Document ID: SEC-2011-1271-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2011-08-24T04:00Z

[Federal Register Volume 76, Number 164 (Wednesday, August 24, 2011)]
[Notices]
[Pages 53012-53015]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-21661]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65166; File No. SR-NYSEArca-2011-57]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Deleting the Text 
of NYSE Arca Equities Rules 6.16 and 6.16A, and Adopting New NYSE Arca 
Equities Rule 5320 That Is Substantially the Same as Financial Industry 
Regulatory Authority Rule 5320 To Prohibit Trading Ahead of Customer 
Orders With Certain Exceptions (Commonly Known as the Manning Rule)

August 18, 2011.
    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 August 11, 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, II, 
and III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit

[[Page 53013]]

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 delete the text of NYSE Arca Equities 
Rules 6.16 and 6.16A, which limit trading ahead of customer limit and 
market orders, and adopt new NYSE Arca Equities Rule 5320 that is 
substantially the same as Financial Industry Regulatory Authority 
(``FINRA'') Rule 5320. The text of the proposed rule change is 
available at the Exchange, the Commission's Public Reference Room, and 
http://www.nyse.com.

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 delete the text of NYSE Arca Equities 
Rules 6.16 and 6.16A, which limit trading ahead of customer limit and 
market orders, and adopt new NYSE Arca Equities Rule 5320 that is 
substantially the same as FINRA Rule 5320.\4\ As with FINRA Rule 5320, 
proposed NYSE Arca Equities Rule 5320 would prohibit trading ahead of 
customer orders with certain exceptions, including large order and 
institutional account exceptions, a no-knowledge exception, a riskless 
principal exception, an intermarket sweep order (``ISO'') exception, 
and odd lot and bona fide error transaction exceptions, discussed in 
detail below. Proposed NYSE Arca Equities Rule 5320 also provides the 
same guidance as FINRA Rule 5320 on minimum price improvement 
standards, order handling procedures, and trading outside normal market 
hours.
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    \4\ See Securities Exchange Act Release No. 63895 (February 11, 
2011), 76 FR 9386 (February 17, 2011) (SR-FINRA-2009-090). The 
Exchange's affiliates, New York Stock Exchange LLC and NYSE Amex 
LLC, also have filed substantially similar rule filings. See SR-
NYSE-2011-43 and SR-NYSEAmex-2011-59.
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Background

