Document ID: SEC-2020-1813-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange, LLC
Posted Date: 2020-11-13T05:00Z

[Federal Register Volume 85, Number 220 (Friday, November 13, 2020)]
[Notices]
[Pages 72720-72723]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-25059]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90371; File No. SR-NYSE-2020-66]

Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Amendment No. 1 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To 
Amend to NYSE Rule 122 Related to Orders With More Than One Broker

November 6, 2020.

I. Introduction

    On August 3, 2020, New York Stock Exchange LLC (``Exchange'') 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 to 
NYSE Rule 122 (Orders with More than One Broker). The proposed rule 
change was published for comment in the Federal Register on August 12, 
2020.\3\ On September 22, 2020, pursuant to Section 19(b)(2) of the 
Act,\4\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\5\ The Commission has received no comment letters 
on the proposal. On November 3, 2020, the Exchange filed Amendment No. 
1 to the proposed rule change, which replaced and superseded the 
proposed rule change in its entirety.\6\ The Commission

[[Page 72721]]

is publishing this notice to solicit comments on the proposed rule 
change, as modified by Amendment No. 1, from interested persons, and is 
approving the proposed rule change, as modified by Amendment No. 1, on 
an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 89500 (Aug. 6, 
2020), 85 FR 48738 (Aug. 12, 2020).
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 89962 (Sept. 22, 
2020), 85 FR 60854 (Sept. 28, 2020).
    \6\ In Amendment No. 1, the Exchange added the representation 
that it will monitor, via examination-based surveillance, member 
organization compliance with its supervisory obligation
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II. Description of the Proposed Rule Change

1. Overview

    Currently, NYSE Rule 122 (Orders with More than One Floor Broker) 
provides that a member organization may not maintain orders with more 
than one Floor broker to purchase the same security at the same price. 
Because each Floor broker is a separate Participant in a parity 
allocation,\7\ NYSE Rule 122 prevents member organizations from 
circumventing the parity allocation rules to obtain preferential 
execution by splitting a single order among multiple Floor brokers.
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    \7\ See Rule 7.36(a)(5) (defining the term ``Floor Broker 
Participant'' to mean a Floor Broker trading license).
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    NYSE Rule 122 currently contains an exception, and the main purpose 
of the proposed amendment is to clarify this exception. The exception 
is: if the orders are not for the account of the same principal, then 
it is permissible for the member organization to maintain such orders 
with different Floor brokers. This exception reflects the Exchange's 
understanding that some member organizations, or customers of member 
organizations, have multiple trading desks that do not coordinate 
trading strategies and are separated by information barriers. In such 
circumstances, because there is no coordination between such trading 
desks, maintaining those separate orders with more than one Floor 
broker would not be circumventing the parity allocation rules. The 
proposed amendment to NYSE Rule 122 would add Commentary to add 
specificity about this exception with respect to both member 
organizations' proprietary orders and orders that member organizations 
represent on an agency basis for customers.
    Both member organizations and the customers of member organizations 
may consist of multiple trading units that are separated by information 
barriers that restrict the trading units from coordinating trading 
strategies, sharing capital, and sharing profits and losses. The 
proposed amended rule would provide that, if a member organization has 
knowledge and can verify that it or its customer is organized in this 
way, the member organization may route orders for the same security at 
the same price from its independent units to more than one Floor broker 
in a manner that is consistent with NYSE Rule 122.
    In addition, the Exchange proposes to amend the text of NYSE Rule 
122 to remove certain obsolete language and to provide greater 
specificity to the rule text, without changing its meaning.

2. Proposed Changes to Text of Rule 122

    The Exchange proposes to amend NYSE Rule 122 to remove certain 
obsolete language and to provide greater specificity to the rule text, 
without changing its meaning.
    Because the text of current NYSE Rule 122 addresses two distinct 
topics, the Exchange proposes to reorganize the existing rule text into 
new subsections (a) and (b), which the Exchange believes will enhance 
comprehension of the rule.
    The Exchange proposes that new subsection (a) would include the 
current first sentence of NYSE Rule 122. Because the term ``member'' 
refers to the natural person associated with a member organization who 
has been designated by such member organizations to effect transactions 
on the Floor of the Exchange, e.g., a Floor broker,\8\ and Floor 
brokers do not originate orders,\9\ and because the term ``allied 
member'' no longer exists in Exchange rules,\10\ the Exchange proposes 
to delete the extraneous language ``member'' and ``or any allied member 
therein.''
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    \8\ See Rule 2(a) (definition of the term ``member'').
    \9\ See Rule 112(a).
    \10\ See Securities Exchange Act Release No. 58549 (September 
15, 2008), 73 FR 54444 (September 19, 2008) (SR-NYSE-2008-80) 
(Approval order).
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    The Exchange further proposes to amend new subsection (a) to 
specify that the rule applies both to orders ``sent to''--as well as 
those ``maintained with''--more than one Floor broker, and to insert 
the word ``Floor'' before ``broker'' to enhance the clarity of the 
sentence. The Exchange also proposes to replace the phrase ``market 
orders or orders at the same price'' in new subsection (a) with the 
phrase ``orders that may execute at the same price,'' to specify that 
the rule applies to multiple orders of any resting order type that may 
execute at the same price.
    The Exchange proposes that new subsection (b) would include the 
current second and third sentences of Rule 122, relating to how a Floor 
broker can represent an order that already has a portion transmitted to 
the Exchange Book. Because this text addresses a different topic than 
proposed Rule 122(a), the Exchange proposes to delete the extraneous 
``However'' at the start of the first sentence of this new subsection. 
The Exchange also proposes to delete from new subsection (b) several 
phrases--including ``manually or from a hand-held terminal,'' ``in the 
auction market or via the Floor broker agency interest file,'' and ``as 
part of an auction market transaction or automatic execution''--because 
they are extraneous, use obsolete text, and are not necessary to a 
clear understanding of the rule. The Exchange believes that making 
these deletions will have no substantive effect on the meaning of 
subsection (b).
    Finally, the Exchange proposes to delete from new subsection (b) 
several references to the ``Display Book[supreg] system,'' which is an 
obsolete system formerly used by the Exchange, and to replace them with 
references to the Exchange's current ``Exchange Book.'' \11\
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    \11\ See Rule 1.1(k).
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3. Proposed Rule Commentary

