[Federal Register Volume 75, Number 147 (Monday, August 2, 2010)]
[Notices]
[Pages 45185-45187]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-18895]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62578; File Nos. SR-NYSE-2010-43 and SR-NYSEAmex-2010-
53]
Self-Regulatory Organizations; New York Stock Exchange LLC and
NYSE Amex LLC; Order Approving Proposed Rule Changes Amending the
Exchanges' Rules To Incorporate the Receipt and Execution of Odd-Lot
Interest Into the Round Lot Market and Decommission the Use of the
``Odd-Lot System''
July 27, 2010.
I. Introduction
On June 9, 2010 and June 10, 2010 respectively, the New York Stock
Exchange LLC (``NYSE'') and NYSE Amex LLC (``NYSE Amex'' and, with
NYSE, each an ``Exchange'' and collectively, the ``Exchanges'') each
filed with the Securities and Exchange Commission (the ``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
incorporate the receipt and execution of odd-lot interest into the
round lot market and decommission the use of the ``Odd-lot System.''
The proposed rule changes were published for comment in the Federal
Register on June 23, 2010.\3\ The Commission received one comment
letter in support of NYSE's proposal.\4\ This order approves the
proposed rule changes.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release Nos. 62302 (June 16,
2010), 75 FR 35856; and 62303 (June 16, 2010), 75 FR 35865 (each a
``Notice'' and collectively, the ``Notices'').
\4\ See Letter from John N. Jacobs, Chief Operations Officer,
Lime Brokerage LLC, dated June 28, 2010 (``Lime Letter''). The Lime
Letter generally endorsed the incorporation of odd lots and the odd
lot portion of partial round lots into the round lot system.
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II. Description of the Proposals
The Exchanges seek to amend their rules to incorporate the receipt
and execution of odd-lot interest into the round lot market and
decommission the
[[Page 45186]]
system designated solely for handling and execution of odd-lot interest
(the ``Odd-lot System'').\5\ Round lot interest on the Exchanges is
executed by Display Book[supreg] pursuant to Rule 72.\6\ The Odd-lot
Systems are separate from the Display Book that executes odd-lot
interest and the odd-lot portion of ``part of round lot'' or ``PRL''
interest (that is, interest that is larger than one round lot, but is
not a multiple of a round lot). Under the Odd-lot Systems, all odd-lot
interest and the odd-lot portion of PRL interest is executed against
the DMM as the contra party.\7\ Pursuant to the proposed rule changes,
odd-lot interest and odd-lot portion of PRL interest would be accepted
and executed in the Display Book, enabling such interest to interact
with all other market interest and be priced in accordance with overall
supply and demand dynamics. Odd-lot interest and the odd-lot portion of
PRL interest would be generally subject to all the provisions of the
Exchanges' rules that apply to interest executed in the round lot
market.
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\5\ For a more detailed discussion of the operation of the prior
odd-lot system, see the Notices.
\6\ References to the rules herein refer to both the relevant
NYSE and NYSE Amex Equities rules unless otherwise noted. In
general, all market participants with displayed interest at a given
price receive allocations on parity; however, ``Setting Interest''
at a particular price point is entitled to priority. For a detailed
description, see Rule 72.
\7\ See Rule 124(a). Rule 124 also outlines the complex pricing
formula used to determine the price of odd-lot executions.
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In order to incorporate interest for fewer than 100 shares into the
round lot market, the new unit of trading for all securities would be
one share.\8\ Although the new unit of trade would be one share, the
concepts of round lots and odd-lots would remain for the purposes of
quoting. In addition, there would no longer be a separate execution
pricing structure for odd-lot interest and the odd-lot portion of PRL
interest. Further, because the trading of odd-lot interest and the odd-
lot portion of PRL interest is being incorporated in the round lot
market, the DMM would no longer be the contra party to all odd-lot
executions, except for odd-lot size quantity that is to be executed in
the opening, re-opening, and closing transactions but remains
unpaired.\9\
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\8\ See proposed Rules 55 and 56. In addition, proposed Rule 55
retains the ability of the respective Exchange to designate
securities to be quoted in less than 100 shares.
\9\ See proposed Rule 104(e).
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Order Handling, Execution, Allocation
In order to incorporate odd-lot interest and the odd-lot portion of
PRL interest into the round lot market, the Exchanges propose to amend
their rules governing order handling, execution, and allocation to
reflect that odd-lot quantities would not be displayed as the
respective Exchange quotation and odd-lot executions would not be
published to the Consolidated Tape.
Display Book would aggregate all interest at each price point,
including odd-lot interest and the odd-lot portion of PRL interest.
