Document ID: SEC-2010-0488-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Stock Exchange, Inc.
Posted Date: 2010-04-01T04:00Z

[Federal Register: April 1, 2010 (Volume 75, Number 62)]
[Notices]               
[Page 16540-16543]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01ap10-133]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61781; File No. SR-NSX-2010-02]

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

March 25, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on March 23, 2010, National Stock Exchange, Inc. (``NSX'' or the 
``Exchange'') 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 substantially prepared by the 
self-regulatory organization. The Exchange filed the proposal as a 
``non-controversial'' proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ 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\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to adopt a new Rule 11.11(c)(1) ``Self Trade 
Prevention'' Order Modifier that allows an ETP Holder to submit orders 
that may avoid trading against other orders of the same ETP Holder.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nsx.com, on the Commission's Web site at http://
www.sec.gov, at NSX, 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to adopt a new Rule 11.11(c)(1) to make 
available to ETP Holders an order modifier that allows an ETP Holder to 
submit orders that may avoid trading against other orders of the same 
ETP Holder. The proposed changes are more fully discussed below.

Background

    The proposed ``Self Trade Prevention'' (``STP'') modifiers are 
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.
    The Exchange proposes adding three STP modifiers that will be 
implemented and 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. The three new STP modifiers are discussed more 
thoroughly below.
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    \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.

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[[Page 16541]]

STP Reject Newest (``STPN'')

    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.
    STPN Example 1: An order to buy 500 shares @ $22.00 is marked with 
any of the three STP modifiers and becomes a resting order on the NSX 
Book. Subsequently, an order to sell 500 shares @ $22.00 is entered 
with the same designated Unique Identifier and marked with the STPN 
modifier.
    STPN Result 1: The incoming sell order for 500 shares @ $22.00 
marked with the STPN modifier is rejected. The resting buy order for 
500 shares at $22.00 marked with one of the three STP modifiers remains 
on the NSX Book.
    STPN Example 2: An order to buy 500 shares @ $22.00 is marked with 
any of the three STP modifiers and becomes a resting order on the NSX 
Book. Subsequently, an order to sell 700 shares @ $22.00 is entered 
with the same Unique Identifier and marked with the STPN modifier.
    STPN Result 2: The incoming sell order for 700 shares @ $22.00 
marked with the STPN modifier is rejected. The resting buy order for 
500 shares at $22.00 marked with one of the three STP modifiers remains 
on the NSX Book.
    STPN Example 3: An order to buy 500 shares @ $22.00 is marked with 
any of the three STP modifiers and becomes a resting order on the NSX 
Book. Subsequently, an order to sell 400 shares @ $22.00 is entered 
with the same Unique Identifier and marked with the STPN modifier.
    STPN Result 3: The incoming sell order for 400 shares @ $22.00 
marked with the STPN modifier is rejected. The resting buy order for 
500 shares at $22.00 marked with one of the three STP modifiers remains 
on the NSX Book.

STP Cancel Oldest (``STPO'')

    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.
    STPO Example 1: An order to buy 500 shares @ $22.00 is marked with 
any of the three STP modifiers and becomes a resting order in the NSX 
Book. Subsequently, an order to sell 500 shares @ $22.00 is entered 
with the same Unique Identifier and marked with the STPO modifier.
    STPO Result 1: The resting buy order for 500 shares at $22.00 
marked with one of the three STP modifiers is cancelled. The incoming 
sell order for 500 shares @ $22.00 marked with the STPO modifier is 
entered in the NSX Book.
    STPO Example 2: An order to buy 500 shares @ $22.00 is marked with 
any of the three STP modifiers and becomes a resting order in the NSX 
Book. Subsequently, an order to sell 700 shares @ $22.00 is entered 
with the same Unique Identifier and marked with the STPO modifier.
    STPO Result 2: The resting buy order for 500 shares at $22.00 
marked with one of the three STP modifiers is cancelled. The incoming 
sell order for 700 shares @ $22.00 marked with the STPO modifier is 
entered on the NSX Book.
    STPO Example 3: An order to buy 500 shares @ $22.00 is marked with 
any of the three STP modifiers and becomes a resting order in the NSX 
Book. Subsequently, an order to sell 400 shares @ $22.00 is entered 
with the same Unique Identifier and marked with the STPO modifier.
    STPO Result 3: The resting buy order for 500 shares at $22.00 
marked with one of the three STP modifiers is cancelled. The incoming 
sell order for 400 shares @ $22.00 marked with the STPO modifier is 
entered on the NSX Book.