    In addition to the proposed amendments to the rule text listed 
above, the Exchange proposes to amend Rule 122 by adding new Rule 
Commentary to provide greater specificity as to the rule's application 
and to enhance comprehension of the rule.
    The Exchange proposes to add Rule Commentary .01 to specify that, 
for the purposes of Rule 122, sending to, maintaining with, or using 
``more than one Floor broker'' would mean more than one Floor broker 
member organization, or two different individual Floor brokers at the 
same Floor broker member organization. This proposed rule text is not 
intended to add new functionality, but rather to add clarity regarding 
the current Rule text.
    The Exchange proposes to add Rule Commentary .02 to provide more 
specificity as to when a member organization's own orders are not 
presumed to be for the account of the same principal. As proposed, for 
purposes of Rule 122, when a member organization uses more than one 
Floor broker, multiple orders originating from the member organization 
would be presumed not to be for the account of the same principal if 
each order is from a separate trading unit that is separated by 
information barriers or other barriers that restrict the trading unit 
from coordinating trading strategies, sharing capital, and sharing 
profits and losses with other trading units (an ``Independent Unit''), 
as defined in proposed Commentary .02(a). Proposed Rule Commentary 
.02(b) would require a member organization to have supervisory systems 
and written policies and procedures reasonably

[[Page 72722]]

