Document ID: SEC-2012-0764-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2012-05-16T04:00Z

[Federal Register Volume 77, Number 95 (Wednesday, May 16, 2012)]
[Notices]
[Pages 28919-28921]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-11797]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66963; File No. SR-NYSEArca-2012-22]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving a 
Proposed Rule Change To Amend NYSE Arca Equities Rule 7.45 To Address 
the Authority of NYSE Arca or Archipelago Securities LLC To Cancel 
Orders When a Technical or Systems Issue Occurs and Describe the 
Operation of an Error Account for Archipelago Securities

May 10, 2012.

I. Introduction

    On March 15, 2012, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
amend NYSE Arca Equities Rule 7.45 to address the authority of NYSE 
Arca or Archipelago Securities LLC (``Arca Securities'') to cancel 
orders when a technical or systems issue occurs at NYSE Arca, Arca 
Securities, or a routing destination, and to describe the operation of 
an error account for Arca Securities. The proposed rule change was 
published for comment in the Federal Register on March 30, 2012.\3\ The 
Commission received no comment letters regarding the proposed rule 
change. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 66656 (March 26, 2012), 
77 FR 19401 (March 30, 2012) (SR-NYSEArca-2012-22) (``Notice'').
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II. Description of the Proposal

    Arca Securities is a broker-dealer that is a facility, and an 
affiliate, of the Exchange that provides outbound routing services from 
the Exchange to other market centers pursuant to Exchange rules.\4\ In 
its proposal, the Exchange states that a technical or systems issue may 
occur at NYSE Arca, Arca Securities, or a routing destination that 
causes NYSE Arca or Arca Securities to cancel orders, if the Exchange 
or Arca Securities determines that such action is necessary to maintain 
a fair and orderly market.\5\ The Exchange also states that a technical 
or systems issue that occurs at NYSE Arca, Arca Securities, a routing 
destination, or a non-affiliate third-party Routing Broker \6\ may 
result in Arca Securities acquiring an error position that it must 
resolve.\7\
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    \4\ See Notice, 77 FR at 19402, n.4 and accompanying text, and 
text accompanying n.5. See also NYSE Arca Equities Rule 7.45; and 
Securities Exchange Act Release No. 65455 (September 30, 2011) 76 FR 
62119 (October 6, 2011) (SR-NYSEArca-2011-61) at n.4.
    The Exchange also receives equities orders routed inbound to the 
Exchange by Arca Securities from the New York Stock Exchange LLC and 
NYSE Amex LLC. See Notice, 77 FR at 19402, n.5. See also NYSE Arca 
Equities Rule 7.45(c).
    \5\ See Notice, 77 FR at 19402. For examples of some of the 
circumstances in which NYSE Arca or Arca Securities may decide to 
cancel orders, see id.
    \6\ The Exchange states that, from time to time, it also uses 
non-affiliate third-party broker-dealers to provide outbound routing 
services. See Notice, 77 FR at 19402, n.4. See also NYSE Arca 
Equities Rule 7.45(a) (defining ``Routing Broker'' to include Arca 
Securities and any other non-affiliate third-party broker-dealer 
that acts as a facility of NYSE Arca routing orders from the 
Exchange to other market centers).
    \7\ See Notice, 77 FR at 19402. Specifically, the proposed rule 
defines ``error positions'' as ``positions that result from a 
technical or systems issue at Arca Securities, the Exchange, a 
routing destination, or a non-affiliate third-party Routing Broker 
that affects one or more orders.'' See proposed Rule 7.45(d)(2).
    For examples of some of the circumstances that may lead to error 
positions, see Notice, 77 FR at 19402-03.
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    New paragraph (d) to NYSE Arca Equities Rule 7.45 provides NYSE 
Arca and Arca Securities with general authority to cancel orders to 
maintain fair and orderly markets when a technical or systems issue 
occurs at NYSE Arca, Arca Securities, or a routing destination. It also 
provides authority for Arca Securities to maintain an error account for 
the purpose of addressing, and sets forth the procedures for resolving, 
error positions. Specifically, paragraph (d)(1) of NYSE Arca Equities 
Rule 7.45 authorizes NYSE Arca or Arca Securities to cancel orders as 
either deems necessary to maintain fair and orderly markets if a 
technical or systems issue occurs at NYSE Arca, Arca Securities, or a 
routing destination. NYSE Arca and Arca Securities will be required to 
provide notice of the cancellation to all Electronic Trading Permit 
Holders (``ETP Holders'') as soon as practicable.\8\
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    \8\ See NYSE Arca Equities Rule 7.45(d)(1).
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    Paragraph (d)(2) of NYSE Arca Equities Rule 7.45 will allow Arca 
Securities to maintain an error account

