Document ID: SEC-2014-2208-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2014-12-31T05:00Z

[Federal Register Volume 79, Number 250 (Wednesday, December 31, 2014)]
[Notices]
[Pages 78928-78930]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-30589]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73928; File No. SR-NYSEARCA-2014-145]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Amending Rule 6.76A 
by Revising the Order Allocation Methodology for Certain Orders of Five 
Contracts or Fewer

December 23, 2014.
    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 December 22, 2014, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. 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.
---------------------------------------------------------------------------

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

    The Exchange proposes to amend Rule 6.76A by revising the order 
allocation methodology for certain orders of five contracts or fewer. 
The text of 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 Exchange 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 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Rules 6.76A by revising the order 
allocation methodology for certain orders of five (5) contracts or 
fewer. As proposed, for all incoming orders of five contracts or fewer 
the Lead Market Maker (``LMM'') would be allocated the full contract 
size up to the size of the LMM's quote, provided the LMM is quoting at 
the NBBO and there is no Customer interest at the same price ranked 
ahead of the LMM.
    Rule 6.76A sets forth the priority for the allocation of incoming 
orders against bids and offers in the Display Order Process at a 
particular price in the NYSE Arca System (``System''). Specifically, 
pursuant to Rule 6.76A(a)(1)(A), if there is an LMM quoting at the 
NBBO, and there is no Customer interest ranked ahead of the LMM, nor is 
the incoming order a Directed Order, the incoming order will be matched 
against the quote of the LMM for either: (a) An amount equal to 40% of 
the incoming order up to the LMM's disseminated quote size; or (b) the 
LMM's share in the order of ranking, whichever is greater. Generally 
speaking, this means an LMM receives a guaranteed 40% trade allocation 
on any incoming order provided the LMM is quoting at the NBBO, and 
there is no Customer interest ranked ahead of the LMM.
    The Exchange is proposing to revise the order allocation 
methodology to provide that if the LMM is entitled to an allocation 
pursuant to Rule 6.76A(a)(1)(A) and the entire contract size of the 
incoming order is five (5) contracts or fewer, the LMM would be 
allocated the full contract size up to the size of the LMM's quote. As 
proposed, Rule 6.76A(1)(B) would state, ``If the LMM is entitled to an 
allocation pursuant to (a)(1)(A) above, for all incoming orders of five 
(5) contracts or fewer, the LMM will be allocated the full contract 
size up to the size of the LMM's quote.'' This proposed change would 
affect only those incoming orders of five contacts or fewer. The 
Exchange notes that the proposed rule is only available if the LMM is 
entitled to an allocation, which means that if there is Customer 
interest at the same price ranked ahead of the LMM, such Customer 
interest would continue to have priority, even for executions of five 
contracts or fewer. In addition, an LMM must be quoting at the NBBO to 
be entitled to trade with orders of five contracts or fewer.\3\ The 
Exchange is not proposing any changes to the order

[[Page 78929]]

allocation methodology for executions greater than five contracts.
---------------------------------------------------------------------------

    \3\ If the LMM is not quoting at the NBBO, or the LMM is quoting 
at the NBBO but for less size than the incoming order of five 
contracts or fewer, any remaining balance of the incoming order will 
be matched against orders and quotes in the Display Order Process in 
the order of their ranking.
---------------------------------------------------------------------------

    The allocation of orders of five contracts or fewer to a specific 
type of market maker (i.e. LMM) is consistent with similar methodology 
for allocating small size orders on other options exchanges. For 
example, the Chicago Board Options Exchange (``CBOE'') may allocate all 
orders of five contracts or fewer to an LMM or Designated Primary 
Market Maker (``DPM''),\4\ NYSE Amex Options allocates orders of five 
contracts or fewer to the Primary Specialist,\5\ and the International 
Securities Exchange (``ISE'') allocates all orders of five contracts or 
fewer to the Primary Market Maker (``PMM'').\6\ The Exchange's proposal 
would provide its LMMs the same guaranteed allocation of orders of five 
contracts or fewer as these exchanges provide to their DPMs, 
Specialist, or PMMs. Specifically, the Exchange, like NYSE Amex 
Options, and the ISE, would condition this guaranteed allocation on 
there being no Customer orders ranked ahead of the LMM, the LMM quoting 
at the NBBO, and the trade allocation not exceeding the number of 
contracts than the LMM is quoting.
---------------------------------------------------------------------------

    \4\ See CBOE Rule 6.45B(a)(iii)(1).
    \5\ See NYSE MKT Rule 964NY(b)(2)(C)(iv).
    \6\ See ISE Rule 713 Supplementary Material .01(c).
---------------------------------------------------------------------------