designed to ensure that it is not using more than one Floor broker for 
its orders that are for the account of the same principal.
    Proposed Rule Commentary .03 would apply the same concepts to 
circumstances when a member organization uses more than one Floor 
broker for multiple orders that it represents on an agency basis. 
Proposed Rule Commentary .03(a) would specify that orders that the 
member organization represents on an agency basis from a single 
customer are presumed not to be for the account of the same principal 
if the member organization's customer maintains Independent Units and 
the orders are from Independent Units. Proposed Rule Commentary .03(b) 
would specify that if a member organization is representing a customer 
on an agency basis and uses more than one Floor broker for such 
customer, the member organization's written policies and procedures 
must be reasonably designed to ensure that the orders it receives from 
the customer are from Independent Units of the customer. The proposed 
Rule Commentary would specify that the member organization must: (1) 
Use reasonable diligence to know and retain the essential facts 
relating to the operation and supervision of its customer's information 
barriers to ensure there is a prohibition against the coordination of 
trading strategies and that there is in fact no coordination of trading 
strategies, and that the orders are from Independent Units (see 
proposed Rule Commentary .03(b)(1)); (2) review and document such 
reviews that the orders received from its customers originated from 
Independent Units (see proposed Rule Commentary .03(b)(2)); and (3) 
obtain an annual written representation, in a form acceptable to the 
Exchange, from each customer that such orders originate from 
Independent Units (see proposed Rule Commentary .03(b)(3)). The 
Exchange believes that, taken together, these measures will provide the 
member organization and the Exchange with reasonable assurance that the 
orders are not for the account of the same principal, and member 
organizations are operating in compliance with Rule 122.
    The Exchange states that The requirements of proposed Commentary 
.03(b) are not the first time that the Exchange has imposed obligations 
on its member organizations with respect to orders that they represent 
on an agency basis on behalf of their customers. For example, the 
Exchange states, Rule 7.44(b)(6), relating to the Exchange's Retail 
Liquidity Program, provides that if the Retail Member Organization does 
not itself conduct a retail business but instead routes Retail Orders 
on behalf of another broker-dealer, the Retail Member Organization's 
supervisory procedures must be reasonably designed to ensure that the 
orders it receives from such other broker-dealer meet the definition of 
a Retail Order. According to the Exchange, that Rule further provides 
that to fulfill this supervisory requirement, the Retail Member 
Organization must obtain an annual written representation, in a form 
acceptable to the Exchange, from the broker-dealer sending the orders 
that the orders comply with Rule 7.44, and by monitoring whether Retail 
Order flow routed on behalf of such other broker-dealer meets the 
applicable requirements. Here, the Exchange asserts, the proposed 
amended rule would require a similar supervisory obligation for member 
organizations to ensure that orders placed by their customers in fact 
originate from Independent Units. The Exchange represents that it will 
monitor member organization compliance with these proposed requirements 
via examination-based surveillance.\12\
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    \12\ The Exchange represents that it and the Financial Industry 
Regulatory Authority, Inc. (``FINRA'') have entered into a 
regulatory services agreement pursuant to which FINRA will conduct 
specified regulatory services on the Exchange's behalf, including 
examining member organizations' compliance with Exchange rules.
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    Proposed Rule Commentary .04 would add that notwithstanding 
Commentary .02(a) and .03(a), that there is a presumption that orders 
are for the account of the same principal (i.e., not from Independent 
Units) if the trading strategies are run by the same desk, group, 
employee(s), or portfolio manager(s); are otherwise overseen or 
supervised by the same desk, group, employee(s), or portfolio managers; 
or share capital or roll up to the same profit and loss center.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to national securities exchanges.\13\ In particular, the 
Commission finds that the proposed rule change, as modified by 
Amendment No. 1, is consistent with Section 6(b)(5) of the Act,\14\ 
which requires that the rules of an exchange be designed, among other 
things, 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, and to remove impediments to and perfect the mechanism of a 
free and open market and a national market system.
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    \13\ 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).
    \14\ 17 U.S.C. 78f(b)(5).
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    Generally, NYSE Rule 122 provides that a member organization may 
not maintain orders with more than one Floor broker to purchase the 
same security at the same price. The intent of the rule is to prevent 
member organizations from by splitting a single order among multiple 
Floor brokers in order to circumvent the Exchange's parity allocation 
rules and obtain preferential executions. The Exchange has proposed to 
both (1) clarify the existing exception to NYSE Rule 122 that permits a 
member organization to maintain separate orders with more than one 
Floor broker if the member organization has multiple trading desks and 
there is no coordination between those trading desks, and (2) extend 
this exception to include customers of member organizations, provided 
that the orders originate from independent trading desks at the 
customer that do not coordinate their trading.\15\
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    \15\ The Exchange has also proposed non-substantive, technical 
and clarifying changes to the rule text to: (1) Add subsection 
numbering and (2) remove references that are either extraneous or 
obsolete.
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    The Commission finds that this proposed rule change is reasonably 
designed to prevent fraudulent and manipulative acts and practices. The 
Commission believes that the proposed rule change is consistent with 
the purpose and intent of NYSE Rule 122 to prevent the circumvention of 
the Exchange's parity allocation rules. Significantly, in extending the 
``account of the same principal'' exception to the Independent Units of 
a member organization's customer, the proposed rule change would 
require that a member organization accepting such customer orders use 
reasonable diligence to know and retain essential facts relating to the 
operation and supervision of its customer's information barriers or 
other barriers to ensure that there is a prohibition against the 
coordination of trading strategies, that there is in fact no 
coordination of trading strategies, and that the orders are from 
Independent Units of the customer Further, the Exchange has represented 
that it will monitor member organization compliance with these

[[Page 72723]]

requirements via examination-based surveillance.\16\
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    \16\ See Note 12 and accompanying text, supra.
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    Based on the foregoing, the Commission therefore finds that the 
proposed rule change is consistent with the Act.

IV. Solicitation of Comments on Amendments No. 1

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendments No. 1 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-2020-66 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-NYSE-2020-66. 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 website (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 website 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 this filing will also be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change.
    Persons submitting comments are cautioned that we do not redact or 
edit personal identifying information from comment submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-NYSE-2020-66 
and should be submitted on or before December 4, 2020.

V. Accelerated Approval of the Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of Amendment No. 1 in the Federal 
Register. In Amendment No. 1, the Exchange added to its proposal the 
representation that it will monitor, via examination-based 
surveillance, member organization compliance with its supervisory 
obligation to ensure that orders placed by their customers in fact 
originate from Independent Units.\17\
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    \17\ See Note 12 and accompanying text, supra.
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    The Commission finds that Amendment No. 1 is consistent with the 
Act in that is designed, among other things, to prevent fraudulent and 
manipulative acts and practices and to promote just and equitable 
principles of trade. Accordingly, the Commission finds good cause, 
pursuant to Section 19(b)(2) of the Act,\18\ to approve the proposed 
rule change, as modified by Amendment No. 1, on an accelerated basis.
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    \18\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change SR-NYSE-2020-66, as modified by 
Amendment No. 1 be, and hereby is, approved.
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-25059 Filed 11-12-20; 8:45 am]
BILLING CODE 8011-01-P