchange 
believes that higher trading rebates and other

[[Page 70725]]

payments to DMMs have reduced overall DMM trading risk.
    Further, the DMM units' increasing use of trading technology and 
faster NYSE execution speeds enable DMMs to reduce order exposure time 
and better manage the risks of positions held. Faster NYSE executions 
speeds and DMM units' use of algorithms allow them to adjust positions 
quickly in response to changing market dynamics. The NYSE has also 
reduced the time needed to incorporate market information into quotes, 
thereby allowing for better risk controls mechanisms by DMMs. Median 
order-to-acknowledgement latency for NYSE gateways declined 81% between 
June 2011 and June 2016.\21\
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    \21\ The Exchange notes that multi-asset market makers mitigate 
risk by hedging between different products. Technology advances like 
use of microwave towers has reduced data transmission times helping 
firms to better manage risks and hedge price differences between 
equities/ETFs generally trading in the New York area and futures 
generally trading in the Chicago area.
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    Based on the foregoing, the Exchange believes that it is 
appropriate to reduce the Net Liquid Assets requirement for all DMM 
units by an additional 40% to $75 million.
    The Exchange notes that the Exchange and FINRA will continue to 
assess DMM capital requirements and monitor capital positions on a 
daily basis.
    The Exchange will notify DMM units of the implementation date of 
this rule change via a Member Education Bulletin.
    The proposed change is not otherwise intended to address any other 
issues and the Exchange is not aware of any problems that DMM units 
would have in complying with the proposed change.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\22\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\23\ in particular, because 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 regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to, and 
perfect the mechanisms of, a free and open market and a national market 
system and, in general, to protect investors and the public interest 
and because it is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \22\ 15 U.S.C. 78f(b).
    \23\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed change would remove 
impediments to, and perfect the mechanisms of, a free and open market 
and a national market system by reducing the burden on DMM units to 
maintain net liquidity while still reasonably ensuring that DMM units 
have sufficient liquidity to carry out their obligations to maintain an 
orderly market in their assigned securities in times of market stress. 
In this regard, the Exchange notes that overall DMM unit risk levels 
have continued to decline due to, among other things, implementation of 
market-wide volatility controls (e.g., Limit Up/Limit Down price 
controls), enhanced technology resulting in reduced trading latency 
levels, clearing organization risk control enhancements, tighter 
percentage triggers on market-wide circuit breakers, pre-trade risk 
controls (i.e., the Market Access Rule), and clearly defined Clearly 
Erroneous Execution parameters and processes. These initiatives have 
contributed to reducing the potential for significant and/or rapid 
movements in the market and provide support to DMM units in satisfying 
their obligation to maintain an orderly market in assigned securities 
in times of market stress. The Exchange further believes that continued 
market fragmentation, the decline in the average value of DMM units' 
end-of-day position inventories and the shorter duration of positions, 
lower per share trading costs and improved technology to manage market 
risk also support the proposed rule change.
    The Exchange further believes that the proposed change would 
protect investors and the public interest by reducing existing barriers 
to entry for new DMM units and mitigating the potential loss of 
existing DMM units. Stabilizing and increasing the pool of DMM units 
with a more efficient financial structure would be beneficial to the 
Exchange and would also enhance market quality and thereby support 
investor protection and public interest goals. Finally, the Exchange 
believes that it is subject to significant competitive forces, as 
described below in the Exchange's statement regarding the burden on 
competition.
    For the foregoing reasons, the Exchange believes that the proposal 
is consistent with the Act.

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. The proposed change is 
designed to amend the structure of DMM unit financial requirements. 
This proposed change would eliminate a potential barrier to entry for 
new DMM units interested in operating on both markets, thereby 
promoting competition.
    The Exchange notes that market makers and traders on other U.S. 
equity exchanges are not subject to net capital requirements beyond 
those required by the SEC Net Capital Rule. Nonetheless, DMM units have 
unique affirmative obligations and the Exchange continues to believe 
that it is appropriate that their financial requirements be higher than 
other market participants. The proposal would support competition by 
making DMM unit financial requirements more manageable for member 
organizations, including both existing and potential future DMM units, 
and would thereby promote greater interest in seeking DMM unit 
appointments on the Exchange.
    Finally, the Exchange notes that it operates in a highly 
competitive market in which market participants can readily favor 
competing venues. In such an environment, the Exchange must continually 
review, and consider adjusting the services it offers and the 
requirements it imposes to remain competitive with other U.S. equity 
exchanges.
    For the reasons described above, the Exchange believes that the 
proposed rule change reflects this competitive environment.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \24\ and Rule 19b-4(f)(6) thereunder.\25\ 
Because the 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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of

[[Page 70726]]

investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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    \24\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \25\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \26\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b4(f)(6)(iii),\27\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest.
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    \26\ 17 CFR 240.19b-4(f)(6).
    \27\ 17 CFR 240.19b-4(f)(6)(iii).
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    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. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \28\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \28\ 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-NYSE-2016-64 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSE-2016-64. 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-NYSE-2016-64 and should be 
submitted on or before November 3, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
Robert W. Errett,
Deputy Secretary.
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    \29\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2016-24775 Filed 10-12-16; 8:45 am]
 BILLING CODE 8011-01-P