[[Page 28920]]

for the purpose of addressing error positions that result from a 
technical or systems issue at NYSE Arca, Arca Securities, a routing 
destination, or a non-affiliate third-party Routing Broker.
    For purposes of NYSE Arca Equities Rule 7.45(d), an error position 
will not include any position that results from an order submitted by 
an ETP Holder to NYSE Arca that is executed on the Exchange and 
processed pursuant to NYSE Arca Equities Rule 7.41(a).\9\ Arca 
Securities will not be permitted to (i) accept any positions in its 
error account from an ETP Holder's account or (ii) permit any ETP 
Holder to transfer any positions from the ETP Holder's account to Arca 
Securities' error account.\10\ In other words, Arca Securities may not 
accept from an ETP Holder positions that are delivered to the ETP 
Holder through the clearance and settlement process, even if those 
positions may have been related to a technical or systems issue at NYSE 
Arca, Arca Securities, a routing destination, or a non-affiliate third-
party Routing Broker.\11\ If an ETP Holder receives such positions 
through the clearance and settlement process and experiences a loss in 
unwinding those positions, that ETP Holder may seek to rely on NYSE 
Arca Equities Rule 13.2, which provides ETP Holders with the ability to 
file claims against the Exchange ``for the failure of its systems or 
facilities.'' \12\ If, however, a technical or systems issue results in 
NYSE Arca not having valid clearing instructions for an ETP Holder to a 
trade, Arca Securities may assume that ETP Holder's side of the trade 
so that the trade can be processed pursuant to NYSE Arca Equities Rule 
7.41(a).\13\
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    \9\ See NYSE Arca Equities Rule 7.45(d)(2)(A).
    \10\ See NYSE Arca Equities Rule 7.45(d)(2)(B).
    \11\ See Notice, 77 FR at 19403, n.13. This provision would not 
apply if Arca Securities incurred a short position to settle an ETP 
Holder's purchase, as the ETP Holder would not have had a position 
in its account as a result of the purchase at the time of Arca 
Securities' action. See id.
    If error positions result in connection with the Exchange's use 
of a third-party broker-dealer for outbound routing and those 
positions are delivered to Arca Securities through the clearance and 
settlement process, Arca Securities would be permitted to resolve 
those positions. If, however, such positions were not delivered to 
Arca Securities through the clearance and settlement process, then 
the third-party broker-dealer would resolve the error positions 
itself, and Arca Securities would not be permitted to accept the 
positions. See Notice, 77 FR at 19402, n.4.
    \12\ See Notice, 77 FR at 19403, n.13.
    \13\ See NYSE Arca Equities Rule 7.45(d)(2)(C).
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    Paragraph (d)(3) of NYSE Arca Equities Rule 7.45 permits NYSE Arca 
or Arca Securities, in connection with a particular technical or 
systems issue, to either (i) assign all resulting error positions to 
ETP Holders or (ii) have all resulting error positions liquidated. Any 
determination to assign or liquidate error positions, as well as any 
resulting assignments, will be made in a nondiscriminatory fashion.\14\
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    \14\ See NYSE Arca Equities Rule 7.45(d)(3).
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    NYSE Arca and Arca Securities will be required to assign all error 
positions resulting from a particular technical or systems issue to the 
ETP Holders affected by that technical or systems issue if NYSE Arca or 
Arca Securities:
    (i) Determines that it has accurate and sufficient information 
(including valid clearing information) to assign the positions to all 
of the ETP Holders affected by that technical or systems issue;
    (ii) Determines that it has sufficient time pursuant to normal 
clearance and settlement deadlines to evaluate the information 
necessary to assign the positions to all of the ETP Holders affected by 
that technical or systems issue; and
    (iii) Has not determined to cancel all orders affected by that 
technical or systems issue in accordance with NYSE Arca Equities Rule 
7.45(d)(1).\15\
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    \15\ See NYSE Arca Equities Rule 7.45(d)(3)(A)(i)-(iii).
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    If NYSE Arca or Arca Securities is unable to assign all error 
positions resulting from a particular technical or systems issue to all 
of the affected ETP Holders, or if NYSE Arca or Arca Securities 
determines to cancel all orders affected by the technical or systems 
issue, then Arca Securities will be required to liquidate the error 
positions as soon as practicable.\16\ Arca Securities will be required 
to provide complete time and price discretion for the trading to 
liquidate the error positions to a third-party broker-dealer, and would 
be prohibited from attempting to exercise any influence or control over 
the timing or methods of such trading.\17\ Further, Arca Securities 
will be required to establish and enforce policies and procedures that 
are reasonably designed to restrict the flow of confidential and 
proprietary information between the third-party broker-dealer, on one 
hand, and the Exchange and Arca Securities on the other, associated 
with the liquidation of the error positions.\18\
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    \16\ See NYSE Arca Equities Rule 7.45(d)(3)(B).
    \17\ See NYSE Arca Equities Rule 7.45(d)(3)(B)(i).
    \18\ See NYSE Arca Equities Rule 7.45(d)(3)(B)(ii).
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    Finally, proposed paragraph (d)(4) of NYSE Arca Equities Rule 7.45 
requires NYSE Arca and Arca Securities to make and keep records to 
document all determinations to treat positions as error positions; all 
determinations to assign error positions to ETP Holders or liquidate 
error positions; and the liquidation of error positions through the 
third-party broker-dealer.

