[Federal Register Volume 75, Number 65 (Tuesday, April 6, 2010)]
[Notices]
[Pages 17457-17459]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-7753]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-61818; File No. SR-NYSEAmex-2010-18]
Self-Regulatory Organizations; NYSE Amex LLC; Order Granting
Accelerated Approval of the Proposed Rule Change Relating to the
Designation of a ``Professional Customer''
March 31, 2010.
I. Introduction
On February 25, 2010, the NYSE Amex LLC (``NYSE Amex'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder \2\ to designate any Customer \3\ that places more than 390
orders in listed options per day on average during a calendar month for
its own beneficial account(s) as a ``Professional Customer.'' The
proposed rule change was published for comment in the Federal Register
on March 9, 2010.\4\ The Commission did not receive any comments on the
proposed rule change. This order approves the proposal on an
accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Under NYSE Amex rules, ``Customer'' is defined as ``an
individual or organization that is not a Broker/Dealer.'' See NYSE
Amex Rule 900.2NY(18).
\4\ See Securities Exchange Act Release No. 61629 (March 2,
2010), 75 FR 10851 (March 9, 2010) (``Notice'').
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II. Description of NYSE Amex's Proposal
NYSE Amex proposes to adopt a new term, ``Professional Customer,''
which would be defined in NYSE Amex Rule 900.2NY(18A) as a person or
entity that (i) is not a broker or dealer in securities, and (ii)
places more than 390 orders in listed options per day on average during
a calendar month for its own beneficial account(s). Under the proposal,
a Professional Customer would be treated in the same manner as a broker
or dealer in securities for purposes of certain execution rules of the
Exchange. Specifically, the orders of a Professional Customer generally
would be treated in the same manner as a broker-dealer in securities
for the purposes of NYSE Amex Rules 900.3NY(j) (Facilitation Order),
904G(f) (FLEX Trading Procedures and Principles--Crossing Limitations),
934NY (Crossing), 934.1NY (Facilitation Cross Transactions), 934.2NY
(At-Risk Cross Transactions), 934.3NY (Solicitation), 963NY (Priority
and Order Allocation Procedures--Open Outcry), 963.1NY (Complex Order
Transactions), 964NY (Display, Priority and Order Allocation--Trading
Systems), 964.2NY(b)(1)(iii) (Participation Entitlement of Specialists
and e-Specialists), 964.2NY(b)(3)(B) (Allocation of Participation
Entitlement Amongst Specialist Pool), 980NY(b) (Electronic Complex
Order Trading), Rule 995NY(b) (Prohibited Conduct--Limit Orders) and
the Exchange's schedule of fees.
Under the proposal, a Professional Customer would participate in
NYSE Amex's allocation process on equal terms with broker-dealers--
i.e., Professional Customers would not receive priority over broker-
dealers in the allocation of orders on the Exchange. The Exchange
states that the proposal would not otherwise affect non-broker-dealer
individuals or entities under NYSE Amex rules. All Customer orders,
including non-broker-dealer orders included in the definition of
``Professional Customers,'' would continue to be treated equally for
purposes of the Exchange's rules concerning away market protection.
The proposal requires ATP holders to indicate whether Customer
orders are ``Professional Customer'' orders.\5\ To comply with this
requirement, ATP holders would be required to review their customers'
activity on at least a quarterly basis to determine whether orders that
are not for the account of a broker or dealer should be represented as
Customer orders or Professional Customer orders.\6\ The Exchange states
that it intends to file a separate proposed rule change to adopt fees
for professional orders.\7\
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\5\ The Exchange intends to require firms to identify
Professional Customer orders submitted electronically to the system
by identifying them with the number ``8'' in the customer type
field--a mandatory field required for order entry. Manual orders
submitted outside the electronic system would be marked with an
origin code of ``PC.'' These Professional Customer identifiers would
also flow through Exchange systems into audit trail and trade
reporting data. See Notice, supra note 4 at 10852.
\6\ Orders for any customer that had an average of more than 390
orders per day during any month of a calendar quarter must be
represented as Professional Customer orders for the next calendar
quarter. ATP Holders would be required to conduct a quarterly review
and make any appropriate changes to the way in which they are
representing orders within five business days after the end of each
calendar quarter. While members only would be required to review
their accounts on a quarterly basis, if during a quarter the
Exchange identifies a customer for which orders are being
represented as Customer orders but that has averaged more than 390
orders per day during a month, the Exchange would notify the ATP
Holder and the ATP Holder would be required to change the manner in
which it is representing the customer's orders within five business
days. The Exchange confirmed that references to ``five days'' in
footnote 10 of the Notice should be read as ``five business days.''