Aggregated interest would be quoted and published by Display Book if it
were equal to or greater than a round lot when the price point becomes
the respective Exchange best bid or best offer (``Exchange BBO'').
Although a bid or offer may be the aggregation of odd-lot interest and
the odd-lot portion of PRL interest, the sum of which is equal to or
greater than a round lot,\10\ the respective Exchange BBO would still
be quoted in round lots.
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\10\ See proposed Rule 60.
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Because odd-lot interest and the odd-lot portion of PRL interest
would be eligible for inclusion in the respective Exchange BBO, such
interest would be considered ``displayable'' interest for the purposes
of execution and allocation.\11\ Interest would not be considered
displayable when such interest is affirmatively designated as excluded
interest (e.g. reserve interest).
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\11\ See proposed Rule 72.
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In addition, consistent with the current logic of priority and
parity, incoming single odd-lot interest would never be eligible to be
the Priority Interest because it can never be the only interest quoted
at the price point. Similarly, single odd-lot interest at a price point
may not prevent single displayable round lot or PRL interest from
establishing itself as Priority Interest. When single round lot or PRL
interest joins odd-lot interest at a price point and the sum of all
such odd-lot interest is less than a round lot, the single round lot or
PRL that is published as the Exchange BBO would be considered the
setting interest and have established priority at that price point.\12\
PRL interest that is Priority Interest would establish priority for the
full quantity of the PRL interest, and thus would retain its Priority
Interest status even if subsequent executions of the original interest
decremented its quantity to less than a round lot. Priority Interest
would only lose its priority status if it were cancelled, executed in
full, or routed away for execution and returned unexecuted.\13\
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\12\ See proposed Rule 72(a)(iv).
\13\ See proposed Rule 72(b)(iv). Priority of the setting
interest is not retained on any portion of Priority Interest that
routes to an away market and is returned unexecuted, unless such
returned Priority Interest is greater than a round lot and there is
no other interest available at the price point or any other interest
available at the price point is less than a round lot.
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As the matching engine for each Exchange, Display Book would be
responsible for the execution of all incoming interest regardless of
the share size. All incoming interest would be eligible to be executed
against eligible contra side interest.
DMM CCS interest would not be accessed to fill or partially fill an
incoming odd-lot order, but only in reaction to incoming contra side
interest that is equal to or greater than one round lot.\14\ As is the
case today, DMM CCS interest would be required to be for a minimum of a
round lot. However, a DMM would be allowed to provide CCS interest in
PRL quantities.\15\
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\14\ See proposed Rule 1000(d)(i).
\15\ See proposed Rule 1000(d)(ii).
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Executions would be printed to the Consolidated Tape in round lots
or PRL quantities. Transactions that result in executions of less than
a round lot would not: (i) Print to the Consolidated Tape; (ii) be
considered the last sale; or (iii) elect buy minus, sell plus, or stop
interest for execution.\16\ The Exchanges therefore propose to amend
Rule 1004 to clarify that buy minus, sell plus, and stop interest are
elected only by executions that are reported to the Consolidated Tape.
Moreover, because liquidity replenishment points (``LRP'') values are
often calculated based on the last sale on the Exchanges, Rule 1000
would be amended to clarify that only new sales that are reported to
the Consolidated Tape would trigger this requirement.
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\16\ See proposed Rules 13 and 61.
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Display Book would continue to allocate executed shares in round
lots; however, if the quantity of shares to be allocated to a specific
participant were for a quantity less than a round lot, the Display Book
would allocate to the participant the specific number of shares bid or
offered.
Additional New Systemic Capabilities
The system changes required to decommission the Odd-lot System
would enable the Exchanges to expand their price fields. The Exchanges
propose to amend Rule 62 (``Variations'') to remove the requirement
that $.10 be the minimum variation for securities priced at or greater
than $100,000 and replace it with a requirement that the minimum price
variation for quoting and entry of interest in securities priced at or
greater than $1.00 be a penny (``$.01'').
In addition, the incorporation of odd-lot interest and the odd-lot
portion of PRL interest into Display Book would provide the Exchanges'
market data systems access to odd-lot volumes.
[[Page 45187]]
Following implementation of this proposal, depth of book information
published by the Exchanges via their market data systems would include
those quantities. NYSE OpenBook and NYSE Amex OpenBook would publish in
shares the total volume of interest available at each price point.\17\
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\17\ NYSE OpenBook and NYSE Amex OpenBook show the aggregate
limit-order volume at every bid and offer price.