    NYSE Arca Equities Rule 6.16 generally prohibits an ETP Holder from 
trading on a proprietary basis ahead of an unexecuted customer order. 
However, NYSE Arca Equities Rule 6.16 allows an ETP Holder to negotiate 
specific terms and conditions applicable to the acceptance of limit 
orders pursuant to certain conditions of the rule, and NYSE Arca 
Equities Rule 6.16A allows an ETP Holder to negotiate specific terms 
and conditions applicable to the acceptance of market orders pursuant 
to certain conditions of the rule. NYSE Arca Equities Rule 6.16 is 
based on NASD Interpretive Material 2110-2 and NYSE Arca Equities Rule 
6.16A is based on NASD Rule 2111.\5\
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    \5\ See Securities Exchange Act Release No. 64780 (June 30, 
2011), 76 FR 39960 (July 7, 2011) (SR-NYSEArca-2011-40).
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Proposal To Adopt Text of FINRA Rule 5320
    In conjunction with its rules harmonization with FINRA, the 
Exchange proposes to delete the text of NYSE Arca Equities Rules 6.16 
and 6.16A and adopt the text of FINRA Rule 5320, with certain technical 
changes, as NYSE Arca Equities Rule 5320. FINRA Rule 5320 generally 
provides that a FINRA member that accepts and holds an order in an 
equity security from its own customer or a customer of another broker-
dealer without immediately executing the order is prohibited from 
trading that security on the same side of the market for its own 
account at a price that would satisfy the customer order, unless it 
immediately thereafter executes the customer order up to the size and 
at the same or better price at which it traded for its own account.
    Proposed NYSE Arca Equities Rule 5320 permits an ETP Holder to 
trade a security on the same side of the market for its own account at 
a price that would satisfy a customer order in certain circumstances.
Large Orders and Institutional Accounts
    The most notable exception to the customer order protection rule is 
to allow ETP Holders to negotiate terms and conditions on the 
acceptance of certain large-sized orders (orders of 10,000 shares or 
more unless such orders are less than $100,000 in value) or orders from 
institutional accounts as defined in NASD Rule 3110. Such terms and 
conditions would permit the ETP Holder to continue to trade alongside 
or ahead of such customer orders if the customer agrees.
    Specifically, under the proposed rule, an ETP Holder would be 
permitted to trade a security on the same side of the market for its 
own account at a price that would satisfy a customer order provided 
that the ETP Holder provides clear and comprehensive written disclosure 
to each customer at account opening and annually thereafter that (a) 
Discloses that the ETP Holder may trade proprietarily at prices that 
would satisfy the customer order, and (b) provides the customer with a 
meaningful opportunity to opt in to the NYSE Arca Equities Rule 5320 
protections with respect to all or any portion of its order.
    If a customer does not opt in to the protections with respect to 
all or any portion of its order, the ETP Holder may reasonably conclude 
that such customer has consented to the ETP Holder trading a security 
on the same side of the market for its own account at a price that 
would satisfy the customer's order.\6\
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    \6\ As is always the case, customers retain the right to 
withdraw consent at any time. Therefore, an ETP Holder's reasonable 
conclusion that a customer has consented to the ETP Holder trading 
along with such customer's order is subject to further instruction 
and modification from the customer.
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    In lieu of providing written disclosure to customers at account 
opening and annually thereafter, the proposed rule would permit ETP 
Holders to provide clear and comprehensive oral disclosure to, and 
obtain consent from, a customer on an order-by-order basis, provided 
that the ETP Holder documents who provided such consent and that such 
consent evidences the customer's understanding of the terms and 
conditions of the order. In addition, where a customer has opted in to 
the NYSE Arca Equities Rule 5320 protections, an ETP Holder may still 
obtain consent on an order-by-order basis to trade ahead of or along 
with an order from that customer, provided that the ETP Holder 
documents who provided such consent and that such consent evidences the 
customer's understanding of the terms and conditions of the order.
No-Knowledge Exception
    The Exchange is also proposing to include a ``no-knowledge'' 
exception to its customer order protection rule. The proposed exception 
would allow a proprietary trading unit of an ETP Holder to continue 
trading in a proprietary capacity and at prices that would satisfy 
customer orders that were being held by another, separate trading unit 
at the ETP Holder. The no-knowledge exception would be applicable with 
respect to NMS stocks, as defined in Rule 600 of SEC Regulation NMS. In 
order to avail itself

[[Page 53014]]