E-mail from Matthew Vaughn, Counsel, NYSE Euronext to Ronesha
Butler, Special Counsel, Division of Trading and Markets, dated
March 31, 2010.
\7\ See Notice, supra note 4 at 10852.
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III. Commission Findings and Order Granting Approval of the Proposed
Rule Change Change
After careful consideration of the proposed rule change, the
Commission finds that the proposed rule change is consistent with the
Act. Specifically, the Commission finds that the proposed rule change
is consistent with Section
[[Page 17458]]
6(b) \8\ of the Act and the rules thereunder,\9\ and in particular
with:
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\8\ 15 U.S.C. 78f(b).
\9\ In approving the proposed rule change, the Commission notes
that it has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
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Section 6(b)(5) of the Act, which requires that the rules of a
national securities exchange, among other things, be designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism for 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; \10\ and
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\10\ 15 U.S.C. 78f(b)(5).
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Section 6(b)(8) of the Act, which requires the rules of an exchange
not to impose any burden on competition not necessary or appropriate in
furtherance of the Act.\11\
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\11\ 15 U.S.C. 78f(b)(8).
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Under the proposed rule change, customers who place orders on the
level of frequency specified in proposed NYSE Amex Rule 900.2NY(18A)
would be deemed Professional Customers and would no longer receive the
priority treatment currently granted to all public customers. The
Commission has previously approved similar proposals to give the orders
of certain customers, identified as ``Professional Orders'' \12\ or
``Professionals'',\13\ no greater priority than that given to broker-
dealer orders.\14\ Under the Professional Customer Approval Orders, the
orders of public customers that are deemed Professional orders are no
longer accorded the priority granted to the orders of all other public
customers.\15\ While NYSE Amex Rule 900.2NY (18A) differs slightly from
the rules adopted in the Professional Customer Approval Orders, the
Commission believes that the Exchange's proposed rule change is
comparable to rules of the ISE, CBOE and Phlx, which the Commission
found to be consistent with the Act.
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\12\ See International Securities Exchange, LLC (``ISE'') Rule
100 (a)(37C).
\13\ See Chicago Board Options Exchange, Incorporated (``CBOE'')
Rule 1.1 (ggg). See also NASDAQ OMX PHLX, Inc. (``Phlx'') Rule
1000(b)(14).
\14\ See Securities Exchange Act Release Nos. 59287 (January 23,
2009), 74 FR 5694 (January 30, 2009) (``ISE Approval Order''); 61198
(December 17, 2009), 74 FR 68880 (December 29, 2009) (``CBOE
Approval Order''); 61802 (March 30, 2010) (``Phlx Approval Order'')
(together, the ``Professional Customer Approval Orders'').
\15\ Id.
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In the ISE Approval Order, the Commission reviewed the background
and history of customer order priority rules on national securities
exchanges, and analyzed the role played in the shaping of these rules
by various considerations and principles. In this regard, the
Commission discussed the requirement of Section 6(b)(5) of the Act that
the rules of an exchange be designed to protect investors and the
public interest; traditional notions of customer priority in exchange
trading; the agency obligations of exchange specialists; and the
requirements of Section 11(a) of the Act.\16\ In approving the ISE
proposal, the Commission articulated its view that priority for public
customer orders is not an essential attribute of an exchange,\17\ and
noted that in the past it has approved trading rules at options
exchanges that do not give priority to orders of public customers that
are priced no better than the orders of other market participants.\18\
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\16\ ISE Approval Order, supra note 14. For a brief synopsis of
the requirements of Section 11(a), see infra, note 20.
\17\ See ISE Approval Order, supra note 14, at 5697.
\18\ See ISE Approval Order, supra note 14, at 5697, n. 41-44.
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In the ISE Approval Order, the Commission concluded that Section
6(b)(5) of the Act does not require an exchange to treat the orders of
public customers who place orders at the frequency of more than 390
orders per day on average identically to the orders of public customers
who do not meet that threshold.\19\ For the same reason, the Commission
believes that the Exchange's proposed rule change is consistent with
Section 6(b)(5) of the Act.