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Implementation of Proposed Amendments
The Exchanges intend to progressively implement these systemic
changes on a security-by-security basis as it gains experience with the
new technology until it is operative in all securities traded on the
Floor. During the implementation, the Exchanges would identify on their
Web sites which securities have been transitioned to the new system. In
addition, the Exchanges would provide information to their constituents
about any modifications to the start or end date related to the
implementation of such proposal via their Trader Update Notices that
are sent via e-mail to subscribers and posted on the Exchanges' Web
sites.
III. Discussion and Commission Findings
The Commission finds that the proposed rule changes are consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange.\18\ In
particular, they are consistent with Section 6(b)(5) of the Act,\19\
which requires, among other things, that the rules of a national
securities exchange be designed 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, and not be designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers. The Commission also finds that the proposed rule changes are
consistent with the provisions of Section 6(b)(8) of the Act,\20\ which
require that the rules of an exchange not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act.
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\18\ In approving these proposed rule changes, the Commission
has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\19\ 15 U.S.C. 78f(b)(5).
\20\ 15 U.S.C. 78f(b)(8).
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The Commission notes that Display Book would aggregate all interest
at each price point, including odd-lot interest and the odd-lot portion
of PRL interest. Because such interest would be eligible for inclusion
in the respective Exchange's BBO, it would be considered
``displayable'' interest for the purposes of execution and allocation,
unless designated as excluded interest. Aggregated displayable interest
at a given price point would be quoted if its size is equal to or
greater than one round lot when that price point becomes the respective
Exchange BBO. Due to restrictions in the Consolidated Tape Plan,
however each respective Exchange's quote would continue to only be
disseminated in round lots. However, all interest at the BBO would
participate at that price point, even where the aggregate interest is
rounded down for dissemination. Thus, the proposal should increase
market liquidity and efficiency by making odd lot interest available
for execution in Display Book.
The Commission also notes that incoming odd-lot orders would never
be eligible to be the priority interest. Even if received earlier,
undisplayed odd lot interest would not prevent a displayable round lot
or PRL order from establishing itself as priority interest when such
interest is the sole independently displayable order at that price
point if it becomes the BBO. Odd-lot orders could never be the only
interest quoted at a specific price point under the Exchange's rules.
However, PRL interest that is established as priority interest would
have priority for the full quantity of the PRL interest. As a result,
the proposal should not reduce the incentive to quote aggressively to
narrow the BBO that is provided by the Priority Interest rule.
The Commission notes that, as a result of the proposed rule change,
DMMs would no longer act in the capacity of odd-lot dealer and would no
longer be the designated contra-party to all odd-lot executions.
However, the DMM would be obligated to be the contra party to any
unpaired odd-lot size interest that is to be executed in the opening,
re-opening, and closing transactions. In addition, DMM CCS interest
would be available to incoming contra side interest that is equal to or
greater than one round lot, but not to incoming odd-lot orders. The DMM
would be allowed to enter CCS interest in PRL quantities, but, as is
currently the case, DMM CCS interest entered at each price point must
be for a minimum of one round lot. Since the one round lot minimum size
requirement is maintained both for CCS interest and for incoming
interest that may execute against CCS interest, the Commission believes
that the changes to the rules regarding the CCS do not materially alter
the operation of the CCS or the benefits afforded to DMMs by the CCS.
The Commission further notes that Display Book would allocate
executed shares in round lots or the size of the order, if less than
one round lot. Odd-lot allocations would not move the allocation wheel
to the next participant unless such odd-lot allocation completely fills
the interest of the participant who received it. Executions would be
printed to the Consolidated Tape in round lots or PRL quantities.
Again, due to restrictions in the Consolidated Tape Plan, odd-lot
quantities would not be printed to the Consolidated Tape. The
incorporation of odd-lot and PRL interest into Display Book would allow
the odd-lot volumes to be included in each Exchange's market data,
which should enhance the transparency of odd-lot and PRL executions on
the Exchanges. The Commission believes this is a reasonable integration
of Display Book's new capacity for odd lot interest with the Exchanges'
rules regarding allocation and reporting.
The Commission believes that the proposed changes are consistent
with the Act because, taken as a whole, they should enhance efficiency,
transparency, and fairness in the treatment of odd-lot and partial
round lot customer orders, without significantly altering the benefits
and obligations of DMMs and other market participants.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\21\ that the proposed rule changes (SR-NYSE-2010-43 and SR-
NYSEAmex-2010-53) be, and they hereby are, approved.
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\21\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-18895 Filed 7-30-10; 8:45 am]
BILLING CODE 8010-01-P