STP Cancel Both (``STPB'')

    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.
    STPB Example 1: An order to buy 500 shares @ $22.00 is marked with 
any of the three STP modifiers and becomes a resting order in the NSX 
Book. Subsequently, an order to sell 500 shares @ $22.00 is entered 
with the same Unique Identifier and marked with the STPB modifier.
    STPB Result 1: The resting buy order for 500 shares at $22.00 
marked with one of the three STP modifiers is cancelled. The incoming 
sell order for 500 shares @ $22.00 marked with the STPB modifier is 
rejected.
    STPB Example 2: An order to buy 500 shares @ $22.00 is marked with 
any of the three STP modifiers and becomes a resting order in the NSX 
Book. Subsequently, an order to sell 700 shares @ $22.00 is entered 
with the same Unique Identifier and marked with the STPB modifier.
    STPB Result 2: The resting buy order for 500 shares at $22.00 
marked with one of the three STP modifiers is cancelled. The incoming 
order to sell 700 shares @ $22.00 marked with the STPB modifier is 
rejected.
    STPB Example 3: An order to buy 500 shares @ $22.00 is marked with 
any of the three STP modifiers and becomes a resting order in the NSX 
Book. Subsequently, an order to sell 400 shares @ $22.00 is entered 
with the same Unique Identifier and marked with the STPB modifier.
    STPB Result 3: The resting buy order for 500 shares at $22.00 
marked with one of the three STP modifiers is cancelled. The incoming 
order to sell 400 shares @ $22.00 marked with the STPB modifier is 
rejected.

Additional Discussion

    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.
    An incoming STP order cannot interact through resting orders that 
have price and/or time priority. When an order with an STP modifier is 
entered it will first interact with all available interest in 
accordance with the execution process described in Exchange Rules 11.14 
and 11.15. If there is a remaining balance on the order after trading 
with all orders with higher priority, it may then interact with an 
opposite side STP order in accordance with the rules established above.
    STP modifiers are available for orders entered in either an agency 
or principal capacity. An incoming STP modified Post Only order that is 
immediately marketable against a resting STP modified order of the same 
Unique Identifier will not be rejected upon entry; rather, the order 
will be accepted and processed according to the STP instructions.\6\ 
STP orders that are not

[[Page 16542]]

populated correctly will not reject, but will process according to the 
underlying order behavior. Zero Display Reserve Orders submitted with 
an STP modifier will be rejected.
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    \6\ Without STP modifiers of the same Unique Identifier, an 
incoming marketable Post Only order would be rejected so as to 
prevent a locked market pursuant to NSX Rule 11.11(c)(5)(A). The 
incoming STP modified Post Only order is processed because, pursuant 
to the STP instruction, one or both of the orders will be cancelled 
and/or rejected, as applicable.
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    The Exchange believes that adding this functionality 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 new STP modifiers 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 offering the STP modifiers 
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 and to surveil such orders for potential misuse. For these 
reasons, the Exchange believes the STP modifiers offer ETP Holders 
enhanced order processing functionality that may prevent potentially 
undesirable executions without negatively impacting broker-dealer best 
execution obligations.

Effective Date

    The Exchange requests that the effective date for the instant rule 
change be thirty days after the date of filing of this rule change, or 
such earlier date as the Commission determines.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6(b) of the Act,\7\ in general, and 
furthers the objectives of Section 6(b)(5) \8\ 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 a type of order modifier that is in use within the national 
market system \9\ and by allowing firms to better manage order flow and 
prevent undesirable executions against themselves.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(4).
    \9\ See Securities Exchange Act Release No. 60266 (July 9, 
2009), 74 FR 34380 (July 9, 2009) (SR-BATS-2009-022) (approving on 
an expedited basis a ``Member Match Trade Prevention'' order type 
pursuant to proposed BATS Rule 11.9(f)).
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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

    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 rule does not (i) significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 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, provided that the self-regulatory organization 
has given 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,\10\ the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \11\ and Rule 19b-4(f)(6) 
thereunder.\12\ At any time within 60 days of the filing of such 
proposed rule change, the Commission may summarily abrogate 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.
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    \10\ As required under Rule 19b-4(f)(6)(iii), NSX provided the 
Commission with written notice of its intent to file the proposed 
rule change at least five business days prior to the filing date.
    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
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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-2010-02 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-2010-02. 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

[[Page 16543]]

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-2010-02 and should be submitted on 
or before April 22, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-7364 Filed 3-31-10; 8:45 am]
BILLING CODE 8011-01-P