    The Exchange believes that the allocation of order of five 
contracts or fewer will not result in a significant portion of the 
Exchange's volume being executed by the LMM. Nevertheless, the Exchange 
would monitor the sizes of all orders received, and, on a quarterly 
basis, evaluate the percentage of volume constituted by orders of five 
contracts or fewer that were allocated to an LMM. If the percentage of 
the volume executed on the Exchange comprised of orders for five (5) 
contracts or fewer executed by an LMM is over forty percent (40%), the 
Exchange will reduce the size of the orders guaranteed to the LMM in 
this provision. Conducting a quarterly review of Exchange volume and 
analyzing the percentage of orders of five contracts or fewer is 
consistent with review processes at other exchanges with comparable 
allocation methodology for small size orders.\7\ The Exchange proposes 
to include the evaluation process in new Commentary .02 to Rule 6.76A.
---------------------------------------------------------------------------

    \7\ See NYSE MKT Rule 964NY Commentary .01, ISE Rule 713 
Supplementary Material .01(c), and CBOE Rule 6.45B(a)(iii)(1)(A).
---------------------------------------------------------------------------

    The proposed allocation methodology described above is part of NYSE 
Arca's careful balancing of the rewards and obligations that pertain to 
each of the Exchange's classes of memberships. This balancing is part 
of the overall market structure that is designed to encourage vigorous 
price competition among Market Makers, as well as to maximize the 
benefits of price competition resulting from the entry of Customer and 
non-Customer orders, while encouraging participants to provide market 
depth. The Exchange believes by offering LMMs a greater allocation on 
executions of five contracts or fewer, similar to what their 
counterparts on other exchanges receive, the proposed change, which 
guarantees participation rights for LMMs only when quoting at the best 
price, strikes the appropriate balance between the obligations of LMMs 
to provide meaningful depth and liquidity, and the rewards they receive 
for doing so. Furthermore, the Exchange believes that the revised trade 
allocation process, which is competitive with those offered on other 
exchanges,\8\ will help to ensure that NYSE Arca is able to continue to 
attract quality LMMs willing to provide deep meaningful markets to the 
investing public.
---------------------------------------------------------------------------

    \8\ Supra nn. 4, 5, and 6.
---------------------------------------------------------------------------

    The Exchange is also proposing minor non-substantive changes to the 
numbering convention of Rule 6.76A to accommodate the rule change 
described above.
    The Exchange will issue a notice announcing the implementation date 
of the proposed rule change no later than 30 days after the effective 
date of this filing.
2. Statutory Basis
    The Exchange believes that this proposed rule change is consistent 
with section 6(b) of the Securities Exchange Act of 1934 (``Act'') \9\, 
in general, and furthers the objectives of Section 6(b)(5) of the Act 
\10\ in particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade, 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. In particular, and as described 
above, the Exchange believes the proposed rule change is part of the 
balancing of NYSE Arca's overall market structure, which is designed to 
encourage vigorous price competition between Market Makers. In 
addition, the Exchange believes the proposed rule change furthers the 
objectives of the Act because it is also designed to help ensure that 
NYSE Arca is able to attract quality LMMs willing to provide deep 
meaningful markets to the investing public. Increasing quote 
competition should lead to narrower spreads and more liquid markets and 
thus benefit investors. Narrower spreads and more liquid markets can 
serve as a catalyst to attracting additional order flow to the 
Exchange, enhancing price discovery and generally benefiting all 
participants on the Exchange.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange further believes that the proposed rule change would 
be not be unfairly discriminatory in allocating orders of five 
contracts or fewer to the LMM. To help ensure that one class of Market 
Maker is not unduly enriched by this proposal, the Exchange would 
monitor the sizes of all orders received, and by using objective 
criteria, if it determines that the proposed allocation process could 
be seen as discriminatory because of an unfair share of trade 
allocations going to the LMM, would reduce the eligible size for orders 
included in this provision.

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. In fact, the Exchange feels 
that the proposed change will increase competition amongst Market 
Makers seeking appointments as LMMs which should result in narrower 
spreads and more liquid markets for investors. In addition, by offering 
an allocation methodology similar to those offered at other exchanges, 
NYSE Arca will be in a better position to compete with those exchanges 
in attracting well capitalized Market Makers willing to make deep 
liquid markets while acting as an LMM.

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 \11\ and Rule 19b-4(f)(6) thereunder.\12\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on

[[Page 78930]]

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, it has become effective pursuant to section 
19(b)(3)(A) of the Act \13\ and Rule 19b-4(f)(6) thereunder.\14\
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \12\ 17 CFR 240.19b-4(f)(6).
    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 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.
---------------------------------------------------------------------------

    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 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-2014-145 on the subject line.

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-2014-145. 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 NYSE Arca. 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-2014-145 and should 
be submitted on or before January 21, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-30589 Filed 12-30-14; 8:45 am]
BILLING CODE 8011-01-P