of the no-knowledge exception, an ETP Holder must first implement and 
utilize an effective system of internal controls (such as appropriate 
information barriers) that operate to prevent the proprietary trading 
unit from obtaining knowledge of the customer orders that are held at a 
separate trading unit.
    An ETP Holder that structures its order handling practices in NMS 
stocks to permit its proprietary and/or market-making desk to trade at 
prices that would satisfy customer orders held by a separate trading 
unit must disclose in writing to its customers, at account opening and 
annually thereafter, a description of the manner in which customer 
orders are handled by the ETP Holder and the circumstances under which 
the ETP Holder may trade proprietarily at its market-making desk at 
prices that would satisfy the customer order.
Riskless Principal Exception
    The Exchange's proposal also provides that the obligations under 
this rule shall not apply to an ETP Holder's proprietary trade if such 
proprietary trade is for the purposes of facilitating the execution, on 
a riskless principal basis, of another order from a customer (whether 
its own customer or the customer of another broker-dealer), provided 
that the ETP Holder (a) Submits a report, contemporaneously with the 
execution of the facilitated order, identifying the trade as riskless 
principal to the Exchange and (b) has written policies and procedures 
to ensure that riskless principal transactions relied upon for this 
exception comply with applicable Exchange rules. At a minimum these 
policies and procedures must require that the customer order was 
received prior to the offsetting principal transaction, and that the 
offsetting principal transaction is at the same price as the customer 
order exclusive of any markup or markdown, commission equivalent or 
other fee and is allocated to a riskless principal or customer account 
in a consistent manner and within 60 seconds of execution.
    ETP Holders must have supervisory systems in place that produce 
records that enable the ETP Holder and the Exchange to reconstruct 
accurately, readily, and in a time-sequenced manner all orders on which 
an ETP Holder relies in claiming this exception.
ISO Exception
    The proposed rule change also provides that an ETP Holder shall be 
exempt from the obligation to execute a customer order in a manner 
consistent with NYSE Arca Equities Rule 5320 with regard to trading for 
its own account that is the result of an intermarket sweep order routed 
in compliance with Rule 600(b)(30)(ii) of SEC Regulation NMS where the 
customer order is received after the ETP Holder routed the ISO. Where 
an ETP Holder routes an ISO to facilitate a customer order and that 
customer has consented to not receiving the better prices obtained by 
the ISO, the ETP Holder also shall be exempt with respect to any 
trading for its own account that is the result of the ISO with respect 
to the consenting customer's order.
Odd Lot and Bona Fide Error Exception
    In addition, the Exchange proposes applying an exception for a 
firm's proprietary trade that (1) Offsets a customer odd lot order 
(i.e., an order less than one round lot, which is typically 100 shares) 
or (2) corrects a bona fide error. With respect to bona fide errors, 
ETP Holders would be required to demonstrate and document the basis 
upon which a transaction meets the bona fide error exception.
Minimum Price Improvement Standards
    The proposed rule change establishes the minimum amount of price 
improvement necessary for an ETP Holder to execute an order on a 
proprietary basis when holding an unexecuted limit order in that same 
security without being required to execute the held limit order.
Order Handling Procedures
    The proposed rule change provides that an ETP Holder must make 
every effort to execute a marketable customer order that it receives 
fully and promptly. An ETP Holder that is holding a customer order that 
is marketable and has not been immediately executed must make every 
effort to cross such order with any other order received by the ETP 
Holder on the other side of the market up to the size of such order at 
a price that is no less than the best bid and no greater than the best 
offer at the time that the subsequent order is received by the ETP 
Holder and that is consistent with the terms of the orders. In the 
event that an ETP Holder is holding multiple orders on both sides of 
the market that have not been executed, the ETP Holder must make every 
effort to cross or otherwise execute such orders in a manner that is 
reasonable and consistent with the objectives of the proposed rule and 
with the terms of the orders. An ETP Holder can satisfy the crossing 
requirement by contemporaneously buying from the seller and selling to 
the buyer at the same price.
Trading Outside Normal Market Hours
    An ETP Holder generally may limit the life of a customer order to 
the period of normal market hours of 6:30 a.m. to 1 p.m. Pacific 
Standard Time. However, if the customer and ETP Holder agree to the 
processing of the customer's order outside normal market hours, the 
protections of proposed NYSE Arca Equities Rule 5320 would apply to 
that customer's order(s) at all times the customer order is executable 
by the ETP Holder.
Conforming and Other Changes
    For consistency with Exchange rules, NYSE Arca Equities Rule 5320 
will have certain differences from FINRA Rule 5320. The Exchange 
proposes not to include Supplementary Material .02(b) and portions of 
Supplementary Material .06, which relate to OTC equity securities, in 
the Commentary of NYSE Arca Equities Rule 5320 and to change all 
references from ``members'' to ``ETP Holders.''
Implementation Date
    The Exchange proposes to implement NYSE Arca Equities Rule 5320 on 
the same date that FINRA implements FINRA Rule 5320, which FINRA has 
announced will be September 12, 2011.\7\ The Exchange will provide 
notice of the implementation date to ETP Holders via a Regulatory 
Information Bulletin.
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    \7\ See FINRA Regulatory Notice 11-24.
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) \8\ of the 
Act, in general, and furthers the objectives of Section 6(b)(5) \9\ 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 adopting the proposed rule 
at the same time that FINRA implements a substantially similar rule 
will contribute to investor protection by defining important parameters 
by which ETP Holders must abide when trading proprietarily while 
holding customer limit and market orders, and foster cooperation by 
harmonizing

[[Page 53015]]

requirements across self-regulatory organizations.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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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.

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 \10\ and Rule 19b-4(f)(6) thereunder.\11\ 
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 
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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    \10\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \11\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \12\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\13\ 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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    \12\ 17 CFR 240.19b-4(f)(6).
    \13\ 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.

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-2011-57 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-2011-57. 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 such 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-2011-57 and should be submitted on or before September 14, 
2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy.
Secretary.
[FR Doc. 2011-21661 Filed 8-23-11; 8:45 am]
BILLING CODE 8011-01-P