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6(b) of the Act 
\19\ and the rules and regulations thereunder applicable to a national 
securities exchange.\20\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\21\ 
which requires, among other things, that the rules of a national 
securities exchange be 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 mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest; and are not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers. In addition, the Commission 
believes the proposed rule change is consistent with Section 
11A(a)(1)(C) of the Act \22\ in that it seeks to assure economically 
efficient execution of securities transactions.
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    \19\ 15 U.S.C. 78f(b).
    \20\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \21\ 15 U.S.C. 78f(b)(5).
    \22\ 15 U.S.C. 78k-1(a)(1)(C).
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    The Commission recognizes that technical or systems issues may 
occur, and believes that NYSE Arca Equities Rule 7.45, in allowing NYSE 
Arca or Arca Securities to cancel orders affected by technical or 
systems issues, should provide a reasonably efficient means for the 
Exchange to handle such orders, and appears reasonably designed to 
permit NYSE Arca to maintain fair and orderly markets.\23\
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    \23\ The Commission notes that NYSE Arca states that the 
proposed amendments to NYSE Arca Equities Rule 7.45 are designed to 
maintain fair and orderly markets, ensure full trade certainty for 
market participants, and avoid disrupting the clearance and 
settlement process. See Notice, 77 FR at 19404. The Commission also 
notes that NYSE Arca states that a decision to cancel orders due to 
a technical or systems issue is not equivalent to the Exchange 
declaring self-help against a routing destination pursuant to Rule 
611 of Regulation NMS. See 17 CFR 242.611(b). See also Notice, 77 FR 
at 19403, n.11.
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    The Commission also believes that allowing the Exchange to resolve 
error

[[Page 28921]]

positions through the use of an error account maintained by Arca 
Securities pursuant to the procedures set forth in the rule, and as 
described above, is consistent with the Act. The Commission notes that 
the rule establishes criteria for determining which positions are error 
positions,\24\ and that NYSE Arca or Arca Securities, in connection 
with a particular technical or systems issue, will be required to 
either (i) assign all resulting error positions to ETP Holders or (ii) 
have all resulting error positions liquidated.\25\ Also, NYSE Arca or 
Arca Securities will assign error positions that result from a 
particular technical or systems issue to ETP Holders only if all such 
error positions can be assigned to all of the ETP Holders affected by 
that technical or systems issue.\26\ If NYSE Arca or Arca Securities 
cannot assign all error positions to all ETP Holders, Arca Securities 
will liquidate all of those error positions.\27\ In this regard, the 
Commission believes that the new rule appears reasonably designed to 
further just and equitable principles of trade and the protection of 
investors and the public interest, and to help prevent unfair 
discrimination, in that it should help assure the handling of error 
positions will be based on clear and objective criteria, and that the 
resolution of those positions will occur promptly through a transparent 
process.
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    \24\ See NYSE Arca Equities Rule 7.45(d)(2).
    \25\ See NYSE Arca Equities Rule 7.45(d)(3).
    \26\ See NYSE Arca Equities Rule 7.45(d)(3)(A).
    \27\ See NYSE Arca Equities Rule 7.45(d)(3)(B).
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    Additionally, the Commission notes that it has previously expressed 
concern about the potential for unfair competition and conflicts of 
interest between an exchange's self-regulatory obligations and its 
commercial interest when the exchange is affiliated with one of its 
members.\28\ The Commission is also concerned about the potential for 
misuse of confidential and proprietary information. The Commission 
believes that the requirement that Arca Securities provide complete 
time and price discretion for the liquidation of error positions to a 
third-party broker-dealer, including that Arca Securities not attempt 
to exercise any influence or control over the timing or methods of such 
trading, combined with the requirement that the Exchange establish and 
enforce policies and procedures that are reasonably designed to 
restrict the flow of confidential and proprietary information to the 
third-party routing broker liquidating such positions, should help 
mitigate the Commission's concerns. In particular, the Commission 
believes that these requirements should help assure that none of the 
Exchange, Arca Securities, or the third-party broker-dealer is able to 
misuse confidential or proprietary information obtained in connection 
with the liquidation of error positions for its own benefit.
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    \28\ See, e.g., Securities Exchange Act Release No. 65455, 76 FR 
at 62120, n.16 and accompanying text.
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    Finally, the Commission notes that NYSE Arca and Arca Securities 
would be required to make and keep records to document all 
determinations to treat positions as error positions; all 
determinations to assign error positions to ETP Holders or liquidate 
error positions; and the liquidation of error positions through the 
third-party broker-dealer.\29\
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    \29\ See NYSE Arca Equities Rule 7.45(d)(4).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\30\ that the proposed rule change (SR-NYSEArca-2012-22) be, and it 
hereby is, approved.
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    \30\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-11797 Filed 5-15-12; 8:45 am]
BILLING CODE 8011-01-P