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\19\ See ISE Approval Order, supra note 14, at 5697. See also
CBOE Approval Order and Phlx Approval Order, supra note 14.
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The Commission believes that its view with respect to the ISE
Approval Order is equally applicable to the NYSE Amex proposal. In this
regard, the Commission does not believe that the Act requires that the
orders of a public customer or any other market participant be granted
priority. Historically, in developing their trading and business
models, exchanges have adopted rules, with Commission approval, that
grant priority to certain participants over others, in order to attract
order flow or to create more competitive markets. However, the Act does
not entitle any participant to priority as a right. The requirement of
Section 6(b)(8) of the Act that the rules of an exchange not impose an
unnecessary or inappropriate burden upon competition does not
necessarily mandate that a Professional Customer (as defined in the
NYSE Amex proposal) be granted priority at a time that a broker-dealer
is not granted the same right. The NYSE Amex proposal simply restores
the treatment of persons who would be deemed Professional Customers to
a base line where no special priority benefits are granted.\20\ Thus,
the Commission believes that it is consistent with the Act for the
Exchange to amend its rules so that Professional Customer orders, like
the orders of broker-dealers, are not granted special priority.\21\
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\20\ In its proposal, the Exchange addressed compliance with
Section 11(a) of the Act. Section 11(a) prohibits a member of a
national securities exchange from effecting transactions on that
exchange for its own account, the account of an associated person,
or an account over which it or its associated person exercises
discretion unless an exception applies. Section 11(a)(1) and the
rules thereunder contain a number of exceptions for principal
transactions by members and their associated persons, including the
exceptions in subparagraph (G) of Section 11(a)(1) and in Rule 11a1-
1(T), as well as Rule 11a2-2(T) under the Act. The Exchange
represents that the proposal would not affect the availability of
the exceptions to Section 11(a) of the Act, including the exceptions
in subparagraph (G) of Section 11(a) and in Rules 11a1-1(T) and
11a2-2(T), as are currently available. See Notice, supra note 4 at
10852.
\21\ The Commission notes that certain trading practices that
could be affected by the proposed rule change may raise issues
outside the scope of its review of the proposal itself.
Specifically, any entity that acts as ``dealer,'' as defined in
Section 3(a)(5) of the Act, 15 U.S.C. 78c(a)(5), is required to
register with the Commission under Section 15 of the Act, 15 U.S.C.
78o, and the rules and regulations thereunder, or qualify for any
exception or exemption from registration. Activity that may cause a
person to be deemed a dealer includes ```quoting a market in or
publishing quotes for securities (other than quotes on one side of
the market on a quotations system generally available to non-broker-
dealers, such as a retail screen broker for government
securities).'' See Definitions of Terms in and Specific Exemptions
for Banks, Savings Associations, and Savings Banks Under Sections
3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934,
Securities Exchange Act Release No. 47364, 68 FR 8686, 8689, note 26
(February 24, 2003) (quoting OTC Derivatives Dealers, Securities
Exchange Act Release No. 40594 (October 23, 1998), 63 FR 59362,
59370, note 61 (November 3, 1998)).
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Pursuant to Section 19(b)(2) of the Act,\22\ the Commission may not
approve any proposed rule change, or amendment thereto, prior to the
30th day after the date of publication of notice of the filing thereof,
unless the Commission finds good cause for so doing and publishes its
reasons for so finding. The Commission hereby finds good cause for
approving the proposed rule change before the 30th day after the date
of publication of notice of filing thereof in the Federal Register.\23\
The Commission did not receive any comments on the proposed rule
change. As noted above, the Commission previously found that exchange
rules that distinguish between the orders of
[[Page 17459]]
customers who place orders at the frequency of more than 390 orders per
day on average during a calendar month for its own beneficial
account(s) and the orders of customers who do not meet that threshold
are consistent with the Act.\24\ Accordingly, pursuant to Section
19(b)(2) of the Act,\25\ the Commission finds good cause to approve the
proposed rule change on an accelerated basis.
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\22\ 15 U.S.C. 78s(b)(2).
\23\ See Notice, supra note 4.
\24\ See Professional Customer Approval Orders, supra note 14.
\25\ 15 U.S.C. 78s(b)(2).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\26\ that the proposed rule change (SR-NYSEAmex-2010-18), be, and
it hereby is, approved on an accelerated basis.
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\26\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-7753 Filed 4-5-10; 8:45 am]
BILLING CODE 8011-01-P